Prime Minister Julia Gillard described the legislation passed by Australia’s Senate as “historic,” after years campaigning for what is hoped will create a new platform for companies to trade carbon credits and cut pollution. “This is a win for those who would seek their fortunes and make their way by having jobs in our clean energy sector,” said Gillard. “Today we have made history. After all those years of debate and division, our nation has got the job done.”

The Senate passed the carbon tax by 36 votes to 32. There was applause from supporters in the public gallery as the nine Greens voted with Labour to pass the package of 18 bills. The House of Representatives voted for the package two weeks earlier, though not resoundingly – it passed by 74 votes to 72.

Two previous attempts to pass laws for a carbon price failed in 2009, and were partly responsible for the ruling Labour Party’s decision to dump then Prime Minister Kevin Rudd in favour of Gillard in June 2010.

The vote was seen as a major victory for the country’s beleaguered prime minister. The scheme will impose a carbon tax on around 500 of the country’s biggest polluters from July 2012, before moving to a carbon trade scheme in 2015. It aims to reduce carbon emissions by 159 million tonnes in 2020. Political commentators say that Gillard has staked her minority government’s future on pushing the sweeping economic reform forward, and that she will not win a second term.

Coal reliance
Australia is the world’s biggest coal exporting nation and accounts for only around 1.5 percent of global emissions. However, it is the developed world’s highest per capita polluter due to a reliance on coal for 80 percent of its electricity generation.

The carbon price is the central plank in the government’s plan to cut carbon emissions by five percent of 2000 levels by 2020 in an attempt to help reduce global warming.

The bills set an initial carbon price of AUD 23 a tonne and guarantee billions of dollars of compensation for big business and households, which will face higher electricity prices (although some reports have suggested the measures will reduce personal incomes by just 0.1 per cent a year. The government predicts that average household expenditure will rise AUD 9.90 per week, including AUD 3.30 for electricity and AUD 1.50 for gas). Export-exposed industries such as aluminium smelters and steel makers will receive up to 94.5 percent of carbon permits for free, while liquefied natural gas projects will receive effective assistance for 50 percent of emissions.

The scheme sets up an AUD 10bn clean energy finance fund to leverage private investment in renewable energy. Legislation for the fund will be introduced in early 2012. The scheme also sets aside AUD 1.3bn to help coal mines reduce emissions, and includes an extra AUD 300m to help the steel industry, which is struggling with a high Australian dollar and higher raw material costs. Airlines will also pay the tax indirectly, through a rise in an existing aviation fuel excise, although fuel used for international flights will be excluded.

Furthermore, the scheme will allow the government to buy back up to 2,000MW of electricity from Australia’s dirtiest coal-fired power stations by 2020, encouraging new investment in renewable energy and gas-fired power plants. Agriculture is exempt from the carbon price, although farmers will be able to cash in on the market for carbon offsets.

The carbon plan will see Australia join the European Union and New Zealand with national emissions trading schemes, while the US and Japan have smaller regional schemes. The government and the Greens hoped the carbon tax will reignite momentum for a global emissions reduction agreement at climate talks in Durban, South Africa, in December.

“this tax will go”
The conservative opposition – which opinion polls put on track to win the next federal election in November 2013 – has said it will dismantle the tax if victorious and replace it with an alternative that did not explicitly price carbon. “We can repeal the tax, we will repeal the tax, we must repeal the tax. This is a pledge in blood. This tax will go,” opposition leader Tony Abbott said.

The opposition backs a scheme that rewards polluters for low-cost steps to cut emissions from business-as-usual levels but the government and some policy analysts say a national cost on carbon is needed to drive change in investment.

Climate Change Minister Greg Combet wrote in a commentary in The Australian newspaper that “the investment community knows that if Abbott’s threat were ever realised it would increase sovereign risk. Consequently, Australia would suffer as an investment destination.”

Environmental groups have welcomed the votes. Australian Conservation Foundation chief executive Don Henry said that the vote “is historic for the millions of Australians who, in the face of well-funded scare campaigns, have tirelessly urged successive Australian governments to take action on climate change.”

But business and mining groups vigorously oppose the carbon scheme, and have vociferously argued that it will close coal-mines, cost thousands of jobs, hike power bills and damage Australia’s international competitiveness. “The carbon tax will undermine the competitiveness of Australian coal mines with no reduction in the amount of global greenhouse gas emissions from coal mining,” Australian Coal Association chairman John Pegler said.

The Minerals Council, which represents big mining companies such as BHP Billiton and Rio Tinto, said the vote was a “retrograde step” which would undermine export competitiveness and cost the mining sector AUD 25bn by 2020.

