Australia's enormous coal deposits long seemed like an unmitigated gift in an expansive land of sweltering summers. On the planet's driest inhabited continent, fossil fuel delivered cheap, reliable electricity through both extreme heat and torrential storms.

But drought, rampant wildfire in the outback, and the degradation of the treasured Great Barrier Reef have forever altered how Australia views its energy endowment. Facing a future as one of the places on Earth most vulnerable to climate change, and one of the nations with the world's highest per capita carbon emissions, Australia has taken steps to change its fate. (See interactive: "Four Ways to Look at Global Carbon Footprints")

This week the government issued its first ever carbon emissions permits, a milestone in implementation of a new climate and energy law that is expected to give Australia the world's most comprehensive carbon cap-and-trade system by 2015. (Related: "IEA Outlook: Time Running Out on Climate Change")

Joshua Meltzer, a former Australian diplomat who now is a fellow at the Washington, D.C.-based Brookings Institute, says his country, much like the United States and Canada, must now grapple with the economy it has built since the Industrial Revolution around its huge fossil fuel deposits. "You have greater urban sprawl, cheaper fuel, greater use of cars, less use of public transportation, larger houses," than in Europe or Japan, Meltzer said. "At the end of the day," he added, achieving ambitious emission targets "is going to involve some very significant changes in how people live their lives."

Carbon Tax and Permits

Australia passed the Clean Energy Future Package in its fourth attempt at comprehensive climate legislation. Enacted in July, the package establishes a goal of reducing national emissions to 5 percent below 2000 levels by 2020, and 80 percent below 2000 levels by 2050. And it levies a carbon tax on its 300 largest polluting companies, as well as providing incentives for renewable energy and efficiency improvements. Australia's scheme covers more sectors, and more of the country's total emissions, than Europe's long-standing cap-and-trade system. Analysts say California's program, set to go into effect on Jan. 1, has a similar sweep; Australia and California are reportedly in talks to link their carbon markets.

Australia has sought to give its energy-intensive industries a helping hand in meeting new requirements. The first carbon permits, issued free of charge this week to aluminum producer Alcoa and Queensland Nitrates, are part of the government's $8.9 billion program to help certain businesses—those facing global competition—cope with cap-and-trade.

To overcome objections that Australia should not put itself at a competitive disadvantage while other nations drag their feet on climate change, the law was designed to have targets calibrated to the state of global negotiations on carbon emissions. If the international community were to embrace an agreement to stabilize the concentration of greenhouse gases in the atmosphere at 450 parts per million, Australia will set its own target for 2020 at 25 percent below 1990 levels. But, as seems more likely at this point, if nations fall short of achieving a new climate treaty, Australia would set its 2020 goal at a more modest 15 percent below 2000 levels.

"Essentially what Australia is saying is we are prepared to deal with a high carbon price in a situation where the world is doing its fair share to reduce carbon emissions," Meltzer said.

Canberra did not pass cap-and-trade without controversy. About two-thirds of Australians are concerned that household expenses and living costs will rise and they will be worse off in a low-carbon economy, according to the Climate of the Nation 2012 report from the Australian research organization, the Climate Institute. And yet 54 percent of survey participants reported being concerned about climate change; only 10 percent saw no need for action on climate change; and 47 percent of people expressed support for the carbon price when it was fully explained to them.

Support for action on climate change increased during the years-long drought that has gripped the continent, punctuated by a record-breaking heat wave in the summer of 2009. Temperatures climbed high enough to buckle train lines in Adelaide and cook moths landing on sunbaked tennis courts in Melbourne. The sweltering heat exceeded 104°F (40°C) in some cities in late January, and stayed there for days on end. On February 7, a dry, windy scorcher of a day now known as Black Saturday, bushfires raged through Victoria, leaving 173 people dead and 500 injured.

"The long drought in Australia made people think this is what Australia would look like in climate change," Meltzer said. "The environment is dry and arid and fragile, and very susceptible to changes in the temperature. That galvanized support."

