Reforming the Safeguard Mechanism – Musings on Seven Key Aspects of Policy Design

reforming the safeguard mechanism - man welding

matt drum - managing director anthesis

Matt Drum

Managing Director

Australia

The Clean Energy Regulator’s (CERs) Safeguard Mechanism (SGM) consultation paper and draft bills for Safeguard Mechanism crediting were recently released, with around 180 submissions being published from a multitude of stakeholders.

This is part of an initiative started in 2022 by the Federal Government, to reform the system by way of regulation, to help industry reduce emissions in line with Australia’s climate targets.

As someone with intimate knowledge of working with government climate legislation over the past 15 years, I generally believe the fundamentals of a closely monitored emissions intensity focussed reductions trajectory at the sectoral level is the most pragmatic and expedient approach. If and only if the absolute budget for the 217 safeguard facilities is closely monitored. It’s certainly not the most elegant design, however I think we all realise we need to work with what we have already.

I do have some concerns on policy design however that I’ll dig into below, focussing on seven key aspects.

6 key aspects of policy design for reforming the Safeguard Mechanism

1.       Safeguard Mechanism coverage:

I believe the Safeguard Mechanism threshold of 100ktCO2-e should be decreased as soon as possible to 25ktCO2-e. It’s simply lazy policy to be limiting coverage to the arbitrary 100kt and leaves so many opportunities on the table, creates perverse incentives and uncompetitive outcomes.

  • A decreased threshold to 25ktCO2-e should apply by 1 July 2023, although I recognise this may not be feasible, 1 July 2024 is a must. My argument for this is as follows:
    • This (100kt threshold) excludes about 11Mt CO2-e p.a. which could grow unfettered until at least 2026 under the current position – undermining gains achieved by the captured Safeguard Mechanism cohort above 100kt.
    • The argument that it is ‘too administratively complex and costly’ for these smaller facilities is weak – every tCO2-e reduced will cost, and every tCO2-e will count towards 2030 and beyond. We cannot simply afford to ‘ignore’ 11Mt p.a. from these smaller, yet still heavy emitting, facilities.

What is important to note here is the threshold for the 2010-2012 Carbon Pricing Mechanism was 25kt and compliance was almost absolute throughout this period.

  • These additional ~200 facilities are already reporting under NGERs as stand-alone sites, so they already have the systems and resources to report.
  • Emissions intensities for most production variables already exist via the Safeguard Rule Schedules, they could be readily adopted.
  • Innovation from this cohort will not be encouraged and stagnate unless there is a policy driver to do so.
    • Holding the threshold at 100kt CO2-e introduces much more complexity for facilities fluctuating over and under thresholds and incentivises facilities to stay (just) under the mark.
    • Allowing for unpenalised increased emissions growth below the 100kt CO2-e threshold will put more and more pressure on those above the threshold to ensure our Nationally Defined Contributions (NDCs) are met. They will do all the heavy lifting, and their intensity targets will need to decrease quicker than they otherwise would as the total budget gets eaten up by those with no restraints.
    • There will be an increased likelihood and risk of ‘gaming’ – including the incentive to try split facilities to come under 100kt CO2-e.

2.       Deemed surrender for existing ERF projects must stay

  • Safeguard Mechanism facilities that can demonstrate additionality should be allowed to create Australian Carbon Credit Units (ACCUs) and deliver under Carbon Abatement Contracts (CAC) for the entirety of the crediting period.
  • An industrial Emissions Reduction Fund (ERF) project that was developed, designed and registered prior to the release of the Safeguard Mechanism consultation should be allowed to create ACCUs for the life of the crediting period. Companies that have met this criterion have clearly demonstrated the key principle of additionality and should not be penalised for early action. In many instances, significant capital has been deployed, and months/years of planning undertaken to reduce emissions when there was no regulatory driver to do so. The availability of Safeguard Credits as a replacement is of little comfort – we have no idea on their supply, demand and value. ACCUs with a CAC have a fixed floor price that has been used to justify the business case.

3.       We will need a strong audit and assurance framework

Both production and emissions will need scrutiny on an annual basis. In many instances, (particularly the ERF) the CER’s audit framework has been watered down and the frequency of audits reduced dramatically over the years. This in part undermines confidence in the programs and provides little protection for the attacks many ERF Methods have recently received. We cannot afford the same with the Safeguard Mechanism and must have confidence in the numbers reported.

4.       Removal of headroom

The historic policy design was impotent to the point that emissions rose for Safeguard facilities as a cohort, and many millions of tonnes of headroom remain.  If the headroom is not removed, it will be years before any absolute reductions are achieved.

5.       Public reporting

Public Reporting on the absolute emissions reductions achieved by the Safeguard Mechanism must be reported in a transparent and timely manner. The public has a right to see which individual facilities are achieving reductions, and how the aggregated absolute emissions profile for the Safeguard Mechanism cohort is shifting year on year.

6.       Safeguard Mechanism Credits

Pricing, allocation, distribution, eligibility and banking of Safeguard Mechanism credits will be critical and must be carefully calibrated. The Safeguard Mechanism decreasing baselines have long been seen as driving a step-change demand for ACCUs, as historically they have been the only means for facilities that find themselves in an ‘excess emissions position’ to make good.

As baselines tighten, theoretically ACCU demand would increase, prices increase and new offsetting opportunities open. The fundamentals of a thriving and expanding domestic offset market are incredibly important to helping net-out hard to abate emissions. If the Safeguard Mechanism market is flooded with cheap safeguard credits, this could have a significant impact on the ACCU price, potentially stifling the new investment which must occur long-term.

In conclusion, as someone who has dedicated the best part of their career on climate action it is incredibly exciting to see Australian heavy industry moving from simply reporting emissions to having to actively reduce them. There is still a lot of work to do on the policy front but reforming the Safeguard Mechanism is a step in the right direction and although we are still in a period of uncertainty, we understand the wheels are turning quickly.

One thing is certain however, Safeguard covered facilities above 100kt should be turning their minds to decarbonisation strategies immediately.