Why not wait and see what the world does on emissions?

DO you want to know a secret? Australia will end up producing more greenhouse gas emissions than most other countries.

We will still make use of our abundant fossil fuels, even if we burn them more cleanly. But we will use our fossil fuel income to buy emission rights from other countries, such as financing tree planting in the tropics.

That will make it less costly to cut global carbon emissions. And an efficient plan is more likely to tackle global warming than a high-cost plan.

Yet grand schemes are often undone by such political loose threads. Take the Government's porky that its fiscal stimulus plan to put ceiling insulation in every Australian home will cut the nation's greenhouse gas emissions by nearly 50 million tonnes by 2020.

That's now turned into what some claim to be the "fatal flaw" of the Rudd Government's proposed emissions trading scheme, or ETS. Neither ceiling insulation, solar panels nor riding a bike to work will actually cut one tonne of overall carbon emissions, at least not at first.

Such efforts will simply provide room for "big polluters" to pump out more greenhouse gases underneath the Government's overall emissions cap out to 2020.

It's political dynamite for environmentally conscious citizens who expect their inner-glow actions to directly turn down the global thermostat. But then nothing they do will save the planet, given that Australia accounts for only 2 per cent or so of global emissions.

And the shocking idea is actually a design strength of the "cap-and-trade" scheme proposed first by the Howard government and adopted by Kevin Rudd. Such schemes generally aim to control the amount of carbon emissions. Or they aim to control the price of carbon emissions.

But it is difficult to do both. So the cap-and-trade scheme directly targets the key variable for combating global warming -- the amount of carbon emissions. And it aims to achieve any targeted emissions cut at a lower cost to the economy, profits and jobs than other schemes.

As the Government reduces the amount of emissions permits each year, their rising scarcity drives up their price, and hence the cost of emitting carbon. Businesses that can most cheaply reduce their emissions and can sell their permits to those businesses that find it more expensive.

The cap-and-trade scheme sets a (declining) overall quantity of emissions. The market then sets the economy-wide cost of meeting this quota by determining the (rising but fluctuating) price of emissions permits.

A richer economy will be better placed to install less-polluting plant and equipment. People in good paying jobs are more likely to invest in solar panels, even if encouraged to do so by rising electricity prices under a rising carbon price.

Ceiling insulation, solar panels and bike riding will make it easier to cut emission targets after 2020. Remember, this is a policy task that will take decades.

The alternative could be a carbon tax. For a given tax or higher carbon price, any cut in emissions from bike-riding citizens would flow through to lower nationwide emissions. Yet, while it could control the carbon price, a carbon tax would have a less direct handle over the quantity of emissions.

It would be simpler and perhaps less administratively costly. But it also would lose the efficiency benefits from permit trading. That is, unless the ETS is badly designed or overtaken by events. And that's what we're debating now.

For instance, the Government's own adviser, Ross Garnaut, complains that the Government's proposed compensation for emission-intensive export industries is riddled with rorts and could blow the budget. Malcolm Turnbull this week pointed out the costs of excluding agricultural carbon offsets from the ETS: it dulls the incentives to develop bio-sequestration of carbon.

It's still not clear what the Obama administration will have cooked up by the time of the global Copenhagan climate conference in December. Barack Obama yesterday backed "a market-based cap on carbon pollution". Yet a couple of weeks ago, his energy secretary seemed to favour a carbon tax.

And it's impossible to ignore the global financial crisis. Some suggest that arguments against delaying the ETS during an economic downturn are as misguided as those for delaying cuts to import protection during hard times.

They argue that recessions are good times for such adjustments because there is plenty of unemployed skilled labour and investment capital to flow to the new industries. Yet, by the time the ETS is bolted down in 16 months time, the economy will be "accelerating strongly", providing a "favourable environment for new growth industries to expand".

That's a bold call. Cutting import protection yields an economic efficiency dividend, whatever the rest of the world does. In contrast, cutting carbon emissions hits Australia's comparative advantage in cheap fossil fuel-based energy. And, unlike tariff cuts, the cost is higher if we move unilaterally. And this is surely no ordinary recession. By the middle of next year, the Reserve Bank forecasts the economy will be posting annual growth of only 1.25 per cent. And the risks are on the downside.

While there will be more jobless workers to be hired by low-carbon industries, there's unlikely to be much investment capital around to finance them. That's unless the Chinese want to invest in our solar industry rather than our mines. This is a global credit-crunch recession. There's a shortage of capital.

Other than for election advantage over John Howard, there was no compelling need for Rudd to promise to bed down a fully-blown ETS by mid-2010. Now the Government appears to have got the wobbles internally.

The fuss over the emissions payoff from ceiling insulation shows that the ETS scheme is little understood -- and that the Government struggles to explain it. In any case it's not clear that the scheme's design is optimal, or which way the US or China will move.

Rudd could still go to Copenhagen promising to unconditionally cut emissions by 5 per cent by 2020 and by up to 15 or even 25 per cent if the rest of the world agrees. But let's see what comes out of Copenhagen before we lock down a scheme that may or may not be compatible with what other key economies do.