"Without early and strong action, some time before 2020 we will realise we've indelibly surrendered to forces that have moved beyond our control," said the report's author, economics professor Ross Garnaut.
The former diplomat and long-time advisor to governments said in his report that climate change was a "diabolical" problem which could cause immense damage to Australia.
An emissions trading scheme covering as many sectors as possible, including transport, was the best way of reducing the production of the greenhouse gases blamed for global warming, he said.
"The more sectors included in the emissions trading scheme, the more efficiently costs will be shared across the economy," Garnaut said.
However, energy prices would rise under the scheme and low-income households would need to be compensated through funds collected from the sale of emissions permits.
Garnaut said his specific recommendations on emissions targets and carbon pricing would be contained in a supplementary report at the end of August and in the final report to be released at the end of September.
Emissions trading schemes place a limit on the amount of greenhouse gases companies can produce, forcing heavy polluters to buy credits from companies that pollute less -- thereby creating financial incentives to fight global warming.
Garnaut was commissioned to undertake the study last year by the incoming centre-left government of Prime Minister Kevin Rudd, which accused the former conservative government of failing to take action over climate change.
Rudd, who signed Australia up to the UN's Kyoto Protocol on climate change as his first official act in government, wants to create such a trading system by 2010.
Minister for Climate Change Penny Wong has said it would "constitute the most significant economic and structural reform undertaken in Australia since the trade liberalisation of the 1980s."
Business groups have expressed concern that such a trading scheme would push up costs and make it more difficult for companies to compete against foreign firms not faced with similar restrictions.
© 2008 AFP
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