Australian businesses are demanding a $3bn windfall from the government to help offset the costs of meeting new emission targets.

In its 2008 budget submission, the Australian Industry Group (AIG), a non-profit organisation representing 10,000 employers, said the government must cut company tax by five per cent from 2010 – the same year the country's new cap-and-trade scheme is scheduled to be introduced.

The group claimed that if the tax break is not granted, Australian businesses – which include international oil giant Rio Tinto - will be hit with billions of dollars worth of extra costs.

"Many businesses and their employees in trade-exposed industries will find themselves operating at a disadvantage relative to competitors abroad," warned AIG chief executive Heather Ridout.

Separately, a band of 22 top electricity companies this week demanded their own $1bn compensation package, claiming the new carbon targets would cost them an extra $28bn a year.

The calls for financial aid – which could set an international precedent for other leading power firms – coincided with the publication of a discussion paper on emissions trading by Australia's top climate change advisor Ross Garnaut.

Professor Garnaut – who earlier this year published an interim report on climate change's impact on Australia – is opposed to any form of compensation to companies who don't meet the new requirements on carbon emissions.

The new paper urged the government to set the budget and targets for the new Emission Trading Scheme immediately. However, he added that Australia should hold off on implementing specific strategies to curb the impact of climate change until other developed countries had announced what measures they would take – something it is hoped will occur over the next two years as talks to agree a successor to the Kyoto Protocol approach their scheduled completion date of December 2009.

"We should establish an emissions budget and reduction targets prior to the emergence of a comprehensive global agreement, but comparable in adjustment effort to those accepted by other developed countries," Garnaut said.

Under the proposals included in Garnaut's report, emissions permits would be auctioned to firms and the government would introduce welfare payments for low-income families to help them cope with the rising cost of electricity.

The government-commissioned report also recommends the setting up of an independent "carbon bank" to regulate the scheme.

It is hoped the cap-and-trade scheme will tackle Australia's reliance on coal and fossil fuels. According a recent study, Australians are the worst polluters per capita in the developed world, deriving 75 per cent of all power supplies from coal.