The Australian Economic Review, vol. 40, no. 4, pp. 402–9  2007 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research Published by Blackwell Publishing Asia Pty Ltd 1. Introduction Two sets of economic issues are raised by the prospect of climate change. First, climate change alters the constraints and opportunities facing households, businesses and govern- ments which, in turn, require changes in their decisions, or adaptation to climate change. The key policy issue here is the provision of infor- mation to facilitate the ongoing processes of structural change and adaptation to climate change. Second, the contribution of the accu- mulation of greenhouse gas emissions to cli- mate change represents an external cost and market failure, and then raises the choice of ap- propriate mitigation policy interventions. Pol- icy interventions to reduce greenhouse gas emissions in Australia, in most other countries, and globally have been more in the way of ad hoc political reactions rather than the outcome of a reasoned long-term and sustainable eco- nomic policy strategy. This is not that surpris- ing because of the complex characteristics of the market failure, particularly the global and long-term dimensions, and the different incen- tive and equity properties of different potential corrective policy interventions. There is a high level of uncertainty about key scientific and economic parameters, long time periods are in- volved, the externality has global dimensions, and the different market correction instruments have different economic and political charac- teristics. Clearly the first set of issues is impor- tant, but the focus of this Policy Forum is the second set of issues. In this Policy Forum a combination of partial equilibrium and general equilibrium models is employed to evaluate the case for and form of policy interventions to reduce the flow of greenhouse gas emissions, and to assess the economic impacts of market-based policy in- terventions which place an explicit price on carbon or greenhouse gas emissions. The Pol- icy Forum covers the following topics. • By the way of an introduction, this article provides a simplified background picture of the science of climate change, current Aus- tralian policy to reduce greenhouse gas emissions, a partial equilibrium model for thinking about the external cost and its cor- rection, and the issues in reaching a coopera- tive global agreement to reduce greenhouse gas emissions. • Warwick McKibbin describes and supports the idea of a hybrid mixed policy interven- tion system involving a long-term tradable credit and a short-term emissions tax to pro- vide incentives to producers and consumers to reduce greenhouse gas emissions. He il- lustrates the potential application of this hybrid intervention system with special at- tention to a staged ramping-up of the tax rate over time, and having different rates and lev- els for developed and developing countries, Australia and China respectively, to attract the cooperation of developing countries to join a global agreement. Policy Forum: Climate Change: Some Economic Policy Issues Economic Issues with Climate Change John Freebairn* Department of Economics The University of Melbourne * I acknowledge with thanks discussions with Paul Jensen and Beth Webster on an earlier draft.