Is direct action on carbon no action?

Ask 35 leading economists whether they would prefer Labor's carbon price or the Coalition's "direct action" and only two will opt for direct action.

And one of them does it as a sort of joke. Queensland University's Professor Paul Frijters told Fairfax Media last week he believed "direct action" meant "no action". On that basis, he thought it was exactly the right policy "for a small country like Australia".

Economists love prices, for the very good reason that they work. In July 2012 electricity prices jumped 15.3 per cent. Much of the jump was due to the carbon price. (By way of comparison, the same time a year earlier they had jumped 7.7 per cent; the same time this year they rose only 4.4 per cent, the lowest such rise in six years.)

Household electricity use per person dived 3 per cent. Demand for electricity, like demand for nearly everything else, responds to price. If it didn't, the alcopops industry wouldn't have fought so hard against moves to double the alcopops tax in 2008. Alcopops sales wouldn't have slid 30 per cent as a result.

And yet there's a wariness in economists' embrace of prices when it comes to cutting emissions. Of course they are the cheapest way of changing behaviour. The Grattan Institute and the Productivity Commission have each examined the cost of command and control programs such as planting trees or paying households to install solar panels (two of the Coalition's favourites) and found them enormously costly per unit of emissions saved - far more costly than the present carbon price of $24.15 a tonne.

And yet ... Nobel prize-winning economist Paul Krugman puts it this way in an article in the New York Review of Books due out this week: "Why is putting a price on carbon better than direct regulation of emissions? Every economist knows the arguments: efforts to reduce emissions can take place along many 'margins', and we should give people an incentive to exploit all of those margins. Should consumers try to use less energy themselves? Should they shift their consumption towards products that use relatively less energy to produce? Should we try to produce energy from low-emission sources or non-emission sources such as wind? Should we try to remove CO2 after the carbon is burned? The answer is, all of the above. And putting a price on carbon does, in fact,

give people an incentive to do all

of the above."

Economists overwhelmingly agree that a carbon price is the best way to move all the relevant markets at once, cutting emissions for the cheapest possible price. "And I, of course, agree - they'd probably revoke my economist card if I didn't," Krugman says.

And yet: "Studies attempting to analyse how we might most efficiently reduce carbon emissions strongly suggest that just one of these margins should account for the bulk of any improvement - namely, we have to sharply reduce emissions from coal-fired electricity generation.

"Certainly it would be good to operate on other margins, especially because these studies might be wrong. Nonetheless ... direct action to regulate emissions from electricity generation would be a surprisingly good substitute for carbon pricing - not as good, but not bad."

It's as unlikely an endorsement as you'll find. And behind the scenes, the people who drew up Labor's carbon pricing scheme were thinking along similar lines. Quietly, alongside the planned carbon price, in 2011 they set aside up to $2 billion to buy and close as many as five of Australia's dirtiest coal-fired power stations.

Called "Contract for Closure", the companion scheme was direct action of the most direct kind. The closure of just two of those stations - Hazelwood in Victoria and Playford in South Australia - might have cut emissions by 20 million tonnes.

Labor wouldn't have developed the scheme if it didn't see a role for direct action. Later, minister Martin Ferguson abandoned the negotiations after none of the owners would accept his price.

(As it happens the carbon price, the rapid growth of wind farms and the lower demand for electricity generally has done much of what Labor's Contract for Closure program would have anyway. Hazelwood is operating below capacity and Playford has been mothballed. Wind farms now provide a quarter of SA's power.)

The Climate Change Authority in a report released last week also went out of its way to say there was more than one way to skin a cat. It was advising on "ends, not means". Australia would need to ramp up its target for emissions reductions from 5 per cent to 15 or 25 per cent below 2000 levels by 2020.

The Coalition wants to buy emissions reductions through a tender process just as Labor did with Contract for Closure. The authority reckons the Coalition's fund could "mobilise similar emission reductions opportunities" to Labor's emissions trading scheme. The important thing is to get there. It's how the minister Greg Hunt will be judged. Some goals are too important to quibble over the means of achieving them.

Ross Gittins is on leave.

Twitter: @1petermartin