The European Union has had an emissions trading scheme since 2003, has set targets for 2020 and has taken other steps to significantly reduce emissions. New Zealand has legislated for a trading scheme. US states are setting up markets and the Republican and Democratic presidential candidates are promising to end the Bush administration’s recalcitrance on climate change.

Action by developed countries is a necessary first step if there is to be any hope of getting binding commitments from developing countries, which argue that, since it was the industrialised nations that created the problem, they should take the lead in resolving it.

China has announced that it will reduce the energy intensity of its output by 4 per cent a year, a significant step if it is delivered. It has imposed special taxes on industries such as steel, aluminium and cement to reduce their high use of energy. China has by far the biggest nuclear energy building program in the world and has set renewable energy targets.

Reducing emissions need not mean lowering economic growth. The challenge is to break the link between emissions and economic growth. Schwarzenegger has pointed to one way of doing so.

Garnaut suggests that all the money raised from selling permits for an emissions trading scheme be returned to the community. But the compensation has to be indirect if it is not to be self-defeating. Putting a carbon price on petrol, then cutting the excise by an equivalent amount, may be politically appealing. But it reverses the price signal designed to encourage reduced consumption and a shift to other forms of energy. Petrol prices are high enough now to encourage changed behaviour but they may not be in a few years, particularly if the world economy tanks.

That does not mean households, particularly those on lower incomes, should not receive compensation for higher petrol prices but that it should be given in other forms, such as through the social security and tax systems. As much as possible should be channeled into incentives for greater energy efficiency, measures that people on low incomes would not otherwise take.

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