Loy Yang coal-fired power station in the Latrobe Valley. Credit:Carla Gottgens Hunt emerged touting a scheme that has since been panned by many economists and environmentalists. Despite the doubters, Hunt is now preparing to implement it. Direct action has two main elements. The first is a funding pool - called the emissions reduction fund - to pay companies and farmers to reduce emissions. The projects will be selected by "reverse auction" where bidders sell proposed emissions reductions and the government buys the cheapest first, snapping up the next cheapest, and so on, until it meets its targets. Abbott has set aside $1.55 billion for the fund's first three years. Secondly, the government will set a baseline for each major polluter determined by their historical emissions rate. If a company exceeds this level it will face some kind of penalty.

To start fleshing out the plan, Hunt released a "green paper" just days before Christmas. But Tony Wood, energy program director at the Grattan Institute, says many questions about how direct action will work remain unanswered with less than six months to go before its scheduled launch on July 1. They include whether money set aside to buy emissions cuts will suffice to meet promised targets. National emissions including from deforestation rose 1.5 per cent in the year to June 2013 to 571.4 million tonnes, the government said last month. Fugitive emissions from the energy sector - mainly the fast growing coal and gas industries - jumped 11.4 per cent. Despite that, the government remains confident it can meet the ''cumulative abatement challenge" of 431 million tonnes by 2020. The task is less thanks to the use of 121 million tonnes of surplus carry-over emission rights from the first Kyoto commitment period (2008-12). Also unclear after the green paper's release is what will happen after 2020. The government is considering contracts for emission reductions that have a maximum of five years' duration, a period that is likely to be too short for most projects to secure required finance, groups including the Clean Energy Council say.

The government plans a review of the fund "towards the end of 2015" - or around the time of a scheduled global climate summit in Paris - to "provide certainty about the policy". Wood also points to another critical uncertainty - which is also suddenly looming as the main pressure point with business - the complexity of setting the industry baselines that underpin the whole policy. If clear limits are not set down, the government risks spending money to cut emissions only to see the savings lost as industry expands. But many early submissions from large companies have stressed the need to keep the baseline and penalty system "flexible". Mining giant Rio Tinto warned the system should not restrict "growth industries". The gas industry wants exemptions for new LNG projects for five years - the length of the current plan. Some suggest baselines are voluntary unless a company wants to sell emissions cuts to the government's fund.

Matthew Warren, chief executive of the Energy Supply Association of Australia, which represents big fossil-fuel power generators, told Fairfax Media that "The biggest challenge for the government will be the design and application of baselines. There doesn't appear to be any one method that works across different sectors, and different stages of the business cycle." In the green paper, the government is suggesting baselines will not come into effect until July 2015, while the purchasing of emission cuts would begin much sooner. Wood said the process of setting baselines will be complicated and unleash commercial jockeying. The nitty gritty will include whether baselines will be based on total emissions or by unit of output, or intensity. Will they be set on an industry, company or factory level, and what of new technologies? Then there is the question of how to penalise companies for breaching limits. A fine could be imposed, but Hunt says the government has no desire to collect revenue - which would also imply a carbon tax of sorts. The green paper says a transition period could be considered where penalties do not apply and companies are given time to invest in cutting emissions. Or they could "make good" by buying carbon permits to cover extra emissions, with some companies - such as Origin and Wesfarmers - saying these should be allowed to come from offshore as well as domestic sources.

The government steadfastly opposes permit imports. "Our priority is cleaning up our own backyard," said a spokesman for Hunt. But some remain confused if direct action even applies to them. Wyndham City Council, which claims to be Australia's third-fastest growing municipality on Melbourne's south-western fringe, is also home to one of the city's largest tips. Landfill emissions, primarily methane, are big enough to make Wyndham one of the nation's 350 liable entities under the carbon tax. On the one hand, changes to the National Greenhouse and Energy Reporting act accompanying the carbon tax repeal indicate Wyndham will no longer need to report its emissions. On the other, Hunt has said publicly that all entities liable under the carbon tax will have to establish an emissions baseline and keep reporting it. "Wyndham City is yet to establish whether Council would be still be required to report as part of the proposed Direct Action Plan and, if so, the exact nature of these reporting requirements," said Bill Forrest, acting chief executive for the city.

Labor and the Greens are preparing to exploit the confusion with a Senate inquiry into direct action taking submissions until January 20 before it starts public hearings. "The Senate inquiry will allow proper scrutiny of the Abbott government's sham direct action policy," said Tony Burke, Labor's acting spokesman for Climate Change. "This policy is riddled with holes." Before taking office, the Coalition hosted 200 meetings and roundtables to consult on direct action, and has held many since. The green paper fielded 290 submissions and comments are open on it until February 21. "Suddenly what was supposed to be a simple scheme … you are introducing an awful lot of complexity," Wood says. ''The problems are solvable, but it starts to get messy. And the solutions to the core challenges of direct action are still in the melting pot, or have been kicked down the road to 2015.''