The topsy turvy approach to climate change

The crux of Tony Abbott’s Direct Action policy on climate change is having the government pay the worst polluters a fee as an inducement for them to reduce or stop their carbon emissions.

It is an odd policy, to be sure, and without any precedent – which means it is risky in terms of cost and effectiveness.

As Fairfax Media revealed yesterday, only 5.5 per cent of the 35 economists surveyed were in favour of the Direct Action approach to reducing carbon emissions versus 86 per cent in favour of a carbon price or emissions trading system. The only surprise in these findings was that 5.5 per cent (two respondents) were in favour of government payments to polluters.

The Direct Action policy favoured by the Abbott government throws up some interesting potential applications if indeed the economists are wrong and the government subsidy model works.

Let’s look at drink driving and the dreadful carnage, damage, financial cost and grief that drink drivers impose on society.

Why not have the government work out who the worst drink drivers are – say, choosing those with two or more offences – and through a direct action plan, give these offenders money not to drink and drive ever again. Would a cash flow of, say, $200 a month for as long as they didn’t get caught drink driving be enough?

If they never drink drive again, these sorts of payments, it could probably be argued, would be worth it. But what if, after giving them the money, whatever amount it is, they get back in their car after a night on the turps and offend again? Would the government get its money back? It’s unlikely and the policy will have failed.

And what if someone not on the list all of a sudden offends for the first time? Do they then qualify for the government handout? Would there actually be an incentive to offend so that you could qualify for the payment?

In another example, what about having the government pay fat and obese people some cash to lose weight? The benefits from a healthier society would be huge. Interestingly, there have been studies on this cash-for-fat policy that suggest it works – at least in the short run. When given cash that is linked to weight loss and then maintaining a lower weight, people do respond. Many heavy people do drop several kilograms. The problem is that this is expensive and lasts only for the duration of the scheme – as soon as the money stops, the studies find that weight goes back on and the problem is not fixed.

And what of people with a healthy weight or those that don’t drink and drive? It’s a bit unfair that the ‘offenders’ get money for their ways while the responsible ones get nothing.

Paying polluters to stop fouling the air rather than having them pay per tonne of carbon they emit is incongruous.

Economists know that price signals work. It is the central tenet of monetary policy, for example, where high interest rates discourage borrowing and encouraging savings to the point where the economy slows, while low interest rates have the opposite effect.

A tax on tobacco, as opposed to paying smokers to stop smoking, has worked wonders with smoking rates dropping from around 40 per cent of adults in the 1960s, to 24.2 per cent in 2001 and 17.4 per cent in 2011-12.

It is also a superior economic outcome to have the drunkard realise that it is better for them to drink in moderation or catch a taxi or to buy less alcohol because of a tax, and to have the overweight person switch from chips and donuts to tabouli and grilled fish without paying them to do so.

There is no guarantee the payment to polluters under Direct Action will work. And what will happen when the money allocated by the government is exhausted, or those polluters falling just below the threshold of a subsidy miss out?

The price on carbon, which has been in place since July 1, 2012, has resulted in a surge of clean energy production (albeit from a low base) and a drop in per capita consumption of electricity (albeit from a high base). It is working and this, after all, is what both side of politics are trying to achieve with their respective policies.

According to the economics profession in Australia, there seems to be little chance that Direct Action will work to reduce carbon emissions more efficiently or more cheaply than the current policy.

When a piece of public policy is working and there is no material impact on the real economy, the best thing to do is to keep it. This seems to be the case with the carbon price and it is especially the case when the alternative policy, which has the same objective, is obviously expensive and may not work.

Stephen Koukoulas is managing director of Market Economics and was an economics advisor to the former Prime Minister Julia Gillard.