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Undermined by Adverse Selection: Australia's Direct Action Abatement Subsidies
Author(s) -
Burke Paul J.
Publication year - 2016
Publication title -
economic papers: a journal of applied economics and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.245
H-Index - 19
eISSN - 1759-3441
pISSN - 0812-0439
DOI - 10.1111/1759-3441.12138
Subject(s) - subsidy , adverse selection , government (linguistics) , counterfactual conditional , selection (genetic algorithm) , scheme (mathematics) , skew , direct action , public economics , action (physics) , quality (philosophy) , economics , business , environmental economics , microeconomics , industrial organization , computer science , market economy , political science , counterfactual thinking , mathematical analysis , linguistics , philosophy , telecommunications , physics , mathematics , epistemology , quantum mechanics , artificial intelligence , politics , law
This paper examines the economic challenges faced by Australia's Direct Action abatement subsidy scheme. Introduced in 2014, the scheme operates by reverse auction, funding projects voluntarily proposed by the private sector. Because the Government cannot know true project counterfactuals, the lowest auction bids are likely to often be non‐additional “anyway” projects. The scheme is hence likely to exhibit a systematic skew towards low‐quality abatement. The paper presents a model of the adverse selection problem and describes the early experience with Direct Action. A discussion of a way forward is also provided.