Safeguard Mechanism Reforms and Safeguard Mechanism Credits
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The reformed Safeguard Mechanism came into effect on July 1, 2023. Here’s a quick overview of what changed with the government 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 changes?
The main changes 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 decline rate is: For each financial year from 1 July 2023 through to 30 June 2030, both ‘standard’ and landfill baselines will be subject to an annual decline rate of 4.9%.
- The Introduction of Safeguard Mechanism Credits (SMCs): A new initiative, the Safeguard Mechanism Credit scheme, will be established. Under this scheme, facilities can earn credits for falling below their baseline emissions. These credits can be utilised for trading purposes or to offset future emissions. (More about SMCs below).
- Trade Exposed Facilities: A new category called “trade exposed” facilities will be introduced. These facilities will receive certain flexibility in meeting their emission reduction requirements. This flexibility aims to protect these facilities from potential competitive disadvantages.
What is the Safeguard Mechanism Credit scheme?
The Safeguard Mechanism Credit scheme is a new initiative that will allow facilities to earn credits for reducing emissions below their baselines. These credits can then be traded or used to offset future emissions.
The Safeguard Mechanism Credit scheme is designed to:
- Provide an incentive for facilities to reduce emissions: Facilities that reduce emissions below their baselines will be rewarded with Safeguard Mechanism Credits, which they can then sell or use to offset future emissions. This will create a financial incentive for facilities to invest in emissions reduction 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.
- Offset future emissions: Safeguard Mechanism Credits can be used to offset future emissions, which can help facilities to meet their emissions reduction targets. This will be particularly useful for facilities that are unable to reduce their emissions in the short term, but are committed to doing so in the long term.
Safeguard Mechanism Credits (SMCs) – fast facts:
- Who can earn SMCs? Facilities that are covered by the Safeguard Mechanism and that reduce their emissions below their baselines can earn SMCs.
- How many SMCs can be earned? The number of SMCs that can be earned will depend on the total amount of emissions reduced.
- How are SMCs traded? SMCs can be traded between facilities through the Clean Energy Regulator’s (CER’s) Emissions Reduction Market.
- What are the uses of SMCs? SMCs can be used to:
- Offset future emissions
- Meet the emissions reduction requirements of the Safeguard Mechanism
- Sell to other facilities
What should entities reporting to the Safeguard Mechanism do now?
Entities reporting to the Safeguard Mechanism for the 2022-23 compliance period should:
- Review their baselines: Make sure that their baselines are up to date and reflect the new reforms.
- Consider participating in the Safeguard Mechanism Credit (SMC) scheme: If they are able to reduce emissions below their baselines, they may be able to earn SMCs and benefit from the trading market.
- Understand the new trade exposed provisions: If they are a trade exposed facility, they should understand how the new provisions will affect them and how they can meet their emissions reduction requirements.
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.
Image: Department of Climate Change, Energy, the Environment and Water
Key Safeguard Mechanism reporting dates
- Baseline application: Reporting entities must submit an application for a baseline by 31 August following the financial year in which the facility first exceeds emissions of 100,000 tonnes CO2e of covered emissions.
- Reporting: Reporting entities must report their emissions to the Clean Energy Regulator (CER) by 31 October following each financial year.
- Excess emissions: If a reporting entity exceeds its baseline, it must take steps to manage its excess emissions. These steps may include:
- Reducing emissions
- Purchasing SMCs
- Paying an excess emissions charge
- 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.