There's nothing free or efficient about current Emissions Trading Scams

From 1 July 2014, the Rudd Government promises to 'terminate' the carbon tax and move to an emissions trading scheme (ETS) linked to its European counterpart.

If this latest climate policy promise is actually implemented, carbon prices are not 'terminated'. They are determined by the ETS 'market'. Prices become more uncertain and volatile. Is this a better approach?

With a Federal Election imminent, on climate policy, we should review what we are doing – and why.

Ministers spruik an ETS as the most efficient, market-based, way to price and reduce emissions.

Really? What sort of 'markets' are the European and Australian ETS (both being 'cap and trade' schemes)?

Demand for emissions permits is determined by greenhouse gas emitters that must account, and obtain permits for, their emissions. Liable emitters are determined by governments. Governments allow many exceptions and selectively provide substantial numbers of permits free of charge or heavily discounted.

Governments also set the aggregate supply of permits within their jurisdictions, possibly on the advice of a government-established advisory body, like the Climate Change Authority in Australia. They also regulate energy supply sources (eg, renewable energy targets). The Productivity Commission has already found these extra layers of regulation to be very inefficient and costly. It recommended their termination.

Given total permit supply, permit holders can trade their permits, selling them at mutually agreed prices to buyers. This trading part of the ETS is supposed to ensure that 'the market' determines emissions reduction at the lowest cost. But this trading is circumscribed by yet more government controls.

Under 'linkage' with the European ETS, and for access to other (eg, developing country) permits, Australian emitters have limited capacity to purchase permits offshore. There are even more stringent limits on foreign purchases of Australian permits. So market arbitrage is compromised by more government regulation.

The ETS 'market' is defined and suffocated by extensive government regulation. Aggregate permit supply is government-determined. It's subject to their policy whims. Property rights are uncertain and evanescent. The ETS is a political football where, as now, considerations other than reducing emissions often take precedence. For example, a $6 carbon price is politically more attractive than $25 for hip-pocket reasons.

To describe these ETS models as 'free' – or, worse, efficient – 'markets' is a triumph of rhetoric over reality.

Why are we indulging in this regulatory orgy? Supposedly, we want to reduce anthropogenic greenhouse gas emissions to limit global warming. Putting aside the debate about the science – which, while healthy, hardly suggests all agree the matter is settled – are we going about it the right way?

The policy starting point is clear. If anthropogenic emissions are warming the planet, this is a global problem requiring global mitigation action. So we need a global deal.

To maximize the chances of (eventually) getting that, the policy architecture embraced by each country needs explicitly to recognize and accommodate two key lessons we should have already learned.

The first is that a synchronized global emissions reduction programme adopted by all countries at the same time and to the same extent is a pipe-dream. It hasn't happened. It won't happen.

Second, if the chosen policy model has adverse competitive effects on countries adopting it, then 'first movers' will be both limited in number and will weaken their own policy responses to protect their markets. Worse, such a model encourages others not to follow suit at all. Such an avoidable policy design flaw itself undermines chances of a global deal, ever.

Yet the entire (unproductive) debate so far has been couched in terms of adopting just such a policy model (ie, the national emissions production model). Attempts to implement it globally have failed.

These are the clear lessons of the last quarter of a century. Persisting with the same failed approach in future and expecting different results is the classic definition of policy insanity.

Of course, other basic policy matters need sorting too. Ensuring we have credible emissions measurement, reporting and verification (MRV) arrangements is crucial if ETS is not to mean 'emissions trading scams' (as has been the case to date). Australia is up there with the best, but, globally, MRV is a work-in-progress.

European policy makers have a penchant for designing special (ie, rigged) markets. The Common Agricultural Policy (CAP) is an awful example that has long disadvantaged Australia – and EU consumers.

Why on earth should Australia link to the European ETS market? This seems especially bizarre when, as with the CAP, to do so directly attacks Australia's comparative advantage, while our trade competitors are not following suit.

An independent review of the lessons of history should guide where Australia's climate policy goes from here.

It sure beats the policy insanity option.