The ERF sits at the centre of the Direct Action Plan, which outlines how the government will meet its five percent reduction target. It will cost a little over $1.5b over the next four years and will start operating in July.

According to latest estimates of the country's future greenhouse gas, reflected in Australia's Abatement Task and 2013 Emissions Projections, Australia faces a cumulative emissions reduction task of around 431 MtCO2-e from 2014 to 2020.

To meet this objective, the government says it will implement a "practical policy to achieve emissions", one that which will "deliver benefits to Australian landholders and businesses to strengthen the economy."

However, it remains to be seen what penalty, if any, would apply to businesses if their emissions increase. What the paper does say is that guidelines will need to be developed to "safeguard emissions reductions" although there is still some uncertainty as to what these safeguards will be.

Instead, the paper focuses on the principles that will guide the decisions on the design of the ERF:

1. Lowest cost emissions reductions: The ERF will identify and purchase emissions reductions at the lowest cost.

2. Genuine emissions reductions: The ERF will purchase emissions reductions that make a real and additional contribution to reducing Australia's greenhouse gas emissions.

3. Streamlined administration: The ERF will make it easy for businesses to participate.

Based on these principles, the government proposes that the ERF should have three "simple elements" - crediting emissions reductions, purchasing emissions reductions and safeguarding emissions reductions.

Crediting emissions reductions

A wide range of emissions reductions opportunities has been identified, from capturing landfill gas to upgrading appliances and reducing waste coalmine gas.

Different estimation methods will be required to calculate emissions reductions from different activities and reductions identified using these methods will be eligible for sale into the ERF.

The government says that these methods will be developed in consultation with business and technical experts. In the early stages of the ERF however, the government will work with industry to develop methods that have the greatest prospect of delivering large volumes of low-cost emissions reductions.

Methodologies for a range of land sector activities that have already been developed under the Carbon Farming Initiative will continue to apply under the ERF.

To enable a wide range of businesses to participate in the ERF, a menu of emissions reduction methods will be developed:

• Specific emissions reduction activities: activity methods will be developed for specific emissions reduction activities, such as landfill gas capture, energy efficiency and land sector projects. For energy efficiency activities, it will be important that the ERF complements rather than duplicates existing state schemes that promote energy efficiency.

• Large facilities including major industrial emitters: facility-wide methods will be developed using existing data under the National Greenhouse and Energy Reporting Scheme to measure emissions reductions.

In order to ensure that small-scale actions are implemented in a cost-effective manner, the government will encourage project aggregation and facilitate project development for small businesses.

The government is now seeking views on how best to ensure that emissions reductions are genuine, develop methods for calculating emissions reductions from priority activities and how to facilitate the aggregation of emissions reductions across projects and activities.

Purchasing emissions reductions

The government proposes that the Clean Energy Regulator operate a procurement process to purchase emissions reductions at the lowest available cost, an approach akin to a reverse auction.

Simple tenders and other reverse auction approaches create competitive pressures, which would enable the lowest-cost emissions reductions to be identified and purchased by the ERF.

As a start, a simple process would be adopted to make it as easy as possible for businesses to participate. Businesses could submit bids at any time and, at regular intervals, the Clean Energy Regulator could run tender rounds to select eligible offers on a lowest-cost priority basis up to a benchmark price.

This benchmark would be commercial-in-confidence to encourage businesses to submit their lowest price. Once the supply of emissions reductions is well established, the Clean Energy Regulator would move to a more formal auction process. Future auctions could take place several times a year, depending on the supply of projects and in the ERF's initial stages, the regulator could run relatively frequent tender rounds to bring forward the delivery of emissions reductions.

The government is seeking views on how to facilitate early participation in the ERF and operate an efficient auction process to secure lowest-cost emissions reductions.

The government will also enter into forward contracts with successful bidders to guarantee payment for the future delivery of emissions reductions. Businesses will be able to use forward contracts to secure project finance where necessary, before projects are implemented.

Safeguarding emissions reductions

As the ERF is designed to allow businesses to continue ordinary operations without penalty, the paper highlights that it is essential to have a framework that sets out clear guidelines for businesses to operate within.

Businesses will be encouraged to decrease emissions below their historical business-as-usual levels through the ERF. In addition, a mechanism will be developed in conjunction with businesses to provide incentives not to exceed historical emissions baselines.

This element, according to the government, will safeguard the value of funds expended under the ERF and provide businesses with a stable and predictable policy landscape in which to make new investments.

Views are sought on the coverage of the mechanism, how baselines could most easily be set to effectively limit increases in historical business-as-usual emissions, the treatment of new entrants and significant expansions and compliance options in the event that baselines are exceeded.

The paper also highlights the government's intention to build on the Carbon Farming Initiative, which will continue to operate while the ERF is implemented.

However, it said that it will consult with participants to improve the administration of the CFI and is now working on viable options to streamline the CFI and encourage the uptake of land sector activities.

Submissions close on Friday, 21 February. To view the paper and make a submission, click here.