In a move that could yet trigger an early election, Australia's parliament today rejected a wide-ranging climate change and carbon trading bill after the government lost a Senate vote on the legislative package.

The Carbon Pollution Reduction Scheme, which was proposed by prime minister Kevin Rudd and calls for 1,000 of Australia's biggest polluting companies to purchase carbon permits that would cover 75 per cent of the country's emissions starting in July 2011, was defeated 42 votes to 30.

The cap-and-trade plan, the proposed introduction of which had already been delayed by a year, would have required firms to buy a permit for each tonne of carbon produced, priced at A$10 ($8.35, £5) per tonne in the first year of the arrangement, moving to auctioning and trading of permits in 2012.

Rudd's Labor party estimated the scheme would raise up to A$12bn annually, with the bulk of the money earmarked to help taxpayers cope with resulting increases in energy costs.

The plan also entails an unconditional greenhouse gas reduction target of five per cent below 2000 levels by 2020, rising to 25 per cent if other nations agree to a similar target at the UN climate change talks in December.

Business advocates believed the scheme was too drastic and would hinder economic growth without significantly impacting on global warming. Meanwhile, some environmentalists opined that the measures were inadequate.

However, the plan was defeated after an unlikely alliance of opposition, green and independent senators in the parliament's upper house – who harboured different reasons for the rejecting the plan – united to vote against it. The outcome was widely expected.

Australian Greens party senators said the government needed to make a stronger commitment to curb greenhouse gas emissions, a view shared by another dissenting voter, independent Nick Xenophon.

Meanwhile, opposition leader Malcom Turnbull, of the pro-business Liberal party, said that the plan would prove too costly and would damage the Australian economy. He has proposed an alternative plan that he said would guarantee cuts in carbon emissions of 10 per cent by 2020 and be A$49bn cheaper to implement over 20 years than Rudd's scheme.

Environmental groups were divided over the senate's move. Climate Institute chief executive John Connor called it "a tragic postponement of the evolution of Australia's polluting, inefficient and climate exposed economy".

In contrast, Friends of the Earth believed the scheme did not go far enough and would have locked Australia into a high-polluting economic system.

The proposals will now be amended before returning for a second vote in November, when a second defeat for the government would trigger a snap election that polls suggest Rudd would win.

If he is returned by voters, along with an enlarged parliamentary majority for his Labor party, the carbon trading scheme would almost certainly be reintroduced with a greater likelihood of being passed.

Climate change minister Penny Wong told the Senate that the government remained fuloly committed to the legislation. "We may lose this fight, but this issue will not go away," she said. "Australia cannot afford for climate change to be unfinished business."

She also confirmed that a second vote on the proposed packaged would be sought. "The government will consider any serious amendment," Wong said. "We will press on for as long as we have to, we will bring this bill back before the end of the year."

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