Doing nothing is preferable to this

The second downside is more serious. We'd encourage our trade competitors not to mitigate their own emissions.

How so? Our trade competitiveness loss is their gain. Their incentive is to continue business as usual, milking the trade gains we've lost for all they're worth.

We would be dumb to adopt a production-based carbon pollution reduction scheme-type policy. We'd pay a large economic cost for little or no global emissions reduction. We'd strengthen incentives that make a global deal less likely.

Ross Garnaut argues we need a principled approach to the trade-exposed sector when mitigating our emissions.

Special deals and arbitrary classification of industries qualifying for them, the CPRS route, are the antithesis of a market-based approach to this problem.

There is a better way. Focus on reducing national consumption of emissions. This employs all the information used under a production approach. It does one other thing. All costs (for example, permits) incurred by producers are treated as input tax credits, using the existing GST system. Exports and business sales receive full input tax credits. Border tax adjustments apply to imports at the same rate as their locally produced competitors. Trade neutrality is preserved. Carbon leakage is avoided. No special deals are warranted.

All emissions permits should be sold, whether the price is fixed or floating. Net revenue raised should be used to cut other taxes.

If the current process in Australia leads to another CPRS (especially like CPRS Mk II), there are at least four reasons Australia should do nothing.

First, the policy will be ineffective in reducing Australian emissions (because of large carve-outs) and, even more so, global emissions (because of some carbon leakage).

Second, without a national consumption-based policy, taking no action would be a more principled approach to the trade-exposed sector than the rent-seeking and green protectionism likely to be part of another CPRS-type round of negotiations (at the end, if not at the beginning, of the process).

Third, if a moral stance is relevant to this policy debate, by doing nothing we would avoid being hypocrites, appearing to reduce our emissions but then consuming more via increased imports.

Fourth, by pushing a policy model that individual countries cannot adopt without fear of adverse trade competitiveness effects, Australia would be encouraging continued global resistance to action, thereby reducing the chances of a global deal.