The global politics of climate change are very fluid. And sometimes a dramatic shift in a nation’s policy can be overlooked by the media because its significance is not properly understood.

The declaration of the June G8 meeting in Heiligendamm provided a strong indication of where the debate is going. In a crucial move that’s been overlooked in Australia, the statement declared that future negations should occur under the auspices of the Framework Convention on Climate Change.

Having attacked the UN for years, including its alleged failure to develop a viable response to climate change, President Bush’s endorsement of the G8 statement was a huge concession. In short, Bush blinked.

So where does that leave Prime Minister John Howard’s endorsement of APEC and AP6 over Kyoto and the UN, and ultimately, Australia’s place in the global climate change conversation? When it comes to implementing a carbon trading system, it could have dire economic consequences for this country.

The first commitment period under the Kyoto Protocol begins on 1 January 2008 and it is now clear who is committed to action under it and what they will be doing. The most important developments have been the emergence of the European emissions trading system, which has set the benchmark for the rest of the world, and the emergence of the Clean Development Mechanism, which is channelling billions of dollars of investment into developing countries.

Attention is focusing increasingly on what will emerge after the first commitment period ends in 2012. The parameters of what might emerge remain unclear, but pressure is mounting to ensure that the Conference of the Parties to the UN Framework Convention on Climate Change, to be held in Bali in December, defines a pathway to a new agreement.

The 1992 UN Framework Convention is the mother treaty for the Kyoto Protocol, and the latter was agreed in 1997 because it was accepted that the voluntary measures set out on the Convention had failed to have any appreciable effect on the growth of greenhouse gas emissions.

The decision by the United States to negotiate a future treaty under the auspices of the UN Framework Convention has left the Howard Government stranded. Although Australia ratified the Convention in the early 1990s, the Prime Minister has repeatedly attacked the UN process as flawed and insists that any progress on climate change must occur in other forums, notable AP6 and the forthcoming APEC meeting.

It does not yet seem to have acknowledged the import of the G8 agreement and the dramatic US shift.

While Howard could have relied on the US to back his push for a new international framework at the APEC meeting in Sydney in September, it now seems likely that the US will join with Japan and China in insisting that anything APEC agrees should be supplementary to Kyoto and should not undermine the task of negotiating a new agreement under the UN process.

The Howard plan for APEC to agree to some sort of ‘pledge and review’ system represents a return to the voluntary approach that the original Framework Convention showed cannot work, suggesting that the Government’s thinking is stuck at around 1995.

With Kyoto effectively bedded down, Europe is now turning its attention to what sort of structure will succeed it. Recognising the fluidity of the situation, including the expected transition to a pro-climate administration in the United States at the end of 2008, the EU understands that now is the time to adopt a flexible stance.

This has important implications for the Howard Government’s decision to introduce an emissions trading system. One of the key criteria identified by the Prime Minister’s Task Group on Emissions Trading was that any domestic system should be able to be integrated into other systems, including Europe’s.

Integration has enormous potential advantages for Australian firms with carbon reduction obligations.

Europe has always insisted that no nation would be permitted to take part in its trading system unless it had ratified Kyoto. This was done for pragmatic rather than political reasons, because ratification provides the same set of legal obligations on all Kyoto parties and thereby provides the basis for the harmonisation of trading systems.

It is now reported that Europe has changed its mind and will allow the linking of trading systems regardless of whether they have ratified the protocol. Paul Kelly claims this represents ‘a sharp change in Europe’s mind set’ signalling the obsolescence of Kyoto. Like most of Kelly’s commentary, this misunderstands the politics of climate change and the practicalities of policies.

Europe is talking post-2012. If Australia wanted to integrate its trading system with the European one before 2013 then it would be required to ratify first.

Europe is, however, taking a flexible view of what might lie beyond 2012. This is where Australia hopes it will be able to link its domestic system with others around the world, including the EU. In principle the EU has no objection; indeed, as a means of urging Australia to take a more serious approach to climate change, it encourages this thinking.

However, the Australian Government has not thought through the implications. The report of Mr Howard’s Task Group spends some time discussing the features a domestic system would need to have to be integrated into the EU system, and other systems being developed (notably in the US) that are also expected to be linked with the EU system in due course. The proposed Australian system is designed to make future links possible.

But the Task Group shied away from the most important consideration of all. What sort of targets will prevail in each country? When we pose this question it is apparent that there is no way any Australian system under the Howard Government could ever be linked with the EU system, and probably not those emerging in the US. Why is this so?

Earlier this year the Europe Union committed itself to a binding obligation to cut its emissions to 20 per cent below 1990 levels by 2020, with the option of increasing this to 30 per cent if other countries take comparable action.

This target will require far-reaching changes to the energy economy in the EU 27. The Howard Government, blinded by its ideological hostility to Europe, is only now waking up to the fact that Europe takes climate change very seriously indeed.

But any suggestion of an Australian target within coo-ee of the European one is met with howls of outrage from the Government. Words like ‘economic ruin’ are thrown around. The Howard Government’s proposed emissions trading scheme, to begin in 2012, will almost certainly have a very weak target, which will require much less of Australian emitters.

Hard targets in Europe and easy targets in Australia will mean that emission permits will be expensive in Europe and cheap here. Linking of the two systems would see European firms rushing to Australia to buy cheap permits, and the price difference would disappear on the first day of trading.

One consequence would be the erosion of the integrity of the European targets, something the EU would simply not permit. In Australia, polluters who thought they had it fairly easy would find that the price of permits had doubled or trebled overnight.

The only way to avoid this problem, which will apply to all attempts to link trading systems, is to harmonise not just the structures of the systems but the process of setting emission targets too.

Of course, this is precisely what happened at the Kyoto conference in 1997. Thus, implicit in the Prime Minister’s grand plan to develop a system to replace the Kyoto Protocol is a structural imperative to replicate it.

This replication process even extends to the proposed method of integrating developing countries into a global trading scheme. The Prime Minister’s Task Group recommends a process based closely on the Clean Development Mechanism of the Protocol, which allows firms with carbon reduction obligations to generate credits by investing in emission reductions in poor countries.

So all roads lead back to the Kyoto Protocol or a structure very like it. Despite all of the ill-informed attacks on the treaty in this country, the protocol was in truth an extraordinary achievement, the essential elements of which will inevitably be imitated in any subsequent global system.