After more than a decade debating whether to pass a carbon-limiting law, Australia’s Senate in November voted in a landmark bill that will impose a price on carbon emissions. The country, which accounts for just 1.5% of global carbon emissions, but which is the world’s highest emitter per capita because 80% of its power comes from coal-fired generation, has become the second major economy behind the European Union to pass such a measure. (See “The Big Picture” on p. 12 for other countries with carbon taxes.)

The legislation sets a fixed carbon tax of A$23 (US$23.78) per metric ton on the top 500 polluters beginning July 2012. Increasing 2.5% annually, the tax will then move to an emissions trading scheme with a floating-rate price from July 2015. Government is expected to limit or increase the amount of tradable permits released every year, and companies could then be able to trade carbon credits with similar systems in New Zealand and Europe. Europe currently trades carbon emissions from between $8.70 and $12.60 a metric ton, a price significantly lowered by the ailing global economy.

Spurred by a further A$10 billion funding in clean energy, the program is expected to spark multi-billion-dollar investments in natural gas and renewable power (though not, pointedly, in carbon capture and storage plants) to replace Australia’s coal plants. According to the Australian Coal Association—which said the tax package had “fatal flaws”—the nation relies heavily on brown (soft lignite) and black (lower sulfur and ash) coal for electric power. Large black coal plants, which fire 57% of Australia’s generation, are located near extensive black coalfields in both New South Wales and Queensland as well as in Western Australia. Brown coal–fired baseload power stations are located in Victoria’s Latrobe Valley. South Australia also relies heavily on subbituminous coal mined at Leigh Creek in the north of that state.

The country is the world’s largest exporter of coal: In 2010, black coal bought by countries including Japan, China, South Korea, and India brought in A$43 billion (US $43.96 billion)—or 15% of Australia’s exports of goods and services, second only to iron ore.

Because coal forms such a major part of Australia’s economic backbone, government regulation of emitted carbon has been a hotly contentious issue. The unpopularity and eventual fall in 2007 of former Prime Minister John Howard, a conservative, and the Labor Party’s Kevin Rudd in 2010 have both been imputed to dissention over the tax. Current Prime Minister Julia Gillard hailed the tax’s passage, which followed “37 parliamentary inquiries, and years of bitter debate and division,” she told reporters in November.

The Senate passed the tax by 36 to 32 votes after the Australian Greens Party supported the Gillard-led minority Labor government. The measure was part of an 18-bill package, which had passed the lower house of Parliament by a narrow margin of just two votes. Opposition leader Tony Abbott has pledged to repeal the law if he wins the prime ministerial post in late 2013.

Sonal Patel is POWER’s senior writer.