Reforming the Safeguard Mechanism

Government has announced that it will review the operation of the Safeguard Mechanism with a view to reducing greenhouse gas emissions from Australia’s highest emitting facilities. 

Comments on the discussion paper are due by 20 September 2022, with key issues in the discussion paper being calculation of baselines, the use of crediting mechanisms.

Snapshot

• The Safeguard Mechanism Reforms: Consultation Paper has been released for public consultation until 20 September 2022.  A more detailed framework will be released later this year for further consultation.
• The Safeguard Mechanism was established in 2016, and applies to facilities that emit more than 100,000 tonnes of Scope 1 CO2-e (which translates to about 215 facilities).  The Safeguard Mechanism was designed to limit the emissions from those facilities.
• The review of the Safeguard Mechanism is closely related to the Climate Change Bills that have recently passed the House of Representatives, and the review of the integrity of Australian Carbon Credit Units, which is due to report by the end of 2022.  The review will also be relevant to any future amendments to the Environment Protection and Biodiversity Conservation Act 1999, including the response to calls for a greenhouse gas trigger to be included in that Act.
• Government has indicated the safeguard changes are due to be legislated by 31 March 2023, and will take effect from 1 July 2023.  The amendments are designed to force emissions reductions by the approximately 215 facilities covered by the Safeguard Mechanism by 3.5-6% a year to 2030, to achieve an aggregate abatement of about 170 million tonnes of CO2-e to 2030.  Safeguard Mechanism facilities contribute about 28% of Australia’s national emissions each year.

Safeguard Mechanism Reforms: Consultation Paper

Under the discussion paper, the threshold emissions limit of 100,000 tonnes of Scope 1 CO2-e is to be retained, with the discussion paper focussed on how baselines are set, the introduction of safeguard mechanism credits (SMCs), how trade exposed and emissions intensive industries should be managed and the use of carbon offsets.

Baselines and headroom

The discussion paper starts with the premise that baselines must fall in order for the Safeguard Mechanism to contribute its share to Australia achieving its 2030 greenhouse gas emissions reduction targets, and that baselines have a key role to play in determine emissions reductions.

The discussion paper considers whether baselines should be set as a fixed (absolute) or a production adjusted (intensity) framework, with the discussion paper indicating that stakeholders preferred a production adjusted framework to encourage improvements to the emissions-intensity of production (rather than reducing production).

The discussion paper discusses options for removing “headroom” that is a result of legacy baseline setting arrangements.  The intention is to remove headroom in order to ensure abatement occurs, and to allow crediting and trading to commence.

Options for setting baselines for new facilities (but not expansion of production at existing facilities) are also canvassed in the discussion paper.

Trade-exposed and emissions intensive industries

The discussion paper invites feedback both on how trade exposed and emissions intensive industries should be defined, and what assistance measures should be provided to those industries.  Assistance measures considered include:

• funding for low emissions technology (in preference to providing less stringent baseline decline rates). This may include grants from the Powering the Regions Fund and National Reconstruction Fund, as well as existing funding such as ARENA, CEFC and NAIF;
• a mechanism whereby Government would reserve a percentage of all SMCs credited under the scheme, with Government then directly providing the SMCs to trade-exposed and emissions intensive facilities; and
• differentiated baseline decline rates, although the discussion paper raises concerns about the effectiveness and fairness of such an approach.

Safeguard Mechanism Credits

The discussion paper proposes to allow a trading scheme within the Safeguard Mechanism to allow participants who do not reach their baselines to trade the “credits” that are achieved by reduced emissions.  The integrity of the SMCs will be closely tied to the process by which baselines are set.  The SMCs are not considered “offsets” and are separate to ACCUs, but provide an incentive for participants to reduce their own emissions, and an option for particularly exposed industries to reduce overall emissions.

Use of offsets

The discussion paper proposes that the use of Australian Carbon Credit Units (ACCUs) continue for the Safeguard Mechanism.  The current review being undertaken into the integrity of ACCUs is recognised in the discussion paper, and will be further considered following the conclusion of that review, particularly with respect to the changes to the ERF contract arrangements that allowed for exit fees to be paid rather than deliver ACCUs to government.  Deemed surrender provisions for ERF contracts at safeguard facilities will be reconsidered which is considered appropriate given an equivalent financial incentive would be provided with declining baselines.

International offsets are not proposed to be a part of the initial changes to the Safeguard Mechanism, with concerns for the incentives to change the domestic economy, the integrity of international offsets and ensuring that only units that contribute to Paris Agreement targets could be included.  It is recognised that there may be benefit in amending the Safeguard legislation to allow for the possibility of future use of relevant and high integrity international units for compliance purposes.

Key takeaways

Key issues for the redesign of the Safeguard Mechanism will be the setting of baselines, the use of credits and offsets and the policy approach to be taken to trade exposed and emissions intensive industries.

The consultation timeframe for the discussion paper is acknowledged to be “tight” with key policy formulations around baselines and incentives to reduce emissions being difficult issues that will need to be resolved in a short space of time.

Facilities under the Safeguard Mechanism will be under pressure to accept reduced baselines, including over time, with industries that will struggle to meet those reduced baselines having to rely on credits and offsets.  For industries with capacity to reduce emissions to well below the baseline, mechanisms such as the SMC potentially create a positive incentive to benefit from decarbonization strategies.

By Kathryn Pacey, Partner, Peter Briggs, Partner, Heidi Asten, Partner, Melanie Debenham, Partner, Nick Baker, Partner, Neena Aynsley, Partner, Timothy Stutt, Partner, Mark Smyth, Partner, and Jay Leary, Partner.