While there is no price on carbon it is costing households and companies money to reduce their emissions. When there is a price on carbon, households and companies will save money if they reduce their emissions, and it will cost them money if they do not. This creates carrots and sticks in a market for means to reduce emissions.
Rejecting the idea of a price on emissions, the Liberal/National party Coalition led by Tony Abbott has adopted what they present as an "all carrot and no stick" policy on reducing Australia's greenhouse emissions. The policy has two main parts.
First, existing taxes will be used to create a fund which government will allocate to companies to help them reduce their emissions. The policy calls this a "direct action" approach to reducing emissions, contrasting this approach with the government's plan to put a price on carbon emissions and leave it to the market to determine the cheapest way to reduce emissions and thus avoid increased costs.
Second, companies which do reduce their emissions below business as usual will be able to sell this CO2 abatement to the government, with existing taxes once again used to buy the carbon credits from companies.
Rather than this being all carrot and no stick, the taxpayer gets whacked twice - funding industry action to reduce emissions, then buying the "carbon credits" - while industry keeps the carrot. The taxpayer loses by our taxes being higher than would be the case if our taxes were not funding industry investment to lower emissions, and we have no opportunity to avoid this impost by taking our own action to reduce our emissions as would be the case with a price on carbon.
It is curious that the Coalition should have adopted such a policy, since it travels down the same road that has proved so perilous for the Labor government. The home insulation scheme, the solar panels scheme, and the cash for clunkers proposal are all direct action initiatives. They demonstrate how hard it is for government, operating through the public service, to intervene in the economy to achieve outcomes as efficiently as the market. Clearly the Liberal Party has abandoned the free market philosophy is has espoused for a generation and now believes it can manage the public service in a way that will allow it to better provide services than the market would be able to do.
This is an odd position for the Coalition to find itself in. It would have Australia stand alone among developed nations in not using the market to deal with CO2 emissions, as the policy itself makes clear, admitting that "Some countries have adopted a national emissions trading approach to reducing carbon emissions, while others have relied on taxes or a combination of the two" (page 8). The table on page 9 shows that "some countries" includes all the western market economies apart from Australia, with the only major national economies listed as holding out against market mechanisms being Australia, Brazil, India, Indonesia, Russia and Saudi Arabia. With such an obvious demolition of the anti-free market approach in their own document, it is hard to believe that the Coalition takes the climate change policy seriously or indeed that any senior person in the parties actually read it closely.
Any careful reading would surely have saved the Coalition from espousing the ridiculous idea that there would be no benefit to Australia from our companies taking action to reduce emissions in other countries. Do they believe that in addition to our national land and sea boundaries we also have our own atmosphere? Where is the border in the sky such that, for example, emissions reductions in Indonesia would have no effect on Australia's climate?
Even more embarrassing, the policy is not scalable: what will become of this policy when the current science on climate change is accepted by all political parties and we start the hard work of finding ways to drastically reduce our carbon emissions? This will require a transformation of our economy. Would a Coalition government seek to achieve this by centrally planning the whole of the economy, or would it then adopt - like all other developed market economies - a price on carbon pollution, and give the magic of the market a chance to do its work.
Clearly this is a policy written by polluting industries which have no more interest in reducing their emissions than tobacco companies have in reducing the rates of smoking or asbestos manufacturers had in reducing exposure to that deadly fibre. To protect these industries the Coalition (Coal-ition?) will force the long suffering taxpayer to bear the burden of both the immediate costs of the little action to be taken and the much larger costs of the adaptation which will be necessary in the future if we do not use the market now to put our economy on a track to a low emissions future.
Adam Smith ended the first book of his The Wealth of Nations with a warning against just such policies, writing
The interest of dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public... The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the scrupulous, but with the most suspicious attention.
As he watches conservative politicians respond to the urgency of climate change by taking the stick to the taxpayer and handing carrots to polluting industries, Adam Smith must surely be rolling in his grave.