Australia and the European Union agreed on Tuesday to link their carbon trade schemes by 2018.
Australia will also scrap its planned A$15/tonne carbon floor price when its emissions trading scheme starts in July 2015. Currently, Australia's carbon tax is fixed at A$23 a tonne.
Ditching the floor price is the first major change to Australia's controversial plan to price carbon following concerns from businesses facing higher costs than European competitors.
The move means business in Australia will be able to use EU allowances, which they can buy now, to cover up to 50 per cent of Australian liabilities from July 2015 but European companies will have to wait until 2018 to use Australian allowances.
Carbon permits in the EU are currently trading around €8.16 a tonne, although Australian Climate Change Minister Greg Combet said he remained confident the price would recover by 2018, when the full linkage would start.
Combet said he stood by government budget forecasts for a carbon price of around A$29/tonne by 2015/16.
Australia is one of the world's highest per capita emitters of pollutants blamed for causing global warming, due largely to its reliance on coal-fired power stations. Putting a price on carbon is Australian Prime Minister Julia Gillard's key policy to fight greenhouse gas emissions and to help cut emissions by 5 per cent of year 2000 levels by 2020.
Combet said the link with 30 nations in the European scheme would provide more business certainty and would eventually see a levelling in the price of carbon permits between Australia and Europe.
"This means that from 1 July 2015 Australia's carbon price will effectively be the same as that that operates in our second largest trading bloc," he said. "The same carbon price will cover 530 million people."
Neighbouring New Zealand also has an emissions trading scheme, China is developing schemes in some provinces, while South Korea plans to price carbon from 2015. Some parts of the US and Canada also have plans to price carbon. Combet said talks about linking with New Zealand's scheme were ongoing.
Australia's price on carbon covers around 300 of the country's biggest polluting companies including mining giant BHP Billiton, Qantas Airways and BlueScope Steel and 60 per cent of the country's 550 million tonnes of annual emissions.
Australian companies will be able to cover up to 12.5 per cent of their liabilities with UN-backed Certified Emissions Reduction credits (CERs), currently trading near record lows of around €3.
The international linkages could boost demand for credits from the EU's $130bn trading scheme, and the smaller $2bn UN scheme, by up to 165 million tonnes a year.
Combet said business had made it clear they wanted more flexibility on the carbon price once Australia moves to a trading scheme.
The Australian Greens, who support the minority government and whose support is crucial for the government to pass laws, said the link with the EU scheme would be good for business certainty.
"We are effectively exchanging a short-term floor price for a long-term trajectory, for stability," Greens leader Christine Milne told reporters.
"Companies from today will know that they are going to be dealing with the European price, and that has to be good news."
Environment groups also welcomed the change, although business and Australia's resources industry continued to condemn the price on carbon.
"Europe cheering the Australian carbon tax, as they did when it was announced last year and as they have done today, is Europe breathing a sigh of relief at our expense," said Peter Anderson, chief executive of the Australian Chamber of Commerce and Industry.
The Minerals Council of Australia, which represents the booming mining industry, said the announcement would do nothing to alleviate the cost of the carbon tax over the next three years.
"Australia's carbon tax and emissions trading scheme is far more onerous than any other scheme in the world, including the European Union's," council chief executive Mitch Hooke said.