Australia is the world's top coal exporter but the coal industry has complained the planned emissions trading system (ETS), due to start in July 2011, would force mines to close and lead to thousands of job losses.
The Australian newspaper said the government was considering lifting compensation under the ETS for the coal industry to $1.5 billion (US$1.24 billion) to protect jobs and help build political support for its scheme.
A spokesman for Junior Climate Change Minister Greg Combet, who is leading talks with the coal industry on the ETS, said the minister had no comment on the media speculation.
Australia's carbon trade scheme will cover 1,000 of Australia's biggest companies and will put a price on carbon pollution, giving business a financial incentive to curb emissions over time.
The government had previously offered the coal industry $750 million in compensation for the ETS, but the Australian Coal Association said without changes, the scheme would cost the industry about $14.5 billion over 10 years.
Coal miners want the government to treat coal the same as the aluminum, cement and liquefied natural gas industries, which will receive 60 to 90 percent of their carbon permits free in the initial years of carbon trading.
But government officials have said exempting coal from the costs of the ETS would see a hole of about $500 million a year in expected revenue from the sale of carbon permits.
Under existing plans, only 23 big polluting coal mines, out of Australia's 121 coal mines, would receive compensation for the impact of the ETS. Other mines would not be included in the ETS as their emissions are below the ETS threshold.
Prime Minister Kevin Rudd wants laws to set up carbon trading, and lock in an emissions reduction target of up to 25 percent by 2020, passed by parliament ahead of global climate negotiations in Copenhagen in December.
The laws remain locked in parliament's upper house Senate, where the government needs an extra seven votes to pass its legislation, and are set to be defeated when a vote is taken on August 13.
Opposition leader Malcolm Turnbull has said he would be willing to pass the laws later in the year if the government agrees to a series of amendments, including more protection for the coal and coal-fired electricity sectors.
If the laws are rejected twice, Rudd, who remains well ahead in opinion polls, could have the option of calling a snap election in early 2010, rather than waiting for the next scheduled election in late 2010 or early 2011.
A Newspoll in the Australian newspaper found Rudd had extended his lead over the opposition and would easily win an election held now, with 57 percent support compared to 43 percent for the opposition.
The Newspoll also said 53 percent of those polled believed Australia should either wait until after the Copenhagen talks before it passes its ETS laws, or should not introduce carbon trading at all.
Australia produces about 1.5 percent of the world's carbon emissions, but is one of the leading per-capita polluters due to its reliance on coal-fired power for about 80 percent of the nation's electricity.