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Carbon Tax Down Under

“It will provide business and investors with the certainty and confidence that they require to make long-term decisions about the future allocation of their capital.” That’s the reaction of Australia’s Institute of Chartered Accountants to the government’s proposal to put a price on pollution.

The response from leaders in affected industries hasn’t been so clinical. But if the US experience is any guide, these environmental regulations--which aren’t a done deal--won’t be as debilitating to business as some interested parties would have you believe.

From an economic perspective, the wisdom of Australia assuming a leadership role on greenhouse gas emissions is questionable; the plan involves industries that have driven the country’s economy for a decade. But the ambitious plan would cut emissions in one of the developed world’s top polluters to at least 5 percent of 2000 levels by 2020. Nevertheless, the “Clean Energy Plan” advanced by Prime Minister Julia Gillard appears relatively benign.

Beginning Jul. 1, 2012, Australia’s 500 biggest polluters will pay a tax of AUD23 (about USD24.65) per metric ton of carbon emitted. The carbon tax will increase by 2.5 percent per year, plus inflation. In 2015 this scheme will expire and the market will set the price of carbon emissions and emissions credits. At that point, Australia will be home to the largest cap-and-trade scheme outside Europe.

According to this proposal, the market price of carbon credits would decline as businesses reduce their carbon output. In theory, such a regimen would incentivize efforts to improve energy efficiency.

The plan also includes measures to soften the blow to business. The government would set aside AUD9.2 billion over the first three years to help industries adjust to the new tax, including AUD5.5 billion for upgrading coal-fired power plants that aren’t closed down; AUD1.3 billion for coal mines to target methane emissions; and an additional AUD1.3 billion to create jobs at the mines most affected by the tax.

High-emission exporters, such as steel, aluminum and pulp and paper makers, would get free carbon permits to assist them while they undertake initiatives to reduce pollution. The proposal grants the steel industry an additional AUD300 million in “adjustment payments.”

The government would also purchase and decommission the worst coal-fired power plants--about 2,000 megawatts of generation capacity--including the controversial Hazelwood power plant, reputed to be Australia’s least carbon-efficient power station.

With AUD10 billion in start-up funding, a newly established Clean Energy Finance Corp will invest in companies seeking to get green energy projects off the ground. Another new body, the Australian Renewable Energy Agency, would receive AUD3.2 billion to support the development of renewable energy.

The proposal excludes fuel for most business and personal transportation from the carbon tax, but owners of heavy transport vehicles will face levies in 2014. Domestic aviation fuel taxes would also increase by an amount equal to the carbon tax.

Average assistance to households under the plan is forecast to offset the cost-of-living increases that will result as carbon-tax-paying polluters pass on costs to customers. This will form the cornerstone of Gillard’s defense of her Clean Energy Plan, which faces considerable public opposition.

The carbon tax, should it be enacted, would land squarely on coal-fired power plants that produce 77 percent of the country’s electricity and iron and mineral mining companies that account for 35 percent of Australian exports.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.