Update on Australian Government's Direct Action climate change program: The Safeguard Mechanism

An update on major developments in the Australian Government's Direct Action climate change program, regarding the key element the Safeguard Mechanism. 

Will be relevant for any business operating large emitting facilities or with commercial arrangements in Australia involving material greenhouse gas emissions. This includes for electricity, gas and coal operations and transactions.

Overview

What has happened?

Following the Paris conference, attention turns to Australia's domestic climate change programs. The Australian Government has been implementing its ‘Direct Action’ program. Major developments occurred in late 2015 for the program’s key element - the ‘Safeguard Mechanism’ - which will apply to large greenhouse-gas-emitting facilities from 1 July 2016. The Safeguard Mechanism will impose reporting obligations and – potentially – ‘carbon costs’.

This note contains a short overview of the principal features of the Safeguard Mechanism.

Who needs to know?

The Safeguard Mechanism is relevant for any business which operates, or which has commercial arrangements involving facilities in Australia with material greenhouse gas emissions. This includes electricity, gas and coal facilities.

What needs to be done?

The Safeguard Mechanism needs to be considered in the commercial arrangements for such facilities, particularly in carbon cost clauses and change of law clauses.

Introduction to ‘Direct Action’: Emissions reduction and Safeguard Mechanism

The Australian Government’s ‘Direct Action’ climate change program has two pillars:

• Emissions reduction: accrediting emissions reduction and abatement projects to earn ‘Australian carbon credit units’ (ACCUs), which can be purchased by the Government at auction through the Emissions Reduction Fund. For further information on the Emissions Reduction Fund please see our previously published article,¹ and
• Safeguard Mechanism: under which, from 1 July 2016, large emitting facilities will be held accountable to baseline emissions levels, which they must not exceed except by surrendering prescribed carbon units.

The Safeguard Mechanism

Application

The Safeguard Mechanism will apply to a ‘responsible emitter’, being the entity with ‘operational control’ of a ‘large designated facility’.

This is a facility that emits greater than 100,000t CO₂ equivalent (CO₂e) per annum. But it excludes:

• emissions from waste accepted at a landfill before 1 July 2016, and
• emissions from grid connected electricity generators, unless the grid connected electricity generation sector as a whole exceeds 198,000,000tCO₂e in any financial year.

Obligations

Responsible emitters must:

• register under the National Greenhouse and Energy Reporting system, unless already registered,
• report on large designated facilities, and
• avoid an ‘excess emissions situation’.

Excess emissions situation

An excess emissions situation exists for a facility if it exceeds its 'baseline emissions number'. This can be avoided by surrendering ‘prescribed carbon units’ (including ACCUs and - potentially - recognised international units).

If an excess emissions situation exists then a civil penalty can apply of $18,000 per day of exceedance to a maximum of $1.8 million.

The ability to surrender carbon units, or the possibility of facing a penalty, is what may result in ‘carbon costs’. This requires consideration in commercial arrangements.

Baselines

A facility’s ‘baseline emissions number’ for any relevant period is either:

• a default level of 100,000t CO₂e, or
• the level set under a ‘baseline determination’, which must be more than 100,000t CO2e.  

There are five types of baseline determinations available to establish and re-establish the baseline emissions number for any particular facility:

1. a ‘reported-emissions baseline determination’, where adequate historical emissions data is available,
2. a ‘calculated-emissions baseline determination’, where:
   1. a facility has insufficient historical emissions data to make a reported-emissions baseline determination, or
   2. for which historical emissions may be a poor indicator of future emissions either because the facility has significantly expanded or because it is subject to the inherent emissions variability associated with the extraction of natural resources.

   Specifically, a facility must meet one of the following criteria:

   i)      the ‘new facility criteria’,

   ii)     the ‘significant expansion criteria’,

   iii)    the ‘inherent emissions variability criteria’ associated with the extraction of

   natural resources, or

   iv)    the ‘initial calculated baseline criteria’,

3. a ‘benchmark-emissions baseline determination’, where a facility (other than a landfill facility) is a new facility or a significant expansion of an existing one,  
4. a ‘production-adjusted baseline determination’, for a facility which has been the subject of a calculated-emissions baseline determination or a benchmark-emissions baseline determination and for which actual, historical production data has since become available, and
5. a ‘landfill-benchmark baseline determination’, for landfill facilities.

This variety of determinations gives responsible emitters substantial flexibility:

• the making of a determination is at the request of the responsible emitter except where a ‘reported-emissions baseline determination’ applies, and
• for any particular facility, there is a range of possible determinations which can be made on a range of bases and at a range of times.

Possible future changes to climate change regulation in Australia

It appears likely changes to the Direct Action program will be required. In particular, there is uncertainty whether the program, with the funding currently available, will achieve emissions reductions sufficient for Australia’s 2020 target (is a 5% reduction against 2000 emissions) or beyond. At the Paris UN climate change conference in late 2015, Australia committed to reduce emissions by 26–28 % against 2005 levels by 2030. Consequently further changes may be required to the Direct Action program, or an alternative program implemented. This will likely be an issue at the 2016 Federal election. The Labor party is positioning itself to present a more aggressive climate change policy.

Given this uncertainty, the possible scenarios will need to be contemplated in commercial agreements, by appropriate carbon cost or change of law clauses.

This article was written by John Taberner, Consultant, Sydney and Michael Voros, Special Counsel, Perth.

Endnotes

1. Direct Action legislation passed.