The Australian Government Thinks it Can Pay Polluters to Fight Climate Change

Direct Action, as you may recall, is the Federal Government's answer to the carbon tax. Instead of putting a tax on carbon emissions and forcing the market to adapt, the government has allocated 2.5 billion tax dollars to reward companies for cutting emissions, thereby fighting climate change. And last week, the Australian Government invited the country's big polluters to bid for a slice of those rewards.

It worked like this: The Clean Energy Regulator, which is the governmental department legislating climate policy, did an application call-out on Wednesday and Thursday last week. They asked companies to detail how much money they'd need for every tonne of carbon they didn't produce, as well as a description of how this would be achieved. Now this is a fairly routine way to implement policy, except that in this case the policy is junk. As economists and scientists have reiterated since 2013, Direct Action is ineffective and expensive, but we're doing it anyway.

"It's a bit like they made a bet to run naked down the street and now they have to do it" wryly summarises Giles Parkinson, editor of the Australian energy publication, Renew Economy. According to him Direct Action simply gave the government a point of difference while in opposition and was never intended as an effective alternative. "Direct Action is the policy to have when you don't actually have a policy," he says. "To achieve a five percent reduction in emissions by 2020, you need a policy to make that happen. And Direct Action isn't it."

Climate economists have long argued that reaching a five percent reduction on 2000's emissions by 2020 will require far more money than $2.5 billion. A cost analysis by the Australian Institute in 2011 found that the government would need around $100 billion to meet that target. Not only that, but an allocation of 3.2 billion (which is what the Liberal Party allocated at the time of publication) would actually cause emissions rise by 18.5 percent, rather than fall. The reasons are manifold, but a central failing is how the scheme evaluates success.

Frank Jotzo is the Director at the Centre for Climate Economics and Policy. According to him Direct Action will attract lots of emission reduction projects, but not all of them will involve action. "The companies offering projects have an incentive to overstate their benefits," he warns. "This means they'll pass off activities that they would have done anyway, just to collect the money." According to him this was one of several issues associated with the UN's Clean Development Mechanism, which was a similar scheme ratified in 2006. Sadly that has since faded into obsolescence.

This scepticism about the Direct Action isn't even confined locally. As was reported widely this week both China and the US have lodged questions with the UN querying Australia's dedication to tackle climate change. Brazil even bluntly described Australia as having a "low level of ambition", while China queried the way the government measures reductions. "1990 is an internationally common choice for base year of 2020 targets," wrote China's scientists. "But Australia chose 2000 instead." This anomaly was also picked up by Brazil and the US. Australia is expected to cobble together a response by December when the world meets to agree on a climate plan in Paris.

For the moment, the Liberal Government will uncharacteristically charge ahead with a state financed solution to a free-market problem. They are however, conducting the tender process in a stock frugal way. Like in any other public tender, successful contracts will go to the cheapest bidders. As the Clean Energy Regulator said on their website, "the best strategy for success at auction is to bid the lowest price at which it is worth your while to undertake the project. Participants with the most competitive prices will be successful."

This is well and good if the government is looking to build a road, but building a road is a one-off task. Fighting climate change will take decades; setting a low price on carbon now will only make the job harder down the track. As Giles Parkinson suggested, the government is approaching this from the wrong angle. "The Clean Energy Regulator was instructed to buy as many tenders as possible. It's not about buying quality. It's about buying lots of tenders, cheap," he says.

It seems crazy that we've got so far down this track. As Jemma Green, who is a Research Fellow at Curtin University wrote of Direct Action in October last year, "the policy still gives a worrying sense of being on a diet but without stopping eating cream buns." To further that analogy, last week saw the government's first call-out for low-fat buns. The successful contracts will be published this Thursday, along with their price tags.

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