Steam and other emissions are seen coming from a funnel at an oil refinery on the outskirts of Melbourne February 24, 2011. [Photo/Agencies]

CANBERRA - Australia will set a carbon price from July 1 2012 as an interim measure until a full emissions trading scheme can be introduced three to five years later, Prime Minister Julia Gillard said on Thursday.

But Gillard said no decision had yet been made on what the price would be, or how much industry and households would be compensated for the new costs.

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"This is an essential economic reform, and it is the right thing to do," Gillard told a news conference.

"Carbon pollution is a threat to our country, and a threat to our future prosperity," she added.

The new deal has the initial backing of key Green and independent MPs in the lower house of parliament, but could still face obstacles in the upper house Senate where an earlier carbon trade scheme was twice defeated, before being shelved.

"I do not believe that Australia needs to lead the world on climate change, but I also don't believe that we can afford to be left behind. That is why the time is right and the time is now," Gillard said.

Gillard's minority government needs support from one Green and three independents to pass laws through the lower house.

Key independent Tony Windsor said while he supported the set price and move to an emissions trading scheme, more needed to be worked out before he would guarantee his vote.

"This is very much the start of the process in my view," Windsor told reporters. "There's a lot of discussion to take place on this issue. What we've established today is a framework to attempt to work within. That doesn't mean the game is over."

Australia, the world's biggest exporter of coal, is one of the highest per-capita carbon emitters in the developed world due to a reliance on coal for 80 percent of electricity generation.

Climate change is a key political issue in Australia, reflected in the successes of the Greens in August elections.

One of the main reasons Labor had dumped former prime minister Kevin Rudd ahead of the election was voter anger over the shelving of an emissions trading scheme.

"The two-stage plan for a carbon price mechanism will start with a fixed price period for three to five years before transitioning to an emissions trading scheme," Gillard said.

The power sector wants a carbon price to underpin future investment, but business and mining firms oppose carbon trading, saying it would lift costs and take projects offshore.  

The government has promised to cut emissions by five percent of year 2000 levels by 2020, and wants to price carbon emissions to encourage business to cut pollution.

"A carbon price is a price on pollution. It is the cheapest and fairest way to cut pollution and build a clean energy economy," she added.