At some point in June, the Australian government will announce it has spent up to $2.3bn over three years on a scheme that the prime minister believes is a reckless waste of public money.

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That is not how it will be expressed. If the past is a guide, the government is likely to quietly issue an understated press release saying the latest auction of the emissions reduction fund – the scheme better known as Direct Action, which the former environment minister Greg Hunt described as the centrepiece of Australia’s efforts to tackle climate change – has been a success.

However, the specifics of how the money is to be spent will be all but impenetrable to most people.

First, a recap: Hunt hastily conceived Direct Action over the summer of 2009-10 after Tony Abbott pipped Malcolm Turnbull by a vote in a ballot for the Liberal leadership, having run on a platform of quasi-climate scepticism and withdrawing Coalition support for requiring big polluters to pay for the carbon dioxide they emitted. With Kevin Rudd a popular first-term leader, Abbott becoming prime minister seemed a remote possibility. But he proved a brutally effective opposition leader, Labor imploded and the 2013 election was a blue-tied landslide. Hunt set about implementing a $2.55bn policy that, even within the Coalition, many thought unlikely to ever be legislated.

It would have been cheaper if the government negotiated to buy the land rather than pay landowners to protect it.

The emissions reduction fund pays farmers and businesses to cut carbon dioxide emissions below what they would have otherwise been. It does this through a reverse auction – people nominate how cheaply they believe they can reduce emissions and bureaucrats choose the cheapest bids. The government buys carbon credits from the successful projects once emissions cuts are verified.

According to the scheme’s architect, it is great value for money. In the run up to the landmark Paris climate conference in 2015, Hunt said early auction results were “stunning”. He looked forward to telling the United Nations meeting about how Australia had built “one of the most effective systems in the world for significantly reducing emissions” that would meet our recently announced 2030 target, a cut of at least 26% cut below 2005 levels.

Turnbull described it another way. While on the backbench, he observed that Direct Action would involve billions of taxpayers’ dollars being spent paying farmers to create offsets so industry could freely pollute, a plan he described as “a recipe for fiscal recklessness on a grand scale”. He noted that, from Abbott and Hunt’s perspective, the policy at least had the virtue that it could be easily scrapped if climate change proved not real, or if the rest of the world was doing nothing about it.

Today, the evidence of the impact of climate change continues to mount, the world has made significant, though inadequate, commitments to address the problem, and the emissions reduction fund rolls on. It has now been Turnbull government policy longer than it was Abbott government policy.

The Clean Energy Regulator, which runs the fund for the government, has signed contracts to buy credits equivalent to 191.7m tonnes of carbon dioxide over the next decade or so – about 3% of what Australia is expected to emit in that time. About 30.5m have been acquitted so far.

But national emissions, which fell between 2012 and 2014 under the carbon price scheme introduced by Labor and the Greens and abolished by the Coalition, are tracking upwards year-on-year. A thinktank analysis late last year found Australia was the only wealthy country where emissions from energy combustion were at a record high.

Though it continues, the government’s enthusiasm for its self-described main climate policy has visibly waned since Turnbull returned to the leadership in 2015. The “Direct Action” label has disappeared from the government’s lexicon. Frydenberg does not spruik the emissions reduction fund’s wares with Hunt’s brio, and its notional funding has been slashed.

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In the dying months of Abbott’s prime ministership, he and Hunt promised it would be topped up with $200m a year between 2018 and 2030, lifting public spending on offsets to nearly $5bn. But there was nothing for it over the next four years in the recent budget.

While political and media attention has fallen away, projects being bankrolled by the emissions reduction fund may become increasingly important in the years ahead assuming the government is successful in negotiating into life its plan for the electricity sector – the national energy guarantee, or Neg.

As proposed, it would allow electricity retailers to buy carbon offsets as an alternative to reducing emissions, potentially creating a larger secondary market beyond the government for farmers and businesses to sell the credits they generate. Big polluters covered by the other part of Direct Action – what the government calls the “safeguard mechanism”, which was promised to stop industrial emissions increasing emissions to wipe out the cuts the government is paying for – are already using the offsets in small amounts.

Two questions, then: what are taxpayers getting for their billions? And how robust are the projects that are counted as emissions cuts?

