While the government is preparing to repeal the carbon price, the fires in New South Wales remind us that it is in Australia's interest for the world to act on climate change - and that starts with a credible effort at home, writes Frank Jotzo.

No specific incident like the NSW fires can be unequivocally attributed to climate change. But extreme weather - droughts, heatwaves, fires, floods - is exactly what we would expect to see much more of as a result of climate change. Cutting emissions is elementary risk management for a nation that is more vulnerable to climate change than most others.

The majority of people see it that way. It is for good reason that the government supports the national 5 per cent reduction target, and also the reduction range up to 15 or even 25 per cent. We are a rich country with high per person emissions and ample opportunities for reductions. Other economies are heading for significant reductions by 2020: Europe has opted for a target of 20 per cent or more, the United States is well on track to a 17 per cent reduction, and China has committed to stop increasing the use of coal in its fast growing economy.

Environment Minister Greg Hunt has said that he wants to help broker a climate agreement between China, the United States, India and Europe. It is a tall ambition, but Australia can indeed play a helpful role internationally. But this can only happen if we are seen to make a strong effort ourselves. If Australian domestic climate policy is seen as a fig leaf, then we can forget any ambition to help international progress.

To make direct action effective would require much more money than budgeted. And it is difficult to imagine the government spending more. The money given to emitters will have to come from taxes, and lean times are ahead fiscally.

It also means lots of red tape. Companies who put their hand up for payments need to prove that their projects will reduce emissions below what would have happened anyway, and they can make money by over-claiming. So the government regulator will need to be strict, which in turn will make it harder for projects to get accepted.

And the scheme would inevitably miss out on many low-cost abatement options that cannot be defined as projects eligible for payments.

So direct action policy spells large payments from government to industry, with ongoing detailed regulatory involvement, and at high economic cost. This will surely not be the future of Australia's climate policy. Malcolm Turnbull on Q&A said as much, calling direct action "short-term".

What are the alternatives?

One is direct regulation. Consider the United States: efforts towards a national emissions trading scheme have been thwarted, so the Obama administration instead uses mandatory emissions standards. Thanks to cheap gas and to regulation, no new coal-fired power stations will be built in the United States. California has its own emissions trading scheme, but much of the action there also comes from regulation.

Direct regulation could be effective in Australia: compulsory shutdown of old power stations, strict rules for industrial plants, mandatory fuel and energy standards for cars and houses, more subsidies for renewable power, and so on.

But it would be costly. It would force some high cost actions and miss out on many low-cost opportunities. It would meet resistance by the industries concerned - unless of course there were sufficient sweeteners, again courtesy of taxpayers.

Which brings us back to putting a price on carbon emissions.

A carbon price creates an incentive for all businesses and consumers to use all low-cost options to cut back on energy use and emissions. Other policy instruments are important, but carbon pricing is the best cornerstone.

And it brings in money, rather than being a drain on the budget. The IMF and OECD are calling on governments to put a price on carbon and use the money to plug holes in budgets or better still reduce other taxes. China is preparing for emissions trading as part of its overall policy mix.

Carbon pricing in Australia is not dead and buried. Today's carbon pricing scheme is likely to be repealed, but a future Coalition government might well re-introduce a form of carbon pricing.

Perhaps it could be an emissions trading scheme - fully market-based, not a whiff of tax about it. Perhaps a tax on fossil fuels, as part and parcel of a package of business tax reform.

Or perhaps it will be left for a future Labor government to once more to put in place emissions pricing.

Ultimately though, bipartisanship is needed to get a lasting climate policy framework. Right now it is hard to see how the political consensus on the carbon issue, lost at the end of 2009, might re-emerge. But things have changed rapidly and drastically before on the rollercoaster that is Australia's climate policy.

Frank Jotzo is director of the Centre for Climate Change Economics & Policy at the Australian National University's Crawford School. He is currently visiting at the Centre for European Economic Research in Germany. View his full profile here.