In the country's biggest economic reform in decades, Australian Prime Minister Julia Gillard on Sunday announced that carbon emissions would be taxed at US25 dollars a tonne from July next year.
The country's 500 biggest polluters will be targeted in a plan that paves the way for the the biggest market-based trading scheme outside of Europe.
The fixed price per tonne will be charged until 2015.
Ahead of an address to the nation, Gillard told press conference in Canberra:
As a nation, we need to put a price on carbon and create a clean energy future. Australians want to do the right thing by the environment.
But the scheme, which will raise overall consumer prices rise by nearly 1 percent, has drawn heavy criticism from the conservative opposition. Critics also say it will hurt economic competitiveness.
The Sydney Morning Herald said increases to the cost of living would be a knock-on effect resulting from polluting companies passing on their carbon costs to the consumer.
The paper reported that a $15 billion package of tax cuts and increased benefits meant that 4 million Australian households would receive more in compensation that the carbon tax would actually add to their cost of living.
It also said that a further 2 million households would be no worse off, while 700 households would receive no compensation.
The Daily Telegraph newspaper in Sydney said that as part of its carbon pricing policy the Australian government planned to pump $13 billion into expanding the country's clean and renewable energy sector.
Leading up to Sunday's announcement, the energy industry had campaigned strongly against the tax, which the government said would affect any company that produced 25,000 tonnes of carbon dioxide per year.
In March, protests were held across major cities in Australia, which is a major exporter of coal, and relies on the fossil fuel for 80 percent of its electricity needs.
The agriculture and forestry industries will be exempt from paying the tax, along with motorists, excluding large trucks. Meanwhile steel makers, coal mines and electricity generators will be compensated to ensure they do not go out of business.