“I think it is important to keep the challenge of climate change in perspective,” the Prime Minister told the Business Council of Australia’s annual dinner last night.

“I share your President’s view that it is happening and although I have been accused and continue to be accused of being somewhat of sceptic on the issue, the truth is I’m not that sceptical.”

It’s not the most emphatic form of words for a leader to use. The PM sounded stronger in the Daily Telegraph, in an “exclusive” with Malcolm Farr headlined “I will lead on greenhouse“.

Still, his central message seems to be that Australia’s response to climate change must not unfairly damage the nation’s economy and industries.

Ross Gittins demolished this approach in the Sydney Morning Herald yesterday:

The subject matter of all this may be new, but the mentality – the protectionism, the favouritism, the half-baked government intervention – is depressingly familiar.

It’s so antediluvian. It’s as though Mr Howard has learnt nothing from the whole rationalist project, as though he knows no more economics than the Fraser government did.

He had important comments to add:

The rational solution to the problem of global warming is hardly rocket science. We need as far as possible to harness market forces in solving the problem so as minimise the misallocation of resources and loss of economic welfare.

We need to avoid ad hoc interventions and resist the temptation to have politicians and bureaucrats deciding which industries, energy sources and technologies offer the best bet. That is, we should avoid picking winners and rather establish a level playing-field between the contenders.

But Gittins’ solution was a carbon tax. Are there other options?

The Prime Minister seems to recognise a need to change. “My impression is that the business community believes that at some point a price will be put on carbon and many business people are already making investment decisions with that in mind,” he told The Daily Telegraph.

Last night he continued with his line “We need a new Kyoto that includes Australia, but includes Australia on a basis which is appropriate to our interests and our needs.”

But he announced the establishment of an inquiry into carbon emission trading.

None of this will please the carbon trading zealots. They seem to fail to recognise a central weakness in their argument. Kyoto isn’t worth a pinch of sh*t if major polluters aren’t signatories. Perhaps it’s because of attachment to their old “Think global, act local” mantra.

In the wake of the Stern Report, the London Daily Telegraph editorialised:

[G]overnments aren’t very efficient organisations and are rarely much good at running things. This is also self-evidently a global rather than national problem and should be treated as such. That means businesses — not bureaucrats — are best placed to take the lead role within a broad framework set by national governments.

There should be some simple guiding principles. Measures should be based on incentives, not penalties, and there should be a heavy investment in technology, not an abject retreat into rationing.

This argues, in turn, not for the wholesale imposition of green taxes (though some are probably inevitable), but for carbon allocations that will ultimately allow both individuals and companies to choose how they make their contribution to cutting emissions — and to trade their allowances if they wish.

The Telegraph observes “such a sophisticated structure will be immensely difficult to create and enforce” – adding “That is why politicians… are instead reaching so readily for the blunt and simplistic weapon of higher taxes. They should think again. This is a complex problem that requires complex solutions — not a knee-jerk hike in taxation.”

John Howard knows he’s got some political catching up to do on climate change. He must also know the old Hardball rule “don’t get even, get ahead”.

He knows that workable solutions will beat warnings of imminent catastrophe and denunciations of human arrogance any day.

And that’s what he’s setting out to find.