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By Rob Taylor

CANBERRA, Oct 26 (Reuters) - Australia's Prime Minister Kevin Rudd won office promising to be a climate change warrior but his chief weapon -- a carbon trade scheme to slash emissions -- is falling victim to shifting politics and world financial tumult.

A former diplomat, Rudd made ratification of the Kyoto climate pact -- opposed by the former conservative government for more than a decade -- his first act after winning November elections tinged green by the seeming onrush of climate shift.

"The Rudd government was elected partly on its promises to take strong action, not just symbolic and token gestures, to cut greenhouse gas emissions and in particular to build renewable energy," says carbon trade and environment academic Mark Diesendorf from the University of New South Wales.

Even before winning, Rudd commissioned respected climate economist Ross Garnaut to design an emissions scheme to rival in breadth the world's biggest regime already operating in Europe.

Successive surveys showed Australians overwhelmingly wanted a government to fight global warming after climate scientists said the country was experiencing a pace of climate change unmatched elsewhere, bringing droughts, storms and agricultural hardship.

Now, after a sharp economic slowdown, bloodletting on world financial markets and unemployment lifting off a three-decade nadir, the government seems to have dropped its sights in line with Australians fast-shifting concern to their jobs.

FREE PERMITS

Complaints about the scheme's likely impact from influential resource firms like Woodside Petroleum Ltd <WPL.AX> also are playing a role, tied to the government realisation that emissions upheaval from mid-2010 will come just ahead of the next election.

"We are going to see a bunch of concessions in the direction of free permits for big polluters, although I think looking at the logic of the scheme cutting emissions there is no real case," John Quiggin, a carbon trading expert at Queensland University's School of Economics, told Reuters.

Rudd and his Climate Change Minister Penny Wong will outline their preferred scheme late this year, following public consultations dominated so far by global miners such as BHP Billiton <BHP.AX> <BLT.L> and power companies such as AGL Energy <AGK.AX>.

An interim framework in July proposed free permits for major polluters to help them adjust, a relatively low carbon permit price of around A$20 ($13.40) a tonne, fixed for two years, and subsidies for motorists and households to help with the inevitable fuel and electricity price hikes.

The proposal would force 1,000 of Australia's biggest polluting firms to buy permits to emit, including transport company Toll Holdings <TOL.AX>, Origin Energy <ORG.AX> and the world's top iron ore exporter Rio Tinto Ltd/Plc <RIO.L>, with the expected A$10 billion raised going towards compensation.

But that was before the global financial crisis halved growth expectations to around 2 percent or worse next year, and the blackest warnings -- played down by the government -- that 4.3 percent unemployment could yet spike to 9 percent.

Rudd says the problem of global warming "doesn't disappear because of the global financial crisis", but appears to have softened his zeal, promising Garnaut only to take account of recommendations a year in the drafting.

Garnaut certainly sensed the shift, recommending a two-track approach towards Rudd's 2050 target of a 60 percent cut in 2000-level emissions, focusing on a "practical" interim cut of 10 percent by 2020 while also laying out more ambitious options.

That offers Rudd the attractive post-crisis option of a scheme that will not bring too much upheaval, for business or the public, but allow him to have delivered on a key election promise in the possible environment of a global recession.

"The government is hardly likely to have a stronger cap than Garnaut. Sadly the government has already rejected some of his best suggestions, like no free permits," says Diesendorf.

SOFT CARBON

Quiggin says an artificially low fixed carbon price may go some way to mollifying big polluters, who unsurprisingly favour no scheme or a limited one, but warns it will drive international investment out of Australia's protected market and into the more lucrative $40 billion carbon trade in Europe.

Renewable energy firms want higher prices to make solar, wind and wave power more competitive, while coal-fired electricity generators and other emission intensive industries want adjustment costs as low as possible.

When the prevailing carbon price in the European Union is around 22 euros, or $27, per tonne, insiders in Canberra are tipping a two-year price under A$10 a tonne, or just $6.70, with some saying it could even be as low as A$8.

"To have a serious target you need a price which is of the order of A$30 a tonne, while the other, and they go together, is you essentially need to close down brown coal power stations, replacing them with low-emission technologies," he says.

And that is Rudd's conundrum. While his public appeal is tied to recognition of climate change and helping Aborigines, he promised business to govern as an economic conservative. In Canberra, that means looking after coal and resource interests.

Australia is the world's fourth largest greenhouse gas emitter on a per head basis and relies on ageing coal-fired power stations for 80 percent of its energy needs. It is also the world's biggest thermal coal exporter.

A weakening on emissions will risk to Rudd's record popularity in a nation that sees itself as green, albeit on a foundation of heavy energy reliance.

An Auspoll survey last week for the independent Climate Institute showed public backing for Rudd's management of climate change had slumped from a pre-Kyoto ratification high of 43 percent to just 28 percent.

But a recent Lowy Institute poll showed voters did not back climate action if it costs jobs or income.

"Australians are understandably concerned about the economy, but are still hungry for action on climate change and leadership on this issue is now up for grabs," Climate Institute CEO John Connor said. ($1=A$1.49) (Editing by Sonya Hepinstall and Bill Tarrant)

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