SYDNEY (AFP) - Australia on Thursday axed a divisive carbon tax after years of vexed political debate, handing the government a key victory after it went to the polls last year vowing the levy would go.

The upper house Senate voted 39-32 to scrap the charge that was imposed by the former Labor government on major polluters from 2012 in a bid to reduce carbon emissions.

It followed days of protracted negotiations with the minor Palmer United Party, which embarrassed the government last week by pulling its crucial support for repeal of the tax at the last minute.

But powerbroker Clive Palmer won concessions for tougher measures to ensure cuts to electricity and gas prices were passed through to consumers and businesses and the legislation was passed to subdued applause.

Prime Minister Tony Abbott went to the polls in September with repealing the pollution levy as a central campaign platform, arguing the cost was being passed to consumers, resulting in higher utility bills.

"Scrapping the carbon tax is a foundation of the government's economic action strategy," said Abbott, who once claimed evidence blaming mankind for climate change was "absolute crap".

"This is great news for Australian families and for our nation's small businesses.

"We are honouring our commitments to you and building a strong and prosperous economy for a safe and secure Australia," he added.

The government must walk a tightrope in the upper house, needing the backing of minor party senators such as those from Palmer's party to get its legislative agenda passed if it cannot secure support from Labor or the Greens.

This includes not only scrapping the carbon tax but the massive spending cuts it has planned to bring the budget under control.

- Taking Australia backwards? -

Abbott's conservative government says dumping the tax would save households A$550 (S$639) a year and strengthen the economy, which is among the world's worst per capita polluters due to its reliance on coal-fired power and mining exports.

Under the carbon tax, the country's biggest polluters paid for the emissions they produced, giving them an incentive to reduce them.

The current administration - the first post-war Australian government not to have a science minister - favours a "direct action" plan that includes financial incentives for polluters to increase their energy efficiency.

The Climate Action Tracker, an independent monitor of countries' carbon pledges and actions, has claimed this method will increase Australia's emissions by 12 percent in 2020 instead of reducing them by five percent from 2000 levels as per its own target.

Labor leader Bill Shorten said Abbott had "embarrassed Australians".

"Tony Abbott is taking Australia backwards while the rest of the world is moving forward," he said in a statement.

"All of Australia's major trading partners are taking serious action on climate change, including in our own region." Greens leader Christine Milne joined Labor in expressing outrage, saying abolishing the tax would make Australia an international "pariah".

"It is a monumental blunder for the nation under a climate-denying prime minister," she said.

"It will make life worse for future generations and make Australia a global pariah. There will be many people around Australia as distraught as we are, who accept the science on climate change." Abolition of the tax caps years of bitter debate.

Former Labor prime minister Julia Gillard famously promised voters there would never be a carbon tax under a government she led, and then announced a fixed-price on carbon pollution after she won the 2010 election.

The "broken promise" dogged her for years with Abbott's "axe the tax" rhetoric eating away at her government and ultimately paving the way for her toppling as Labor leader by Kevin Rudd.