TWO conclusions ring out clearly from the Productivity Commission's report on what other countries are doing about climate change. First, the world is moving to tackle climate change, with Australia in the middle of the pack rather than out front. And second, the cheapest way to bring down carbon emissions is by introducing an emissions trading scheme.
Some may be surprised that the commission, Australia's high priest of economic rationalism, should endorse raising costs for business and consumers by putting a price on carbon. I humbly suggest they have misunderstood both economics and the commission.
Economics certainly aims to minimise costs and maximise output. But its horizons are long-term, and universal. Any economics student learns that if the act of production creates costs for others (what economists call externalities), then government should impose taxes to sheet those costs back to the producer.
With rough justice, that is what a carbon tax or emissions trading scheme aims to do. Unless you want to ignore the findings of climate science, there is no clearer example of an externality than companies, mines, consumers or cows pumping their waste gases into the air to heat up the atmosphere, if that will threaten the future livelihoods of millions of future inhabitants of our planet.
The point of a carbon tax or emissions trading scheme is to maximise our long-term welfare - the welfare of future generations, particularly those at risk from rising seawaters (think Bangladesh, or the Pacific islands) or from hotter temperatures and rising evaporation (think farmers in Australia's food bowl, the Murray-Darling Basin).
They work by raising prices. But remember: when the price of emissions rises, it creates the incentive for producers and consumers to change the way they operate, to shift to technologies or ways of life that produce fewer emissions. You face the full impact of the price rise only if you stand still and change nothing. And the purpose of charging for carbon is to drive change.
Take an example that has nothing to do with climate change. The steep rise in world petrol prices (along with traffic congestion and rapid population growth) saw passenger trips on Melbourne public transport jump 36 per cent in four years. People didn't stand still to cop the full brunt of the petrol price rise: many of them dodged it by finding a cheaper way to get to work, to sport, or to a night out.
Or take an example where carbon pricing (or the threat of it) is central. In the past, coal fuelled around 80 per cent of Australia's electricity supply. But in the four years to 2008-09, more than half the growth in power generation came from gas and renewables (mostly wind). And at last count, coal-burning stations make up just 10 per cent of all generating capacity now under construction or committed across Australia.
Gas and wind have taken coal's place, not least in Victoria. Origin's new 550-megawatt (million watt) gas-fired plant is about to come on stream in Mortlake. An hour west, AGL is building Australia's biggest wind farm (420 MW) at Macarthur. The switch from coal is not costless - the commission cites estimates by the Electric Power Research Institute that gas costs roughly 10 per cent more than coal, but wind roughly twice as much - but it will cost us far less than the upgraded transmission system, smart meters and solar subsidies that are now driving up power bills.
The wind stations are being built to comply with the federal government's renewable energy target. The commission estimates that even the best renewable projects will cost us $37 for every tonne of greenhouse gas emissions they save, whereas Europe's emissions trading scheme is doing the job for $20 a tonne in Germany, and $29 in the UK. Its core conclusion is clear: the most efficient path to reduce carbon emissions is to allow the market to find the cheapest ways to bring them down.
Australia's tragedy is that, for purely political reasons, the Coalition has now locked itself into turning its back on the market, and rejecting emissions trading, or the carbon tax that would lead into it. It plans to reduce emissions by paying producers to take ''direct action'' - yet the commission's finding is that direct action is the most costly policy of all.
It focuses on two examples: the incentives for Australians (and overseas households) to put solar panels on their roofs, and laws requiring biofuels such as ethanol to be added to petrol. It estimates that ''excessive'' federal subsidies and state feed-in tariffs mean taxpayers and consumers are paying between $431 and $1043 for every tonne of greenhouse gas emissions saved. It estimates the same cuts could have been achieved by a carbon price of $9 a tonne.
Biofuels were another idea that looked attractive, if you ignore the price tag. The commission estimates the cost in Australia at $532 per tonne of emissions saved by using ethanol, and $186 a tonne from biodiesel. At least that's better than China, where it estimates the biofuels program has actually increased emissions. No doubt you could argue with the numbers, but the conclusion is unavoidable: these schemes deliver very poor value for money.
Tony Abbott should read this report, and think hard about what it is telling him to do if he becomes prime minister. The Coalition needs to find a way back to trusting the market. The task ahead is colossal: both parties have committed to reduce Australia's emissions by 2020 to 5 per cent below 2000 levels, yet to get there would require us to cut emissions by almost 25 per cent in eight years from the current trajectory. Mickey Mouse schemes won't do it.
The bottom line is that change is inevitable, but it can be cheap. For most of us, it means using commonsense around the home: switching off lights not in use, wearing warm clothes in winter and opening up to the breeze in summer, buying energy-efficient cars and appliances, keeping tyres full of air, all that stuff.
Change is what this is about. Embrace it, and it'll cost less than you think.
