Ever since the Rudd government first proposed providing assistance to trade-exposed industries as part of its carbon pricing policy in 2008/09, industry has been in lobbying mode, angling for large-scale exemption from their carbon costs.

Emissions-intensive industries like Australia's coal, LNG and steel sectors have argued – loudly – that until all other overseas competitors face an equivalent carbon price, the government should protect them from associated costs in the interests of keeping a level international playing field.

And while the Gillard government offered some early resistance to meeting CPRS-levels of compensation, it has essentially capitulated, proposing that protection from the domestic carbon price should, initially, be kept at levels of 60-90 per cent.

Even the government's climate advisor, Ross Garnaut – who was highly critical of the industry compensation levels offered under the CPRS – has shifted on the issue, agreeing that CPRS levels of protection should be allowed during the three-year, fixed-price period, after which time it should be reassessed by an independent body, such as the Productivity Commission.

The Greens, meanwhile, having rejected outright the CPRS compensation package as "a victory of lobbying power over good policy," have been more amenable to the measures this time around, instead offering suggestions of compromise.

"There are plenty of options for a middle ground between the over-generous CPRS package and the principled approach to industry compensation that we are all aiming to get to as soon as possible," Greens Deputy Leader, Senator Christine Milne, said in April.

"The most important thing we all need to bear in mind when working on a vital reform such as putting a price on pollution is that negotiations need to take into account the needs of the whole community, not just vested interests."

But one group that has maintained its opposition to CPRS-level industry compensation measures is the Grattan Institute. In 2009 they called it a massive waste of money, and now, in 2011, they are calling it "new protectionism."

In a new report, released Monday, the independent think tank maintains that the level of compensation in the federal government's draft carbon price legislation, for black coal, LNG and steel, is "unjustified and costly."

The Grattan report analyses the effects on the three industries of a $40/t of CO2e carbon price – a figure chosen because it is well above the proposed starting price, and which also happens to be the figure named by industry leaders, amid reported concerns that a market-based system of emissions trading, with government-influenced prices, could double the carbon price in 2015-2016.

But according to the Grattan Institute report, even with a carbon price of $40/t, the impact on these industries would be negligible.

"Coal mines would remain open and many would expand. The viability of many LNG projects would not be significantly affected," the report says. "(And while) a carbon price with no industry assistance could add to ...pressures (facing the steel sector), ...the government's proposed assistance is so generous that steel producers will receive an unjustified windfall gain."

The report, authored by Tony Wood and Tristan Edis, argues that the main legitimate rationale for industry protection is to prevent carbon leakage: where a carbon price forces industry to shift production to other countries, without a reduction in global emissions.

But it says that the government's draft bill has failed to apply the carbon leakage test, instead choosing to implicitly adopt a rationale for industry protection.

The carbon pricing package "does not take into account that any exemptions given to these industries shift the cost of reducing carbon pollution onto the whole community, and therefore amount to a new form of protectionism," the report says.

"Assistance for coal mining and LNG production puts a particularly heavy burden on the rest of the community because their combined emissions are set to double in the next decade," say Wood and Edis.

The paper also suggests that industry claims that jobs would be lost without assistance should be scrutinised carefully.

"The independent Productivity Commission should be given more scope to review protection in the wider public interest, applying a true carbon leakage test. To ensure transparency, the bill should also provide for public access to detailed data about industry emissions and levels of assistance," it says.

"In other words, the bill seeks to created an artificial international level playing field for our trade-exposed, emissions-intensive industries as a way to reduce the risks of carbon leakage. This is not the right approach.

"The draft bill's underlying assumption that there should be an international level playing field sounds fair on the surface. But in effect, it embeds a protectionist policy. It perverts the historic role of the Productivity Commission of reducing protectionist measures to increase the productivity of the Australian economy. It perpetuates distortions that benefit emissions-intensive industries while imposing significant costs on other Australians.

The report suggests that the government, when faced with a choice between treating emissions-intensive industries unfairly compared to the rest of the world, or treating other Australians unfairly relative to emissions-intensive industries, has sided with industry. And, it concludes, "on average, (the Australian community) is worse off."

The report goes on to say that "If an industry is unduly sheltered from the carbon price, it might be larger than if it paid the full price. As a result, its emissions will be higher. In order to reach Australia's emissions targets, other industries and consumers must reduce their emissions more, or pay others overseas for emission reduction credits.

"The issue is particularly stark for the coal and LNG industries," the report continues. "Since they are expected to expand substantially over the next two decades, other Australians will have to reduce their emissions much more. It is unfair that the coal and LNG industries will not shoulder their share of this burden."

The report notes that combustion emissions from liquefying gas for export are forecast to grow by 400 per cent, while incorporating fugitive emissions means growth in LNG emissions will make the oil and gas sector one of the largest sources of emissions in Australia by 2020.

On the steel industry, the report says that it doesn't follow that the government should protect it "at all costs."

Due to recent shifts in global steel prices and exchange rates, it points out, "there is a real risk that some parts of the Australian steel industry will move offshore. Paying a full carbon price increases this risk, but is not the primary driver.

In its current state, it says, the government's compensation package "will leave the steel industry better off than without a carbon price. In effect, it is protecting the Australia industry, not from a carbon price, but from structural adjustments in the global steel industry."

And it quotes BlueScope Steel CEO Paul O'Malley, who – in commenting on the company's significant financial losses – said the key financial drivers the industry was facing were "the macro-economic challenges around the high Aussie dollar, high raw material prices, and low steel prices – it's definitely not about carbon."

The report concludes that the analysis illustrates how "public debate around carbon pricing is heavily influenced by arguments that are often not well supported by transparent evidence."

It suggests that, to avoid protectionism, "the provisions of the legislation could be simplified to just one of the four objectives currently in the Bill: to provide assistance to trade-exposed industries in a manner that is "economically and environmentally efficient."

It could then be left up to "suitably qualified institutions like the Productivity Commission to assess whether assistance meets this broad objective."