By James Grubel and Rob Taylor
CANBERRA (Reuters) - Australia unveiled plans on Sunday to slap a carbon tax of A$23 a tonne on its 500 worst polluters from 2012, sweetened by tax cuts for voters fearing higher power bills, and paved the way to adopt the largest emissions-trading scheme outside Europe.
Prime Minister Julia Gillard said the worst polluting companies would have to pay a A$23 ($24.70) price that would rise by 2.5 percent a year, before the minority government moved to a controversial market-based emissions scheme in mid-2015.
"Australians want to do the right thing by the environment," said Gillard, whose country is the rich world's worst per capita greenhouse gas emitter due to a heavy reliance on aging coal-fired power stations for electricity.
Gillard, whose popularity has slumped to record lows over plans to price carbon and drive up household energy costs, said the plan would cut 159 million tonnes of carbon pollution in 2020, reducing emissions by 5 percent over 2000 levels.
"That is why the Gillard government is implementing a comprehensive plan for a clean energy future for our nation. It's time to get on with this, we are going to get this done," she told reporters.
The stakes are high for Gillard's government, which has just a one-seat lower house majority, but the package already has the support of the Greens and key independents, giving her the numbers she needs to pass it through parliament. Two previous attempts in 2009 were defeated.
But the danger is that a vigorous campaign by the conservative opposition and business groups opposed to the tax, expected to begin within days, could erode public support below already catastrophic levels and frighten political backers.
Australia's scheme will cover 60 percent of carbon pollution apart from exempted agricultural and light vehicle emissions, with Treasury department models showing it would boost the consumer price index by 0.7 percent in the first year of the tax, in 2012-13 (July-June).
It could also aid global efforts to fight carbon pollution, which have largely stalled since U.S. President Barack Obama last year ruled out a federal climate bill this term. Outside the EU, only New Zealand has a national scheme in operation.
"This is a transparent carbon pricing framework for the long term and we welcome it. The addition of the independent Climate Change Authority to recommend targets will ensure the science and economics get a fair hearing in future," said Nathan Fabian, CEO of the Investor Group on Climate Change.
Australia said it hoped to link its scheme, which would cost A$4.4 billion to implement after household and industry compensation to avoid a political backlash, to other international carbon markets and land abatement schemes when its emissions-trading market was up and running.
Europe's system, which covers the 27 EU member states plus Norway, Iceland and Liechtenstein, has forced power producers to pay for carbon emissions, driving cuts where power plants were forced to switch to less carbon-emitting natural gas or biomass.
AID FOR STEEL-MAKERS, METAL REFINERS
Gillard said her government would spend A$9.2 billion over the first three years of the scheme to ensure heavy polluting industries like steel and aluminum production were not killed off, and help close down the oldest and dirtiest power stations.
Assistance would come from free carbon permits covering 94.5 percent of average costs for companies involved in the most emissions intensive and trade exposed sectors like aluminum smelters and steel manufacturers, while moderate emitting export industries would get 66 percent of permits for free.
Coal miners, including global giants Xstrata Ltd and the coal arms of BHP Billiton, would be eligible for a A$1.3 billion compensation package to help the most emissions intensive mines adjust to the tax, which would add an average A$1.80 per tonne to the cost of mining coal.
Australia, a major coal exporter, relies on coal for 80 percent of electricity generation, which in turn accounts for 37 percent of national emissions.
The government would also set up loan guarantees for electricity generators through a new Energy Security Fund, to help the industry refinance loans of between A$9 billion and A$10 billion over the next five years.
The government would fund the shut-down or partial closure of the dirtiest generators and remove up to 2,000 megawatts of capacity by 2020, while short-term loans would be offered to generators to help re-finance debt and buy permits.
Australia's booming liquefied natural gas (LNG) sector, which is due to decide on A$90 billion worth of new projects, would also be included in the scheme, despite calls for 100 percent protection. The sector will receive 50 percent assistance, Climate Change Minister Greg Combet said.
Steelmakers, including Australia's largest steelmakers BlueScope and OneSteel Ltd, will receive 94.5 percent of free permits and A$300 million in extra grants to help support jobs.
Agriculture will be exempt, but the government wants farmers and foresters to cash in on carbon offsets through its carbon farming initiative, which will allow offsets through forestry, changes to land clearing, savannah burning and animal management.
To sooth belligerent voters, who polls show are 60 percent opposed to a carbon price, the government has offered tax cuts to low and middle-income households, as well as increased state pension and welfare payments.
As well as exempting fuel from the scheme for all motorists except for heavy transport, the tax-free threshold would also be tripled to A$19,400 by July 2015 when emissions trading begins.
"No Australian will pay more tax as a result of these changes," Gillard said.
(Editing by Mark Bendeich and Ed Davies)