Safeguard Mechanism reforms: New guidelines released on emissions-intensity determination applications and a review for a potential carbon border adjustment underway

In October 2023, the Clean Energy Regulator released guidelines to assist responsible emitters and auditors making applications for an emissions-intensity determination. For existing Safeguard Mechanism facilities, this determination will be an important factor in how a facility’s unique baseline will be calculated under the reformed Safeguard Mechanism scheme.

Snapshot

• Applications are due by 30 April 2024. This is the first compliance deadline under the reformed regime for existing facilities.
• Separately, the Australian Government has announced a review into potentially introducing a carbon border adjustment mechanism (CBAM) and other options to address carbon leakage, with the findings due September 2024.

Guidelines for emissions-intensity determination applications

The Safeguard Mechanism reforms have commenced and will apply to the reporting year starting 1 July 2023 onwards. Aspects of the new regime are being iteratively specified, through guidance and legislative instructions.

Put simply, the purpose of the Safeguard Mechanism reforms is for Australia’s highest scope 1 GHG emitters, called ‘facilities’, to deliver a proportionate share of Australia’s emission reductions, in accordance with annually declining baselines (a GHG emissions limit). The trajectory for baseline decline is intended to support achieving Australia’s commitment under the Paris Agreement of emission reduction targets of 43% by 2030 below 2005 levels and net zero by 2050.

The emissions-intensity determination (Determination) for existing facilities will be an important factor in how each facility’s baseline will be calculated (baselines for new facilities are dealt with differently). We note:

• Emissions-intensity” for a production variable means the emissions released, in tCO2-e, per unit of the production variable.
• A facility will need to use the production variables (a type of product produced at the facility) listed Schedule 1 of the Safeguard Rules. Government is in the process of reviewing and updating production variables (with some updates made earlier this month).
• The Determination will be calculated based on historical production and GHG emissions data from facility.
• The baseline will be calculated with a “hybrid” emissions-intensity number. This is a combination of the site-specific Determination and industry-average default emissions-intensity numbers. This combination will be:
  • initially weighted towards facility-specific emissions-intensity numbers (i.e. taking into account how emissions-intensive the facility’s production is); and
  • towards the financial year commencing 1 July 2029 will progressively become more weighted to the default ‘industry average’ emissions-intensity numbers.

(Source: DCCEEW, here)

• If an existing facility starts producing a new production variable, a ‘best-practice’ emissions intensity value will be applicable to that production variable.

Considerations for preparing an application for a Determination

The Guidelines explain the various application requirements, which include data and supporting calculations on the facility’s production variable and emissions data for the financial years commencing 1 July 2017 to 1 July 2021. An audit will need to be provided in the application (with some exceptions).

Existing facilities should consider the application requirements now, if they have not yet done so. Given the requirements include sourcing historical data, calculations to be made, other supporting information and an audit report to be obtained, we expect applications will take some time to prepare.

If you would like assistance understanding the application requirements in respect of your facility, please get in touch.

Australian CBAM Review underway, with lessons from the EU’s new CBAM

As part of the next tranche of Safeguard Mechanism reforms, Government is considering “carbon leakage” and addressing potential competitive disadvantage faced by Safeguard Mechanism facilities.

Carbon Leakage is where a business decides to move its operations from a country with more rigorous GHG emission reduction laws and policies (say, Australia following the Safeguard Mechanism reforms) to a country with more lenient laws and policies, for cost reasons. A CBAM could apply a tariff on products imported from more lenient countries to disincentivise carbon leakage.

Led by Professor Frank Jotzo, the CBAM review is considering additional policy options that could address carbon leakage arising from differing emission reduction policies. The review will focus on the feasibility of a CBAM regarding coverage of products (particularly in relation to steel and cement) and sectors, investment attractiveness, consistency with trade standards, and reductions in global and regional emissions. The final report is due 30 September 2024, with recommendations considered for the Government’s Net Zero 2050 plan.

The Jotzo review has opportunity to learn from the European Union’s new CBAM. The first phase of the EU CBAM commenced this month, which requires EU importers of cement, iron and steel, aluminium, fertilisers, electricity and hydrogen to report the direct and indirect GHG emissions embedded in their imports. From 1 January 2026, CBAM certificates will need to be purchased and surrendered, with associated costs. Speaking to the AFR on 7 September 2023, Professor Jotzo emphasised it is not inevitable that Australia will adopt a CBAM, with other options on the table during the review.

Written by Melanie Debenham, Partner and Paige Mortimer, Solicitor