Rudd blamed the opposition's decision not to support the measure and the lack of real progress internationally on climate change.
Rudd's plan, aimed at cutting Australia's emissions by 5 percent of 2000 levels by 2020, would have taxed high emission-producing companies and offset the charges with free emissions permits and financial compensation.
The prime minister's announcement comes less than a week after a report released by Melbourne think tank the Grattan Institute -- "Restructuring the Australian Economy to Emit Less Carbon" -- concluded that $22 billion in "free" permits, to be issued to heavy polluters under the proposed legislation over the next decade, are a waste of taxpayers' money.
The Australian Senate first rejected the ETS legislation last August then again in December just before the U.N. Copenhagen climate change meeting where Rudd had hoped to assume a lead role as one of the few developed nations to have such a law in place.
Now the legislation is timed to the Kyoto Protocol, the international climate agreement aimed at reducing greenhouse emissions, which expires at the end of 2012.
"That will provide the Australian government at the time with a better position to assess the level of global action on climate change," Rudd said.
Rudd had previously spoken of the ETS as the answer to the "great moral and economic challenge of our time," referring to climate change.
He stressed Tuesday that Canberra's targets on greenhouse gas emission reductions would prevail and that climate change continues to be a key global issue.
While the opposition supports the government's emissions reduction target and renewable energy targets, it opposes any emissions trading scheme or a carbon tax. Instead, it proposes cutting emissions through a range of measures, such as storing carbon dioxide in soil and planting 20 million trees by 2020.
Australia, the world's largest exporter of coal, has the highest per capita of carbon emissions among developed nations, with an average output of 20.5 tons of carbon dioxide per person each year.
John Connor, chief executive officer of The Climate Institute, said news of the shelving of the ETS legislation was "extremely disturbing."
"It's a bad day," he said in a statement, not only for Australians, but also "for the global community looking to Australia to be helpful in rebuilding trust and momentum in climate action."