Safeguard Mechanism Reforms and Safeguard Mechanism Credits

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Grace Tully

Senior Consultant

Australia

The reformed Safeguard Mechanism came into effect on July 1, 2023. Here’s a quick overview of what changed with the safeguard mechanism reforms, how the new Safeguard Mechanism Credit (SMC) scheme works, what reporting entities should do now and key safeguard reporting dates.

What are the Safeguard Mechanism reforms?

The main changes according to the safeguard mechanism reforms are:

  • New baselines: The baselines for emissions will be reduced gradually over time, in line with Australia’s commitment to reach net zero emissions by 2050. The baseline will be subject to an annual decline rate which will apply for each financial year from 1 July 2023 through to 30 June 2030. The default decline rate is 4.9% per annum, but facilities may be eligible for a reduced decline rate under the trade-exposed, baseline-adjusted allowance.
  • Trade Exposed Facilities: A new classification for ‘trade-exposed, baseline-adjusted’, or TEBA, facilities has been introduced. TEBA facilities can apply for a reduced decline rate for up to three years to help protect them from competitive disadvantages. Facilities must apply for TEBA status before the 31 October following the end of the financial year for which they are applying.
  • The Introduction of Safeguard Mechanism Credits (SMCs): Facilities can earn Safeguard Mechanism Credits for falling below their baseline emissions. These credits are equivalent to one tonne of carbon dioxide equivalent and can be sold to other Safeguard facilities or banked to manage future liability. (More about SMCs below).

What are Safeguard Mechanism Credits?

Safeguard Mechanism Credits (SMCs) are a newly formed carbon credit created to incentivise facilities to reduce their emissions below their Safeguard baseline. SMCs can be sold to other facilities on the secondary market, surrendered by a facility to stay within their baseline, or retained for future use until 2030.

The creation of Safeguard Mechanism Credits is designed to:

  • Provide a financial incentive for facilities to reduce emissions: Facilities that reduce emissions below their baselines will generate SMCs, which may provide a financial incentive for facilities to invest in decarbonisation projects.
  • Create a trading market for emissions reductions: Safeguard Mechanism Credits can be traded between facilities, allowing covered facilities to buy and sell units to surrender in order to meet their baselines. This will help to create a more efficient market for hard-to-abate industries to remain compliant.
  • Manage future emissions: Safeguard Mechanism Credits can be generated early in the Safeguard period and banked to manage future emissions. This can provide facilities the opportunity to increase certainty in the cost of future emissions management if they can prioritise low cost, easily implementable decarbonisation activities in the short term to generate SMCs while their baselines are higher, which they can then retain to manage future liability.

Safeguard Mechanism Credits (SMCs) – fast facts:

  • How many SMCs can be earned? SMCs will be proportional to the amount a facility’s emissions sit below their baseline in a particular financial year, or the amount it’s net emissions are below the net baseline at the end of a multi-year monitoring period.
  • Who can earn SMCs? Facilities that are covered by the Safeguard Mechanism and that reduce their emissions below their baselines will generate SMCs.
  • How are SMCs traded? SMCs can be traded between facilities through the facility’s ANREU account.
  • What are the uses of SMCs? SMCs can be:
    • Banked to manage future emissions
    • Sold to other facilities

What should entities reporting to the Safeguard Mechanism do now?

Entities whose scope 1 emissions exceed 100,000 tCO2­e in FY24 should:

  • Review their baselines: Forecasting out your Safeguard baseline to FY30 against different production and emissions scenarios can help establish an understanding of potential liability and/or credit generation opportunities over the next seven years of the SGM.
  • Explore opportunities to obtain TEBA status: If a facility is eligible for trade-exposed, baseline-adjusted status, it can apply for a TEBA-adjusted decline rate prior to 31 October, reducing their baseline for the FY24 period.
  • Establish a decarbonisation plan: Researching opportunities to reduce scope 1 emissions and undertaking cost-benefit analysis should be undertaken in the context of the SGM to ensure that potential SMC generation opportunities are realised. Developing a marginal abatement cost (MAC) curve can assist facilities with the prioritisation of project, may assist with the development of a financial case for implementation.

Our team of experts have explored the new scheme in depth and has already assisted some of Australia’s largest emitters in modelling their positions against their baselines to FY30, and interpreting the impact of the changes on existing projects.

Key Safeguard Mechanism reporting dates

  • Baseline application: Reporting entities must submit an application for an emissions-intensity determination (EID) by 30 April 24 for their FY24 baseline. In subsequent years, a facility must apply for an EID by 31 October after the end of the relevant financial year.
  • Reporting: Reporting entities must report their emissions to the Clean Energy Regulator (CER) by 31 October following each financial year under the National Greenhouse and Energy Reporting (NGER) scheme.
  • Excess emissions: If a reporting entity exceeds its baseline in a given financial year, it must take steps to manage its excess emissions. These steps may include:
    • Applying for a multi-year monitoring period, with applications due 15 November after the first proposed year of the period.
    • Purchasing and surrendering SMCs or ACCUs prior to the 1 April compliance deadline.
    • Applying for TEBA status prior to the 31 October after the financial year to reduce your baseline.
  • Compliance review: The CER will conduct a compliance review of each reporting entity every three years. This review will assess whether the entity has complied with the Safeguard Mechanism requirements.

Need help navigating Safeguard Mechanism Credits or the Safeguard Mechanism reforms?

Our team of experts have supported many of Australia’s largest emitters with audit, strategic advisory and ACCU procurement for the Safeguard Mechanism. They have an in-depth knowledge of the Safeguard Mechanism Act and can help you navigate the Safeguard legislation and explore opportunities that exist to not only comply but to drive innovation and abatement at scale.

Learn about how we helped Orica bring to life one of the largest abatement projects in Australian History and reach out to us if you need advice.