The current 50 per cent unit cost would increase to 67 per cent from January 1, then 83 per cent from January 1 2018, with all sectors in the ETS paying the full market price from 1 January 2019.
The current price ceiling which capped units at $25 would remain.
"It is time businesses move towards paying the market price of their emissions. Gradually removing the one-for-two measure is a pragmatic and practical way for them to manage the costs," Mrs Bennett said.
Removing the subsidy was expected to positively impact the operating balance by $356 million over the next four years, based on a New Zealand Unit price of $12.
Changes to the subsidy primarily affected ETS participants in the waste, transport, energy, electricity and industry sectors, and importers of goods containing synthetic greenhouse gases.
Businesses exposed to international trade competition, and whose emissions are a big part of their costs, would continue to receive an allocation of emissions units to protect their competitiveness.
The agriculture sector remains excluded from the ETS.
Youth climate change organisation Generation Zero was pleased the Government was removing the subsidy, but said the slow phase-out and the indefinite extension of the $25 per tonne price cap was "a big let down".
"We had hoped for the 2-for-1 subsidy to be removed immediately and a plan to raise or remove the price cap, as we argued for in our submission on the ETS review," said policy spokesperson, Paul Young.
In 2011, the ETS Review Panel advised the Government to phase out the two-for-one subsidy by 2015 and raise the price cap each year to a level of $50 per tonne by 2017.
"The ETS changes announced by Minister Bennett today are weaker than what the Government's own review panel advised it to do five years ago," Mr Young said.
Modelling produced for the Government by NZIER found that keeping the price cap at $25 per tonne could increase New Zealand's net emissions by over 11 per cent (8 million tonnes) in 2020 compared with a scenario where the price rises to $50 per tonne.
"By keeping the carbon price down, the Government will be missing out on opportunities to reduce our emissions and making it harder to meet our 2030 target," he said.
New fund for waterways
Meanwhile, Environment Minister Dr Nick Smith has announced a new $100 million contestable fund to be spread over the next 10 years to support initiatives to clean up the country's fresh waterways.
The new "Freshwater Improvement Fund" was part of a broader package of measures to strengthen new national standards, introduce new stock exclusion rules, improve Maori participation and introduce new requirements for minimising nutrient losses and efficient water use.
"This fund will help communities achieve their desired water quality and quantity limits faster," Dr Smith said.
"Recognising the importance of private investment, priority will be given to projects that include funding from business or philanthropic funds.
"By encouraging this funding now we can achieve significant results for New Zealand and minimise the long-term clean-up costs."
The subsidy will be phased out over three years to give businesses time to plan and adjust, to support a more stable market.
The new fund was in addition to the $354 million already committed to specific freshwater clean-up projects since 2000, including at Lake Taupo, the Waikato and Waipa rivers, Rotorua lakes, the Manawatu River, Lake Te Waihora (Ellesmere), Waituna Lagoon and Lake Brunner.
More cash for tackling invasive trees
In today's Budget was also $16 million of new operating funding over four years to tackle wilding conifers.
The invasive trees are considered a major threat to ecosystems, and once established spread fast and were hard to eradicate.
"Wilding conifers compete with native flora and fauna for sunlight and water, and can severely alter natural landscapes," Minister for Primary Industries Nathan Guy said.
"This funding will help protect productive land, the tourism and forestry sectors, and sensitive water catchments from the impacts of this tree pest."
The new funding would be used to control wilding conifers in the highest priority areas, which were likely to include Molesworth Station, the headwaters of the Southern Alps lakes and rivers, the Wakatipu Basin, and the North Island's central plateau.
It would also support greater collaboration between the Crown, regional councils, community groups, land owners, and foresters.
"Wildings are the most significant weed problem New Zealand faces -- and the number one target of the War on Weeds," Conservation Minister Maggie Barry said.
"Wilding conifers currently cover more than 1.8 million hectares of land, and are spreading at an estimated rate of 5 per cent a year."
The new funding provided in Budget 2016 built on the estimated $11 million spent on the management of wilding conifers each year.
New conservation funding also included the already announced $21 million for The Battle for Our Birds programme -- New Zealand's largest ever pest control operation to fight an expected pest population boom caused by a heavy beech seeding.
Environment and conservation highlights:
• The Emissions Trading Scheme one-for-two subsidy introduced during the global financial crisis will be phased out.
• A $100 million Freshwater Improvement Fund will help clean up New Zealand's rivers, lakes and aquifers over the next decade.
• An additional $16 million is provided to tackle wilding pines in the highest priority areas.
• The Battle for Our Birds programme -- New Zealand's largest pest control operation -- receives $21 million this year to fight an expected pest population boom caused by a heavy beech seeding.
Conservation cuts slammed
Environmental groups have claimed the Budget will mean cuts of tens of millions of dollars to conservation funding, however a spokesperson for Conservation Minister Maggie Barry has clarified there had been no cuts.
The Department of Conservation finance team expected the final budget for the Vote for 2016/17 to be substantially higher than Budget night once budget transfers were confirmed during the year, the spokesperson said.
