CANBERRA - Australia's parliament rejected laws to set up a carbon trading scheme on Wednesday, scuttling a key climate change policy of Prime Minister Kevin Rudd and providing a potential trigger for an early 2010 election.

Acting Prime Minister Julia Gillard said the government would re-introduce the carbon trade bills in February to give the opposition Liberal Party one more chance to support the scheme, adding the government was not looking at an early election.

Today the climate change extremists and deniers ... have stopped this nation taking action on climate change, Gillard told reporters.

This nation is one of the hottest and driest continents on Earth. We are going to be hit particularly hard and early by climate change, she said. We are determined to deliver the Carbon Pollution Reduction Scheme, we are determined to deliver real action on climate change.

The second rejection of the carbon-trade legislation by a hostile Senate on Wednesday gave Rudd a legal trigger to call an election that could come as early as March or April 2010, and to then ram his laws through a special joint sitting of both houses of parliament if he was returned to power.

But Gillard played down early election speculation.

The prime minister has made it very clear that it is his intention to have the parliament go full term, she said.

The prime minister, who is overseas, had hoped to take his carbon-trade scheme to next week's global talks in Copenhagen, where world leaders will seek a new agreement to curb greenhouse gas emissions.

The emissions trading scheme (ETS) would have been the biggest outside Europe, covering 75 percent of Australian emissions and starting in July 2011.

The Senate rebuff throws the future of carbon trading in Australia into confusion, creating new uncertainty for business, which had sought clarity from the political debate.

From the point of view of a lot of businesses in Australia they're now back in the dark. No one knows what is coming next, said Tim Hanlin, chief executive of the Australian Climate Exchange.

For a lot of companies that are going to make investment decisions as we come out of recession, it will be more difficult with no certainty about the carbon price.

Australian electricity prices fell after the Senate rejected the legislation, with the 2011 contract falling 3.7 percent to A$44 per megawatt hour in thin trade.

The cap and trade carbon scheme would have forced big polluters, particularly in the coal and electricity sectors, to buy carbon emission permits. Rising permits prices would act as an incentive to reduce greenhouse gases.

The scheme was defeated in the Senate, by 41 votes to 33, by opposition climate skeptics and Greens who wanted tougher emission reduction targets. Two Liberals voted for the laws. The government only needed seven opposition votes to pass the laws.

The Liberal Party last week agreed to back the carbon laws, but climate change skeptics forced a leadership and policy change on Tuesday. We won't have an ETS as part of our policy going to the next election..., Liberal leader Tony Abbott said Wednesday.

MARCH ELECTION?

Senior opposition lawmaker Christopher Pyne said he expected a dissolution of both houses of parliament and an election early in the new year, ahead of polls due around late November.

I think the election will be on March 6, Pyne said.

Political scientist Dr Rick Kuhn, of the Australian National University, said reintroduction of the bills would maintain pressure on the Liberal Party while keeping open the option of calling an early election.

It's more likely that they are keeping the pressure up on the Liberals, driving a wedge further inside the Liberals, he said. I don't think the government's bluff has been called. I think they are in a very, very strong position.

Bookmakers Centrebet said the odds of a Rudd victory at the next election lengthened for the first time in several months after the carbon laws were defeated, to A$1.22 from A$1.15 -- meaning a A$1 stake would win A$1.22 -- while odds of an opposition win shortened to A$4.10 from A$5.00.

Market analysts believe defeat of Australia's emissions trading plans could temporarily dent political momentum ahead of next week's U.N. climate talks, but the impact is unlikely to affect global carbon prices until at least 2013.

European emissions traders told Reuters that regardless of whether some opposition rebels backed the government's bill or it failed completely, an Australian scheme in its proposed form would have little immediate impact on carbon prices.

Australia's population of 21 million has the rich world's highest per capita carbon emissions. It is heavily reliant on coal, shipping and motor transport, so its environmental policies and carbon-cutting potential are closely watched.

(Additional reporting by James Grubel in CANBERRA and Jonathan Lynn in GENEVA; Editing by Michael Perry and Alex Richardson)

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