Under the current carbon tax system which went into effect in July 2012, the country's top 500 polluters were charged $22 for each ton of carbon emitted into the atmosphere, increasing to about $23.40 next year.
It was to remain in place until 2015, when it would be replaced by an ETS scheme.
"The government has decided to terminate the carbon tax, to help cost-of-living pressures for families and to reduce costs for small business," Australian Prime Minister Kevin Rudd said Tuesday in announcing the decision to switch to an ETS system a year early, beginning next July.
Energy companies had sought to recoup their tax expense by raising prices on consumers. In the first year of the carbon price, household bills rose by 0.4 percent, The Guardian newspaper reports.
Rudd said the ETS model is used around the world, including Great Britain, Germany and soon in China.
Instead of paying about $23.40 per ton of emissions next year, large emitters are likely to pay about $6, due to the low cost of carbon permits in Europe, says The Guardian reported.
Leader of the Greens Party, Christine Milne, who had negotiated the carbon-pricing scheme with former Prime Minister Julia Gillard, denounced Rudd's announcement, The New York Times reported.
"What he is now doing in order to make it cheaper for the big polluters to pollute, in order to try and make a political point, he's actually slashing a billion dollars out of environmental protection in Australia," Milne told reporters. "You don't protect the environment by cutting environment programs."
Don Henry, chief executive of the Australian Conservation Foundation told the Australian Broadcasting Corp. Rudd's plan for the most part is "still sound because an emissions trading scheme is essential if we're going to tackle climate change, but we would like to see another look at investment into protecting our environment."
Rudd, along with Australian Treasurer Chris Bowen and Minister for Climate Change Mark Butler, unveiled $3.9 billion worth of savings to offset the $3.8 billion in revenue the government expects to lose from selling carbon permits more cheaply, the Times reported.
The measures include reductions in compensation for coal-fired electricity generators.
Erwin Jackson, chief executive of The Climate Institute, writing in ABC's online opinion page "The Drum," said the cuts would reduce the competitiveness of the most polluting brown coal power stations somewhat, but would "also reduce the investment some of these generators will have to make in clean energy."