The Kyoto Protocol allows rich countries to meet greenhouse gas emissions targets by funding clean energy projects in the developing world via a trade in carbon credits.

A government-sponsored report Friday said Australia should set up a carbon trading system by 2012, but take a gradual approach, setting an upper limit on carbon prices initially, and allocating free emissions permits to coal exporters.

Australia hasn't ratified Kyoto, and so its announcement on Friday was a big step forward, said Deutsche's Mark Lewis.

"What's important is to look symbolically: that they're moving at all is a very interesting development," he said.

Carbon markets push up the price of electricity generated from burning fossil fuels, and so raise power prices and industry costs.

To create a level playing field they should link up globally, to have the same carbon price everywhere. The problem is that the new schemes all look rather different.

"Regional developments are welcome, but linking schemes that differ a lot in both design and stringency would be very difficult," said Michael Grubb, chief economist at the British government-backed Carbon Trust.

The United States rejects carbon markets because by raising industry costs they threaten jobs, it says.

Details of Canada's plan will emerge over coming months. It will set emissions targets on industrial sectors like power generation, forestry, metals, and allow companies to buy emissions rights on a domestic carbon market.

GROUNDSWELL

Australia already has national targets for adoption of renewable energy, and it has state-level schemes to curb greenhouse gas emissions.

The world's leading coal exporter relies on high carbon-emitting coal for about 80 percent of electricity generation, with renewable energy about five percent.

Unlike Australia, Canada has ratified the Kyoto Protocol but says it won't be able to meet its binding greenhouse gas emissions targets under the pact.

The United States hasn't ratified the Kyoto pact, and on Thursday reiterated it was opposed to a global carbon market, but that position may soon be obliterated by US presidential candidates to replace George W. Bush in 2009, and individual states, which take the opposite view.