I’m not sure that Geoff Carmody has pinpointed the key issues in carbon pricing policy. Like many economists he seems confident that, with the right policy, carbon pricing would successfully reduce emissions to whatever extent is required. It's just a matter of getting the policy right. He invokes ‘Economics 101’ to back his argument. But he ignores two critical aspects.

Firstly, energy and GDP are bound together. In the short term any reduction in energy consumption brings a fall in GDP. Indeed, given the annual energy consumption of any OECD country, one can easily calculate its GDP with reasonable accuracy. So, while there will certainly be a marginal impact of energy price on reducing energy consumption, the ultimate link with prosperity imposes a major practical and political constraint.

Second, a carbon price is meant to drive a shift to lower-carbon energy technologies. That’s the theory, and it has been working to some extent, in some economies, in some sectors, like electricity generation. The constraints are to do with intrinsic limits of solar and wind technologies, unrealistic hopes for future geothermal and carbon capture technologies, and absence of practical replacements for liquid fuels for transportation.

So it’s not just about economics, it’s about adopting realistic outlooks for technology

Carbon pricing is rapidly turning into a dogs breakfast. Not only are we to abrogate to the failed European scheme but according to the AFR we are to have mini permit auctions from next year. I'm fairly sure that wasn't supposed to happen til 2015 so it seems we'll have carbon tax + ETS-lite + foreign carbon credits. It has 'winner' written all over it.

The odds are we'll achieve the pissweak 5% emissions reduction 2000-2020 due to the global economic downturn and the recent trend to gas fired generation. However the Germans remind us that gas is a much more expensive fuel than coal so a relapse is still on the cards. Carbon tax will have little or nothing to do with achieving a 5% cut. If anything the emissions cut by 2020 should be around 30%. As often pointed out we'd do more for global emissions reduction by slightly reducing coal exports rather than a domestic carbon tax.

And as Tombee points out carbon pricing is a tough sell in a shrinking world economy. Perhaps this is why all the schemes are tokenistic not effective. I also believe that any grand plan that omits nuclear energy is doomed to fail. I guess that means we've chosen both a shrinking economy and melting ice caps.

I don't necessarily disagree with either Geoff or Tombee or Taswegian but one point should be made about current high prices.

* Electricity demand has levelled out. Look at the resports produced by teh Aus Energy Regulator and the Aus Energy Market Operator. This is partly the result of the economic restructuring with a lot of manufacturing closing down, but also due to high prices. High bills are discouraging energy use.

* Much of the problem with over-investment can be eliminated if the Aus Energy Regulator is given more discretion to rule on price increases. At the moment, as I understand it, the rules are set up so that over-investment is encouraged. Many of the restrictions on peak charging during those really hot days could also be dropped, as Geoff suggests.

I don't see any confusion, linking the carbon credits to the European market gives it more strength.
Europe being depressed at the moment, has caused a slump in the cost of credits, but can Europe stay depressed for ever.
10$ / credit at the moment.
AU credits will be on sale before the 3 years entry to Europe opens.
Invest in credits or invest in ways of making your company cleaner, so no further costs can be incurred.

Curmudgeon is right that some reduction in demand for electricity can be attributed to higher prices, mostly network charges rather than carbon tax. However it will not produce the really big CO2 cuts that climate scientists say we should make.

579 what you're talking about sounds like a recipe for fraud. For example I expect Australia's carbon farming initiative to demonstrate that we are not only slapdash in scientific terms but babes in the wood when it comes to anything beside digging up rocks. The Europeans will laugh at our CFI credits unless they are absurdly discounted. Brokers not farmers will pocket the cash. Meanwhile the big coal fired power stations (ie not the old or semi-idle plant) keep spewing away. The winners will be the hangers-on.

The big coal fired plants have the most to gain from green power, there is no carbon credits or 23 $ / ton required.