Australia unveiled plans to hit its worst polluters with a carbon tax in the nation's most sweeping economic reform in decades, smoothing the way for the largest emissions-trade scheme outside Europe with tax cuts for voters and sweeteners for industry.

Prime Minister Julia Gillard said today 500 companies including steel and aluminium manufacturers would pay a A$23 ($24.70) per tonne carbon tax from next year, rising by 2.5 percent a year, moving to a market-based trading scheme in 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 ageing coal-fired power stations for electricity.

Gillard, whose popularity has slumped to record lows over the scheme, said the plan would cut 159 million tonnes of carbon pollution in 2020, reducing emissions by 5 percent of 2000 levels.

"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 Labor party, which relies on the support of Greens and independents. Her government has just a one-seat lower house majority.

But the package already has the support of the Greens and independents, giving her the numbers she needs to pass it through parliament in the coming months. Two previous attempts in 2009 were defeated.

With the details now finally released after months of waiting, Gillard and her government will now try to convince voters opposed to the scheme ahead of a parliamentary vote.

"It is absolutely critical that the government sells this very effectively," said Tony Wood, director of the energy programme at the Grattan Institute, a policy think tank.

The danger is that a vigorous campaign by the conservative opposition and business groups opposed to the tax, could erode public support and frighten political backers ahead of elections due by 2013.

"This tax is going to go up and up and up as time goes by. I think this package is going to compound the trust problem that has dogged the prime minister. This package certainly sets up the next election to be a referendum on the carbon tax," said conservative opposition leader Tony Abbott.

To neutralise opposition, Gillard said more than A$24 billion to be raised from pollution permit sales over the next three years would go to households through generous tax cuts worth more than A$15 billion.


Australia's scheme will cover 60 percent of carbon pollution apart from exempted agricultural and light vehicle emissions, with Treasury models showing it would boost the consumer price index by 0.7 percent in its first year, 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 his present term. Outside the EU, only New Zealand has a national carbon scheme.

"There's an undoubtable boost for momentum on global carbon pricing. Other countries will look at one of the most carbon polluting economies on the planet that has made one huge stride forward towards putting a price on carbon," said John Connor, chief executive of The Climate Institute.

Australia said it hoped to link its scheme, which would cost A$4.4 billion to implement after household and industry compensation, to other international carbon markets and land abatement schemes when its emissions market was 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 cleaner natural gas or biomass.

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 aluminium production were not killed off, and help close the oldest and dirtiest power stations.

Assistance would come from free carbon permits covering 94.5 percent of carbon costs for companies involved in the most emissions-intensive and trade-exposed sectors, such as aluminium 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.

"We support action on climate change but are disappointed at the government's lack of genuine consultation," said Xstrata Coal spokesman James Rickards in a statement.

The Minerals Council of Australia criticised the scheme as a "dangerous experiment with the Australian economy".

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 brown-coal generators in Victoria state and remove up to 2,000 megawatts of capacity by 2020, replacing them with cleaner gas, while short-term loans would help them 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, BlueScope

and OneSteel Ltd , will receive 94.5 percent of free permits and A$300 million in 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.


The scheme also set-up a A$10 billion Clean Energy Finance Corporation to fund new renewable and cleaner generation capacity, such as wind, solar, gas and wave power plants.

"This is the moment where Australia turns its back on the fossil fuel age, and turns its face towards the greatest challenge of the 21st century, and that is addressing global warming," said Australian Greens deputy leader Christine Milne, whose party wields the balance of power in the Senate.

To soothe voters, with polls showing 60 percent opposition to a carbon tax, the government has offered tax cuts to low and middle-income households, as well as increased state pension and welfare payments.

Treasurer Wayne Swan said all taxpayers earning below A$80,000 a year would get tax cuts worth around A$300 a year, which analysts said could actually help boost the struggling retail sector, where spending has been sluggish.

Many analysts broadly praised the scheme.

"It is much more than a carbon tax. It is a comprehensive suite of measures that together can not only reduce our emissions, but also encourage growth of innovative, green technologies, industries and jobs," said Caroline Bayliss, Australia Director of The Climate Group, an international advisory and NGO. ($1 = 0.930 Australian Dollars)