The world’s second-biggest miner has warned that the carbon and mining taxes have increased the sovereign risk involved in investing in Australia. Vale – the Brazilian mining giant that employs 1,500 people at its mines in Queensland’s Bowen Basin and New South Wales’ Hunter Valley – says that the mineral resources rent tax (MRRT) could affect the flow of foreign investment in Australia’s resources sector. Vale has previously stated that it wants to develop greenfield coal projects in Queensland over the next decade.

“The development of legislation to support the MRRT and carbon tax, along with various state government legislation, is contributing significantly to an increase in sovereign risk of investment in Australia’s resources sector,” the company warned in a submission to Treasury on the resource tax reforms.

Business Council of Australia president Graham Bradley has warned that his members – chief executives of top-100 companies – were concerned several policies were adding to sovereign risk. Earlier in the year, other business leaders, including BlueScope Steel and Brambles chairman Graham Kraehe, also warned that sovereign risk concerns had been heightened by the government’s handling of its plans for a carbon price.

Reports to the government by the Investment Reference Group also warned that heightened sovereign risk concerns could lead to energy investors seeking higher returns and the nation to lose important investments to offshore rivals.

Yet according to research by carbon advisory and analytics firm RepuTex, the Gillard government’s carbon tax will hit top-200 companies just as hard as Kevin Rudd’s previous plans, adding AUD 33.4bn to the cost of doing business across its first decade. About AUD 14.6bn of the extra cost is expected to be passed on to consumers, while the remaining AUD 18.7bn will be worn by listed companies, mainly at the smaller end of the S&P/ASX 200 index’s mining and energy sectors.

This sum works out at about one percent of the total underlying profit of the top 200.

RepuTex believes that smaller companies engaged in high-carbon activities will face more immediate competitive challenges, despite government assistance. According to the study, materials, industrials and energy companies will face the biggest burden, carrying 60 percent, or AUD 11.4bn, of the costs that cannot be passed on.

Heavy reporting requirements…
Professional services firms have also pointed out that the new rules will require companies to change their financial reporting and the information they disclose to regulators and investors. Adrian King, national partner in charge of KPMG’s Climate Change and Sustainability Services practice in Australia, said that in the immediate term, CEOs, CFOs and their boards will need to examine the financial reporting implications of the climate change plan, and that “these implications will not be the same for every business.”

According to King, “probably the most important reporting issue is the potential effect on asset impairment testing.” He said that the impact of this on June 2011 financial statements will depend on the directors’ view as to whether they can reasonably estimate how a carbon price mechanism would affect the recoverability of the carrying amount of assets.

“If a carbon price could potentially impair the value of assets, this fact should be disclosed in the financial report. Information about the assumptions made and the nature of key uncertainties identified should be included in the disclosure,” said King.

“What is clear is that a carbon price will lead to additional recognition, measurement and disclosure issues within entities’ financial reports. Reporting entities should make sure they have sufficiently robust and auditable systems and processes to support their financial reporting,” he said.

King also warned that even private companies unencumbered by external reporting obligations should nevertheless consider how the economic realities behind these reporting and accounting issues could affect their credit standing. “Banks and other lenders will certainly be looking into these matters,” he said.

…or boon for investors?
But not every business group believes that the carbon rules will be disastrous. The world’s four major green investment groups – Europe’s Institutional Investors Group on Climate Change, the US-based Investor Network on Climate Risk, Australia’s Investor Group on Climate Change, and the United Nations Environment Programme Finance Initiative – have hailed Australia’s carbon tax as a boon for investors, strongly backing the government’s claim that the scheme will deliver economic benefits. Combined, the four investors represent $20trn in funds.

A new report by British investment expert Rory Sullivan praised Australia’s clear carbon reduction targets, its transparent climate policy and the fact that the carbon-trading scheme would be clearly linked to international markets. The report, commissioned by groups representing 285 pension funds and other institutional investors around the globe, found that Labour’s carbon price and financial assistance for green technology “should provide investors with real confidence” in investing in renewable energy in Australia. But it noted that one of the major risks was “political risk, in particular that the opposition Liberal Party may unwind elements of the proposals if elected.”

Nathan Fabian, chief executive of the Investor Group on Climate Change, one of the four groups that commissioned the report, said: “International investors believe Australia’s policy framework is one of the best in the world for investment certainty. Experience shows that when good policies are rolled back, confidence of investors is undermined for several years… Investors believe that carbon pricing is the only real, long-term policy solution for Australia.”

While the country’s extractive industries may still be lobbying hard against the carbon scheme, political observers believed that there was little doubt that it would pass in November’s key vote.

The only question that remains is how long the legislation will last. If Gillard’s government loses the election in two years, the coalition opposition has vowed to repeal it – and even if it only decides to dismantle parts of the scheme, the effect could be damning.