Safeguard Mechanism Bill passes Parliament setting stage for Safeguard Mechanism reforms

The Safeguard Mechanism (Crediting) Amendment Bill 2023 was passed by the Australian Parliament on 30 March 2023.  The Bill was primarily introduced to enable the crediting element of the reform, however the changes negotiated with the Australian Greens Party are not limited to crediting and will extend beyond amendments to the Bill itself.

We explore key aspects of the Bill and our current understanding of the other agreed amendments to the Safeguard Mechanism Reforms.

Snapshot

• The Safeguard Mechanism (Crediting) Amendment Bill 2023 (the Bill) was passed by the Australian Parliament on 30 March 2023. It will play a key role in the Safeguard Mechanism reforms.
• The Bill as passed includes amended provisions that reflect part of the agreement reached with the Greens. These amendments are largely mechanical, and include new objects and triggers for the Minister to consider the adequacy of the Safeguard Mechanisms Rules (Rules) based on the progress of declines in greenhouse gas emissions, with associated public consultation and accountability.
• The Bill is the first of a number of new or amended legislative instruments. In particular new Rules will be required and drafting of the rule change reflective of other amendments agreed with the Greens is not yet publicly available.
• The reforms to the Safeguard Mechanism are still intended to take effect 1 July 2023.

Amendments to the Safeguard Mechanism

The reforms to the Safeguard Mechanism include key concepts as follows:

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

For further background on the proposed reforms, see our January blog post here.

The Bill reforms

Many of the details of the design of the Safeguard Mechanism, such as how baselines are set, will be contained in new rules (subordinate legislation).

The original purpose of the Bill was primarily to enable the crediting element of the reforms. The Bill introduces reforms to enable facilities whose emissions are below baselines levels to generate tradable SMCs. Each SMC represents a tonne of CO2e emissions. SMCs can be traded and used by other Safeguard covered facilities to reduce net emissions.

The Bill also implements the first stage of the Government’s response to the Samuel Review of ACCUs.

Amendments to the Bill following agreement with Australian Greens party

An agreement was reached with the Australian Greens Party to enable the passing of the Bill, however the scope of that agreement is not limited to the crediting elements and original scope of the Bill.

The Bill as passed includes amended provisions that reflect part of the agreement reached with the Greens. These amendments are largely mechanical, and include new objects and triggers for the Minister to consider the adequacy of the Safeguard Mechanisms Rules based on the progress of the facilities against the Safeguard Mechanism declines in greenhouse gas emissions, with associated public consultation and accountability.

Key amendments include the following:

1. A “hard cap”: Inserting additional legal objects of the NGER Act, including (a) ensuring that total net safeguard emissions for all of the financial years between 1 July 2020 and 30 June 2030 do not exceed a total of 1,233 million tonnes of carbon dioxide equivalence (referred to as a ‘hard cap’), and (b) ensuring that net safeguard emissions decline to no more than 100 million tonnes CO2e for the financial year beginning on 1 July 2029. These objects are intended to be given teeth through other amendments.
2. Minister to consider amending scheme upon CCA advice: If the Climate Change Authority (CCA) advises the Minister that (net/) safeguard emissions for a financial year are not declining consistently with the objects of the NGER Act, and that the rules need to be amended to achieve those objects, the Minister must undertake public consultation into whether the rules ought be amended to achieve the outcomes above, and, if necessary, amend the Rules. There is a similar requirement in relation to advice from the Secretary to DCCEEW.
3. Introduction of a so-called “Pollution trigger”: the Minister for Environment must notify the Minister and the Climate Change Authority if the Environment Minister has approved a project under the EPBC Act that is likely to result in an increase in emissions of a large facility, or a new large facility entrant into the Safeguard Mechanism, for the financial year (or a future financial year).  Similar to above, this would trigger public consultation and the potential for amendment to the rules to ensure the objects of the NGER Act are achieved. The Government has explained:

“In response to the Samuel Review, the Government has committed to “require reporting of Scope 1 and 2 emissions and related management actions over the life of the project”. EPBC approvals of new projects that are expected to enter the Safeguard Mechanism will cause an assessment by the Government of that project’s reported emissions against the Objects above.

The Minister would need to act where the Secretary of the Department, based upon emissions information including from the Clean Energy Regulator and EPBC approvals, considers changes to the Rules may be needed to meet the Objects."

Other amendments to the Safeguard Mechanism reforms

A number of other measures have been agreed with the Greens to secure passage of the Bill. These amendments to the Government’s previously announced Safeguard Mechanism reforms are expected to be reflected in other legislative instruments that support the regime, notably the Rules. There is limited publicly available detail on these aspects at this stage, but from announcements to date we understand they include the following:

1. New facilities will be subject to international best practice, which means zero reservoir emissions for new gas fields supplying existing LNG facilities: The original Government proposed reforms included that new facilities’ baselines will be determined based on international best practice emissions-intensity benchmarks, adapted for the Australian context. The Government has now agreed with the Greens that new gas fields supplying existing LNG facilities, these will be treated as new facilities and best practice will be zero emissions for reservoir CO2 emissions.
2. Methane and NOx reporting: Large facilities will be required to report methane and nitrous oxide emissions (which the regulator will make public). The Government has stated the CCA will be asked to review methane measurement, verification and reporting, with a view to improvements being implemented by July 2024.
3. ACCU usage: Companies using over 30 per cent ACCUs offsets to meet their requirements must explain their reasons for doing so to the regulator.
4. Specific requirements applicable to the Beetaloo basin: All new gas entrants in the Beetaloo basin will be required to have net zero scope 1 emissions from entry.

Next Steps

The Bill is the first of a number of new or amended legislative instruments. In particular new Safeguard Mechanism Rules will be required and drafting of the rule change reflective of other amendments agreed with the Greens is not yet publicly available. Full implications of the announced amendments to the Safeguard Mechanism reforms are therefore unclear at this point. The reforms to the Safeguard Mechanism are, however, still intended to take effect 1 July 2023.

by Kathryn Pacey, Melanie Debenham, Heidi Asten with Samuel Colwell and Paige Mortimer.