Academics say Direct Action will create “subsidy culture”

Two leading academics from Australian National University have slammed the Abbott government’s Direct Action proposal to reduce emissions, saying it would be ineffective, encourage “rent-seeking” and create a “subsidy culture”.

More importantly, they said it was likely to fail. It would not be able to get least cost abatement because it would miss smaller projects, the financing time line was too short, and there was no means of ensuring that the abatement would not have been occurring anyway, without a government handout.

The assessments by Frank Jotzo, the head of the Centre for Climate Economics & Policy at ANU’s Crawford School of Public Policy, and Paul Burke, an economist with the Crawford School of Public Policy at the ANU, have been submitted to the government’s review of its Green Paper issued just before Christmas.

Direct Action has been almost universally panned by economists and analysts, and dismissed as an act of politics, not policy. But these assessments from Jotzo and Burke, are among the most damning, along with Bloomberg New Energy Finance, which described Direct Action as “wishful thinking” and “unfinanceable”. The head of CO2 Group, one of the longest established carbon abatement firms in the country, has given up and the company turned to aquaculture instead.

Jotzo, a long time supporter of carbon markets, said the proposed Emissions Reduction Fund, the centerpiece of Direct Action, may support particular emissions reductions activities, but could not deliver long-term, broad-based climate change mitigation action.

He said it would suffer from budgetary restraints, would be administratively difficult, could overstate abatement, and create perverse incentives.

“More broadly, any discretionary subsidy approach is in danger of fostering a culture of rent seeking with its adverse impacts on the overall economic policymaking framework,” he noted..

Burke said Direct Action could not, as the government claimed, be least cost, because many low cost abatement possibilities were small, and not worth the costs and uncertainties of applying for subsidies. “Many of the “lowest hanging fruit” of emissions reductions will therefore be missed,” he said.

And companies were likely to seek funds that they would have implemented even without government support. This means it fails the test of “additionality”. In other words, it becomes pointless.

Burke also said “business-as-usual baselines” would be impossible to reliably estimate, and because of that it would be impossible to work out what reductions the program is achieving.

This raised the risk of companies seeking funds that they would have implemented even without government support.  Those working in the industry suggest this is exactly what is happening –projects are being delayed because companies are waiting to tap government funds. This means it fails the test of “additionality”. In other words, the whole exercise becomes pointless and a waste of money.

Burke said this would create a “subsidy culture” that runs against the basic tenets of capitalism. Instead of requiring the Government to “pick winners”, carbon pricing automatically provides firms and others with an

He said Direct Action would have to be funded by other taxes and, unlike carbon pricing, would not provide net revenues.

“There is no reason to think that collecting revenues from carbon pricing involves larger costs to the economy than collecting revenues from other taxes. The Government has to tax something, and taxing greenhouse gas emissions makes sense because doing so simultaneously achieves both revenue and emissions objectives.

“Given our existing fiscal deficit, it is inadvisable to take on a costly new scheme like Direct Action, particularly as it is likely to provide questionable abatement benefits. “