The Government's key climate change adviser has recommended polluters pay a carbon price of $26 a tonne, raising $11.5 billion in the first year of a carbon tax.

In his final climate report, Professor Ross Garnaut says 55 per cent of the revenue should go to households and 35 per cent to the polluting businesses as compensation.

The remainder will go towards innovation and carbon farming, which will be offset by existing spending.

The package is said to be budget-neutral.

Professor Garnaut says the move to a full floating-price emissions trading scheme should be made in 2015.

The Government had already said more than 50 per cent of the revenue would be returned to householders - particularly pensioners and low-income households - to compensate them for higher prices.

Professor Garnaut recommends the increase in petrol prices be offset by a one-off reduction in petrol excise, with the revenue loss made up with reform of private vehicle fringe benefits tax arrangements.

He says low- and middle-income households should be compensated via tax cuts, including raising the tax threshold to $25,000.

"For those low-income households that do not stand to benefit from tax cuts, adjustments could be made to indexation arrangements for pensions," the report said.

"Full compensation and not over-compensation should be the objective."

The report says $1 billion over four years should be used to help workers and communities in coal-based power generation areas, such as the La Trobe valley.

Prime Minister Julia Gillard's minority government wants a carbon tax on 1,000 of the country's biggest polluters to start in July 2012, with a transition to a full emissions trading scheme three to five years later.

The Government, Greens and independent MPs are currently working out details of the carbon tax, including the starting price and levels of compensation for industry and households, with final details expected by early July.

The report recommends transitional assistance for emissions-intensive, trade-exposed industries which find themselves competing against cheaper overseas produced goods.

It says such assistance would prevent industry from moving offshore to a country with less stringent pollution controls.

Assistance to these industries would no longer be needed once other countries impose similar carbon constraints to Australia, the report said.

Professor Garnaut says good governance is pivotal to the success of the scheme and he recommends three independent bodies be set up to implement it.

One would advise on future targets and scheme caps, another on assistance to the trade-exposed polluters, and a third scheme regulator or "carbon bank" to administer the final emissions trading scheme.

Should the Government disagree with recommendations made by the independent committees, then it would be required to present to Parliament its reasons.

Battle of interests

The report describes the climate change debate as a struggle between "special interests and the national interest".

It says a market-based emissions trading scheme will be far more resistant to vested interests rather than a fixed-price regulatory approach which provides opportunities for industry lobbyists.

Innovation success, the report says, will govern how much the transition costs. It recommends $2.5 billion a year be poured into support for research into new technologies - mainly through public institutions like the CSIRO.

It says there is a massive potential for reduction of carbon in the atmosphere through biosequestration - farmers adding carbon to their soil by planting trees.

Professor Garnaut predicts a 3 per cent reduction in demand for electricity when the scheme is introduced as a result of prices rising by about 10 per cent.

But he says price fluctuations will be less than those experienced in 2006 due to distortions in price regulation of distribution networks.

Professor Garnaut also has hit back at critics of the carbon tax who argue Australia is getting ahead of the world.

He says Australia's decisions on climate change influence other countries.

"I don't accept that my country is a pissant country. All the evidence is against it," he said.

"We matter even on climate change, even though our emissions are only 1.5 per cent of the world's, just like the UK matters with its 1.7 per cent."

Professor Garnaut presented his report to the Prime Minister this morning.

Ms Gillard says the Government is considering using tax cuts as a way of compensating people for the higher costs caused by a carbon price.

"As we work through designing household assistance and carbon pricing, tax cuts are a serious option," she said.

Ms Gillard says she will consider the report carefully and then decide on a final position.

Tony Abbott has criticised Professor Garnaut's proposal for an independent committee to set Australia's emission reduction targets.

The Opposition Leader says he does not think the committee would be accountable.

"The idea that taxes in this country should effectively be set by people who are outside the Parliament and who are not accountable to the people I think is just odd," he said.

"This just goes to show how out of control the Government is on this whole climate change question."

The Australian Conservation Foundation's economics adviser Simon O'Connor says the starting carbon price needs to be higher than the one recommended by Professor Garnaut.

"$40 is about the level we need to start at if we're really going to unleash the clean energy investment in Australia and see some serious money into the clean-energy economy," he said.

"Then we really get a chance at tapping into the economic opportunities that come from a transition to a low-carbon economy in Australia."