The business lobby's big victory in eradicating ''green tape'' has collapsed as the Gillard government shelves controversial plans to hand over environmental decision-making to the states.
As green groups geared up for a big summer protest campaign against the move, the Prime Minister, Julia Gillard, will tell business leaders on Thursday that negotiations to strike handover deals with each of the states had hit legal complications and state processes that failed federal environmental standards.
She will explain the talks were reaching wildly varying conclusions from state to state - potentially leaving businesses with a more confusing set of environmental laws than they have now.
And she will ask the states to come back to the federal government with a unified national position about which environmental decision-making powers should be handed over and how they would legislate their pledge to meet high federal standards.
This is a request the states are likely to find very difficult to meet.
The agreement to slash ''green tape'' was heralded as a historic win for business groups at the inaugural Council of Australian Governments Business Advisory Forum in April. Its shelving will be a very bitter pill at the second meeting between key business leaders, the Prime Minister and premiers on Thursday, ahead of Friday's formal COAG.
Some states are understood to have been prepared to take over about 90 per cent of environmental decision-making, while others wanted to take on only about 25 per cent, resulting in a potential mishmash of laws around the nation.
Existing state processes did not always meet the federal protection standards and governments were advised this raised the risk of legal challenge, potentially increasing uncertainty for business.
But the federal government will introduce its own legislation to reduce the time taken for environmental approvals of big development projects and to set out whole categories of projects that won't need federal approval at all.
Business groups say overlapping state and federal environmental powers are costing them billions of dollars, but environmentalists and scientists have insisted the federal government must retain the power to intervene in major development applications as a ''last resort''.
Business will be happier with an announcement on Thursday that the federal government will ask the Productivity Commission to find ways to ease the cost burden on small business caused by excessive regulation and red tape.
The Finance Minister, Penny Wong, and the Assistant Treasurer, David Bradbury, will tell the forum the Productivity Commission will be given nine months to look at the costs incurred by small business as a result of federal and state regulators.