Outing a Coalition policy con

I have long thought Australia had much to learn from the success of its Murray Darling Basin water management policy in developing its approach to reducing carbon emissions.

So too, it appears, does the Coalition who, according to Shadow Minister for Climate Action, Environment and Heritage Greg Hunt, has modelled its direct action policy upon the same policy that has shaped our world revered water markets.

Hunt's claims on this analogy are flawed however, and indeed, lessons from Australia's water markets underpin the logic of the government's carbon pricing mechanism rather than support Direct Action.

Australia's Murray Darling Basin water policy includes the following key attributes:

-- Water users pay for every megalitre of water they consume.

-- Water users must acquire water entitlements for each unit of water they use and (nearly) all water used is accounted for.

-- Trade in entitlements enables water to be accessed by higher value water users.

-- A cap in water use ensures the resource is not over extracted.

-- A water buyback scheme is in place to reduce the cap, by purchasing water from water entitlement owners to improve the allocation of water to achieve environmental objectives.

The final attribute, the water buyback scheme, is what Hunt claimed in a speech at this year's Carbon Expo his direct action plan has been informed by.

Take note, the government's carbon pricing mechanism, which he seeks to revoke, includes a price, a unit entitlement system (called permits), a cap on emissions, emissions accounting and funding to incentivise emission reductions. It is these attributes of Australia's water policy that are the envy of the world's water managers. They promote water use efficiency, innovation and achieve environmental objectives – and few water users would disagree. The water buyback scheme happens to be the least popular component.

I put the question to Hunt at Carbon Expo in Melbourne on Friday, given he felt the cap and trade system unnecessary and costly in the carbon market, would he seek to revoke such in the water market? He answered the question like a true politician, in that he didn't.

Direct Action provides a compelling but unfortunately too-good-to-be-true promise of delivering environmental outcomes through an incentive only approach. Imagine, for a moment, if no cap, no price and no trade existed in the water market. There is no shortage of irrigable land in the Murray Darling Basin thus with no restraint on water consumption, any payment provided to incentivise water conservation would simply make more water available to be used elsewhere.

To further highlight the nonsense - imagine no cap on water use existed and the government wanted to achieve an environmental objective of allocating water to a high value wetland. As payments are made for water conservation, without a cap, water users could simply respond by expanding the area of land they irrigate. Indeed, incentive only payments have the perverse effect of incentivising excess consumption simply to attract future conservation payments. Thus with no cap, the costs of achieving the environmental objective through an incentive only scheme continue to spiral upwards over time.

The cap, therefore, is essential for ensuring water is not over consumed. Policy to enable trade reduces the economic costs of the cap by enabling scarce water resources to be accessed by those who can obtain the highest possible economic use.

The direct action component, the water buyback scheme, only works because this market architecture is in place. The cap ensures that all water purchased via direct action will then be available to be used for the stated environmental objectives. The history of trade enables the government to set realistic budgets and to ensure water users are compensated at fair prices.

Thus the Coalition climate change direct action policy compares poorly to our world famous water management policies. Without a binding cap on emissions the Coalition can provide no guarantee it will achieve its stated 5 per cent emissions reduction objective. In the absence of a price and constraint on emissions, carbon emissions will grow unchecked and, in turn, the costs of incentivising their reduction will continue to spiral.

The Coalition has responded to the fear that the costs of its scheme will escalate by indicating its policy is price capped. However, this undermines another Coalition claim that its policy will achieve the same environmental objective as the government's.

James Bentley is an experienced environmental economist having worked in UK government and international consulting firms and Australia's largest irrigation company providing advice on water resources and carbon market economics, environmental policy and natural resource risk management. He currently works as an environmental economist for an Australian-based ecological infrastructure firm.