Greenhouse Gas Emissions Reform: The Revised Safeguard Mechanism

Introduction

Following earlier consultation, on 10 January 2023 the Climate Change and Energy Minister Chris Bowen released the Federal Government’s proposed changes to the Safeguard Mechanism which, from 1 July 2023, will require 215 of Australia’s largest greenhouse gas emitters to reduce emissions produced by a facility - Scope 1 emissions - by 30% by 2030. The proposal is for a mandated 4.9% per year reduction for facilities that emit more than 100,000 tonnes CO2-e per year under the National Greenhouse and Energy Reporting (Safeguard Mechanism) Amendment (Reforms) Rules 2023.

 

Carbon Credits

Emitters that exceed this mandated reduction will be issued Safeguard Mechanism Credits, which can be sold or banked.

Facilities will be able to buy Safeguard Mechanism Credits or Australian Carbon Credit Units (ACCUs) if they cannot achieve the mandated reductions. Certain businesses will be excluded from generating safeguard credits e.g. new landfills (until 2026-7), facilities using baseline borrowing or multi-year monitoring, and those subject to deemed surrender. ACCUs will no longer be generated by safeguard facilities but can be created by projects outside the safeguard mechanism such as planting trees. However, existing Emissions Reduction Fund projects will be allowed to create ACCUs for their existing crediting period. International offsets are currently not part of the agenda. However, further consultation on this will occur later this year.

The Safeguard Mechanism (Crediting) Amendment Bill 2022 creating safeguard mechanism credits will need Coalition or crossbench support. The Greens have signalled dissatisfaction with allowing the purchase of carbon credits and so this issue requires monitoring.

 

Carbon Credit Pricing

The proposal seeks to price carbon credits at USD75 per tonne in the financial year 2023-24 which will be indexed by CPI +2% (see the proposed Carbon Credits (Carbon Farming Initiative) Amendment (No 2) Rules 2023). The penalty for not meeting an emission reduction target is a fine of USD275 per tonne of exceedance in the year (i.e. one penalty unit per tonne), which the Government considers will incentivise over-emitters to buy carbon credits, as the cap price is substantially lower than the fine for non-compliance.

 

Carbon Tariffs

Emission Intensive Trade Exposed (EITE) businesses such as aluminium refineries, steel mills and cement producers will face competition from countries with less stringent carbon requirements/greenhouse gas abatement requirements.

While many EITE businesses already have plans or commitments to decarbonise, to remain competitive such trade exposed businesses may move their carbon intensive production to countries with less stringent carbon requirements/greenhouse requirements. Also, local producers may use more carbon intensive imports to avoid using Australian products subject to the safeguard mechanism. These consequences are called ‘carbon leakage’.

The Minister is also considering how to prevent carbon leakage and protect Australian businesses against imports from countries without appropriate carbon emission regulation. Recently, the EU introduced the Carbon Border Adjustment Mechanism (CBAM), which will initially require that importers of certain goods report the greenhouse gas emissions embedded in their imports. By 2027, importers will effectively be mandated to pay a carbon tax on products imported from countries without appropriate safeguard mechanisms. CBAM is one option being considered by the Minister.

 

Financial Assistance for Emissions intensive trade exposed industries

The Government proposes to assist the transition for EITE businesses through USD600m of financial assistance via the Powering the Regions Fund. Further, facilities facing an elevated risk of carbon leakage – called Trade Exposed Baseline Adjusted Facilities- may be eligible to apply for a reduced decline rate for their carbon emissions, up to a minimum decline rate of 2% per year.

 

Baseline setting

The proposed baseline setting process aims to allow baselines to rise and fall with changes in quantities produced or services delivered at a facility. The emissions-intensity of a facility will be adjusted over the period to 2030 using a hybrid approach. This hybrid approach will combine industry average performance with the performance of each facility (with the weighting towards site-specific emissions intensity declining over the period and the industry average increasing over the period).

New facilities would have their baselines set at international best practice (adapted for Australia).

Facilities would be able to borrow up to 10% of their baseline each year, subject to a 10% interest rate (as a form of discouragement).

Certain facilities that exceed their baselines may be able to access multi-year monitoring periods, i.e., those that face delays in accessing cost effective abatement technologies, subject to having credible plans to reduce emissions over the period.

 

Future reductions

There will be a review in 2026-27. Future reduction rates are to be set by 1 July 2027 based on changes to Australia’s Nationally Determined Contributions under the Paris Agreement.

 

Consultation periods

The Minister’s policy paper and draft regulations on the Safeguard Mechanism Reforms are up for consultation until 5 PM, 24 February 2023. Consultation on the design and implementation of the Powering the Regions Fund closes on 3 February 2023.

Gerry Bean actively follows corporate governance developments and issues in Australia with a particular interest in the areas of climate change and ESG, including the Federal Government of Australia’s current “Climate-related financial disclosure: Consultation paper”.