Plants, rubbish dumps and supermarket lights

About 80% of projects with contracts under the emissions reduction fund are in the rugby league states north of the Murray. The overwhelming majority of those are in a corridor of land between Cobar in western New South Wales and Quilpie in south-western Queensland and involve restoring or protecting plant life. Vegetation projects – regenerating degraded habitat, tree-planting and “avoided deforestation” schemes in which landowners are paid to not clear their land – are expected to deliver two-thirds of the cuts promised to date.

Using these projects to create offsets isn’t a new idea. Many existed under the Carbon Farming Initiative introduced under Labor in 2011. The notable difference between the parties is who pays for the credits. Under Labor, they would have been mostly sold to business. Under the Coalition, it is taxpayers who have been doing the buying.

The regeneration projects have broad support – few would argue that they do not perform valuable work or store carbon dioxide. University of Queensland research fellow Megan Evans found they can have not just environmental benefits, but be good for regional communities, bringing investment and jobs.

However, some critics have questioned what happens after the “permanence period” – either 100 or 25 years, depending on the contract, in which the land must not be cleared. As the law stands, bulldozers could come out as soon as the period is up. Equally, fire or drought could sweep through at any point and release what has been protected. Yet supporters believe that once a market is established, the rationale to use carbon farming to make marginal land profitable will continue.

Avoided deforestation projects, which have been signed up to deliver 26m tonnes and – based on the average $11.90 per tonne of carbon dioxide paid under the scheme – could receive more than $300m of public money, are more contentious. They rely on a counterfactual though – it is impossible to know if a landowner ever really intended to clear the land.

Tim Baxter, a legal academic with the Australian-German Climate and Energy College, doubts many with government contracts did. He says some landowners had permits to clear their land for more than eight years before registering with the fund. At the other end of the scale, one project received a permit to clear just 49 days before registering. “Both raise serious questions,” he says.

Thinktank the Green Institute looked at the cost per hectare and found that it would have been far cheaper in most cases if the government negotiated to buy the land rather than pay landowners to protect it.

Facebook Twitter Pinterest Academics believe landowners who received public money for avoided deforestation projects may not have intended to clear the land. Photograph: Auscape/UIG via Getty Images

But early evidence from satellite data suggests avoided deforestation projects could be making a difference. In an analysis published by the government’s Climate Change Authority, academics Megan Evans and Andrew Macintosh found a steep decline in deforestation in western NSW since 2012, while other parts of the state showed little change in land-clearing rates. Evans did say, however, it was a desktop analysis only and it is not yet clear what has caused the decline.

About half of all outback vegetation abatement projects are being managed by the Sydney-based environmental markets company Green Collar. Its chief executive and co-founder, James Schultz, says the methods used to estimate the emissions reductions from avoided deforestation and habitat regeneration projects are based on conservative assessments of what drove changes in land-clearing rates in the past, such as commodity prices and input costs.

“The method doesn’t pretend to say ‘this is a precise estimate of exactly what happens with clearing over every square inch of every property’,” he says. “They’re all estimates. The important thing is the estimate is well within the margins of what we think happens in the real world. They’re all going to be under-estimates of what is delivered.”

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While it is necessarily imperfect, Schultz says Australia’s carbon offsets scheme is world-class and rigorously policed. “We do hundreds of audits a year and then the Clean Energy Regulator does spot audits across the top of that,” he says.

According to Baxter, a glaring omission from the rules is the impact of climate change itself. Australia’s scientific agencies suggest that, under the goals of the Paris conference, western NSW is projected to be on average 2.3 degrees warmer and have 8% less rainfall by 2100, a shift that would make it more akin to outback Queensland. “The difference between the closed woodlands of Bourke and the open woodlands of its future is a loss of approximately half its foliage cover – and a commensurate loss of carbon stored in the forests,” Baxter says. “The law doesn’t deal with that.”

An arguably larger question hangs over landfill sites that receive credits for capturing and combusting methane that leaks from decomposing rubbish. As revealed by Guardian Australia, an independent expert committee has recommended the government not extend contracts with sites that use the methane to generate electricity as they are what economist Paul Burke calls “anyway” projects – they would have existed without the fund and have a viable revenue stream from selling electricity and renewable energy certificates. This has been a long-standing criticism of landfill gas projects, dating back to their inclusion in earlier schemes. Critics say it means they are creating “junk” credits that do not reflect additional emissions cuts. Frydenberg is yet to say whether he will accept the committee’s advice.

