Mr Rudd has said climate change is "the moral challenge of our generation"
The Australian government has put plans for a flagship emissions trading scheme on hold until 2013 at the earliest.
The move comes after the scheme was rejected twice by the Senate, where Prime Minster Kevin Rudd's government does not have a majority.
Mr Rudd, who came to power promising tough climate action, blamed opposition obstruction and slow global progress on emissions cuts for the plan's delay.
Australia is one of the highest per capita carbon emitters in the world.
Australia has some of the highest per capita carbon emissions of developed nations.
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Mr Rudd had hoped the Carbon Pollution Reduction Scheme (CPRS) would cut Australia's carbon emissions by up to 25% from 2000 levels by 2020, by requiring industrial polluters to buy licences to emit carbon.
The scheme had been scheduled to begin in July 2011, but Mr Rudd said the government would now delay plans until the Kyoto Protocol expires in 2012.
He said doing so would "provide the Australian government at the time with a better position to assess the level of global action on climate change".
The BBC's Nick Bryant in Sydney says the postponement is a major climbdown by the Rudd government, which reflects the changing politics of climate change in Australia.
Developed countries with highest CO2 emissions
|Tonnes of C02 per capita, 2006
Ahead of the Copenhagen climate change conference, the prime minister looked set to fight - and win - this year's Australian election on the emissions trading issue, says our correspondent, but polls have pointed to an erosion of public support.
Mr Rudd had hoped to enact the CPRS into law before last year's Copenhagen climate summit.
But in December, shortly before the summit opened, the proposed scheme was rejected by the Senate for a second time.
The move came after the opposition Liberal party ousted its leader Malcolm Turnbull - who had pledged his backing for the measure - and replaced him with climate sceptic Tony Abbott.
Mr Rudd said the Liberal Party's decision to "backflip on its historical commitment to bring in a CPRS", coupled with a lack of global action on climate change, meant it was inevitable that the scheme would be delayed in Australia.
"It's very plain that the correct course of action is to extend the implementation date," he said.
Despite the decision, the prime minister said his government remained committed to reducing greenhouse gases.
"Climate change remains a fundamental economic and environmental and moral challenge for all Australians, and for all peoples of the world. That just doesn't go away," he said.
Mr Rudd's critics will say that this exposes a familiar characteristic of his leadership: his reluctance to fight for causes when the polls suggest he might be in danger
But Mr Abbott accused Mr Rudd of a lack of credibility over the policy reversal.
"It seems the government has dropped its policy to deal with climate change because it is frightened the public think that this really is just a great big new tax on everything," ABC News quoted him as saying.
"He's running away from it because he seems scared."
Mr Abbott has previously said it would be premature for Australia to adopt such a scheme ahead of other countries.
Some lawmakers had questioned the scientific case for global warming and said that the emissions trading scheme would damage Australia's economy.