IT DOES not matter whether you are a global warming sceptic, it is still difficult to deny that unsustainable economic pressure on natural resources and the environment is the most substantial market failure in the history of the market economy. Therefore, regulation is inevitable.
Surprisingly, most economists, most politicians and even the public don't seem to be particularly concerned with the type of regulation.
Direct regulation or financial inducement are both appropriate measures to promote a sustainable economy and, particularly, sustainable energy generation and use.
Nevertheless, the debate seems to be evolving about the shape and form of the financial inducement - carbon tax versus carbon emissions trading - and the directions and magnitude of compensation required.
In the international context, observers are mostly concerned with the timing of Australia's action, but that in turn depends on when and what this country's big competitors and trading partners do to curb their carbon emissions.
However, neither an emissions trading scheme nor an excise tax on carbon emissions might work at all.
Imposing a cost on socially or environmentally undesirable consumption is effective only if consumers have a choice - for example, higher taxes on cigarettes might be a good reason to quit smoking.
Another example is in Singapore, where a heavy fiscal burden is imposed on those who buy cars, helping to reduce the number of cars on the roads of that densely populated city-state; but it only works because public transport is a viable and a cheap substitute.
Compared with these examples, energy and fuel are necessities with no immediately available substitutes.
At the starting point of introducing either a carbon tax or an emissions trading scheme, there will be no sufficient alternative source of energy to those based on fossil fuel.
Therefore, consumers will have to absorb the additional cost, while major polluting industries will have little or no incentive to invest in alternative clean technologies.
Meanwhile, the price of such a policy will be lower disposable incomes, lower discretionary spending, and, consequently, an overall slowing of the economy.
All these impacts are inevitable before any progress can be made in restructuring the energy sector. Furthermore, the economic slowdown will reduce the capacity of both private investors and the public sector to invest in cleaner energy.
The overall negative impact on the Australian economy will occur irrespective of the impact of an emissions trading scheme or carbon tax on Australian export industries.
There is no doubt that any environment conservation strategy should incur costs, which, in the beginning, will affect living standards. Two questions arise: are we as a community ready for a sacrifice, and could we not at least think about a workable solution at a comparable cost?
Such a solution might not be simple. We might combine direct regulation with financial inducements, and target overall relative reduction in energy consumption and gradual reduction in energy based on fossil fuel.
Direct regulation enforcing a step-by-step decrease in fossil fuel use might in turn force energy generators to invest in clean energy.
As with emissions trading, this will make energy more expensive. However, higher energy costs will follow investments in new clean technologies, not precede unrealistically expected action on behalf of the energy industry. In the latter case, carbon tax or emissions trading costs can simply be passed on to consumers.
At the same time, like it or not, the financial inducement component should start with unpopular measures of very selective excise taxation in areas where close substitutes are available.
One possible example is the replacement of a uniform car registration fee with one that increases steeply according to engine capacity. Some developed nations have already implemented such a system to encourage the use of smaller cars and reduce fuel consumption. Lower registration fees could also be used to encourage the purchase and development of cars powered by alternatives to internal combustion engines.
Progressive excise taxation, which varies according to power consumed, can also be applied to appliances and other electric devices.
All applications of the excise tax will send a signal to consumers, diverting them to goods consuming less power, and to manufacturers, which will need to meet changing consumer preferences.
Importantly, such market signals will be transmitted not just to domestic manufacturers and importers, but also to overseas suppliers.
The proceeds from such excise taxation and the increases in car registration could all be used to fund projects targeting lower energy consumption and the move to cleaner energy.
* Dr Gennadi Kazakevitch is deputy head of the department of economics in the faculty of business and economics at Monash University.
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