Less employed emission reduction fund methods – including supermarkets installing new lighting systems and companies reducing pollution from vehicle fleets – have also drawn flak. Burke, from the Australian National University’s Crawford School of Public Policy, says the fund should never have been extended to include industrial emitters, energy or transport as there were more effective ways to cut emissions in those parts of the economy – some form of carbon price, for example. “I don’t think it’s a good idea for the Australian public to be paying for Coles and Woolies to change their lights,” he says.

As Turnbull has pointed out, in Australia the offsets scheme is the policy. And it is barely making a dent.

Added up, it is difficult to know what taxpayers are getting for their investment. There has been surprisingly little academic research into what it is delivering. Some insiders privately say the Clean Energy Regulator does not do enough to ensure the projects they sign contracts with will be able to deliver, pointing particularly to the experimental techniques involved in storing carbon in soil. Even supporters believe as designed it is unlikely to deliver the cuts the government has promised.



What is clear is that there is little support inside and outside government for using taxpayers’ money to offset a fraction of Australia’s growing emissions. An offset scheme is generally used in conjunction with other policies to help make cuts as cheap as possible for those having to make them.



As Turnbull has pointed out, in Australia the offsets scheme is the policy. And it is barely making a dent.

The most recent greenhouse gas data shows pollution is up in every sector of the economy that gets money from the emissions reduction fund. Deforestation is outstripping habitat restoration by a rate of five-to-one based on government data. Emissions from waste, agriculture and big industry all rose last year. Recent auctions indicate industry interest has slumped, in part because the government seems indifferent to the scheme.

James Schultz, whose company is perhaps the greatest beneficiary under the emissions reduction fund, is among those who wants the government to change tack. “I’m a strong advocate for a more pure market-based mechanism,” he says. “It is just not economically efficient to have the taxpayer pay for it rather than private industry.”

Where to from here?

The only sector in which there has been a fall in emissions is the one not covered by the emissions reduction fund – electricity, due to the closure of some coal-fired power. Electricity is also the area where there are obvious steps being taken to introduce a policy. The government wants to bring in a Neg with a target of a 26% cut by 2030 – a level scientists say is far short of what is needed in the power sector. Some analysis has suggested this goal would be reached regardless given the pace of the transition under way.

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The government is also moving to make changes to the safeguard mechanism that covers big industrial emitters. Currently, polluters are set an emissions limit – known as a baseline – at the highest level they emitted between 2009 and 2014. Though the scheme is supposed to stop emissions rising, companies can apply to get a higher baseline. This freedom to increase emissions without penalty did not stop 16 industrial sites breaching their baseline last year and having to hand in millions of dollars-worth of carbon credits, mostly bought from emissions reduction fund projects – a sign that Australia has an operational carbon market, albeit a small one.

The government is now considering making the safeguard mechanism less tied to historic emissions. A climate policy review released in December suggested emission limits could be loosened so they “increase with production, supporting business growth”. This has widely been interpreted as letting companies emit more without penalty.

Insiders say an effective reboot of the scheme could also be used to tighten the baselines for the majority of polluters that are now emitting below – sometimes well below – their historic highs. It would prevent these businesses being able to argue in future that they should be given free carbon credits for beating an outdated historic baseline and selling them to polluting companies that are breaching their limit.

Those familiar with the thinking say there may also be a shift in the way the baseline is expressed from total emissions to emissions intensity – that is, how much a company emits for each widget it makes. This would allow emissions at a site to “increase with production” as the government has promised without immediately blowing out the baseline.

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This could leave industrial emissions soaring unchecked. But it is also being interpreted as potentially laying the groundwork for a future emissions intensity scheme – the kind the government emphatically ruled out for the electricity sector amid uproar from the Coalition’s right wing.

The argument goes that a trading scheme – or two, if you count the Neg – could eventually provide a future government with a market for Australia’s carbon credits if it chose not to put more cash into the emissions reduction fund.

Of course, these sort of predictions have been made before and the government’s position is that it opposes any form of carbon price or trading. Its message is that it will not stand in industry’s way and wants to encourage new and expanding operators to invest in Australia without penalty.

But it is worth remembering that Hunt promised the safeguard mechanism would cut industrial emissions by 200m tonnes between 2020 and 2030 to help meet the Paris greenhouse target.

Guardian Australia last week asked Frydenberg if this remained the government’s position. He did not answer the question.