EMMA ALBERICI, PRESENTER: At 9 O'clock tomorrow morning Tony Abbott will introduce the carbon tax repeal bill. It will be the first piece of legislation to be debated by the 44th Parliament. Labor is happy to axe the tax but only if it's replaced by a credible alternative that brings down the level of Australia's carbon emissions. Labor has labelled the Government's direct action plan a con. According to the Opposition there isn't a single environmentalist or economist in Australia that thinks it will meet the promised target to cut carbon pollution by 5% on 2000 levels by 2020. Our guest tonight defies that theory. He's an energy economist with the global advisory firm Frontier Economics. Back in 2010 Danny Price did some work on direct action on behalf of the then Opposition. He supports the principles of direct action and joins us now from Melbourne to explain why. Danny Price, welcome to Lateline.

DANNY PRICE, FRONTIER ECONOMICS: Good evening.

EMMA ALBERICI: Can I begin by asking you to explain exactly how direct action works?

DANNY PRICE: Well, direct action, perhaps if I contrast it with the way that the carbon tax work or the carbon price works. The carbon tax is effectively a stick, if you like, whereas a direct action is a carrot. So instead of charging everybody for all of their emissions, under direct action anyone who betters a certain yardstick, or a benchmark, or a baseline would be receiving a reward for that action. And that would induce people to invest in cleaner, lower emission activities. That's the fundamental difference between a carbon tax and direct action.

EMMA ALBERICI: So how does direct action encourage heavy industry to actually cut their emissions?

DANNY PRICE: Well, if, for example, you take the electricity supply industry, so certain electricity supply operators have options to reduce their emissions, well, they could participate in an auction for funds to help fund the investment in those cleaner activities. And so instead of an adjuicement by way of penalty, people are being induced to invest in cleaner technology because they receive funds to help them invest in those technologies.

EMMA ALBERICI: But there's no compulsion for them actually to participate and under direct action how do you stop big emitters from continuing to burn so called dirty types of coal? Is there anything in the policy that actually stops them from doing that?

DANNY PRICE: Yes, indeed there is. I mean direct action comprises both a reward and also a penalty. So if any producer comes along and starts to emit a much higher rate than they did before, well then that penalty would cut in. It's in fact a combination of carrots and some sticks but very much the focus is on encouraging greater quantities of cleaner energy or cleaner forms of production.

EMMA ALBERICI: And yet Greg Hunt specifically says direct action assumes no revenue at all for the Government which suggests there's no need for any kind of penalty for firms?

DANNY PRICE: Well, it doesn't a penalty doesn't necessarily involve the Government charging firms a fee for not making the benchmark. A penalty, for example, could require a firm to actually make good on their emissions. And so instead of, you know, like a fine, it could be that they have to then go out and purchase a certain quantity of clean energy. So that could be completely consistent. The Government, of course, hasn't yet put anything out about how the penalties will work or the baselines will work which will be a challenge for the Government and they're the two, you know, most difficult issues for the Government to deal with. But I guess we'll get to see what the form of the penalty is going to be.

EMMA ALBERICI: But you insist there needs to be a penalty of some kind?

DANNY PRICE: Well in fact the direction action policy has always had a penalty included in it. It's been a consistent feature of direct action from the very first document, that's been put out on direct action. But the Government has very much focused on the carrot side, the subsidy side to induce cleaner activity rather than on the penalty side.

EMMA ALBERICI: Can you tell us exactly what your role has been in the development of this policy?

DANNY PRICE: As you mentioned from the outset a couple of years ago, we were asked by the then Opposition to review their costings of direct action and to look at whether the range of the abatement measures were consistent with the literature at the time and in both cases we concluded that the costs were reasonable and the level of abatement they expected in the policy was very consistent. In fact probably on the conservative side of the evidence that was available at the time.

EMMA ALBERICI: Now, at the time in 2010 the Government had said that the total allocation under this fund that that would offer money to emitters to stop bad behaviour, that that fund would be worth $10.5 billion out to 2020. But now that's been revised and the Government is budgeting just $2.55 billion to 2018. Tony Abbott says they won't spend a cent more than that out through the forward estimates. Is that going to be enough to meet that 5% target?

DANNY PRICE: Well, I think my understanding is that the total funds are not just 2.55, they are the funds available for the next four years. Past that, there will be some subsequent funding to meet the targets. So the Government's only ever talked about the forward estimates but beyond that there will be funds available to meet that target. That's my understanding.

