Energy Minister Chris Bowen launched the highly anticipated Safeguard Mechanism review on Friday, revealing it would probe whether its current settings would help to achieve Australia's 2030 climate target and what should change for the coming decade.
The announcement comes after the federal government announced plans to reduce climate emissions by 62 to 70 per cent by 2035, and after widespread criticism from environmental groups for the policy's use of carbon offsets.
The Safeguard Mechanism applies to more than 200 facilities that emit more than 100,000 tonnes of greenhouse gases a year, including coal mines, liquefied natural gas plants, steelworks, aluminium refineries, and large manufacturers.
It places an annual emissions cap on each facility that reduces over time, and can be met by carbon cuts or credits.
The policy review will investigate whether limits are set correctly to meet Australia's 2030 emissions target of a 43 per cent reduction on 2005 levels, and determine the settings to help meet the 2035 goal.
The review will not consider significant reforms to the mechanism but rather examine how the existing framework can continue to deliver effective emissions outcomes beyond 2030.
Changes to carbon offsets and credits allowed under the scheme should be considered in the review, Climate Council senior advisor Ben McLeod said, to ensure large polluters made a genuine effort to cut emissions.
"What we've seen to date is that it hasn't cut climate pollution very much from the facilities it covers and is essentially an offsetting scheme," he told AAP.
"To get on track for the 2035 target, we'll need to see some changes to those offset rules and we'll also need to update the overall rules for the Safeguard Mechanism."
Australia's electricity and agricultural sectors had made significant efforts to cut pollution, Mr McLeod said, and the mechanism should ensure other markets pulled their weight.
"When we look around for our next best opportunity to cut climate pollution, it's really in the resources sector," he said.
"When we look at coal, gas and iron ore mining corporations, they represent a significant share of Australia's pollution but they also have great options to cut it."
Consultation on the Safeguard Mechanism Review will remain open until September 18, with a report due in early 2027.
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