Australia risks isolation unless it prices carbon: adviser

Steam and other emissions are seen coming from funnels at a chemical manufacturing facility in Melbourne June 24, 2009.

CANBERRA (Reuters) - Australia's top climate adviser said on Tuesday the country faced isolation and potential trade retaliation unless it puts a price on carbon pollution and joins international efforts to fight global warming.

In his final report to the government, adviser Ross Garnaut also said Australia should consider a stronger emissions target, and the commitment to cut emissions by 5 percent of 2000 levels by 2020 should be the minimum target. Garnaut said the 2010 Cancun global climate meeting increased the need for Australia to set strong targets, after delegates agreed to limit global warming to no more than 2 degrees Celsius.

"If we didn't do much we would run great risks for Australia," Garnaut said. "It would be contrary to our national interest because it would make a strong global mitigation outcome less likely," he said, referring to global steps to fight climate change.

"Inaction by Australia, with the highest emissions per person in the developed world, would invite retaliation in trade and other areas of international cooperation," he says in the report.

Prime Minister Julia Gillard wants a carbon tax from July 2012 on the country's 1,000 biggest polluters, with a transition to a full emissions trade scheme three to five years later.

Government, Greens and independent lawmakers are currently working out details of the tax, including the starting price and levels of compensation for industry and households, with final details expected by early July.

But winning agreement is far from certain.

Australia's Labor government has struggled to introduce a carbon price as the cornerstone of its climate policy since it first came to power 2007, when Labor defeated conservative prime minister, John Howard.

Since then the carbon price issue has seen three more political leaders, one Labor PM and two Liberal party leaders, toppled and Labor's carbon price legislation defeated twice in parliament.

Gillard said she would consider Garnaut's final report.

"Pricing carbon is an economic reform where the benefits far outweigh the costs," she said.

"He tells us a fixed price followed by a carbon trading scheme is the best path forward to reduce the dangers of climate change without damaging the prosperity of the Australian nation."

Australia, the world's biggest coal exporter, produces about 1.5 percent of global emissions. It relies on coal for 80 percent of electricity generation and is struggling to rein in growing emissions, particularly from the mining, oil and gas sectors.

CALL FOR STRONGER TARGET

Business has called for the price to start at A$10 a tonne, although more business groups, including oil producer Shell, are backing emissions trading schemes to give business more investment certainty.

"We would recommend that emissions trading schemes become established, because we think that would be the most economically efficient way of directing investment," said Jeremy Benthan, Shell's vice president of global business environment.

Environment groups said the government now needed to set stronger emissions targets and ensure a high carbon price to fight global warming.

"The real test for any agreed pollution package will be whether Australia's pollution levels are falling and whether we are driving domestic transformation and investment in Australia's world-class, clean-energy resources," said John Connor, chief executive of the Climate Institute think tank.

To pass the carbon tax laws, Gillard's minority government needs support from the Greens and three independents, who continue to argue about details of the carbon price and emissions targets.

To break the political deadlock, Garnaut has proposed an independent advisory body be set up to decide on future targets, once the emissions trading scheme is in place.

He said a carbon price of A$26/tonne would be needed for Australia to reach its 2020 emissions target. It would raise A$11.5 billion in its first year, 2012-13. Revenue would rise for 10 years, but then stabilize and fall as emissions fall.

He said 55 percent of the revenue should to be given to households, to compensate for higher prices, and 35 percent to compensate business.

The revenue would include potential sales of about 10 percent of undated permits, for use in future years, which would help set up a small secondary market and establish a forward price for carbon when the emissions trade scheme starts.

He also proposed an independent carbon bank to guarantee the integrity of the Australian market and oversee the issue of permits, to help Australia avoid the kind of problems that have plagued the European emissions trading scheme.

But Garnaut warned that Australia faced more natural disasters even if warming was limited to two degrees Celsius, leading to more intense droughts, floods and bushfires.

Floods and storms in eastern Australia last December and earlier this year killed dozens of people, damaged homes, roads and bridges and disrupted billions of dollars worth of coal exports. Sugar and other crops were also damaged.

(A$ = $1.07)

(Additional reporting by Rob Taylor and Sonali Paul in Melbourne; Editing by David Fogarty)