Farmers are set to be the early movers in the Federal Government's first Direct Action auction which begins on Wednesday, but analysts who have modelled the scheme say it simply will not work.

The Government's flagship Direct Action climate policy was designed to replace the carbon tax, which was removed in July last year.

At its core is the Emissions Reduction Fund (ERF), which is designed to do the heavy lifting in reducing Australia's emissions.

Comprised of $2.5 billion of taxpayers' money, the ERF will directly pay polluters not to pollute and, among other things, encourage farmers to develop carbon sinks.

Environment Minister Greg Hunt said he has confidence in the scheme and in Australia's ability to meet its targets via the policy.

Yet analysts who have modelled the Direct Action auctions cannot see the scheme working.

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Hugh Grossman, executive director of RepuTex, a company that provides energy and carbon market analysis, said it remained to be seen if Australia could meet its 2020 target of a 5 per cent reduction in emissions from 2000 levels.

"At this point we think the Emissions Reduction Fund falls short of achieving that emissions reduction target, and falls short by quite some way," he said.

"Best case scenario, we see the Emissions Reduction Fund purchasing about 50 per cent of Australia's abatement task, about 120 million tonnes.

"At worst, the ERF will purchase around 20 per cent."

Under the scheme, John Bull will nurture the growth of native trees, like Mulga and Bimblebox, for their lifetime. ( ABC News: Jake Sturmer )

How the auction works

Individuals or businesses will nominate how much carbon pollution they are willing to reduce, along with a price per tonne.

For example, a farmer might offer to reduce 5,000 tonnes of carbon at $20 per tonne.

The Government's Clean Energy Regulator (CER) will then set the ceiling price, per tonne of carbon, to govern the auction, which could be anywhere from $5 to $25.

From there, the Government will award contracts to the bidders who offer to reduce carbon at the cheapest price.

Around 200 projects have registered to participate in the first auction, most of them farmers and waste management operators who have some experience in a similar scheme introduced by the previous government, the Carbon Farming Initiative.

Participant John Bull purchased his property in Bourke in New South Wales seven years ago and since then has experienced the three driest and the three wettest years on record.

At its peak his grazing property ran up to 15,000 head of sheep and cattle but, as a result of drought conditions, today he has none.

Mr Bull said he viewed the Direct Action auction as an insurance policy against seasonal volatility.

"This project provides a form of income that's a stable form of income, it's not so dependent on the seasons so it's an add-on to your grazing enterprise," he said.

Under the scheme, Mr Bull will nurture the growth of native trees like mulga and bimblebox, which store carbon in their trunks, for their lifetime — usually about 100 years.

He will also agree to a series of land management restrictions which effectively prevent sheep grazing and reduce the amount of cattle across 13,000 hectares of his land.

"I'm sure there's going to be some sections of the community who look at this and say it's a bit of a joke but the way I view it is that we're presented with an opportunity," Mr Bull said.

"The Government's framed a market ... and all we're doing is taking advantage of a market that's being created.

"At the end of the day we're trying to make a quid off the place."

John Bull said that if the price was too low, the sacrifice of downsizing would not be worth it. ( ABC News: Jake Sturmer )

Price of carbon will determine success or failure

Critical to the success of the scheme is the price per tonne of carbon.

Mr Bull said that if the price was too low, the sacrifice of giving up sheep grazing and downsizing his cattle would not be worth it.

"If the price was too low, the sacrifice you make within those land restrictions would not make the project viable," he said.

Mr Grossman said a low price would also "discourage investment by industry to reduce emissions".

"If the price is high, we're going to see companies actively want to reduce their emissions and ... participate in the market, so that's ultimately a good thing."

But if the price is too high the Government would not be able to purchase the "lowest cost abatement", and the $2.5 billion allocated to the ERF auctions under Direct Action would fall short of the amount required to meet Australia's 2020 targets.

"Ultimately, how the regulator elects to set that price will effectively determine the success or failure of the scheme," Mr Grossman said.

Mr Grossman said although carbon farming initiatives had a considerable role to play, emissions from big industry would account for the vast majority of emission reductions down the track.

"We would expect around 80 per cent to come from industry by 2020 and that's where you get sizable emissions reductions at a lot cheaper prices," he said.

Industry will be watching this first auction closely before it decides if, and how, it will participate in the next one.

The rest of the world will also be keeping an eye on the auction, as expectations for the Climate Summit in Paris and Australia's post 2020 targets firm up.