Australia's Prime Minister Kevin Rudd said on Tuesday that a deeply unpopular carbon tax will be replaced by a less severe emissions trading scheme a year ahead of schedule, in a bid to lower power bills for households as a tight national election looms.

The carbon tax on Australia's worst industrial polluters, including its coal-reliant power producers, went into effect in July 2012 and was supposed to remain in place until 2015. At that point, it was set to be replaced by an emissions trading scheme, in which the cost of emitting a ton of carbon would be determined by buyers and sellers in a carbon market.

Rudd is advancing that timeline by a year, with the emissions trading scheme now beginning on July 1, 2014. The move will reduce the cost of carbon from a predicted A$25.40 ($22.42) per ton in July next year to an estimated A$6 per ton, Rudd said.

"The government has decided to terminate the carbon tax to help cost of living pressures for families and to reduce costs for small businesses. This is the fiscally responsible thing to do," Rudd told reporters in the northern city of Townsville.

"The nation's 370 biggest polluters will continue to pay for their carbon pollution, but the cost will be reduced, meaning less pressure on consumers.

The move is expected to save Australian households an average of A$380 a year, Rudd said. The savings would largely be in the form of lower energy bills.

The government will cover a predicted $3.8 billion shortfall in the federal budget with spending cuts, including scaling back funding for some environmental programs.

The carbon tax was enacted under the previous prime minister, Julia Gillard, who was ousted by Rudd last month in an internal Labor Party coup. Rudd had been ousted as prime minister by Gillard in her own internal coup three years earlier.

Under Gillard, Labor looked set for an overwhelming defeat in this year's elections. But recent polls suggest the race has tightened since Rudd took back the reins. Gillard had set elections for Sept 14, though Rudd can hold them between August and November. He has refused to publicly announce a date, though said "there's not going to be a huge variation" from Sept 14.

Gillard pushed through the carbon tax in a bid to gain needed support from the minor Greens party, despite a campaign promise not to do so. The government defended the move as a necessary weapon against climate change. Australia is one of the world's worst greenhouse gas emitters per capita because of its heavy reliance on massive coal reserves to generate electricity.

But the backlash from the public was intense, with some dubbing Gillard "Ju-liar". Conservative opposition leader Tony Abbott has repeatedly hammered Labor over the tax, using it to paint the ruling party as untrustworthy.

On Tuesday, Abbott criticized Rudd for saying the government was terminating the tax. "All he's done is simply brought forward Julia Gillard's carbon tax changes by 12 months. He's not the terminator - he's the exaggerator. He's not the terminator, he's the fabricator," Abbott said.

"He's changed its name, but he hasn't abolished the tax. All he's done is given Australians one year only of very modest relief."

AP-AFP-Reuters