Doing nothing is preferable to this

Remember the joke about the shipwrecked economist on an island with a can of beans?

When asked how to open the can, he says: "Assume a can opener."

Australia's official analysis of greenhouse gas mitigation policies assumes away the most insuperable problem, getting a global deal, rather than assessing why we've failed.

This is poor risk management. Alternative policies are available but not tested. Scenarios where major emitters do not act to reduce emissions are plausible but not evaluated. If anything, history suggests such scenarios are more likely. What if all major emitters don't take effective action to reduce their emissions? "Moral suasion", references to Australians as the largest per capita emitters and asserting Australian action is needed to save the Great Barrier Reef (and the Sydney Opera House) are irrelevant.

Australia accounts for just over 1 per cent of global emissions, and falling. If we shut down completely tomorrow, global man-made emissions would be barely affected. Australian action means almost nothing by itself. If we are to act, we should push for a policy minimising current man-made impediments preventing a global deal. Only that will deliver significant mitigation. We're doing just the opposite.

The government seems determined to adopt an emissions policy that taxes our exports (when our major competitors do not), and taxes our import-competing producers (but not the imports with which they compete). Bluescope Steel chief executive Paul O'Malley eloquently argued the stupidity of this for trade-exposed manufactures in an interview on the ABC's Inside Business last Sunday.

This is like saying we'll unilaterally introduce a GST that taxes our exports and zero-rates our imports. No country does that. Even our production taxes (excises on petroleum, tobacco and alcohol) have border tax adjustments (so-called revenue customs duties) to provide trade competitiveness neutrality.

This policy design madness has two downsides.

First, across very many industries, our trade competitiveness is reduced. One response will be to reduce output and shift to competitor countries not imposing a carbon price. This includes agriculture, due to carbon pricing of its inputs, despite its proposed exemption. Australia loses activity and jobs. Emissions reductions here are partly offset by increases overseas.

This does not mean Australian consumption of greenhouse gas emissions declines relative to business as usual.

Our consumption of emissions will increase. We'll buy more imports from countries to which our economic activity shifted. We'll be economic losers and environmental hypocrites.

This seemingly is the European story. Last Sunday O'Malley noted that, since 1990, European Union consumption of emissions was up 47 per cent, even though emissions production was flat.

The second downside is more serious. We'd encourage our trade competitors not to mitigate their own emissions.

How so? Our trade competitiveness loss is their gain. Their incentive is to continue business as usual, milking the trade gains we've lost for all they're worth.

We would be dumb to adopt a production-based carbon pollution reduction scheme-type policy. We'd pay a large economic cost for little or no global emissions reduction. We'd strengthen incentives that make a global deal less likely.

Ross Garnaut argues we need a principled approach to the trade-exposed sector when mitigating our emissions.

Special deals and arbitrary classification of industries qualifying for them, the CPRS route, are the antithesis of a market-based approach to this problem.

There is a better way. Focus on reducing national consumption of emissions. This employs all the information used under a production approach. It does one other thing. All costs (for example, permits) incurred by producers are treated as input tax credits, using the existing GST system. Exports and business sales receive full input tax credits. Border tax adjustments apply to imports at the same rate as their locally produced competitors. Trade neutrality is preserved. Carbon leakage is avoided. No special deals are warranted.

All emissions permits should be sold, whether the price is fixed or floating. Net revenue raised should be used to cut other taxes.

If the current process in Australia leads to another CPRS (especially like CPRS Mk II), there are at least four reasons Australia should do nothing.

First, the policy will be ineffective in reducing Australian emissions (because of large carve-outs) and, even more so, global emissions (because of some carbon leakage).

Second, without a national consumption-based policy, taking no action would be a more principled approach to the trade-exposed sector than the rent-seeking and green protectionism likely to be part of another CPRS-type round of negotiations (at the end, if not at the beginning, of the process).

Third, if a moral stance is relevant to this policy debate, by doing nothing we would avoid being hypocrites, appearing to reduce our emissions but then consuming more via increased imports.

Fourth, by pushing a policy model that individual countries cannot adopt without fear of adverse trade competitiveness effects, Australia would be encouraging continued global resistance to action, thereby reducing the chances of a global deal.

Even if a global deal is likely, realistically, developed countries probably have to cut emissions before emerging countries. That pits Australia, acting early, against its main trade competitors, acting later.

Henry Ergas is right. We'll incur significant costs even reducing our emissions consumption. We're a rich country (with emissions consumption to match) owning large emissions-intensive resources. If countries buying our exports apply border tax adjustments to them (and competitors' exports), so be it. If not, why should we do so unilaterally? If we won't apply similar adjustments for emissions embedded in our imports, why should those selling them to us?

Targeting national consumption of emissions helps promote a global deal. Targeting emissions production does not.

Doing nothing is preferable to another CPRS, whatever the odds of a global deal.