Adam Triggs | Carbon pricing is a political timebomb. But it is the best way

If you ask economists what the best way is to fight climate change, for example, you'll almost certainly get a single answer: put a price on carbon so business take account of their environmental costs and have an incentive to reduce them.

The answer is correct, but it's sort of politically unhelpful. Australia's political history on pricing carbon, after all, has been bumpy to say the least.

Policies ranging from an emissions trading scheme to a carbon tax and an energy guarantee were all attempts at pricing carbon in different ways.

All of them failed, and all of them took down a political leader on the way out.

The Albanese government's safeguard mechanism is our newest price on carbon.

But it only applies to our biggest polluters meaning it only applies to some businesses within some industries.

It's a great start, but far from the economy-wide carbon price we need to get emissions down in a way that imposes the least cost for society.

The good news is that there are practical things that can be done to help price carbon in Australia.

The even better news is that these reforms are technical and behind the scenes and won't generate the same level of political heat that we've seen in the past.

The first thing we can do is reform banking regulations.

If carbon was being properly priced, environmentally friendly borrowers would get loans with lower interest rates than environmentally unfriendly borrowers.

But regulations are getting in the way of this.

Since the global financial crisis, banks are required to hold spare capital on their balance sheets to buffer against shocks.

But not all capital is equal. Regulations dictate what constitutes high-quality capital (e.g. US bonds) versus low-quality capital (e.g. Russian bonds) but these regulations ignore sustainability issues.

This is a problem because the evidence shows that green borrowers are also safer borrowers.

They are less likely to default or be late on their repayments, meaning that any asset which is underpinned by these loans should be treated as being higher-quality capital.

If we changed this, banks would have an increased incentive to hold more green assets and issue more green loans with lower interest rates for green businesses.

The result is an increase in sustainable investment by allowing the market to price carbon and climate risks and allocate loans accordingly.

The second thing we can do is to get better data on the energy ratings of houses. Banks worry about a lot of things when lending money to people, and one of the things they worry about is "bill shock".

We've all experienced it. Bill shock is when a bill comes in the mail that is somewhat larger than what we were expecting.

For people who don't have much savings in the bank, it can be catastrophic. For banks, it can mean customers defaulting on a mortgage repayment.

Turns out, people who live in houses with low-energy ratings are more likely to experience bill shock by getting slapped with higher electricity and gas bills during cold winters and hot summers.

The problem is that banks don't have much data on this. If they did, they would be able to offer lower interest rates and more loan approvals to people buying energy efficient houses.

It would also create an incentive for people to make their houses greener to get the cheaper mortgage.

The third thing we can do is allow the parallel import of second-hand cars. The fact that electric vehicles are so much more expensive than combustion engine vehicles is proof that we are not properly pricing emissions.

One of the key reasons electric vehicles are so rare and expensive in Australia is because, unlike countries like New Zealand, we can't easily import second-hand vehicles into this country.

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Reforming the Australian Design Rules to make it easier to get electric vehicles into Australia and scrapping the rules that stop people from importing second hand electric vehicles - a historic regulation from when we used to make cars in Australia - would make EVs cheaper and easier to get.

Again, this is about pricing carbon emissions by removing the barriers that are making EVs so expensive, far more expensive than what is socially optimal.

All these reforms are about allowing markets to more effectively price carbon.

Whether it's reflecting the cost of emissions from cars in their price, whether it's reflecting the cost of inefficient housing in the cost of their mortgage or whether its reflecting the carbon costs of borrowers in their interest rates, they all do the same thing: they use the power of markets to drive action on climate change.

And they all require one thing and lots of it: data. Markets can't price risks without data.

The more constraints we place on access to data - through restrictions motivated by privacy, intellectual property or anti-competitive conduct - the harder it will be for the private sector to price carbon risks and fight climate change.

With emissions still skyrocketing and governments facing growing budget challenges, governments need all the help they can get.