Businesses are urging the government to move slowly in trying to cut carbon. But when does transitional assistance become needless corporate welfare? Clancy Yeates reports.

When heads of industry met federal ministers at Sydney's Hilton Hotel earlier this month, the corporate chiefs didn't mince their words.

Executives from BHP Billiton, Woolworths and Qantas - just a few of the household names represented on the government's business roundtable on climate change - agreed a carbon price was needed. But with the pleasantries behind them, they were quick to direct the conversation to a more pressing concern: the impact on their bottom lines.

In no uncertain terms, the executives asked for yet more meetings with government to make sure there were no ''unintended consequences'' of putting an economy-wide price on carbon.

The Climate Change Minister, Greg Combet - a veteran negotiator from his union days - is said to have worked hard to reassure the corporate chiefs. The Prime Minister, Julia Gillard, has also promised not to ignore the ''good work'' of the carbon pollution reduction scheme (CPRS), blocked by the Greens for its generosity to business.

However, the soothing words have not calmed business nerves over Labor's plan to legislate for a carbon price this year.

In Canberra, the impact of a carbon price on high-emission or trade-exposed industries is also shaping up as a key hurdle for Labor's plans to cut carbon pollution. With the Opposition opposed to the so-called ''big new tax'', the government needs to strike a delicate balance between a policy that is ambitious enough for the Greens without inflicting too much pain on industry.

No one thinks this will be easy. On one hand, business groups are warning of another ugly fight with corporate Australia if they are ignored. On the other, economists say too much compensation for industry simply passes the burden to consumers - who are already facing surging power bills with more pain to come.

Gillard says pricing carbon will be the biggest economic reform since the wave of 1980s deregulation, which included floating the dollar and removing trade barriers.

Such changes inevitably create winners and losers, prompting calls for public assistance. Car makers, for instance, have received billions from governments of all stripes.

But there is a fine line between genuine transitional assistance and public handouts to ''rent seekers'' - and the distinction is likely to drive much of the carbon debate in months to come.

According to a Grattan Institute report, Rudd's CPRS promised compensation worth $22 billion for emission-intensive and trade- exposed industries. Most of the assistance was targeted at aluminium, steel, cement, liquefied natural gas, and coal industries.

This time, emission-intensive and trade-exposed industries are again calling for assistance to help with transition. But while the CPRS debate took place against the backdrop of the financial crisis, much has changed in the past few years.

Now, many of the companies pushing for compensation are also benefiting from a once-in-a-century resources bonanza.

The liquefied natural gas industry - promised $3.6 billion in free emissions permits under Rudd's scheme - is a case in point. The chief executive of the Australian Petroleum Production and Exploration Association, Belinda Robinson, says the CPRS didn't go far enough in recognising LNG's ''green'' role as a replacement for coal overseas.

''Putting a price on carbon simply serves to make the economics of getting these projects to financial investment decision a little bit harder,'' she says. ''Shouldn't we be looking at how we can encourage the growth of that sector, not winding it back?''

But if there are genuine fears of a carbon price in the industry, it hasn't stopped gas companies from announcing $31 billion in spending on LNG projects in the last few months alone.

The Grattan Institute report found Rudd's carbon price was ''highly unlikely'' to influence investment decisions. When the oil price was $US80 a barrel (today it's $US100), the report said the LNG projects' returns on equity would be well above 12 per cent - and carbon was a small fraction of the capital and labour costs.

Moreover, the institute's chief executive, John Daley, says Robinson's argument that LNG is replacing coal overseas does not mean the industry should have no incentive to emit less. ''LNG is a potential replacement for coal, but [eventually] other technologies are going to replace LNG. So LNG should pay its carbon price just like everyone else,'' he says.

The coal industry - which stood to receive more than $1 billion in compensation under the CPRS - has also enjoyed a profit boom since the last round of negotiations. Meanwhile, global coal prices have risen between 30 per cent and 60 per cent in the last year alone, and Australian mines are among the least costly in the world.

Less contentious is the aluminium sector - one of the most intensive users of electricity.

Under the CPRS the industry was to receive more than $8 billion worth of free permits, and the executive director of the Australian Aluminium Council, Miles Prosser, says he will now push for a similarly ''workable'' arrangement to prevent the industry heading overseas.

''If we did close down smelters in Australia, they would be replaced by the investment in China,'' Prosser says. ''I would be surprised if the Labor government was happy to see industry move offshore and jobs move offshore to a country which doesn't have a carbon cost.''

