Policy makers who advocate an emissions trading scheme as the solution to global warming, but who overlook the role of Australia's coal exports, are suffering from delusion. Practically every atom of carbon in our exports of coal will soon become a molecule of atmospheric carbon dioxide. The Garnaut report provides no recognition of this. Our coal exports are the elephant in the room that we pretend does not exist.

Coal is the most carbon intensive fuel. Most of Australia's coal production is exported. Australia has the largest reserves of coal available for export and is by far the world's largest exporter of coal. Australia supplies almost 40 per cent of globally traded coal. Coal mainly consists of carbon. These exports are Australia's largest carbon emission, larger than all other atmospheric carbon emissions combined.

Currently, Australia's annual gaseous emissions of carbon dioxide amount to about 590 million tonnes. Our exports of coal are about 250 million tonnes. Almost all of that coal will later be turned into carbon dioxide, with a mass of about 740 million tonnes. So, more carbon already leaves Australia in ships than is discharged into the atmosphere. Despite the pretence of reducing atmospheric emissions, current investments will double our coal export capacity within a few years.

When this happens, Australia's contribution to global warming as a result of our coal exports will dwarf all other domestic sources of emission. The proposed emissions trading scheme is thus little more than elaborate facade that appears to do something but avoids addressing Australia's global responsibility regarding coal. Due to this coal delusion, whatever carbon emissions any domestic scheme can possibly save will be insignificant compared with the projected increase in Australia's carbon emissions, in the form of coal.

Both the recent Garnaut report and the government's Green Paper on Carbon Pollution not only fail to address this issue but are seemingly at lengths to indicate that Australia's coal exports will be protected from any impact of a carbon price as a result of the trading scheme. Energy intensive trade exposed industries are to be quarantined from the effects of emission mitigation requirements due to what is called as "carbon leakage". This is the contention that emissions saved in Australia may "leak" overseas. No "leaks" in coal export ships are contemplated.

It is true that imposing costs on Australian industry that simply drive polluting industries elsewhere, will have no net effect on global carbon emissions. However coal exporters such as Australia are in short supply and will remain so. This is a rather significant fact to overlook. How is it that the coal delusion arises? For the culprits in mass delusion, round up the usual suspects - fear, wishful thinking, and blind faith due to adherence to cultural myth and ideology.

The fear is that any impact on the coal export industry will damage the economy. This fear is unwarranted, because even if export volumes are halved and prices double, there is no loss of revenue.  Prices have doubled in the last year, yet volumes have increased. If we fear the consequences of global warming then we need to overcome our fear of higher export prices and mining less coal. This fear leads to blindness to the opportunities that higher coal prices may provide.

It is wishful thinking to imagine that taking actions that are limited in scope and geography will somehow solve a global problem. It is wishful thinking to imagine that carbon sequestration can be anything other than a belated and partial solution. It is wishful thinking to imagine that alternative energy production will be deployed in the required quantities unless there is a global price signal to motivate it.

The idea that Australia cannot influence world markets derives from faith in what economists call the "small country" assumption. Australia is deemed to be a small player and therefore a price taker. Exporting companies are loath to suggest otherwise. So the carbon solutions are focussed on domestic issues rather than global ones.

In the global coal trade, the small country assumption is patently false.  Australia is neither small in market share, nor market power. Australian coal suppliers secured price increases of over 100 per cent this year. The small country assumption is small minded. This has led to blind faith in an emissions market as the only feasible solution.

In the Garnaut Review it is argued that a carbon trading scheme is preferable to a carbon tax as this will limit emissions directly. However alternative energy production will only be economic if the carbon price is high enough and with a trading scheme the price is highly uncertain.

In the last budget the Australian government imposed a resource rent tax on LPG condensate exports. This is a form of carbon tax. There is no such tax on coal. There should be. Most of the world's traded coal is supplied by a handful of countries. Australia can lead the way by coordinating with these countries and imposing a tax on coal exports. This will provide revenue for a global abatement fund and a price signal to the world that coal is a polluting resource and that alternatives are needed.

This would achieve more than trading schemes ever will. It will address our global warming responsibilities by using our ability to influence the global coal market. Only Australia can do this. But first we need to overcome the coal delusion.

Dr John L Perkins is a Melbourne freethinker and economist at the National Institute of Economic and Industry Research.