For nearly 40 years, black coal has been mined at Myuna, an underground operation a short drive south-west of Newcastle. Each year about 2 million tonnes is dug up, dropped on to an overland conveyor and sent to the Eraring power plant next door to be burned.

Although the New South Wales mine isn’t new, its operation under owner Centennial Coal has changed over the past couple of years, leading to a dramatic increase in greenhouse gas escaping its coal seams.

Emissions at the mine in 2017-18 were 65% above the government-agreed limit for the site. New data published just before Christmas show Centennial was also in breach last financial year, with carbon pollution at Myuna 47% above its limit.

In an era in which political battles are fought over how to meet climate targets, an emissions rise of this proportion – nearly half a million tonnes at one site over just a couple of years – is noteworthy. Along with similar examples at other industrial sites, including those owned by BHP, Chevron and a range of other fossil-fuel companies, it helps explain why official data says the Morrison government will fail to cut emissions to 5% below 2000 levels in 2020 as it claims.

It was not supposed to be this way. Among the issues on the agenda for the Morrison government this year as it considers where to head on climate policy is whether this trend in industrial emissions can continue.

How did we get here?

Back in 2015 when Tony Abbott was still prime minister, the Coalition released details of what it called a “safeguard mechanism”, a policy it said would deal with the problem of rising pollution from big industry. Greg Hunt, the environment minister who designed the policy, told ABC Radio National it would put “a limit on the emissions that individual firms can have”.

Specifically, it would set a limit – a baseline – for about 140 industrial facilities that emitted more than 100,000 tonnes each year. While the government chose not to emphasise the point, companies that breached their baseline at a particular site without federal approval would have to pay by buying carbon credits created through cuts elsewhere.

As Hunt described it, the safeguard mechanism was half the Coalition’s direct action climate policy (a name long since dropped). The first half of direct action was the emissions reduction fund, a $2.5bn incentive scheme under which the government would pay for pollution cuts, mostly from landowners who signed up to plant or look after native vegetation. The second half would “safeguard” those cuts – ensure they were not just wiped out – by preventing “significant increases in emissions above business-as-usual levels” elsewhere.

In practice, the scheme has run quite differently.

In the case of Centennial Coal, the Australian Conservation Foundation found it could reasonably have been expected to pay more than $6m to offset its extra emissions, based on the price the government pays for carbon credits. Instead it followed rules set up by the government that allowed it to retrospectively apply for a change to its baseline arrangements.

Most people paying attention to the scheme have been left to wonder: why have a policy to limit emissions that routinely allows companies to ignore their limit?

Suzanne Harter, a climate campaigner with the ACF, is among those who says it makes no sense. “If the government keeps increasing the pollution baselines, there is no point to the safeguard mechanism,” she says.

Tennant Reed, who runs climate, energy and environment policy for the Australian Industry Group, which represents the interests of more than 60,000 businesses, agrees. “If it never has to do something to actually reduce emissions it will have been a waste of time for everyone involved,” he says.

The numbers tell a pretty basic story. In the first two years of the scheme, analysts at energy and carbon consultancy RepuTex found the regulator had approved changes that allowed big industry to emit up to 32% more without penalty than when the safeguard was introduced.

Companies used only some of this additional headroom. Actual emissions under the scheme rose 12% over those two years.

Based on this, RepuTex found the safeguard was likely to lead to an extra 280m tonnes of pollution over the next decade, more than six months’ worth of Australia’s total carbon pollution. It would more than eclipse the 193m tonnes of cuts contracted under the emissions reduction fund.

RepuTex’s executive director, Hugh Grossman, said it meant taxpayers’ dollars spent on storing carbon dioxide in vegetation was “effectively money going down the drain”.

The rise in emissions under the safeguard mechanism reflects a longer-term trend. In a separate report, RepuTex found industrial emissions had risen 60% since 2005, the year against which the government has pledged at least a 26% cut by 2030.

The surge has been driven by the creation of a $50bn liquefied natural gas export industry across northern Australia and increases in direct combustion at mining sites, venting of fugitive emissions in fossil fuel extraction and pollution from metals, chemicals and minerals processing.

The rise in industrial emissions is the primary reason national emissions have stubbornly refused to fall while there has been a historic drop in pollution from power plants and a significant dip from farming due to the drought.

That could start to change this year as more of the recent record investment in solar and wind power, spurred by the now-reached national renewable energy target, is comes online. But analysts say Australia cannot hope to meet its climate targets while major industry is left unchecked. The industrial sector is expected to pass power generation to become the country’s most polluting sector within two or three years.

A key question for the government is whether it intends to address this as it considers new climate policies this year. One option likely to be before it will be a recommendation in a review of its climate policies led by the businessman Grant King, that quietly submitted its report earlier this month. In a discussion paper sent to some interest groups late last year, King’s panel floated changing the safeguard mechanism so companies that emit less than their baseline would be rewarded with carbon credits they could sell to the government or business.

The scheme was clearly was designed with that in mind. In 2015 Hunt said it would be used to cut emissions by 200m tonnes over the decade to 2030. It implied limits would be enforced and tightened so companies had to either reduce pollution over time or trade in carbon credits to offset it. In other words, a return to a form of carbon pricing.

That idea was dropped before the last election - the safeguard mechanism was not included among policies that would be used to meet Australia’s commitments under the Paris climate agreement. The current minister for emissions reduction, Angus Taylor, says the mechanism is “designed to support growth while encouraging businesses to lower their emissions intensity”.

The shift proposed by King in last year’s discussion paper would come with challenges – for example, working out how to guarantee that businesses were rewarded for changes in practice that cut pollution, and not for things over which they had no control, such as a downturn in the economy.

It would also require the government to commit to forcing industry to reduce pollution over time, a shift seemingly at odds with Morrison’s “technology over taxation” mantra.

But the shift could have the support of the Australian Industry Group, which backs turning the safeguard mechanism into a meaningful emissions policy as long as it includes protection for export industries so they are not disadvantaged against overseas competitors.

Reed says if there is an intention to reduce industrial emissions, ratcheting down baselines under the safeguard mechanism is an obvious option. “That would be a substantial step, and a substantial change,” he says. “The safeguard mechanism could be part of how we get there, but right now it’s not doing much other than creating paperwork for industry and the government.”

The government has already begun to make changes to the safeguard that would allow that sort of shift. When the scheme began, emissions baselines were initially based on either a facility’s historic emissions or an independent forecast of future pollution.

Under changes being introduced this year, all facilities will be moved to limits based not on their total emissions, but on emissions intensity – how much they emit each unit of production. In one sense this just locks in what is already happening in cases such as the Myuna colliery – if companies lift production they will be able to put out more carbon pollution without risking a penalty.

But emissions intensity baselines could also be more obviously reduced over time to drive a shift to cleaner practice without putting pressure on production levels. This is part of what Labor proposed to do – without releasing much detail – when it said before last year’s election it would cut emissions under the safeguard by 45% by 2030.

Erwin Jackson, policy director with the Investor Group on Climate Change, believes the government can delay action on industrial emissions for only so long. The longer it waits, the greater the risk of a more “dramatic and draconian” shift as the pressure to act – from investors, from other countries, from the planet – escalates.

He says the Australian climate debate remains stuck on the idea that pumping emissions into the atmosphere does not have a cost that will be borne eventually, one way or the other. “To address climate change you have to reduce emissions, and someone has to pay for that. Investors are already pricing this risk,” he says. “The longer we delay action the higher the cost will be.”