On Tuesday 1 December, the Liberal Party abandoned its longstanding climate change policy involving the establishment of an emissions trading scheme (ETS). On Wednesday 2 December, the Senate voted to reject the ETS legislation and the new Leader Mr Tony Abbott said that he is now working on a new policy which, the media reports he says will involve cutting emissions but without any tax, ETS or increased electricity prices.

Many people have asked: is this possible? Is there a costless way to cut emissions?

While there are some energy efficiency measures which pay for themselves over the long term, the simple fact is that there is a cost of moving to a lower emission economy. That is because the cheapest form of generating energy in Australia is by burning fossil fuels which emit a lot of greenhouse gases. And the cheapest coal, brown coal, is the dirtiest.

To give you an example; one of the major generators recently told us that their brown coal power station in Victoria produced 1.3 tonnes of CO2 per megawatt hour of electricity. A new combined cycle gas turbine generator produced 0.3 tonnes of CO2 per MW hour.

So if you substitute wind, solar, nuclear or even gas for coal your electricity will result in less emissions but will cost more.

However, by putting a price on those CO2 emissions the cleaner, less emissions intensive forms of generation become more competitive because they have a lower carbon price to pay.   

Similarly with the great opportunities for CO2 abatement by increasing green carbon or agricultural offsets, there is a cost. If a farmer is to plant trees as a carbon sink or change his land management to raise soil carbon levels, somebody is going to have to reward him or her for doing so. 

By the same token, an Indonesian farmer is not going to protect the rainforest if there is money to be made by cutting it down and no reward for leaving it as it is, let alone replanting it.

Now whether these carbon abatement techniques are driven by an ETS, a tax, regulation or by massive government subsidies they all have a cost and we will have to pay for it.

The reason an ETS is the preferred approach around the world (and indeed was the policy of the Howard Government) is because it is more efficient and offers the lowest cost abatement.

So if we rule out an ETS or a tax what are we left with? We could pass regulations to require power stations to clean up their act or use more renewable energy (that is what the Renewable Energy Target does now). This increases the cost of power and so electricity prices go up.

We could pass regulations to make farmers plant more trees and change the way they manage their land. That increases the cost of food and fibre.

How do we address these price rises? Well if you dont want to pass them on to consumers, presumably a Government would  raise taxes so that either subsidies can be paid to generators to offset their increased costs or compensation paid to households for the higher electricity prices.

Whichever way you look at it, going green is going to cost money and the challenge for any alternative policies to an ETS is to demonstrate that it will deliver lower cost abatement. In other words there is no point cutting emissions by regulation if the cost to the economy is greater than by using an ETS.

While I look forward to what emerges from the the new policy development efforts, I note in passing that many of us would find it incongruous if a free enterprise party, the Liberal Party, abandoned a market based means of pricing carbon and reducing emissions and replaced it with heavy Government regulation and the increased bureaucracy to administer it.

Without traversing any further the last, very difficult few weeks I do want to pay a special tribute to my colleague Ian MacFarlane who handled the negotiations with Labor’s Senator Penny Wong, the result of which saw the Government making very substantial concessions which on any view gave us the bulk of what we were seeking to achieve in the amendments we had presented to the Government on the 18^th of October.

The concessions made secured tens of thousands of jobs by providing protection for workers in the Emissions Intensive Trade Exposed Industries (EITEIs), protected and provided new opportunities for agriculture as well as securing electricity supply.