Steel makers have also signalled they will be asking for more, with a BlueScope Steel spokesman highlighting the competitive threat of low-cost Asian producers.

''It is not in Australia's interests - economic or environmental - to force domestic industries to shut down or curtail production, only to see that production replaced by higher-emission overseas production,'' the spokesman said.

Most people, including the Greens, agree these emission- intensive, trade-exposed sectors such as aluminium and steel should receive some assistance. But whether they need as much as Rudd promised is hotly debated.

Rio Tinto - which owns half the country's smelters - was reminded of the looming battle on this front last week after posting a record $US14 billion profit. The leader of the Greens, Bob Brown, accused the mining giant of trying to ''gouge'' public money in lobbying for compensation. He also promised to drive a harder bargain this time around, saying Rio would have pocketed $565 million a year in taxpayer support under the CPRS.

The most controversy, however, is reserved for the electricity industry. Power stations are responsible for about half the country's carbon emissions, and Labor's own climate change adviser, Professor Ross Garnaut, has argued there is no justification for giving them support. In contrast, the CPRS promised $7.3 billion in free permits.

The chief executive of the Energy Supply Association of Australia, Brad Page, says removing this assistance would ''strand'' billions of dollars worth of power station assets and threaten the sector's ability to raise capital.

Assistance is needed to help encourage investment in new plant, he says, and shut the highest-polluting power stations without punishing investors and creditors.

''That is no different to what has gone on in the automotive industry over 15 to 20 years, with well over $12 billion spent on it,'' he says. ''These can't be payments for business as usual ... that's pure rent-seeking.''

But since cutting carbon has been on the agenda for the past two decades, won't it create a moral hazard if investors in the most carbon-heavy power stations are bailed out? No, says Page, who argues the public should help the investors because the community has been the real winner from unpriced carbon.

''You've got to look at who the beneficiary has been of this, and it isn't simply the power generators. Frankly the community is a massive beneficiary out of this, so there is a responsibility there for some reasonable funding for a transition.''

For consumers, however, all these business pleas for special treatment may be hard to stomach. At a time when electricity costs are soaring, every handout to industry comes at a price to the rest of the economy.

The executive director of the Australia Institute, Dr Richard Denniss, explains there's no ''free lunch'' when trying to reduce carbon - it requires a change in behaviour across the economy. ''The more compensation you provide to the polluters, the duller the price signal and the less money left over to invest in alternatives,'' he says.

Compensation can make sense on equity grounds or if it is politically necessary to get what you want, Denniss says. But otherwise, the economic case for handouts is difficult to make.

The Grattan Institute's Daley adds that the CPRS arrangements were also excessive when it came to saving jobs. His research found protecting the aluminium sector amounted to a annual subsidy of $161,000 per worker.

''The most important thing is to get a carbon price in. It would be good policy to have much less compensation than was offered last time around,'' he says. ''If we're doing this to protect jobs it's not obvious that we need to do anything like what was suggested last time.''

However, these calls for restraint are unlikely to quell the demands of the many smaller businesses who are joining the rush for assistance.

The key independent Rob Oakeshott this week said small business had not been heard in the carbon debate, in a sign he could push for wider compensation for this sector.

His remarks were pounced on by the Australian Chamber of Commerce and Industry chief Peter Anderson, who is calling for small and medium companies also to be reimbursed for higher energy costs.

Heather Ridout, chief executive of the Australian Industry Group, also said a ''standout weakness'' of the CPRS was its failure to assist moderately-emitting trade-exposed industries, such as food processing, paper and chemicals. Ridout - a member of the business roundtable on climate change - said her lobby would push for more help for these industries.

Whatever happens in the carbon debate, it appears the big companies will face plenty of competition as they demand similar compensation to last time. In part, this is because the terms of the debate have changed. Rather than being the ''greatest moral challenge of our time'', pricing carbon has become yet another economic debate. Whether Australia opts for a carbon tax or an emissions trading scheme, there is likely to be a feisty debate over how to spend the revenue raised.

Denniss says unions who support a carbon price could be more emboldened in their demands, such as making sure higher electricity prices do not affect the quality of social services. With miners posting record profits and asking for assistance at the same time, such appeals to the public good could be popular indeed.

''People thought it was an environmental issue, but this time around it's being seen as more of a market reform issue,'' Denniss says. ''It means people say, 'If this is about the economy, why don't we spend $10 billion on education, rather than giving it to coal fired power stations?'.''

Going up in smoke