Hamish McRae: Drought, growth and a changing climate

Australia will make a huge effort to adapt its entire economy. It could influence the rest of the world

Darwin, Australia. The great China boom continues, transforming the world economy almost by the day - and nowhere is it more keenly felt than in Australia. In Britain, we see the impact in upward pressure on the price of oil and other resources on the one hand, and in the general downward pressure on manufactured goods prices on the other. We know that Chinese growth is a key element in the booming world economy, but the direct impact is muffled.

In Australia, by contrast, the noise from China is loud and clear. China is the principal driver of the great Australian boom.

A century ago, Australia was, in terms of income per head, the second richest country on earth. Natural resources created that wealth, though then the drivers were different: more commodities such as wool and gold, rather than the present coal, uranium and other minerals. Now, thanks largely to Chinese demand for raw materials, Australia is racing back up the wealth league table. A week travelling round its major cities has convinced me that it is quite plausible that in another 20 years' time it could be the second richest nation again. The Australian dollar is soaring, the economy has been growing at more than 3 per cent a year for 12 years, there is a desperate shortage of skilled staff and house prices, unsurprisingly, have risen in much the same way as they have in Britain,

We all think nowadays of the global knowledge economy, with education and skills the principal generators of wealth, but natural resources, if combined with good governance, can still be a hugely important contributor to economic success. Without solid democratic institutions, natural resources can be as much of a curse as a blessing: we only have to look to Russia to see that. There are only a handful of developed countries that combine abundance in natural resources with good education, a highly skilled workforce and a long record of solid democratic governance. Three spring to mind: Canada, Australia and in a slightly different category, Norway.

Canada and Australia may have many similarities, in particular the combination of a huge land-mass and a relatively small population, but in one crucial respect they are very different. That is the impact of environmental change. Canada, on balance, may gain from climate change; Australia is threatened by it. Whereas a warmer planet would probably help Canadian agriculture, most of Australia is already suffering from a decade-long drought. As this newspaper has reported in detail, agriculture has been devastated. One Queensland farmer told us that he had water in the house to drink, but nowhere else: his farm had completely shut down. The great glittering cities, including even Perth on the west coast, are struggling to maintain supplies.

There are some places, however, where rainfall has increased. For example, up in the north, in the sub-tropical Darwin region, there is abundant rainfall - but it has a population of little more than 100,000. There is a huge debate going on as to how over the next half century to rebalance the nation: put simply, to what extent could you move the water or the people? The former is expensive, for pumping water across the continent would cost much more than the alternative of desalination of sea-water. And the latter is impracticable, for you cannot move cities of a million or more people.

And China is the key new element. It is almost as though Australia has been forced to make a Faustian bargain. It gains huge riches by exporting its raw materials to China, but it pays in that it suffers as much as any country from the damage that China's boom is doing to the global environment. This year China has become a net importer of coal for the first time - it became a net importer of oil in the early 1990s. It is also becoming a larger emitter of greenhouse gases than the US. It is building a new power station, usually coal-fired, about every four days. The most convenient cost-cost supplier of coal is Australia.

You could say that other countries are making similar bargains. For example the United States gets cheap goods imports of consumer goods, which hold down its prices and increase the standard of living of Americans, but at the price of China building up US assets that it may at some stage want to sell. You could also note that the change in the Australian climate preceded the latest surge of Chinese growth and the associated pollution.

It is in fact possible that the switch in Australian weather patterns may be one of those random shifts that take place irrespective of human behaviour. But that in a way is more worrying, for anything that China does would come on top of existing pressure on a fragile continent. I don't think anyone believes that Chinese growth could have a beneficial impact on the Australian environment. The likelihood is that it is somewhere between being at best pretty damaging and at worst profoundly so.

So what is to be done? Well, there has been a clear switch of emphasis in Australia, and I don't think that is just because there is a Federal election in six months. A decade ago, Australia, along with the US, refused to ratify the Kyoto Treaty limiting carbon emissions. The attitude was that Australia was a resource producer, and nothing should be allowed to hold back its coal and other mineral exports.

Now there is profound concern about the environment. This is not just from the left: it is cross-party. I found myself sitting beside a right-wing politician who banged on about the need to price water properly, to get out of crops that need heavy irrigation, and to think of ways to boost the economy in places where there was ample water, such as Darwin.

Over the next half century Australia will, I think, make a huge effort to adapt its entire economy to climate change. It has a long tradition of pulling together - the expression is nation-building - when confronted with large-scale national pressures. But really it has no option. It does not matter what is causing climate change; it has to adapt to it.

That surely is the big message for the rest of us: adapt sensibly. Whatever the role of China in exacerbating Australia's environmental difficulties, it also makes the adjustment easier in the sense that it is providing the cash to help pay for necessary change.

In the case of Australia, what it does to limit its own emissions will hardly have much impact on the global picture, or indeed on Chinese attitudes. The imbalance of the populations is too great. A 21 million tail is not going to swing a 1.3 billion dog. But on the issue of adaptation, Australia could have a lot of influence on the rest of the world.

There are a string of issues here. How you build political support. How you design economic incentives. How you compensate people whose livelihoods have been destroyed. How you use the power of the market to foster changes in behaviour. How you avoid tokenism and the tyranny of crass targets. I think we could learn something on that last bit too.