The first thing any student of basic economics learns is that a free market is the most efficient method to allocate resources. And this is where Direct Action gets it all wrong, writes Ian Verrender.

It was a throwaway line over lunch.

Back when the Coalition was in opposition, a former senior party adviser, chortling at the incongruous nature of the fight over climate change, couldn't help himself.

"You know what the main difference is between us?" he asked. "The (Labor) government wants to take money from polluters and give it to taxpayers while the Coalition wants to take money from taxpayers and give it to polluters."

If it wasn't so serious, it'd be hilarious.

For the past five years, the great philosophical debate around climate change has been fought over the science and, in particular, whether human involvement plays a role.

Given both major parties have signed up to reduce greenhouse gas emissions - which by definition means both believe in human involvement in climate change - it was a totally unnecessary argument with the annoying spectacle of barely literate politicians disputing science.

But in all the smoke over the science, a fundamental economic principle has been swept under the table without so much as a peep, let alone a decent argument.

For at least the past 40 years and arguably for a good deal longer, Australian governments have embraced a free market ideology; that the economy should be driven by market forces rather than the heavy hand of government.

Last week's hard fought political victory for the government on its much vaunted Direct Action carbon policy effectively replaces a pricing mechanism with a subsidy, a strategy that carries enormous risk for the government, both political and economic.

The first thing any student of basic economics learns is that a free market is the most efficient method to allocate resources.

That's not to say markets are perfect. They're not. They're often distorted by the irrational behaviour of humans and the interference of governments. More often than not, they require regulatory oversight and intervention to prevent dangerous bubbles forming.

But a price signal is infinitely superior in shaping behaviour, in balancing the competing interests between suppliers and consumers, than any other system, as recent history in Eastern Europe and Asia has shown.

And that's the primary problem with Direct Action. In shifting from a carbon price to a subsidy mechanism, the decisions on who will take action and what action will be taken to reduce emissions will now fall to a bureaucrat, a committee or an unwieldy collection of both.

Quite apart from the opportunity for mistakes, and even corruption, the danger is that the entire program simply fails to deliver, to the detriment of the taxpayer.

You don't have to delve too far into the archives to find examples.

Take the Textile Clothing and Footwear plan. ALP senator John Button, a long-time proponent of reduced protection and open markets, advocated for the Hawke government's across the board tariff cuts in 1988 and 1991.

To overcome textile industry and union opposition, and in an effort to modernise the industry so it could face the brave new world of competition, Button oversaw a plan that would inject more than $1 billion into the nation's textile manufacturing plants.

It was a disaster. The industry - including a large number of multi-nationals - happily took the cash and, in some cases, upgraded and transformed their plants to import centres so they could shut down local manufacturing.

As a means to cutting emissions and pollution, Abbott's Direct Action plan faces exactly the same problems. Taxpayer cash will be doled to large corporations before any action is taken, without any guarantee of success.

If in two years, billions have been spent with no reduction in emissions, the blame will fall squarely on the Government and specifically on Tony Abbott's shoulders. Will the big polluters be forced to hand back the cash?

Then there are the administrative costs. It is more than likely that a sizeable chunk of the $2.55 billion of taxpayer funds so far committed to the project will be swallowed by the program's administration, thereby reducing any financial return on the investment.

You only have to look at Julia Gillard's school halls project for evidence of that. In an attempt to make sure businesses didn't overcharge, the then government instituted multiple layers of bureaucratic oversight. The building industry still overcharged, the costs blew out enormously and the policy became a political albatross.

It is an odd tack for a Coalition Government and more so this one. Abbott has long boasted of his small government credentials, his commitment to free markets, the need for smaller bureaucracy and a reduction in that ubiquitous "red tape".

It stands in stark contrast to his and Treasurer Joe Hockey's commendable stand on corporate welfare when they refused to cave in to the demands from Detroit for yet another round of taxpayer cash handouts to maintain the car industry.

And for a new Government seemingly so committed to fiscal discipline in order to fix a "budget crisis", to replace a tax delivering an income stream with a loosely articulated policy involving a significant cost, hardly seems logical.

The new policy will deliver enormous relief to the coal industry and coal fired power generators. But as Greg Jericho pointed out on The Drum last week, the removal of the carbon tax may have delivered the biggest electricity price cuts on record. But the cuts were nowhere near as large as the price hikes endured by consumers after the carbon tax was introduced, primarily because most of the price hikes weren't related to the carbon tax.

From a consumer perspective, electricity prices remain elevated, exorbitant even. It is also important to remember those power price drops in the September quarter were one-offs.

They will not continue to fall because of the carbon tax removal and may in fact resume their northward march. And as time goes on, the memory of the modest power price cuts of September 2014 will dim.

From a political and economic perspective, it would have been far better for the Government to move from a tax to a market price for carbon.

Contrary to popular belief, power generators care little about a carbon price. They simply want a return on their assets and to maximise their profits. If they foresee a high price for carbon emissions in the future, they will invest in other forms of generation.

Australian coal-fired generators are amongst the world's dirtiest and they are coming to the end of their lives. Within the next few years, power companies will need to make decisions on their replacement. But once again, the future is uncertain.

Certainly, under the truce struck with Clive Palmer last week, the price has been removed. But for how long? Former Reserve Bank governor Bernie Fraser has the task of completing a series of reports about the introduction of Emissions Trading Schemes elsewhere in the world. His final report will be due shortly before the next election.

Given our major trading partner China has suddenly embraced the concept of pollution reduction and carbon pricing with America attempting to ram through similar measures, there is a good chance Fraser will recommend the reintroduction of a carbon price.

The Greens last week were scathing in their assessment of Palmer and his deal with the Coalition. But at least it holds out the prospect for the introduction of sensible economic policy down the track.

Had they not been so belligerent and torpedoed the deal Kevin Rudd struck with Malcolm Turnbull for an ETS, we could have been spared years of mindless posturing from ignorant politicians.

Ian Verrender is the ABC's business editor. View his full profile here.