July 4 (Bloomberg) -- Australia should introduce a ``broadly based'' emissions trading system as an ``urgent'' remedy to address climate change, Ross Garnaut, the government's adviser on global warming, said in a report released today.

Garnaut said trading should start with a two-year ``transition period'' in 2010 to address climate impacts on the economy and the government needed to ``go further'' on its pledge to cut greenhouse gases 60 percent by 2050. Garnaut didn't set trajectories in the draft report, and is waiting for Treasury Department modeling on the economic impacts.

Prime Minister Kevin Rudd, whose first act in office was to ratify the Kyoto Protocol on climate change, wants to show that Australia can provide leadership on the environment without ending 17 years of economic growth. Business groups have voiced concern higher energy costs will cut earnings at the resource companies driving Australia's growth.

``When you introduce emissions trading and you act on climate change, there will be an increase in energy prices,'' Rudd told Across Australia radio today. ``The climate change effect is already being felt across Australia.''

The trading plan, which will cover more than 70 percent of the country's emissions, will use the so-called cap-and-trade design used in the European Union. Companies are set an emissions cap and must hold sufficient permits to meet that limit. If they exceed the target, they buy permits from businesses that have undershot their respective caps.

`Dangerously High'

``A well-designed, broadly based emissions trading scheme has important advantages,'' Garnaut, 61, said in the report. Greenhouse gases will rise to ``dangerously high levels'' without mitigation, he said the report, released in Canberra. A final report on the 15-month study is due by Sept. 15.

BHP Billiton Ltd., the world's largest mining company, said it noted the Garnaut report ``with interest'' and will await the government's policy paper, due to be released July 16.

Xstrata Plc, the biggest exporter of energy coal, said a carbon-trading system should be ``fair and reasonable'' for industry. The Zug, Switzerland-based producer of coal, copper, nickel, zinc and lead will study the implications of the report, spokesman James Rickards said by phone from Brisbane.

Australian Industry Group chief executive Heather Ridout said the trading plan should be as ``comprehensive as possible'' and include transport fuel.

``Any action that simply results in an Australian business closing down its operations here and moving them to another country would be an exercise in futility,'' she said in an e- mailed statement

`Real Tax'

The Business Council of Australia, which includes the nation's biggest companies, yesterday said consumers, already battling record fuel prices, face higher costs.

``This thing is a real tax that we're putting on this country and our products,'' said Don Voelte, chief executive officer of Woodside Petroleum Ltd., manager of Australia's biggest liquefied natural gas producer. Voelte said in April he ``loses sleep'' over how companies competing with overseas rivals will be compensated for the introduction of a cost on carbon.

BlueScope Steel Ltd. and OneSteel Ltd., the nation's two- biggest steelmakers, are likely to be most affected by a carbon emissions-trading system, Andrew Gray, a Melbourne-based analyst at Goldman Sachs JBWere Pty Ltd., said in a report today.

``Ultimately, the financial outcome from the pricing of carbon will be a function not only of the net liability incurred by each company but also the ability that each one has to pass this cost down through the supply chain and to their customers,'' Gray wrote.

Revenue Returned

Garnaut said revenue from the sale of emission permits must be returned to Australians. Garnaut said half should go to households, particularly with low incomes, as tax reductions and welfare payments, 30 percent to businesses and 20 percent to research on low-emission technologies.

The cost of climate change is already being felt by Australians through higher water, energy and food prices. Gasoline prices rose to a record A$1.62 ($1.56) per liter last week, according to industry data, and food prices rose 2.1 percent in the first quarter, the fastest pace in two years, government figures show.

Australia is experiencing its worst drought on record, with water-use restrictions having been in place in Sydney for six years. The Murray-Darling Basin river system, home to almost half of the nation's farms, is under long-term environmental and ecological degradation as a result of land clearing and water shortages, a government report said last month.

To contact the reporters on this story: Gemma Daley in Canberra at gdaley@bloomberg.net

Last Updated: July 4, 2008 01:23 EDT