July 16 (Bloomberg) -- Australia will compensate power producers and households for an emissions trading system to start in mid-2010, Climate Change Minister Penny Wong said.

Wong, releasing a discussion paper on the plan today, said the government would set a medium-term cap for emissions late this year and will issue permits to meet that limit, with the market then deciding the price of carbon. The system will include transport, with petrol excise cut on a ``cent-for-cent'' basis to account for price increases caused by emissions trading.

Business groups are concerned higher energy costs may cut earnings at the resource companies driving Australia's growth. Asia's fifth-biggest economy is in its 17th year of expansion. Emissions trading would raise the average price of goods 0.9 percent in the first year, including a 16 percent gain in energy prices, based on carbon at A$20 ($19.60) a ton, Wong said.

``Key details like targets are yet to be released,'' John Connor, Chief Executive of the Sydney-based Climate Institute, said in an interview in Canberra. ``We are unclear about assistance and the detail will be critical for trade-exposed sectors.''

The government will issue free permits or give a one-off cash bonus to coal-powered electricity generators after consulting with utilities, Wong said. It will increase welfare payments and reduce taxes to help households, particularly those with low incomes, cope with the system.

Emissions Target

Today's Green Paper is a draft of the government's plan to cut greenhouse gases 60 percent by 2050 and it will now consult with industry about the design of the emissions trading system. The Treasury department will release economic modeling in October, followed by a White Paper at the end of 2008 that will include a medium-term draft. Legislation is due to be introduced in the first half of 2009.

``All parts of industry, all parts of the economy, have to make some effort,'' Wong told the National Press Club in Canberra today.

The emissions trading system will affect 1,000 businesses that produce more than 25,000 tons of carbon dioxide equivalent a year, Wong said. It will exclude agriculture, and will reassess this in 2013 with farming included at the earliest from 2015. The government wants the trading system to cover 75 percent of Australia's greenhouse gas output.

Policy makers addressing climate change had to deal with ``unimagined degrees of uncertainty,'' Reserve Bank of Australia Governor Glenn Stevens said in Sydney today. ``The challenges seem to be of an order of magnitude bigger than the ones faced by monetary policy.''

Cap-and-Trade

The government will set up a climate Action Fund and an Electricity Sector Adjustment Scheme to help businesses adapt to an emissions trading system, Wong said. A proposed cent-for-cent cut in gasoline excise to compensate drivers will cost the Fund A$1.7 billion per year, the Climate Institute's Connor said.

Under a cap-and-trade system, companies are set an emissions ceiling and must hold sufficient permits to meet that limit. If they exceed the target, they buy permits from businesses that have undershot their respective quotas.

Australia's climate change policy adviser Ross Garnaut this week urged companies to work with the government on an emissions trading plan and said they could not afford to ignore the issue.

Garnaut this month released a draft for a ``broadly based'' cap-and-trade emission trading plan, as used in the European Union, starting 2010. BHP Billiton Ltd., the world's biggest miner, noted the report ``with interest'' and Xstrata Plc, the largest exporter of energy coal, said the system should be ``fair and reasonable'' for industry.

`Nowhere to Go'

Leaders of the Group of Eight industrialized nations last week set a target of cutting emissions at least 50 percent from current levels by 2050. China and India led objections from developing countries to committing to the goal.

Prime Minister Kevin Rudd, whose first act in office was to ratify the Kyoto Protocol, said there was no ``breakthrough'' at the G8 summit in Japan and negotiators may be ``left with nowhere to go'' unless developed and developing countries strengthened their commitments on global warming.

The United Nations Framework Convention on Climate Change is overseeing international efforts to craft an accord that unites industrialized and developing nations in the fight against global warming. Negotiators from 170 nations aim to agree on a treaty to replace the Kyoto Protocol after it runs out in 2012. The talks are set to wrap up in Copenhagen next year.

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

Last Updated: July 16, 2008 00:52 EDT