Australia kicks off carbon tax, PM future in doubt

* Australia joins the EU and New Zealand in pricing carbon emissions

* Banks, polluters to remain sidelined due to uncertainty

* A$23/tonne starting price, carbon trading begins 2015

By James Grubel and Stian Reklev

July 1 (Reuters) - Australia on Sunday joins a growing number of nations to impose a price on carbon emissions across its $1.4 trillion economy in a bitterly contested reform that offers trading opportunities for banks and polluters but may cost the prime minister her job.

Australia's biggest polluters, from coal-fired power stations to smelters, will initially pay A$23 ($23) per tonne of carbon dioxide emitted, more than twice the cost of carbon pollution in the European Union, currently trading around 8.15 euros ($10) a tonne.

The economic pain will be dulled by billions of dollars in sweeteners for businesses and voters to minimise the impact on costs, with the consumer price index forecast to rise by an extra 0.7 percentage point in the 2012-13 fiscal year.

The scheme allows emissions trading from 2015, when polluters and investors will be able to buy overseas carbon offsets, or ultimately trade with schemes in Europe, New Zealand and possibly those planned in South Korea and China.

Prime Minister Julia Gillard's minority government says the plan is needed to fight climate change and curb greenhouse gas pollution. Australia has amongst the world's highest per capita CO2 emissions due to its reliance on coal-fired power stations.

Yet even as it starts, the scheme's future is in doubt. The conservative opposition has vowed to repeal it if they win power in elections due by late next year and have whipped up a scare campaign saying the tax will cost jobs and hurt the economy.

Gillard, her poll ratings near record lows and her Labor party heading for a heavy election defeat, hopes that the campaign will quickly run out of steam once the scheme starts.

"Cats will still purr, dogs will still bark," Gillard said after Opposition leader Tony Abbott's visit to an animal shelter to warn of higher electricity prices on charities. "The leader of the opposition's fear campaign will collide with the truth."

LEMMINGS

But voters remain angry that Gillard broke a 2010 election promise not to introduce a carbon tax and many observers think government hopes of a resurgence after July 1 are unlikely.

"The damage is already done," political analyst Nick Economou at Monash University said.

"What will be interesting is whether Labor takes the lemming option and follows her over the cliff, or whether it decides that she is the cause of their problems and has to go."

A poll by the respected Lowy Institute think-tank found 63 percent of voters oppose the carbon scheme.

Many big polluters, such as miners, also remain vehemently opposed and uncertainty over its future is crimping investment in the power sector.

UBS has cut its earnings estimates for global mining houses BHP Billiton and Rio Tinto by between 3 and 4 percent ahead of the carbon tax and another tax on mining profits also due to start on Sunday.

The Australian carbon scheme is the product of years of fierce bargaining with business and political parties.

It will initially cover just under 300 companies and councils that comprise about 60 percent of the nation's roughly 550 million tonnes of CO2.

For the first three years, polluters will pay a fixed price for CO2 emissions, reaching A$25.40 a tonne in the final year.

From July 2015, emissions trading with regular auctioning of pollution permits will start, along with rules that allow polluters to buy overseas emission reduction offsets, such as Certified Emission Reductions (CERs), part of the United Nation's Kyoto Protocol climate pact.

A floor of A$15 a tonne and a cap of A$20 above the expected international price will run till 2018.

BILLION-DOLLAR PRIZE, MAYBE

Despite the scheme's soft start and openness to international markets, bankers and big polluters remain cautious, with opposition leader Abbott's "blood oath" to repeal the scheme stirring deep unease.

Traders are also awaiting final rules on implementing the floor price on international units.

Morgan Stanley says it is likely there will be very limited trade in international units until there is certainty on the repeal risk, plus clarity on the 2015-18 floor price and whether Australia agrees to a second commitment period under Kyoto.

"Since a domestic unit auction will most likely not occur until after the next election in late 2013, if the Opposition is still talking about rescission and repeal, it is unlikely that a forward market will develop in these units," Emile Abdurahman, executive director of Morgan Stanley Commodities in Sydney, said in emailed comments.

For now, repeal remains a real possibility because of the way it has polarised the country, Australian National University climate policy analyst Frank Jotzo wrote in a recent commentary.

"Australia's carbon pricing mechanism might enter history as one of the best-designed yet shortest-lived policies for climate change mitigation." ($1 = 0.9976 Australian dollars)($1 = 0.8047 euros)