The ground is shifting under the Government’s climate change approach and its previously politically strong position on the issue is being undermined.

The equation used to be simple: by adopting the appearance of moderation while committing to introduce an ETS, the Government could attack both the Greens and the Coalition as extremists. The Coalition, anxious to avoid being painted as greenhouse denialists, would deal with the Government in the Senate to pass the ETS legislation.

But in its haste to placate business, the Government has created a complex ETS that will punish low emitters and reward heavy polluters, while creating minimal incentives to actually reduce carbon emissions. It has also set a bare minimum target of 5% reduction by 2020. The biggest winners out of the Government’s ETS, as it stands, will be heavy polluters and financial engineers in the likes of Macquarie Bank, who will work out ways to exploit and game this new, complex trading system.

As a result, green groups are turning their backs on the Government’s ETS. The backstory here is that many environmentalists were never particularly enamoured of the idea of a market-based solution to climate change in the first place. The default preference among many green groups is for regulation and taxes, rather than capitalist tools. As it stands, we’ll never get to actually see whether a market-based solution would work because the politicians aren’t providing one.

But earlier this month, the ACF announced it would campaign against passage of the ETS legislation in the Senate. A climate summit in Canberra composed of dozens of smaller and local environmental groups also condemned the scheme. The Greens are holding their fire for the moment but it’s impossible to see them backing the Government’s model without fundamental changes that, as Bob Brown said yesterday, remove the rewarding of big polluters.

The Coalition leadership is also refusing to sit still and let itself be characterised as sceptics, even if there are plenty of deniers in its ranks. Compared to the disastrous handling of the issue by Brendan Nelson, Turnbull has handled climate change adeptly. He cleverly flicked the White Paper to an external review (an Andrew Robb idea), enabling the focus to remain on the Government. And in an attempt to outflank the Government, Malcolm Turnbull launched his Green Carbon initiative in late January, committing to significant emissions reductions in areas not currently covered by the Kyoto agreement or the proposed ETS. The initiative got rather swamped by other minor issues like the stimulus package, but it indicates the direction the Coalition wants to go.

Meanwhile the economic downturn strengthens the hand of those inside and outside the Government who’d like to delay the ETS. The Treasurer’s reference of the issue to the House Economics Committee will give the Government options for deferring the start date, or suggesting alternatives, like a carbon tax. There’s a strong suspicion within Coalition ranks that the Government is preparing the way for a deferral of the ETS start date until after the next election.

The new push for a carbon tax is gaining momentum precisely because the Government’s ETS is so bad. An effective ETS is preferable to a tax because businesses can trade credits, provide a direct incentive to further reduce emissions and partly fund investment in greener infrastructure and processes. An ineffective ETS is a huge administrative exercise with no real benefits except to bankers, and less efficient than a carbon tax, which is administratively much simpler.

A tax — which can be offset by reductions in other business taxes, leaving no net impact but establishing an incentive to reduce emissions — would address the Coalition’s biggest concern with the ETS: the possibility of carbon and jobs leakage overseas. Turnbull and Andrew Robb have both left open the option of considering a tax. Senior Coalition sources say the Coalition’s commitment is to an economic instrument to address climate change, and that while they are predisposed to an ETS to do the job, they’re not wedded to it or opposed to a carbon tax. The outcome of the Coalition’s own review, being conducted by CIE’s David Pearce and due in the next fortnight, will be instructive. Climate Change spokesman Greg Hunt is also well placed to consider the issue, given he wrote a university thesis on carbon taxes versus emissions trading.

But whether the Coalition has a serious chance of derailing the Government’s strategy of painting it as a bunch of sceptics will depend heavily on its ability to convey the complex message that it is committed to better emissions targets than the Government, but pursued via non-ETS initiatives. Voters may not understand an ETS, but they’ve come to believe it’s the way to fix climate change. It will be a tough sell, particularly when media attention is focussed on the economic crisis and leadership shenanigans.

Even so, the comfortable position that the Government was in last year on the issue is eroding quickly. Kevin Rudd and Penny Wong might have been too clever by half in seeing climate change as a weapon in the Prime Minister’s campaign to marginalise the Opposition.