'Final' Direct Action plans published

The government have published their final White Paper on how Direct Action will replace the Carbon Tax.

The idea of direct action is that companies will 'bid' for contracts that will allow them to introduce measures to reduce carbon emissions. The government claim that they will meet the 5% reduction target in carbon emissions by 2020 as a result.

Very few people have any confidence that this new scheme will work. Economists have a very clear view on the effectiveness of various schemes to reduce negative externalities.

BEST

Permit trading schemes

Tax

Regulation

Nothing

WORST

The Direct Action scheme counts as regulation. Perhaps the kindest thing that can be said about it is that it is better than nothing.

The problem of regulation is that it relies on somebody deciding the amount of reduction and/or the budget for the regulation. Neither will be necessarily the optimal (allocatively efficient) amount and are likely to be restricted by both budgets and political constraints.

The advantage of both tax and trading schemes is that they rely on the market and can be managed so that the economy adjusts to the socially optimal position. Both have the weakness that negative externalities must be well understood to achieve their goal. 

However trading schemes have the huge advantage of allowing the cheapest possible reduction in negative externalities. By this standard Direct Action comes a very poor third in reducing carbon emissions.

The Guardian outlines the practical problems of the proposed Direct Plan here.