"It will never happen cost free. It is not a cost-free business," Rudd told the National Press Club on Wednesday.

Rudd wants carbon trading to cover 75 percent of Australian emissions from mid-2010, with 1,000 of the country's biggest firms, including global miners BHP Billiton and Rio Tinto, to buy permits to cover emissions.

That would lead to a market price on carbon emissions, which would provide a financial incentive for companies to clean up their pollution.

The government's discussion paper on carbon trading proposes compensation for consumers and businesses facing higher energy costs, with big initial subsidies for big polluting companies that will be slowly phased out.

Companies with more than 2,000 tonnes of emissions per A$1 million (US$850,000) in revenue would pay for only 10 percent of total emissions, while companies producing 1,500-2,000 tonnes of carbon would pay for 40 percent of their emissions.

But business groups representing Australia's biggest companies and resource exporters have complained the emissions trade system will erode corporate profits and force some companies to close operations or move offshore.

The Business Council of Australia, which represents the country's 100 top companies, said emissions-intensive export firms would need much higher than promised levels of government compensation to remain competitive.

Rudd said the government's draft plans for carbon trading were designed as a basis for negotiation, and government ministers were already involved in direct talks with industry.

"We intend for this to be a real negotiating process," Rudd said, adding the business community accepted something had to be done to fight global warming.

"If you are going to reduce greenhouse gas emissions, which we must, and if we are to be credible negotiators in the essential negotiations coming up over the next 12 months or so to get a global deal, then this is the necessary course of action."

The government plans to finalise its carbon trading plans by the end of the year, with legislation to be introduced to parliament in 2009 and emissions trading to start in July 2010.

Australia is the world's 16th biggest carbon polluter, accounting for about 1.5 percent of global emissions, but produces five times more carbon pollution per person than China and is the fourth-largest per-capita emitter. (US$1 = A$1.17) (Editing by David Fogarty)