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CANBERRA (Reuters) - Australia unveiled its most sweeping economic reform in decades on Sunday with a plan to tax carbon emissions from the nation's worst polluters, reviving hopes of stronger global climate action with the largest emissions trade scheme outside Europe.
Prime Minister Julia Gillard said 500 companies including steel and aluminum 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.
"It's time to get on with this, we are going to get this done," said Gillard after a bruising battle to win political support for the scheme, which has polarized voters and business. A parliamentary vote on the scheme is expected before year-end.
Australia is the developed world's worst per-capita greenhouse gas emitter because of its heavy reliance on cheap coal for power generation. Emissions are set to rise in the booming economy without a carbon cost, the government says.
The stakes are high for Gillard's Labor party, which relies on the support of Greens and independents for a one-seat lower house majority. Her popularity has slumped to record lows over the scheme.
With the details now finally released after months of waiting, Gillard will now try to convince voters opposed to the plan ahead of a parliamentary vote, trying to deflect a campaign against it by the hardest hit businesses.
"It is absolutely critical that the government sells this very effectively," said Tony Wood, director of the energy program at the Grattan Institute, a policy think tank.
Australian retail and clean-energy stocks were expected to be among the winners, and airlines and miners among the plan's losers, but analysts said financial markets overall were tipped to take the policy in their stride.
The scheme aims to cut national emissions by 5 percent of 2000 levels by 2020, which would mean a cut of about 160 million tonnes.
The package already has the broad support of the Greens and independents, although crossbenchers said they had yet to support extra measures to protect steelmakers and jobs in the vital coal industry.
Parliament twice rejected previous attempts to price carbon in 2009 and any fresh rebuff in a vote expected around October would seriously threaten Gillard's government.
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.
Abbott has seized upon voter fears of a new tax and higher costs from a scheme that aims to transform how the nation generates and uses energy across the economy.
To neutralize 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.
"Other countries will look at one of the most carbon polluting economies on the planet that has made one huge stride forward toward 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 aluminum 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 in the most emissions-intensive and trade-exposed sectors, such as aluminum smelters and steel manufacturers, while moderate emitting exporters 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 criticized 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.
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 toward 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.
Additional reporting by James Grubel and Mark Bendeich in Canberra; Editing by Ed Davies and David Fogarty