The announcement before Christmas that the Government was dropping the proposed carbon tax was bad news for business, the country and the environment.

An analysis of the 475-page report from the Ministry for the Environment and the consequent Cabinet paper reveals it to be a poorly justified, rushed decision that effectively replaces a robust policy framework with possible soft measures that will not work.

And what is not well understood is that it will increase New Zealand's greenhouse gas emissions significantly.

The decision will undermine New Zealand's credibility internationally. We have been a leader at the United Nations negotiations and have had the political courage to differentiate ourselves from the United States, which strenuously opposes price-based measures at least at federal Government level.

We are now stepping more in line with the US position, even though the international community strongly rejected its approach at the Montreal summit in December.

Some business leaders have praised the decision, but the effect is to create a long period of uncertainty for the market over just how to factor the cost of carbon emissions into investment decisions.

Just how does a director of a large power company make decisions on significant new projects without clear Government policy? This is why it is important to put a price on carbon.

Many OECD countries have carbon taxes. Europe has emissions trading which is another way of putting a price on carbon. State Governments in Australia and the US are going the same way, although their respective federal Governments oppose Kyoto.

Business New Zealand, however, supports voluntary measures to tackle our emissions deficit. But they will not work. The United Nations Framework Convention on Climate Change tried the voluntary approach internationally in the early 1990s - and emissions went up. That led to the Kyoto Protocol, which sets up a cap-and-trade mechanism and puts a price on carbon.

It is ironic to have some business leaders arguing for non-price measures when they understand better than most that if you really want to change behaviour, you need to put a price signal into the market that encourages that.

New Zealand's carbon tax would have done exactly that. It was supposed to be introduced in April next year. Because of the tax, the Resource Management Act was amended to take consideration of greenhouse gases out of the realm of local and regional councils.

The idea was to avoid double jeopardy - where a company paid once through the tax and then had to show how greenhouse gases would be avoided or mitigated on resource consents for new projects.

Now the tax has been cancelled the RMA needs to be changed back to where it was, otherwise not only do polluters not pay their environmental costs, they also get a free ride in consenting processes.

Negotiated Greenhouse Agreements were designed to give exporters that were energy-intensive exemptions from the tax in return for moving towards world's best practice in emissions management for their sector. Millions of dollars were spent on NGAs. Now they are worthless because everyone is exempt. The lack of stability and consistency in government policy must be galling for those businesses that took it seriously.

A key reason given for dropping the tax, in the ministry's report, is that it is too late to put it in place by next year. But that is because officials who should have been working up the final design of the tax have been preoccupied writing the review itself, which has been some months in gestation, presumably in the expectation of a change of government. That's a bureaucratic catch 22 resonant of a "Yes Minister" approach.

The report itself fails to properly analyse the justification for dropping the tax and fails to come up with any sound replacement policy mix. It turns the clock back to the early 90s when countries thought they didn't have to take climate change seriously.

But now the evolving science is firming and the worst-case scenarios are looking more probable. It is ironic that Australian farmers, who are seeing the red centre expanding and the coastal fringe contracting, are calling for more robust action from their Government while New Zealand farming leaders, and Business New Zealand, are at the "do little" end of the spectrum.

The net effect of dropping the carbon tax, if you interpret the ministry's own numbers, is that New Zealand's excess emissions in the Kyoto Protocol's first commitment period will rise substantially. They will go up from 33 million tonnes of CO2 equivalent to 49 million tonnes, an increase of 36 per cent. This is quite extraordinary given the commitment to put New Zealand on a downward path in gross emissions by 2012.

Indeed, the ministry's report concedes that our emissions will continue to grow. They certainly will if the Government is advised to drop effective policies to reduce emissions.

Where do we go from here? That's not clear. We could have a carbon tax on everything except transport fuels if that was the area of political sensitivity. Or we could introduce full-blown emissions trading and devolve the forest sinks and go the European route.

Or we could follow the voluntary approach which would be a cop-out. The way ahead may be made clearer when Climate Change Minister David Parker speaks at the Australia-New Zealand Climate Change and Business Conference this month.

* Gary Taylor is the chairman of the Environmental Defence Society and convener of the 2nd Australia-New Zealand Climate Change and Business Conference in Adelaide on February 20-21.