Australia imposed a carbon tax on around 300 of its biggest polluting companies in July, covering around 60% of emissions.

"Linking the Australian and European Union systems reaffirms that carbon markets are the prime vehicle for tackling climate change and the most efficient means of achieving emissions reductions," Combet said in a joint statement with European Commissioner for Climate Action Connie Hedegaard.

A full two-way link, by means of the mutual recognition of carbon units between the two cap and trade systems, is to commence no later than 1 July 2018. Under this arrangement, businesses will be allowed to use carbon units from the Australian emissions trading scheme or the European Union Emissions Trading System (EU ETS) for compliance under either system.

The move means business in Australia will be able to use EU allowances to cover Australian liabilities from July 2015 but European companies will have to wait until 2018 to use Australian allowances.

Combet said business had made it clear they wanted more flexibility on the carbon price once Australia moves to a trading scheme.

"Starting today, Australian liable entities can purchase EU allowances for future compliance in Australia" Mr Combet said.

"These arrangements provide Australian businesses with access to a larger market for cost-effective emission reductions and provide European market participants with enhanced business opportunities" Mr Combet said.

"At the end of the day, I think this is the best public policy outcome," Combet told reporters, adding Australia was continuing negotiations on linking its scheme with New Zealand's emissions trading scheme.

Combet said Australia would also impose a new limit on the use of eligible Kyoto units. Companies will still be able to meet up to 50% of liabilities with international units, but will only be allowed to meet 12.5% of liabilities with UN-backed Kyoto units.