Reforms proposed to Safeguard Mechanism framework released

Snapshot

On 10 January 2023 the Department of Climate Change, Energy, the Environment and Water (DCCEEW) released a position paper for consultation detailing proposed reforms to the Safeguard Mechanism. The reforms are directed at achieving Australia’s emissions reductions target of 43% below 2005 levels by 2030 and commitment to net zero emissions by 2050, and overall requires reductions of 4.9% per year for entities covered by the Safeguard Mechanism.

The proposed reforms to the Safeguard Mechanism framework has three key concepts:

• a progressive baseline reduction rate from 1 July 2023 to the end of 2030, which will transition to industry average benchmarks post-2030;
• new flexible compliance measures to provide emissions-intensive businesses with options to comply with the Safeguard Mechanism requirements; and
• tailored compliance options for Safeguard facilities determined to be ‘emissions-intensive, trade-exposed’ (EITE).

Consultation on the proposed reforms is open until 5:00PM AEDT 24 February 2023.

Proposed legislative amendments are expected to be finalised by April 2023 to commence on 1 July 2023.

The position paper follows a preliminary consultation paper released in August 2022 and an initial exposure draft of proposed amending legislation released in October 2022.

Background

The Safeguard Mechanism requires facilities with emissions above 100,000 tonnes of carbon dioxide equivalent annually to keep net emissions below a baseline emissions limit. Net emissions must not exceed the baseline either through undertaking emissions abatement initiatives or by purchasing carbon emissions units to manage excess emissions.

The Clean Energy Regulator administers the Safeguard Mechanism regime under the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015.

The Safeguard Mechanism currently applies to about 215 facilities over a range of sectors.

Summary of proposed reforms

The following reforms to the Safeguard Mechanism framework are proposed:

Baselines

• Progressive baseline reduction – the introduction of a hybrid baseline model with baselines to be reduced in the short term at an average baseline decline rate of 4.9% each year to 2030 for all Safeguard facilities (excluding EITE facilities – see further detail below). The site-specific baseline reduction rate method will transition to a standardised industry-average benchmarks post-2030.
• Production oriented baselines – baselines at Safeguard facilities will be determined using site-specific emissions intensity values based on actual production levels, to ensure baselines reflect changing productivity levels.
• New emitters subject to international best practice - new facility baselines will be determined based on international best practice emissions-intensity benchmarks (there are currently no further developments on how ‘international best practice’ will be identified or applied in an Australian context).

Flexible compliance arrangements

• Crediting and trading scheme – access to crediting and trading of Safeguard Mechanism Credits (SMCs) from 1 July 2023 whereby emitters under the Safeguard Mechanism can both:
  • automatically earn SMCs where emissions fall below the baseline to incentivise abatement initiatives
  • trade SMCs to offset emissions and reduce net emissions

Access to Australian Carbon Credit Units (ACCUs) to offset emissions will continue however facilities will no longer be able to register for ACCUs generation for new Safeguard Mechanism projects beyond existing crediting periods or government purchase contract terms.

• Banking and borrowing - broader access to banking and borrowing arrangements with unlimited banking of SMCs until 2030 (irrespective of generation date) and borrowing of up to 10% of baselines from the Federal Government to be permitted up to 2030 at a 10% interest rate from the year after borrowing commences.
• Emerging technologies - extension of monitoring periods to be multi-year (the proposal is currently for five year multi-year monitoring periods up to 2030) to support cost effective abatement technologies investment for facilities who evidence a long-term plan to reduce cumulative emissions within the multi-year period.
• Cost containment measures – The Federal Government will sell all Government-held ACCUs into the market at market $75/tonne for 2023/24, effectively creating a price ceiling to support market certainty. The price cap is to be indexed at the Consumer Price Index + 2% annually.

Tailored treatment of EITE facilities

• The categorisation of EITE facilities into two types of facilities:
  • Trade Exposed facilities: for emitters whose activities relate to a commodity with a trade share over 10% and
  • Trade Exposed Baseline Adjusted facilities: for Trade Exposed facilities facing an elevated risk of carbon leakage due to increased costs as a result of the Safeguard Mechanism reforms.
• All EITE facilities will receive a dedicated funding boost of $600M Safeguard Transformation Scheme from the Powering the Regions Fund to support decarbonisation activities.
• EITE facilities that are Trade Exposed Baseline Adjusted facilities can apply to the Clean Energy Regulator for a discounted baseline decline rate (not below the baseline decline rate floor of 2%).

Penalties

• The civil penalty to be updated to reflect both the number of days of exceedance of baseline and the quantity of excess emissions (currently the civil penalty is based on the number of days of exceedance only).
• The maximum civil penalty of 1 penalty unit per tonne of excess emissions per year (from 1 January 2023 one civil penalty unit is equivalent to $275.00).
• An infringement notice charge of one-third of the maximum civil penalty, to a maximum of 150,000 penalty units.

Landfills

• New landfill projects will not be eligible to generate SMCs from 2023-24 to 2025-26 to ensure no ‘double-dipping’ overlap with Emissions Reduction Fund (ERF) projects that generate ACCUs. Landfills currently covered by the Safeguard Mechanism will continue as ERF projects to generate and trade ACCUs until the end of their current crediting period.

Future consultation topics

While not proposed as part of the initial reforms, the Government has flagged the potential for further consultation on the ability for the carbon offsets scheme in Australia to recognise international offsets to contribute to Australia’s international climate targets and be included on the Australian National Registry of Emissions Units.

Government has also committed to undertaking a review in 2023 to explore policy options to prevent carbon leakage that may be included as part of the Safeguard Mechanism reforms.

Further information

The position paper and proposed legislative amendments can be viewed here: https://consult.dcceew.gov.au/safeguard-mechanism-reform-consult-on-design.

Feedback is also sought on proposed amendments to associated subordinate legislation to facilitate changes to the Safeguard Mechanism framework, including the National Greenhouse and Energy Reporting (Safeguard Mechanism) Amendment (Reforms) Rule 2023, Carbon Credits (Carbon Farming Initiative) Amendment (No. 2) Rules 2023 and Australian National Registry of Emissions Units Rules 2023.

Consultation is open until 5:00PM AEDT 24 February 2023.

As part of the proposed design consultation process, DCCEEW will present an online information session for stakeholders to learn more about the proposed changes to the Safeguard Mechanism framework and assist with preparing responses to the positions paper consultation. The one-hour session will take place on Thursday, 19 January 2023 from 2.30PM AEDT – register here.

DCCEEW has previously conducted consultation on the Safeguard Mechanism reforms during 2022 by releasing a consultation paper and exposure draft legislation for review (feedback is now closed). The exposure draft legislation includes the Safeguard Mechanism Reforms (Crediting) Amendment Bill 2022 currently before Parliament and the draft Carbon Credits (Carbon Farming Initiative) Amendment (Safeguard Facility Eligibility Requirements) Rules 2022.

Prepared by Kathryn Pacey and Jaya Prasad