Australia is set to approve measures giving polluters financial incentives to reduce emissions blamed for climate change, in a move critics described as ineffective environmental policy.

The so-called "direct action" plan, which will see the government pay companies to increase energy efficiency, passed through the upper house Senate early today following a marathon debate.

The bill is expected to be approved next month by the lower House of Representatives where the conservative government of Prime Minister Tony Abbott has a majority.

It comes after Abbott axed a tax on greenhouse gas emissions introduced by the previous Labor administration, fulfilling a central pledge from last year's elections.

"We have delivered on our promise to implement an emissions reduction fund to ensure that there is real and practical action to achieve our emissions goals and targets without a carbon tax," Environment Minister Greg Hunt told reporters.

China and the United States are the biggest greenhouse gas polluters, according to a report by international scientists issued last month, but Australia's output is considered high per capita.

$2.25 billion Emissions Reduction Fund is part of the government's plan to meet its emissions reduction target of five percent below 2000 levels by 2020.

Under the plan, competitive auctions will be held, with the government entering into contracts to buy emissions reductions from successful bidders at the lowest cost, Hunt said.

He added that the emissions reductions would be "real and significant" as payments would only be made when the pollution cuts occur.

But the Labor opposition leader Bill Shorten criticised the scheme, describing it as "paying big polluters to keep polluting, which is terrible policy".

"In terms of 'Direct Action', Labor just doesn't believe it is the right way to go. We believe in trusting the marketplace to set the price signal," Shorten said today.

The policy has also been slammed by the Greens party, with leader Christine Milne saying there was "no modelling or any evidence to suggest it will do anything at all to reduce pollution".

The plan passed with the backing of the Palmer United Party. As part of the government's deal with mining magnate Clive Palmer's party, Hunt agreed to keep the Climate Change Authority and set up a three-stage, 18-month inquiry into an emissions trading scheme.