It looks like Kevin Rudd had a brain explosion last Friday; climate change denialists are sabotaging the future of humanity by asking tough questions about policy. In the Prime Minister’s view, the opposition are cowardly for not promoting government policy. Of course, in democracies, the opposition are not supposed to promote policy; that is the government’s job. That is why Kev lives in the big house and gets the big salary.

Commentators are going to focus on the Prime Minister’s attack on “sceptics”, as if the only barrier to stopping global warming in its tracks is Barnaby Joyce and Cory Bernardi.

But Rudd’s real problem is that his government’s climate change policy is incoherent and is becoming ever more expensive. Rudd has had good mileage criticising markets over the past year. It seems the neo-liberal belief in markets is all but discredited. Yet what is his “solution” to climate change? A new synthetic market in the emissions trading scheme.

Admittedly, Rudd asked a very good questions at the Lowy Institute last Friday, “Where is the evidence basis offered by the new league of world government conspiracy theorists that climate change can be effectively dealt with by market means or by uncoordinated national means? Answer — there is none.” Indeed. But he’s off message. Last December, Wayne Swan and Penny Wong told us that “Australia will make its fair contribution, including by implementing efficient market-based policies to substantially cut domestic emissions in a cost-effective way”?

Swan and Wong wrote that line in the preface to the Treasury modeling for the Carbon Pollution Reduction Scheme. The report, Australia’s Low Pollution Future: The Economics of Climate Change Mitigation is more quoted than it is read. Certainly Rudd quoted extensively from the report last Friday.

The Treasury modelling investigates four possible scenarios relative to a reference scenario — some sort of “business-as-usual” case. At best it can be considered to be a sophisticated thought experiment and does not constitute a forecast of the actual economy. The exercise does, however, provide an estimate of the magnitude of the program costs (but not benefits) of introducing a cap and trade system. None of the four scenarios correspond to the details of the actual policy that the Australian government has introduced. In addition, the Treasury modelling does not include a) the costs and impact of global warming itself, b) does not well capture any short-term economic adjustment costs, c) does not capture ‘market failures’ caused by asymmetric information, externalities, or strategic behaviour, d) does not include transaction costs associated with emission permit allocation, e) does not capture the beneficial consequences of mitigation policy and f) does not capture non-market goods and services.

This list is taken from the Treasury document itself.

Most importantly the Treasury modelling does not dwell very long on the losers from the government’s CPRS. The economy declines relative to the reference case — that is the policy design. The losers are shown at page 161 of the Treasury document and I reproduce the graph below.

The two poorest states, South Australia and Tasmania fare the least worst. (There isn’t much economic activity already there to be destroyed.) Over the next 40 years the two biggest losers are the resource growth states of Queensland and Western Australia. The relative decline in WA only occurs after 2040, but Queensland takes the hit early. You would think that the government would have some explanation for the citizens and voters of Queensland and WA as to why they were bearing the brunt of the CPRS policy. New South Wales and Victoria aren’t far behind; their residents might want some explanation too.

Another problem with the Prime Minister’s argument is jobs. Rudd says

Treasury modelling also demonstrates that all major employment sectors grow over the years to 2020 – substantially increasing employment from today’s levels. Treasury modelling also projects that clean industries will create sustainable jobs of the future – in fact by 2050 the renewable electricity sector will be 30 times larger than it is today.

Unfortunately that is not what the Treasury modelling indicates. At page 151 we read:

… real wages are assumed to adjust in the long run to ensure the labour market remains in equilibrium. As output slows slightly in response to emission pricing, firms’ demand for labour also slows slightly. In the short run, real wages are assumed to be sticky, taking up to 10 years to adjust, resulting in some temporary unemployment. However over time, real wage growth slows, demand for labour increases, returning employment to reference case levels …

The Treasury indicates that Australia will experience “up to 10 years” of “temporary unemployment” before real wages decline. Treasury forecasts that real wages might decline by anywhere between 5.4% and 11% relative to the reference case. That is why there is no unemployment; Treasury assume it away by imagining that real wages fall. At the same time, Treasury assume the green jobs and green technology into existence. That is not at all what Rudd told the Lowy Institute.

The CRPS is turning out to be a lot more expensive than first promised. The government first indicated that it would be “revenue neutral” — by that they meant self-funding. The government intended to spend all the money raised. Now we hear that the CPRS is not revenue neutral and is forecast to run at a loss. The economic modelling is not as rosy as the government says and the UN is asking for heaps of money at Copenhagen. No amount of name-calling is going to change the fact that this policy is a lemon and needs to be radically reconsidered.

Sinclair Davidson is professor in the School of Economics, Finance and Marketing at RMIT University and a senior fellow at the Institute of Public Affairs.