By Ross Gittins
It's strange to reject ''a big new tax'' in favour of an approach that would need a huge increase in spending on subsidies and incentives.
TONY Abbott's stated intention to have ''a strong and effective climate change policy'' that doesn't involve either an emissions trading scheme or a carbon tax is rife with internal contradictions.
Tony Abbott.Credit: Glen McCurtayne
For a start, it's strange for a party of the right to reject the pro-market solution to climate change in favour of a much more intrusive, regulatory approach.
For another thing, it's strange to reject ''a big new tax'' in favour of an approach that, if it were to work, would require a huge increase in government spending on subsidies and incentives. If such an approach wasn't to involve huge deficits and debt, or cuts in other government spending, it would require huge increases in ''old'' taxes.
The pragmatist in Abbott knows he must go to the election with a credible-sounding plan to respond to the threat of climate change. But all the populist campaigning against ''a big new tax'' has, ironically, ruled out the most sensible approach.
Let's get back to basics. If you agree that global warming is a problem and something should be done, you have to accept it's a case of ''market failure'' that market forces can't correct by themselves.
You must therefore accept the need for government intervention in the market in some form.
Most economic rationalists accept the need for intervention, but want to ensure it does as little as possible to disrupt the market and distort the choices made by producers and consumers. They see the basic problem as that the ''social cost'' of the damage done by greenhouse gas emissions isn't reflected in market prices.
So if they can find a way to get the social cost incorporated into market prices - to ''internalise the externality'' - they can leave it to market forces to do the rest.
One way to do this is to impose a tax on carbon emissions, which forces up the prices of emissions-intensive goods and services, thereby reducing demand for such items, encouraging energy efficiency, reducing any price disadvantage suffered by less-polluting energy sources and creating a monetary incentive for companies to find new solutions to the problem.
An emissions trading scheme is very similar. Its key role is also to raise prices, with the proceeds from sales of emissions permits going to government as a de facto tax. It creates a new synthetic market for the purchase and sale of permits and associated derivatives.
In theory, this makes it superior to a carbon tax. In practice, it makes it more difficult to administer and possibly opens it to greater price manipulation and uncertainty.
What you do with the proceeds from the tax is of secondary importance. You can give them to households as compensation for the rise in their cost of living, use them to cut some other tax, use them to fund research into technological solutions or use them for some unrelated worthy cause.
But if you reject both the economic rationalists' market-based solutions, what's next? Regulatory compulsion or budgetary incentives.
You could pass laws requiring vehicles to meet higher emission standards, appliances to be more energy-efficient and homes and buildings to meet higher standards of weather-proofing. You could even impose retro-fitting.
You could compel power stations to move to less-polluting means of generation, or just double the renewable energy target to 40 per cent. You could tightly regulate farming practices.
Sound attractive? Sound like the sort of thing a Liberal government would do? Hardly. But voluntary efforts would fall far short. Abbott has continued the Liberals' commitment to the Government's target of reducing emissions by 5 per cent of their level in 2000 by 2020.
That's tougher than it sounds because, left to their own devices, emissions keep growing. On Treasury's projections, it requires emissions in 2020 to be 21 per cent lower than they otherwise would be.
Coal-fired electricity generation is cheap relative to renewable energy or nuclear energy precisely because its market price doesn't include the social cost of the pollution it causes.
So if you want to overcome this cost-disadvantage faced by non-fossil energy sources without using ''a big new tax'' or without resort to compulsion, you have to provide big subsidies from the budget as an inducement.
I fear the saga of the Liberals' travails over climate change has a lot more twists and turns to go.