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CANBERRA, Jul 4 (Reuters) Australia should slap tough limits on greenhouse gas emissions, including on the energy and transport sectors, but should compensate industries whose foreign rivals are free to pollute, an official report said today.
The 600-page draft report, prepared by climate-change dviser Ross Garnaut in an effort to shape public policy, also urged Australia to go further than its current goal to cut greenhouse gas emissions by 60 per cent by 2050.
He warned of a major dent to the economy if it avoided the hard decisions on climate change.
''We cannot drop the ball,'' Garnaut said in a speech after releasing the report. ''Our location makes us already a hot and dry country. Increases in temperature and lower rainfall have a much bigger impact here than on other wealthy countries.'' He estimated that if Australia chose a ''middle-of-the-road'' policy, climate change would still cost about 4.8 per cent of gross domestic product, or US$384 billion, by end of the century.
''An effective market-based system will be as broadly based as possible, with any exclusions driven by practical necessity and not by short-term political considerations,'' the report said.
Prime Minister Kevin Rudd won a huge election victory last November on a green agenda, but his plans to cap greenhouse gas emissions and reward low-polluters through an emissions-trading scheme have begun to unnerve voters and industry.
The prospect of slapping emissions limits on road transport and electricity generation has raised fears of higher fuel prices and electricity bills at a time when rising living costs are already eating into the government's popularity.
With the government due to map out its own policy options this month, industries such as electricity generation, coal and agriculture are lobbying hard. Power generators say they would be forced to raise electricity prices and farmers and coal-miners warn they would lose competitiveness against foreign rivals.
Some businesses could even disappear, Australia's peak business group said this week.
Under the proposals, businesses that pump out less greenhouse gas than their allowable limit would receive credits and be able to sell those credits -- essentially permits to pollute -- to firms that were exceeding their emissions quota.
The report gave no hard figures on carbon pricing or emissions caps.
The report conceded that a competitive emissions-trading system, due to begin in 2010, could cause big price gyrations in the early stages and accepted there was a good argument for relying initially on fixed-price permits in the first two years.
But it said ''emissions-intensive'' export industries should be compensated if their offshore rivals were free to pollute, with compensation to be determined by an carbon-bank regulator.
It said compensation directed to disadvantaged exporters, to keep them in Australia, should be limited to as much as 30 percent of the cost of purchasing emission permits.
Australia's coal industry, the world's biggest coal exporter, is one of the most sensitive issues. Australia has the highest per-capita level of carbon emissions in the rich world, largely because it burns coal to generate about 77 percent of Australia's electricity.
But green politicians, who could cast a pivotal vote on the scheme when it goes before parliament, say Rudd's Labor government is close to the coal-mining trade unions and vulnerable to special pleading from the industry, which employs thousands of voters in the ruling party's worker heartland.
Garnaut stressed that the emission scheme should not become a government revenue-raiser, suggesting 50 percent of the likely 15-20 billion dollars (14-19 billion dollars) raised from permit auctions should be returned to households and 30 per cent to hard-hit businesses.
The other 20 per cent would go to renewable energy.
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