Basil Fawlty couldn't have done it better.

Treasurer Scott Morrison last week stood at the lectern and delivered a thundering dissertation on the urgent need for cuts to company taxes.

The occasion was the release of the Productivity Commission's latest report on how best to lift our living standards.

So convincing was the Treasurer's speech, so lucid his argument, a reasonable person may well have formed the impression that the commission endorsed his major policy initiative.

Sadly, not. In fact, not a single sentence on company tax is to be found anywhere in the entire report, the modestly titled 'Shifting the Dial: 5 year productivity review', which runs to six chapters with various forwards and appendices.

Instead, it focuses on health, employment, urban planning and the rather sticky question of energy. And it's here that it drops a bombshell and aims several Exocet missiles at strategic targets.

The energy crisis fix — a carbon price

A sober document it may be, as you'd expect from an apolitical body like the Productivity Commission. But the headline on energy pulls no punches.

"Energy is an appalling mess", it screams, describing Australia's electricity markets as being in "a fragile state".

Little wonder the Treasurer opted for the diversion tactic: the old "Look over there, it's a puppy" device.

The Productivity Commission report contains some blunt assessments on the nature of our energy problems and how to fix them, which indirectly deliver a savage blow to the Coalition's policies and strategy.

The primary recommendation is to adopt a carbon price. It isn't the first time the commission has urged the Government to rethink its carbon emissions strategy. But the looming catastrophe in our energy markets has given the message new urgency.

Having been a cabinet minister in Tony Abbott's government — which junked the carbon price and established a multi-billion-dollar handout program in its place — the Treasurer's reluctance to address issues raised in the report is understandable.

But, as the commission points out, it is the very failure to address the problems that have led to the dire situation in which we now find ourselves.

Inaction and indecision from the Federal Government has killed electricity generation investment. If that's a strategy to maintain the status quo, to retain coal fired generators, it is doomed to failure.

As the commission points out, policy failure or fence-sitting is likely to hasten the demise of coal fired electricity generation.

"Doing nothing on emissions intensity (via price or via some other proxy) is most likely to ensure that the fear of redundancy for coal will become a reality," it says.

Why a carbon price?

There are three competing factors in electricity generation: reliability, cost and emissions.

Unfortunately, our current system of regulated prices has failed to send the correct signals on those factors.

A decade ago, state governments overinvested in their poles and wires to "gold-plate the system" to avoid a political backlash from power blackouts. No thought was given to the cost of that extra reliability. But that now is a major component in our soaring power bills.

It's a similar story with generation and emissions. Those regulated prices are slow to adapt.

Just as they don't reflect the true cost of carbon emissions, or the cost involved in reducing those emissions, they similarly don't price in the real cost of the unreliability of renewable energy.

The recent report by Chief Scientist Alan Finkel, now largely abandoned by the Government, attempted to overcome the problem on unreliability with renewable energy projects by making them factor in battery storage or back-up with gas as part of the project cost.

The point is, improving the reliability of renewables comes at a cost. So too does reducing carbon emissions.

A price on carbon would make those costs far more transparent and lead to innovation and investment that would secure our energy supplies in the long term which ultimately would bring down prices.

The trouble with subsidies

Ask most economists, and they'll tell you a truly free market is the most efficient way to allocate resources. A market price provides incentives to both producers and consumers.

The carbon tax installed by Julia Gillard was about to revert to a carbon price before Mr Abbott fulfilled his election commitment and axed it.

Instead, we've relied upon a motley collection of schemes which essentially provide subsidies in a bid to speed up the switch from fossil fuels to renewables.

The problem with subsidies is that they are inefficient and taxpayers end up shouldering the cost.

In 2001, the Howard government installed the Renewable Energy Target (RET), a program that was boosted in 2009 and 2011 by the Rudd and Gillard governments but then reduced by the Abbott government.

The problem with the RET is that it discriminates between power generation methods and doesn't directly deal with carbon emissions.

Gas, which produces much less carbon that coal, is out the mix because it isn't renewable. Ludicrously, in Europe under its RET, burning timber has increased in popularity because it's renewable. The problem is, it still emits carbon when burnt.

Dr Finkel opted for a Low Emissions Target, which was preferable, because it didn't dictate which technology to use. It also would have introduced a defacto price on carbon. That's now been junked.

Instead, we have the National Energy Guarantee (NEG) which shifts the dial slightly towards a pricing mechanism. Retailers who do not meet their emission reduction targets will able to trade with those who do.

Sadly, the mechanism still is short on detail and the announcement from Prime Minister Malcolm Turnbull was made after the Productivity Commission had delivered its report.

But given the commission favoured Dr Finkel's idea over the RET, it is likely to at least acknowledge the Prime Minister's NEG plan is an improvement.

This is what it had to say on Dr Finkel's Low Emissions Target:

"The critical point is that while there are various ways of placing prices on carbon, establishing an agreement on one of them, even if not perfect, provides a guide for investment toward the lowest cost emission reduction options."

Whatever happened to Direct Action?

It's the subsidy that dare not speak its name.

Around $2.23 billion was spent on government handouts to industry and some of the nation's biggest carbon emitters. Much of the money went to companies planting trees or those who stopped clearing land.

As an emissions reduction program, it was a complete waste of money. Total greenhouse gas emissions rose 0.8 per cent while the program was in operation and the Government confirmed it would not meet its 2030 climate target with the policy.

In May this year, the Parliamentary Budget Office calculated Australians would need to fork out $23.6 billion for the policy to meet the Coalition's Paris Accord commitments.

Compare that with the carbon tax when emissions fell during its short life.

Research by Swinburne University's Jayanthi Kumarasiri and Christine Jubb found the country's biggest emitters said they lost focus on reducing emissions once the tax was repealed because they lost the commercial imperative.

As for the energy crisis and the future of coal, perhaps the Productivity Commission should have the final say.

"The financial viability of refurbishing existing coal-fired power today appears very doubtful, as uncertainty is actually priced into current management models," it said.

"Advocates of older generation technologies who oppose prices that reflect emissions are actually doing themselves a major disservice. Lacking information on risk, investors most likely will not commit."

As Basil told Polly: "Listen, don't mention the war. I may have mentioned it once but I think I got away with it."

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