The emissions trading taskforce was crippled by its own terms of reference, writes Kenneth Davidson.

From the terms of reference:

"Australia enjoys major competitive advantages through the possession of large reserves of fossil fuels and uranium. In assessing Australia's further contribution to reducing greenhouse gas emissions, these advantages must be preserved." 

The paper is based on the assumption that there is a conflict between the environment and the economy — and Australia will be able to choose the economy.

It fails to understand that a healthy economy depends on a healthy environment.

Many of the questions posed by the issues paper border on the fatuous.

For example, what would constitute a workable global emissions trading scheme and how would it best protect Australia's competitiveness?

The answer is: who cares what Australia thinks unless it ratifies the Kyoto Protocol? Unless Australia signs Kyoto Mark I it will be a spectator to Kyoto Mark II when the next round of greenhouse emission reductions will be negotiated in 2008.

The taskforce wants to know, if Australia unilaterally introduces a domestic emissions trading scheme in the absence of a universal, fully developed scheme, what its implications would be for Australia's international competitiveness, and industry performance.

It is as if the work done by the Australian Greenhouse Office (abolished by the Howard Government in 1999) and other energy economists such as Hugh Saddler, environmental NGOs and the National Emissions Trading Forum set up by the state governments, didn't exist.

Emission-trading permits or carbon taxes (which economically amount to the same thing) do not undermine international competitiveness. It is the consumer who pays the cost of the carbon tax, not the producer.

In the case of coal destined for the production of electricity, the tax is paid by the power generator and is passed on to the consumer in the form of higher electricity bills.

The tax on coal exported to China is rebated to the miner. It is up to the Chinese Government whether some sort of emissions tax is imposed on the production and consumption of power in China.

Similarly, it is up to the Australian Government to impose a carbon tax on imports according to the amount of greenhouse gas generated in their production.

The key issues are whether to choose emissions capping and trade or carbon taxes. There are pros and cons for each system of carbon abatement.

Australian politicians freak out when the word tax is mentioned. For this reason, they favour cap and trade.

If this system is to work it requires the cap to be less than current emissions. The EU emissions trading scheme became a fiasco as vested interests managed to persuade 21 of the EU's 25 member governments to set emission targets lower than actual emissions and allowed them to profit from selling their surplus permits to competitors in the four countries whose governments did the right thing.

The critical ingredient in a cap and trade system is that all permits should be auctioned annually.

There is nothing in the issues paper — which is "to be used as a guide to the key issues and questions under consideration" — that discourages submissions promoting carbon trading property rights on the same basis as water rights to irrigators.

These have created property rights that will consume most of the $10 billion the Howard Government wants to spend restoring environmental flows to the Murray-Darling Basin.

Kenneth Davidson is a senior columnist.

Email: kdavidson@theage.com.au

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