EMMA ALBERICI: How much more than 2.55 billion will be required in your view?

DANNY PRICE: Well, I don't know yet because it will depend very much on where the Government sets the baselines, the nature of the penalties that are applied, but in the order of between $7 billion to $10 billion but probably on the lower end of that range.

EMMA ALBERICI: Is that on top of the $2.55 billion?

DANNY PRICE: No, that includes the $2.55 billion but it remains to be seen how much the total cost will be, depending upon the settings of the scheme.

EMMA ALBERICI: The independent analysis by Sinclair Knight Mertz and Monash University has found an extra $4 billion will need to be spent to meet that 5% target out to 2020, so what you're saying suggests they are right?

DANNY PRICE: Well, what I'm suggesting is that the way they presented that was misleading because they had made the erroneous assumption that that was the only fund, the $2.55 billion, was the only funds available and then said there was a shortfall, when in fact the now Government, but then Opposition, had said initially that they had funds available for up to $10.5 billion till 2020. They just assumed that whatever the Government announced in the forward estimates was the total funds available. But my understanding is that there are funds beyond the forward estimates. And that would be the extra $4.5 billion plus the 2.55 would be very consistent with what I've just said I think the costs are likely to be.

EMMA ALBERICI: Now a Fairfax media survey of 35 prominent university and business economists found only 2 of them believed direct action was indeed the better way to limit Australia's greenhouse gas emissions, 30 favoured the existing carbon pricing scheme. Even the right leaning Institute of Public Affairs thinks direct action is "a bad idea". Are they all wrong?

DANNY PRICE: Everyone's got their opinion. No one ever asked me, I guess that would have made 3 economists. I guess direct action has some extraordinarily good features which I don't think many economists have really thought about. It's an area that I've been working in for well over a decade and I've experienced put in place a scheme and the predictions that we made about the carbon tax that it would collapse under its own weight and it would be ineffective have all come true. What I'm saying now is that I think that direct action is in fact the more attractive option and the key reason that I have that view is that whatever scheme is put in place it must, above all else, appeal to investors because it's a policy that can only ever be, it can only ever achieve its objectives through investment. It's not by wishing and hoping. Billions and billions of dollars need to be invested in the way that we produce energy, transport our goods and services. It needs a transformation of the economy. It's basically an investment led policy and the way direct action works is far more attractive to investors if investors actually stop and think about it. Because what it does is it involves the Government contracting with a supplier to provide abatement services. That's a very secure investment. Investors will find that very appealing, as compared to a carbon price which can be changed at the will of the Government. In fact, the Labor Government shot carbon pricing in the foot by demonstrating very clearly that they had total and utter control over the way the prices were set by, for example, removing the carbon price floor because there were some political pressure and then in the lead up to the election a promise to bring trading forward by one year. This fundamentally changes the economics of investments that may have been made in respect of that carbon price and it demonstrated to investors that the carbon price is a confected price. It's not like a price for, you know, bread or cars or soft drinks where the innate desire to consume those goods and services against the costs determined a price. It's totally controlled by government. It's a regulatory construct and the Government demonstrated that they were prepared to change that. The Labor Government was prepared to change that to suit the political mood of the day.

EMMA ALBERICI: So when Labor claims that every economist and environmentalist in Australia says direct action is a con and won't meet the targets, do you think that's driven purely by politics?

DANNY PRICE: No, I think if you ask economists are prices good, it's in their DNA to say that prices are good, particularly when you compare it against government provided services. But prices are only good under certain circumstances where a market will function. But as I've mentioned, this has to be a policy orientated towards investors and I just can't see that investors are going to invest in a scheme where the Government can and will change the price to suit the politics and it could render their investments completely stranded, redundant. That's a big risk for those investors.

EMMA ALBERICI: Essentially those on the Labor side are saying people who support direct action don't believe in the science?

DANNY PRICE: Yeah, I find it really grates with me that you have to believe in carbon pricing to believe in climate change. I think it's unedifying, it's not very helpful. I think it's a sort of juvenile way of thinking about it. There are many different ways of addressing climate change policies. Many different ways of influencing behaviour, as we could have standards, we can have subsidies, we can have rewards, we can have education. To say that the only mechanism that will only work is carbon pricing is in fact nonsense.

EMMA ALBERICI: Danny Price, we're out of time, thank you so much for coming in for us.\

DANNY PRICE: Thank you.