Australians have paid about $2m from the Morrison government’s emissions reduction fund, now rebadged as a “climate solutions” policy, to mining giant Rio Tinto for a diesel-fired power station at a mine in Arnhem Land.

The multinational company qualified for climate funding to help pay for the fossil fuel plant at its Gove Peninsula bauxite mine despite the generator being commissioned before the fund opened.

It is one of several fossil fuel developments by large companies registered with the fund, which the then prime minister Tony Abbott introduced to pay farmers and businesses to cut greenhouse gases below what they otherwise would have been.

Environmentalists and academics are calling for the scheme to be scrapped or narrowed so it does not support fossil fuel projects and includes a tougher test of whether developments would have gone ahead without public money.

National emissions have risen each year since the fund was introduced with an initial $2.55bn four years ago. The prime minister, Scott Morrison, announced on Monday the fund would be renamed and receive an extra $2bn over a decade, or $200m a year.

Oil to diesel

Rio Tinto has received carbon credits and related payments for a 24MW diesel power station built in 2014 after it closed an alumina refinery and heavy fuel oil generator.

A 180MW heavy fuel oil station had provided electricity and stream for the refinery, mine and the town of Nhulunbuy and nearby Indigenous communities. The fuel was expensive and contributed to the refinery becoming unviable. Rio Tinto considered replacing it with gas but could not reach an agreement with the Northern Territory government on a supply deal.

In December 2014, the company announced it had installed the smaller diesel plant, saying it was “better suited to the needs of our operations and the community”. The plant was registered with the emissions reduction fund 10 months after starting operation and has since sold 188,221 carbon credits to the government through the fund, estimated to be worth about $2m.

Projects that receive backing from the fund are required to be new. Asked why Rio Tinto had been allowed to register a diesel plant that was already operating, the Clean Energy Regulator, which administers the fund, said the company was required only to give a “notice of intent” before the project started.

A Rio Tinto spokesman said it did this in August 2014, more than a year before its registration under the fund was formalised and became public. He said eligibility for carbon credits informed the decision to build the plant, which had resulted in a reduction in emissions of about 215,000 tonnes.

Paul Burke, an economist at the Australian National University’s Crawford School of Public Policy, said it was clear from when the emissions reduction fund was introduced that it could lead to “anyway projects” – developments that would have existed regardless – getting public money.

He said the fund was better suited to a niche role paying for emissions cuts from activities that could not easily covered by other policies.

“This type of subsidy scheme is much more useful for projects such as savannah burning,” he said. “We have much smarter policies available for the electricity sector and large industrial projects.”

In the case of Rio Tinto, he said: “A carbon price would have fully given them the incentive to do this project if they needed an additional nudge. It would have been a smarter approach.”

Cash from the fund is distributed through reverse auctions, with the cheapest cuts proposed winning contracts. Across eight auctions, $476m has been paid and another $1.8bn contracted, with $226m left unspent.

A Guardian Australia investigation last year found it was at best often unclear if the fund was offering value for money. Some methodologies paid for cuts that would have happened anyway. Others have had any cuts more than wiped out by increases in pollution allowed elsewhere.

More recently, it revealed Vales Point coal-fired power plant had registered a proposal to upgrade some turbines and South African gold miner Gold Fields is receiving climate funding for a gas-fired power plant it says it would have built anyway.

Asked on Monday whether climate funding should help miners pay for gas plants they would have built anyway, the environment minister, Melissa Price, told ABC radio that most of the money had gone to land projects.

She said the fund was a good environmental and economic policy. It was part of a $3.5bn suite of climate measures announced by the prime minister, including support for pumped hydro storage, a second Bass Strait electricity cable and promised energy efficiency and electric vehicle programs.

Double counting

Tim Baxter, an associate with the Australian-German Climate and Energy College, said a further issue with the payments to Rio Tinto is that the site was also covered by the safeguard mechanism, which is meant to ensure industrial facilities do not increase their pollution above business-as-usual levels.

Major emitters that breach an agreed baseline are supposed to buy carbon credits to offset the increase. But the mechanism has been criticised as lax for allowing companies to nominate their baselines.

Baxter said in the case of companies both covered by the safeguard mechanism and registered under the emissions reduction fund, taxpayers ended up paying polluters to make cuts they were supposed to pay for themselves to meet their baselines. Rio Tinto’s Gove operation fell into this category.

“In this situation, the fund is no longer delivering actual carbon reductions,” he said. “It’s literally paying people to do what they already had to do.”