Under the two-stage approach, aimed at tackling greenhouse gas emissions, a carbon price would be fixed for the first three to five years. After that, it would shift to a flexible price, set by the market pending a review of domestic and international conditions a year before the transition.
"This will give businesses time to understand their carbon liability and begin the transformation in a steady and purposeful way," said Australian Prime Minister Julia Gillard in a statement.
The carbon price would apply to the energy sector, transport, industrial emissions and waste but emissions derived from agriculture would be excluded.
Noting that a carbon price is a price on pollution, Gillard said, the plan "is the cheapest and fairest way to cut pollution and build a clean energy economy."
"The best way to stop businesses polluting and get them to invest in clean energy is to charge them when they pollute."
The world's largest polluter per capita in the developed world, Australia relies on coal for 80 percent of its electricity.
By 2020, Australia aims to cut emissions by at least 5 percent compared with 2000 levels. But recent government estimates suggest the country's emissions are set to rise 24 percent above 2000 levels by 2020 without serious curbs in place.
The Australian Conservation Foundation said a cap on emissions was more urgent than placing a price on carbon.
"A fixed price on pollution … does not on its own ensure greenhouse pollution levels will fall,'' said the foundation's Executive Director Don Henry, The Sydney Morning Herald reports. "We need … a cap on pollution sooner rather than later."
The tax is likely to add at least $300 annually to household electricity bills and more than 26 cents a gallon to gas prices, observers say.
But Gillard said electricity prices would rise whether or not there was a price on carbon.
The government's advisory group on carbon pricing, the multiparty Climate Change Committee, hasn't agreed on the level of the carbon tax and the amount of compensation to be paid to emitters. Buying carbon credits overseas wouldn't be an option under the plan, at least in its early years, the committee said.
The plan is subject to federal parliament passing the legislation.
Opposition Leader Tony Abbott said Gillard's announcement was a "betrayal of the Australian people," the Australian Broadcasting Corp. reports. He predicted a "people's revolt" in response.