An Economy Built on Coal

But the heat also underscored the nation's fossil fuel dependence. On Black Saturday, demand for electricity, driven by millions of air conditioners, overloaded the electric system. Amid deadly heat and ferocious fires, residents also coped with power outages. (Related Pictures: "World's Worst Power Outages")

This kind of "peak" demand spike is a serious vulnerability for Australia, especially in South Australia. While the nation's overall energy use has fallen over the past two years for the first time in history, peak demand has continued to grow. (Related Quiz: "What You Don't Know About Electricity") On the hottest summer days in South Australia, residential air conditioners, along with commercial and industrial activity, can produce more than twice the average demand of a typical day.

Mark Lister, executive director for the Australian Alliance to Save Energy, notes that the problem has been long in the making. Abundant low-grade black coal and brown coal reserves helped build the fortunes of two of the world's largest mining companies, BHP Billton and Rio Tinto, both based in Australia. Electricity prices in Australia were among the lowest in the world until 2007, making the country hospitable for energy-intensive industries like iron, aluminum, steel, and chemicals. Lister notes the investment in coal-fired electricity begat an ever more energy-hungry economy. "There was a real bias in policy thinking towards the importance of that asset and using that asset," he said. "We're very used to investing in large, chunky sort of assets with a well-known project model and financing, and we have our regulations and institutions built around them." (Related: "Mining the Truth on Coal Supplies")

So over the past 20 years, while many developed nations began to shift the mix that powered their electric grids away from the most polluting coal plants, Australia kicked coal into high gear. Among the advanced nations in the Organization for Economic Cooperation and Development (OECD), only Denmark and Greece outrank Australia in their dependence upon coal for electricity. Largely due to coal, its carbon emissions per capita are higher than any developed country; in fact, they're higher than those of all but eight nations—Qatar, Trinidad and Tobago, Kuwait, Brunei, the United Arab Emirates, Aruba, Luxembourg, and Bahrain.

Coal, of course, is not the only natural resource in abundance in Australia. "We also have the world's best wind resources, and tide resources, and solar," Lister said. In fact, the $1 billion, 420-megawatt Macarthur Wind Farm scheduled for completion early next year in southwestern Victoria is said to be the largest wind farm in the Southern Hemisphere, generating enough power for an estimated 220,000 homes each year. As many as 750,000 Australian homes—roughly 10 percent of all homes on the continent—now have rooftop solar panels, amounting to some 1.7 gigawatts of capacity. Incentive schemes that helped to spur installations in 2011 have ended, but industry watchers still expect 600 megawatts of capacity to be added this year. (Related interactive: "Personal Energy Meter")

Another resource Australia has yet to fully exploit: Energy efficiency. The nation launched a major home weatherization program in 2009 as part of its economic stimulus. But insulation installers were not properly trained. Homes caught on fire. Four workers died from electrocution or heat stroke. Although 1 million homes were insulated without incident, the program was canceled.

But the Australian Alliance to Save Energy says properly administered energy efficiency programs could save Australia more than $5 billion annually. Already, Australia has introduced performance standards for many household appliances, including refrigerators and air conditioners. A phase-out of inefficient incandescent light bulbs began in 2009. And this week, new legislation went into effect establishing a national framework for energy efficiency and labeling standards, replacing seven state and territory programs. The law allows the government to regulate the efficiency and carbon footprint not only of electrical goods, but also gas- or diesel-powered products, and related items like window glass, insulation, and air conditioner ducts that can affect energy use.

And in Australia, because of the nation's heavy coal dependence, every kilowatt-hour saved cuts carbon emissions more than in countries that rely on lower- or zero-emissions sources like natural gas, nuclear energy, or renewables. "Australia is better placed [than other nations] to take advantage of efficiency because of the climate imperative," said Lister. "It stands to gain more from efficiency than a country with a cleaner supply." (See interactive: "World Electricity Mix")