Finally, some honesty. In ''Carbon price floor crucial to its aims'' (The Australian Financial Review, July 5) four lead advocates of the government's emissions trading scheme acknowledged it ''is a policy tool created by government to achieve the objective of reducing emissions''.
Advocates have conveniently allied carbon pricing with the reforms of the 1980s and '90s. The narrative has been that market-based carbon pricing is akin to free-market reforms such as tariff liberalisation.
They are nothing alike. It is misleading to suggest ''free market'' and ''market based'' are the same thing. Carbon pricing is not free market. Both a carbon tax and an emissions trading scheme are government interventions in the economy, just like any other tax, tariff or regulation. An emissions trading scheme just uses the technology of a market to impose the cost of a tax and regulation.
The major driver of emissions permit prices will be the legislated volume of supplied permits and the legally required number of market participants demanding them.
Both supply and demand factors will be controlled by politically influenced governments susceptible to the influence of rent seekers.
The reason markets are proposed is to ensure government does as little harm to industry as possible and adds another incentive for efficiency.
Depending on the abatement model used, it is generally accepted that the cheapest cuts will be achieved through efficiency gains first and buying transformative new technology later.
The same principle applies with international trading. Since cutting emissions is a global challenge, international trading allows for cuts to be achieved in countries where it is cheapest first, and where it is most expensive later, such as Australia.
Despite being artificial, allowing for the use of the full flexibility of a market places downward pressure on a floating carbon price. But that is not what Australia needs.
In the lead-up to the carbon tax, the argument from select industries was that we needed a carbon price to provide investment certainty. This never stood up to scrutiny.
By introducing a price, we've swapped the uncertainty of whether we will have a carbon price for the uncertainty of its trajectory.
Based on its emissions profile, primarily from stationary energy, Australia needs a predictable, high carbon price. This is because the margin between the commercial viability of established coal-fired power stations and new, lower carbon and renewable energy investments is so large.
Greens leader Christine Milne unintentionally identified on Channel Ten's Meet the Press the inconsistent nexus at the heart of artificial carbon pricing. According to Milne, Australia needs a ''clear trajectory of where the price is going to go'' because ''a single-digit price doesn't drive change''.
Milne is right. A low price won't drive substantial change. ANU research concludes that to reduce its emissions by 2020, Australia would need a carbon tax rate of about $60.
Considering our emissions profile results from long-term energy investments, an uncertain trajectory compromises the efficacy of emissions trading.
With declining global carbon prices, the likelihood of Australia transforming to a low-carbon future within a reasonable horizon is low.
To lessen the downward pressure on the necessarily high carbon price, the government has included a 50 per cent cap on the number of foreign tradable permits into the scheme, and a floor price of $15 a tonne. Reports last week that the floor price will be cut or scrapped would only increase any decline from the fixed price when it converts to a floating price in 2015.
Yet scrapping the floor price met with resistance from those who had argued for a market-based scheme, as it would be more efficient than other policy alternatives. Their reason was that the market wouldn't deliver the predictability and high carbon cost Australia needs.
Removing the floor price would enhance the relative merits of using market-based carbon pricing to achieve cost-effective emissions reduction. And doing so is crucial, since no other country has imposed such a high-cost and broad-based a carbon price as Australia, and isn't likely to any time soon. Without a lower price, the scheme becomes politically unsustainable without equivalent action in other countries.
Since the only viable solution to cutting emissions is innovation of low-carbon energy technologies that can compete without a carbon price, the better solution is to scrap the scheme. But so long as we keep flawed carbon pricing, we should at least ensure floor prices and restrictions on tradable permits are scrapped to minimise damage to the economy.
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