The Coalition will consider a form of carbon pricing for power companies as part of a long-awaited review of Australia's climate policies, Environment and Energy Minister Josh Frydenberg has confirmed.
The review of the Coalition's direct action policy will focus on electricity price rises, energy security and cutting greenhouse gas emissions but will also look at whether to introduce an emissions intensity scheme for electricity generators – a type of carbon price different to the abolished scheme brought in by the Gillard Labor government.
The possible resurrection of carbon pricing is likely to trigger intense internal debate within the Coalition once the review gets under way next year, while environment groups and the federal opposition are likely to claim the terms of reference for the departmental review lack ambition, given the threat posed by climate change to the planet.
Those terms of reference, released by Mr Frydenberg on Monday, also include consideration of a long-term emissions reduction target for beyond 2030 and the use of international carbon permits created through emissions cuts overseas.
They confirm the existing renewable energy target of about 23.5 per cent by 2020, but do not canvass extending the target into the future.
State-based renewable energy targets - such as those in Victoria (40 per cent by 2025), Queensland (50 per cent by 2030) and South Australia (50 per cent by 2025) will also come under scrutiny.
Mr Frydenberg has regularly criticised the higher targets set by state Labor governments as "unrealistic".
The review comes in the wake of several analyses finding the Coalition's direct action policy - built around an emissions reduction fund that uses taxpayer funds to pay for cuts, mostly through tree-planting and better landfill management - is highly unlikely to be enough to meet Australia's current target of a 26 to 28 per cent emissions cut by 2030 compared with 2005 levels.
Direct action does not penalise polluters, and a study found many of the projects that won funding would have gone ahead without taxpayer backing. A "safeguard mechanism", promised to prevent companies from increasing emissions, has been criticised for being full of loopholes.
The review shapes as the sternest test yet for Mr Frydenberg, who will have to balance Coalition tensions between those National and Liberal MPs who question the science of global warming with those who want to see more ambitious targets.
The debate will come amid a likely dramatic shift in climate policy in the US following the election of Donald Trump, who has said he would abandon the Paris climate deal and has surrounded himself with climate sceptics.
More than 100 countries have ratified the Paris agreement. They include Australia, which confirmed ratification on the day after Mr Trump's election.
In a carefully-calibrated message designed to reassure those Coalition MPs concerned the Turnbull government could take on a green tinge, Mr Frydenberg said the review would balance a "trilemma" of concerns - "energy security, energy affordability and the transition to a lower emissions future".
"We must never forget that there are thousands of Australian families who struggle to meet power bills, and many blue collar workers who feel their jobs in energy intensive industries are now under threat," he said.
"We owe it to them to find the lowest cost way to meet our emissions reduction targets while at the same time ensuring the lights always stay on."
"Our policies to date are working. It is hoped this review will ensure that we remain on track for 2030."
Mr Frydenberg confirmed anemissions intensity scheme, which has been recommended by the Climate Change Authority, would be looked at on a sector-by-sector basis as part of the review.
Some experts have suggested the safeguard mechanism could be adapted into an emissions intensity scheme, which could put a hard limit on how much a plant can emit for every unit of electricity it generates.
Depending on the design, there would be no cost to generators that stayed within the limit, but those that emitted more than allowed would need to buy carbon permits - representing emissions cuts elsewhere - to offset the breach. Those that emitted less would receive permits that they could sell.
The limit would be reduced incrementally over time to make dirtier plants less commercial and encourage investment in cleaner power stations.
Labor indicated before the election it would support this sort of scheme. Experts believe it would be more likely to keep a lid on inevitable price rises than the defunct carbon price.
Several energy and business groups have called for the introduction of a bipartisan national scheme to allow industry to plan investment in the new generators Australia will need.
A discussion paper will be released in February and and the review will be completed next year.
Sign up for our newsletter to stay up to date.