Direct Action or Market Mechanism?
33 out of 35 economists have rejected the government's Direct Action policy to limit climate change. Labor's Andrew Leigh and Liberal Andrew Laming reflect on the survey.PT3M20S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-2wava 620 349 October 28, 2013
Leading economists have overwhelmingly rejected Tony Abbott's direct action climate change policy and backed carbon pricing.
A Fairfax Media survey of 35 prominent university and business economists found only two believed direct action was the better way to limit Australia's greenhouse gas emissions. Thirty - or 86 per cent - favoured the existing carbon price scheme. Three rejected both schemes.
A global increase in temperature needs to be limited to two degrees. Photo: Simon O Dwyer
Internationally renowned Australian economist Justin Wolfers, of the Washington-based Brookings Institution and the University of Michigan, said he was surprised that any economists would opt for direct action, under which the government will pay for emissions cuts by businesses and farmers from a budget worth $2.88 billion over four years.
Professor Wolfers said direct action would involve more economic disruption but have a lesser environmental pay-off than an emissions trading scheme, under which big emitters must pay for their pollution.
BT Financial's Dr Chris Caton said any economist who did not opt for emissions trading "should hand his degree back".
Debate rages as economists concur.
The survey comes as the Abbott government prepares to introduce legislation next month to repeal the carbon price scheme and as debate rages over whether climate change is linked to bushfires.
Mr Abbott last week said he accepted climate change was real, but suggestions that it was linked to fires was "complete hogwash".
In 2011, Mr Abbott took a swipe at some who had criticised the Coalition's scheme, saying "maybe that's a comment on the quality of our economists rather than on the merits of argument''.
Any economist who didn't opt for emissions trading "should hand his degree back", says Chris Caton. Photo: Tamara Voninski
The extraordinary challenge of limiting global warming to less than 2 degrees - the level scientists consider necessary - was underlined by a new report by European consultants Ecofys that found Australia would have to cut emissions by at least 27 per cent by 2020 to play its part.
Australia has a bipartisan target of 5 per cent below 2000 levels by 2020. The Climate Change Authority - set up by Labor and which the Coalition plans to abolish - will this week release its draft recommendation on Australia's 2020 target.
The carbon scheme started as a fixed price - or tax - and is due to become an emissions trading scheme in July 2015. A trading scheme places a cap on emissions and requires big emitters to buy a permit for every tonne of carbon dioxide they release. Permits can be traded, allowing businesses that cut emissions to save money.
Several economists surveyed said the weight of international evidence showed that carbon dioxide emissions could be reduced more efficiently through a broadbased market mechanism such as a trading scheme. "That seems to be the way that the major economies are headed - not uniformly, unfortunately," CBA economist Michael Workman said.
Some said the direct action plan would rely too much on bureaucratic decisions. "If I had to make a choice between pricing carbon and having bureaucrats allocating permits, then I'm going to go for the market mechanism every time," Rob Henderson, a National Australia Bank senior economist, said.
But Australian National University professor Warwick McKibbin said none of the policies on offer in Australia was sufficiently robust. He said the direct action plan could achieve emission reductions, but at higher cost per unit than a well-designed carbon price.
Professor McKibbin predicted a hybrid policy would eventually be adopted.
University of Queensland professor Paul Frijters, one of two economists who favoured the Coalition approach, said he would not describe it as "direct action" but simply as "no action".
"I think the government's current policy of 'no policy' is exactly the right one to take for a small country like Australia," he said.
Commsec's Craig James, who also supported the Coalition's policy, said the standard economic assumption that markets could solve almost anything was not right. He said markets could fail and might be the wrong response to an environmental problem.
"The attempts that the Europeans have made so far have been less than stellar," Mr James said.
Mr James also said he was sceptical that humans were having a serious impact on climate.
A spokesman for Environment Minister Greg Hunt did not respond directly to the survey results, but said the Australian people had voted to repeal the carbon tax.
"The simple fact is the carbon tax does not work," he said.
"The Coalition government is committed to reducing Australia's domestic emissions by 5 per cent by 2020. Labor's carbon tax will not achieve this target. Domestic emissions are set to rise from 560 million tonnes to 637 million tonnes, between 2010 and 2020, under the carbon tax. Labor's carbon tax does a lot of damage to households and businesses, yet it doesn't even do the job."