CANBERRA - The Australian government's plans to cut carbon emissions were headed for defeat in a hostile Senate after the elevation of a new opposition leader opposed to carbon trade laws, setting a trigger for an early 2010 election.

Prime Minister Kevin Rudd, who met President Barack Obama on Monday in Washington, wants to take a lead role at next week's Copenhagen climate change summit by enacting a cap-and-trade scheme requiring polluters to buy permits for their emissions.

However, new Liberal opposition leader Tony Abbott said after his party-room election on Tuesday conservative senators, many of them climate change skeptics, would reject Rudd's emissions trading laws if they were not deferred until early 2010.

Abbott said he believed in climate change but told reporters he was opposed to the government's emissions trading scheme (ETS) model, the biggest economic policy change in modern Australian history, and was not afraid to fight an election on the issue.

This is going to be a tough fight. But it will be a fight. You cannot win an election without a fight, said Abbott, a boxer in his university days who once studied for the priesthood.

Assistant Climate Change Minister Greg Combet said the government would still push for its carbon trade laws to be passed this week, and said he hoped some opposition lawmakers would side with the government and defy Abbott.

The extremists have gained control of the Liberal Party. They are opposed to taking action on climate change, they dispute the science, Combet told reporters.

Rudd has struggled to have his climate change bill passed in the upper house Senate before parliament adjourns until February.

He wants emissions trading to start in Australia in July 2011, covering 75 percent of emissions in the developed world's bigger per capita emitter. The planned carbon trade scheme would be the biggest outside Europe.

The United States is watching Australia's debate closely. A political agreement on carbon trading in Australia would help garner support for action from other countries.

If the Senate ends up rejecting the carbon scheme for a second time, Rudd will have a trigger to call an early 2010 election on climate change, most likely for March or April. Polls suggest his government would win an increased majority.

If Rudd wins a so-called double dissolution election of both houses of parliament, he could then push his climate policy through a special joint sitting of the lower and upper houses.

BUSINESS, ELECTION UNCERTAINTY

Rudd has repeatedly said he does not want an early poll and would prefer elections to be held on time in late 2010.

Whatever the timing, the election would not be fought solely on climate change. Traditional issues such as the economy, unemployment and home loan interest rates would also dominate.

A decision by Australia's central bank to increase official interest rates on Tuesday, and for banks in turn to hike mortgage rates, gave Abbott the chance to pounce on economic management.
The Australian people need to understand that each and every interest rate rise over the next 12 months is due to the irresponsible spending spree of the Rudd government, he said.

Abbott said while the opposition rejected the ETS, it still backed the government's emissions reduction target of at least 5 percent from 2000 levels by 2020, with a 25 percent target if nations agree on an ambitious climate pact in Copenhagen.

The prolonged debate on the ETS has caused some dismay among companies, coal and power firms in particular, who see some sort of scheme as inevitable and are looking for pricing certainty.

Banks and fund managers see the ETS as a boon for traders, investors and new green technologies, while major polluters generally oppose it as a tax on heavy industry.

International Power Australia, a unit of International Power and Australia's largest private-sector generator, says the uncertainty has impinged on talks with its lenders.

Major miners such as BHP Billiton and oil and gas firms such as Woodside Petroleum have criticized the scheme, although have been mollified somewhat by government pledges last month to raise state compensation.

Australian industry is now thrown into total uncertainty regarding a price on carbon and therefore cannot make any informed investment decisions, said Tim Hanlin, managing director of Australian Climate Exchange Ltd.

This is going to put Kevin Rudd under enormous pressure to call an election on this issue, he said.

Monash University analyst Nick Economou disagreed. He said Rudd would now miss his Copenhagen deadline and be in no rush for an election, putting the chances of an early poll at 20 percent.

They may as well play the long game, the patient game, Economou said, adding Rudd would prefer a normal election later in 2010 to give him time to build an attack against Abbott's Liberals with the carbon laws waiting to be passed.

(Editing by Michael Perry and Paul Tait)

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