The move is set to cost the government billions of dollars but Treasurer Chris Bowen said cuts would be made elsewhere to compensate with the Labor Party sticking to its plan to return the budget to surplus in 2015-2016.
Bowen confirmed media reports that the fixed Aus$24.15 ($21.90) per tonne carbon tax would be dumped in favour of a floating price of between Aus$6 and Aus$10 per tonne from July 1, 2014, to ease cost of living pressures for families and help support the non-mining sectors of the economy.
With national elections later this year, Labor is hoping the change will see a drop in soaring electricity prices.
"There is a substantial impact on the budget of doing this, of course there is, and it is several billion dollars, but we will be financing that in a fiscally responsible way," Bowen told the Ten Network, adding that full details would be announced over coming days.
"It means ensuring that our strategy of returning to surplus over the economic cycle is adhered to, so it is a challenge."
He added: "I think families will see a big benefit in what we are bringing forward".
Australia is among the world's worst per capita polluters due to its reliance on coal-fired power and mining exports and introduced a "carbon tax" in 2012, charging big polluters for their emissions.
The government has always said it would move to an emissions trading scheme after three years with a floating price set by the market, but new Prime Minister Kevin Rudd has now moved that forward a year.
The issue of a carbon tax has been hotly debated in Australia.
Former Labor prime minister Julia Gillard's popularity sunk after she announced plans for the carbon tax in early 2011 -- after pledging before her 2010 election that it would not be introduced by a government she led.
The policy backflip prompted protests around the country and conservative opposition leader Tony Abbott, who opinion polls suggest will narrowly win the 2013 election, has vowed to abolish it.