Beneath the sudden appearance of hypocrisy and confusion in the politics of climate change lie a couple of genuinely disturbing and difficult problems.

Relations between the business community and the Rudd government on the subject are breaking down because there is virtually no consultation going on about what will be one of the most significant and complex regulatory burdens ever imposed on corporate Australia.

In the absence of dialogue, there is growing panic.

And although the federal opposition is happily and hypocritically using the oil price boom to discomfit the government over the prospect of an extra price on carbon, there is a real global problem in the collision of the 2008 oil shock with the politics of curbing greenhouse emissions.

It’s going to be politically difficult anyway to increase petrol prices by 10 cents a litre as part of a carbon tax or emissions trading scheme.

But now that the price has already gone up 50c a litre in nine months, and the politics has switched to cutting petrol taxes, not raising them, it has become almost impossible. This is a problem everywhere, not just Australia.

It’s made worse by the fact that oil is not the only raw material price that has been booming: rising commodity prices have been lifting the consumer prices of most staples, so that households around the world are under stress. They don’t want to know about a carbon price as well.

Unless there is a sharp reversal of the food and energy price boom, the meeting in Copenhagen next year to settle on a global approach to combating climate change is in trouble.

One way to look at the problem is the way that the Reserve Bank looked at interest rates last year: the banks had been increasing them separately to official rates, so the official rate did not have to change.

Thanks to unexpectedly high Chinese demand for energy and a massive increase in investment and speculation in oil futures, the ‘carbon price’ is arguably already where it needs to be to curb greenhouse gas emissions.

But the global politics of climate change have a head of steam, and it is hard to see all the lobbies and the politicians now sitting back and saying: “Let’s just wait for petrol pries to come down before we raise them again.”

One interesting effect of the uncertainty in commodity and financial markets has been to start switching the weight of intellectual opinion away from emissions trading to a carbon tax regime.

A straightforward tax on carbon has the advantage of simplicity and certainty: everyone knows what the price is and it can be set for the optimum balance between environmental and economic impact.

But the problem is that governments will get blamed for it, even though it would be a “good tax”, and they would have to do something with the money.

On the other hand a cap-and-trade system can result in huge volatility in the end price of carbon, and depending on how the credits are dispensed, profiteering and wastage among companies.

Professor James Henson from Columbia University in New York, one of the leading thinkers on the subject, has come up with an ingenious scheme that deserves examination by Ross Garnaut as part of his project for the Australian government.

Henson suggests a carbon tax that is immediately recycled in full back to each country’s citizens.

In a speech to the National Press Club in the US last week (available on his website) he suggested:

Carbon tax on coal, oil and gas is simple, applied at the first point of sale or port of entry. The entire tax must be returned to the public, an equal amount to each adult, a half-share for children.

This dividend can be deposited monthly in an individual’s bank account. Carbon tax with 100 per cent dividend is non-regressive. On the contrary, you can bet that low and middle-income people will find ways to limit their carbon tax and come out ahead. Profligate energy users will have to pay for their excesses.

The genius in this idea, apart from its simplicity, is that it would cause political opposition to melt away and it would tend to combine the benefits of a tax with the flexibility of the market.

Whether the carbon price is created through emissions trading or a carbon tax, there is always going to be huge suspicion among the consumers who have to pay it about who is getting the money and what’s being done with it.

Billions of dollars are going to be harvested around the world from resentful consumers as they are forced to pay more for things that result in carbon in the atmosphere.

Giving the money straight back would not only fix the politics, it would also allow the market to operate. Individuals would obviously try to benefit by cutting their own contribution to the tax and reducing carbon use.

That would be far better than governments trying to target the money at greenhouse gas reducing subsidies. Bureaucrats and politicians always think they can manipulate the market efficiently, but it always turns out to be a mess.

And it would be better, in my view, than the unpredictable chaos of a cap-and-trade system, where credits are either given away or auctioned, and then traded. As various experiments have shown it is almost impossible to control the end carbon price and the windfall gain from auctioning the credits is likely to be wasted.

The government’s green paper is due on July 16 and Garnaut is due to report in a month or two.

The main thing the government needs is the community behind it, and to do that it needs to listen.

Unfortunately the message from business people I speak to is that the minister, Penny Wong, is not listening.

Perhaps she and the prime minister are feeling besieged because of the sudden tension in the politics of petrol and also because of the pressure to save the Murray Darling at the same time.

All the more reason to get business people behind you, it seems to me. There is a lot of goodwill and expertise available — along with some self-interest of course.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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