Setting a fixed price for carbon during the initial phase of Australia's emissions trading scheme will stunt the fledgling market, the head of the country's only carbon exchange warned on Friday. The government has yet to fix a price per tonne of carbon for the scheme, set to begin in 2010. But its top climate change consultant said last month the carbon price should start at A$20 (US$13) a tonne, rising by four percent above inflation until 2013. "If they do have a fixed price, it will mean there will not be any emissions trading," Tim Hanlin of the Australian Climate Exchange told Reuters. "I can't see practically how it would work. There's a floor and ceiling of US$20. I can't trade something that has no margin." The government is already under pressure from business to shelve or delay the scheme, saying it could make some companies uncompetitive and force them offshore. The current financial turmoil is another source of uncertainty. "I seriously fear the government is going to do this US$20 a tonne. They'll cave. And it just won't work," said Hanlin, who was visiting Singapore to attend a conference. Australia is the world's 16th biggest carbon polluter and produces about 1.5 percent of global emissions, but it is also the fourth largest per-capita emitter, with five times more carbon pollution per person than China. The government's plan aims to curb carbon emissions by forcing 1,000 of Australia's biggest polluting firms, including global miners BHP Billiton and Rio Tinto to buy permits placing a cost on their emissions. The regime would cover 75 percent of emissions in the A$1 trillion economy. Hanlin also criticised the move, outlined in the government's discussion paper this year, to benchmark industries to the energy-intensity standards and then lump all companies within a sector together. Under the scheme, the largest polluters, producing more than 2,000 tonnes of carbon emissions per A$1 million of revenue, would initially pay for only 10 percent of their total emissions. Companies producing between 1,500 and 2,000 tonnes would pay for 40 percent of emissions. SAFETY VALVE "There are real problems within the structure of how that's going to work," Hanlin said. "If you are one of those companies that are miles below the industry benchmark, you could end up getting free allocations that you could sell on -- possibly sell to one of your peers, indeed one of your competitors who needs even more. But if a company was well above the industry average, that firm could be forced to buy offsets from a much more efficient competitor. "Suddenly, a group that might have been marginal anyway, is even more marginal because they have to transfer wealth to their competitors. It borders on insanity." The government is still consulting businesses on the final shape of the scheme and a policy paper is expected to be released within months. But Hanlin said the scheme already had a price safety valve. "The US$20 a tonne soft-start is unnecessary. The fact forestry has been allowed into the scheme, they are going to be able to provide into the market a product at a cost of production of less than US$20 a tonne." This underpinned the price of Australian Emissions Units issued under the scheme and enhanced liquidity. Emissions offset permits for forestry could enter the market from late 2011. "While there's going to be a lag effect in terms of when they are going to actually start producing permits, the ability of companies to borrow from future permits is certainly going to mean the price is not going to spike up to US$50 to $60 a tonne." He also called for a push for greater energy efficiency. "There needs to be reality check about what a US$20 price of carbon or a US$30 price of carbon actually means. There's so much energy efficiency that can be gained within the economy but it doesn't have a price signal at the moment to encourage it." (A$1=66.3 US cents) (Editing by Clarence Fernandez) Story by David Fogarty, Climate Change Correspondent, Asia