KEY POINTS:
Australian professor Ross Garnaut has some good advice for our Government as well as his own.
"The review suggests that prior to the indelible conclusion of [emissions trading] scheme design in either country, the Australian and New Zealand Governments meet at ministerial level to discuss linking and to
identify any impediments to linking that may warrant adjustment to one or both scheme designs."
The Garnaut climate change review was commissioned first by the Australian states and then the Federal Government to consult and advise on the design of an emissions trading scheme.
Its draft report was released last Friday and a government green paper is due soon. Climate Change Minister Penny Wong is standing by a timetable that has legislation introduced by the end of this year and an emissions trading scheme up and running in 2010.
If Australia's scheme is along the lines recommended by the Garnaut review there will be a family resemblance with the New Zealand scheme, but there are notable differences.
They need not constitute a barrier to linkage between the schemes - a common carbon market, if you will. The environmental integrity of both schemes should be the determining factor there.
But it would be prudent to be sure the differences do not pre-empt linking before anything is set in concrete.
Garnaut argues for the broadest possible coverage for the scheme. That means including transport.
But he is equivocal about including agriculture given measurement difficulties, transaction costs and trade exposure. Its inclusion may be desirable in principle, the review says, but further analysis is required to determine whether it is the most cost-effective means of reducing net emissions from the sector.
Garnaut opposes any concession to the electricity generators - most of Australia's electricity is from coal-fired stations - citing both economic theory and the European experience to argue that the price of every unit of electricity will include a carbon charge whether the generators have had to meet it or not.
So the Australian Government might as well get the money.
He opposes any free allocation of permits - a major difference from the New Zealand scheme - preferring that they be auctioned by the Government.
The main thing is how the resulting revenue is recycled. The review suggests 50 per cent go back to households, especially lower-income ones since the effects of pricing carbon are likely to hit them harder.
Another 20 per cent should be earmarked for relevant research and development and the remaining 30 per cent used for cash subsidies to emissions-intensive trade-exposed industries.
The case for subsidy is, of course, what Garnaut calls the "dreadful problem" of leakage.
That is the risk of irreversible loss of productive capacity over and above what would occur if the firms' international competitors faced similar carbon constraints.
It is not, the review stresses, intended to make good any costs or losses they face as a result of the scheme.
And it warns that capitulation to special pleading could fundamentally subvert the scheme.
"If the eligibility criteria are set too generously, the burden of emissions reductions will be shifted elsewhere in the economy."
The costs the trade-exposed smokestack sector face need to be put in the context of a resources boom from which they have done very nicely, thank you, he points out. Those are silk-lined shrouds that are being waved.
Like the New Zealand scheme, Garnaut favours, indeed presupposes, linkage with other carbon markets. The benefits of increased liquidity apply: lower costs and less volatility.
But the review acknowledges the problem that the smaller parties in international linkages would be price takers and would import any flaws in the larger partners' schemes.
It has misgivings about Kyoto's clean development mechanism market in offsets, which is likely to be the major source of units for the New Zealand scheme. It would like to see a much smaller role for international offsets under whatever regime prevails after Kyoto's first commitment period ends in 2012.
The draft report is all words and no numbers.
The Garnaut review has yet to release the results of the modelling of costs and benefits it has done with the Australian Treasury, or to recommend future targets and trajectories for emissions reduction, or estimate what that would mean for carbon prices and the cost of petrol and electricity.
But the overarching approach is attractive. They would have at any time a firm trajectory or target for emissions reductions for the next five years and indicative ones stretching to the middle of the century.
Movement from one trajectory to the next - more steeply downward-sloping - one would depend what was happening internationally. But firms would always have five years' notice.
This week's G8 summit in Japan gave little reason to be more optimistic about the tormented geopolitics of climate change.
True, the world's leaders did talk about halving emissions by mid-century, but they mentioned no baseline year. That makes the pledge about as empty as the Government's "aspirational" talk of carbon neutrality while remaining grimly silent about timeframes.
Both Australia and New Zealand face the problem that if the world does move to putting a price on carbon emissions we start from the unhappy position of having highly emissions-intensive economies - that is, high levels of emissions per dollar of GDP.
Australians might envy the fact that most of our electricity comes (dry years notwithstanding) from renewable sources.
We in turn might point out that under the Kyoto rules Australia is not liable for emissions from all that coal it exports, whereas in the case of our largest export industry, the emissions (from the bodily functions of sheep and cattle) occur within our shores.
But none of that helps either country embark on the adjustment to a carbon-constrained economy and, as both have further to travel than most, delay is likely to prove costly.
Climate change, Garnaut says, is a diabolical policy problem. Effective remedies require international co-operation of unprecedented scale and complexity.
At times it seemed the issue might be too hard for rational policy making, Garnaut says.
"The special interests are too numerous, powerful and intense. The timeframes within which effects become evident are too long and the timeframes within which action must be effected too short."
An opinion poll for the New Zealand Institute of Economic Research found that less than half of those surveyed were aware of the emissions trading scheme and more than half said they didn't know any details or didn't understand it.
