Unpacking the Proposed Safeguard Mechanism Reforms
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If the proposed Safeguard Mechanism reforms as announced by the federal government this week come to fruition, this will be marked as a turning point in Australia’s emissions trajectory and one of the most significant pillars of Australia’s Climate Change Policy to date.
The proposed reforms will dictate the emission reduction requirements of around 215 of Australia’s most significant polluters, who produce 28% of Australia’s total emissions.
Update: ‘The Safeguard Mechanism (Crediting) Amendment Bill 2023 was passed on 31 March 2023. It amends the National Greenhouse and Energy Reporting Act 2007 (the NGER Act) and other legislation, to establish the framework to give effect to key elements of the reforms, such as introducing credits to the scheme to provide an incentive to facilities to go beyond their baselines.’ More information from DCCEEW
Snapshot – Proposed Safeguard Mechanism reforms
Companies with facilities covered by the safeguard mechanism, should expect an emissions reduction of 4.9% year on year, depending on the industry and starting intensity.
Actual decline rates for each heavy emitter will vary. Setting the new facility baselines will take into consideration the industry, with a target more aligned to each facilities historical performance, but with the goal of an industry specific target by 2030. This means facilities are not penalised immediately for their historical intensity, but will have to aim for industry best practice over time.
All baselines will be based on production – which means the absolute emissions will float with increased production.
For industries concerned about exposure to international trade competitiveness concerns, there may be options to apply for funding to support decarbonisation, through the allocated $600 million in the government’s Powering the Regions Fund, as well as to apply for differentiated decline rates – potentially as low as 2% per year. More information should be forthcoming about this and it will be critical that these definitions are robust.
Rules around heavy emitters’ ability to generate Australian Carbon Credit Units (ACCUs) have also changed. No new projects will be accepted, but projects which are already registered, would continue to be able to generate credits.
What are the key implications for industry with the proposed Safeguard Mechanism reforms?
Key implications for industry include:
New Safeguard Baselines: All safeguard facilities will need to apply for a new baseline by the 30th April 2024. Baselines will use production weighted average emissions intensity values based upon the middle two values within the most recent years of data (FY19 to FY22).
Banking credits: Safeguard Facilities can benefit from moving early, and generating more credits – and will be able to bank their credits and use them in future years before 2030.
EITE: Facilities will need to determine their eligibility for the Powering the Regions funding for decarbonisation, and in fewer cases, eligibility for a differentiated decline rate (which could be as low as 2%) – this relates to companies who may struggle with cost competitiveness for imports in the case of increased costs of carbon.
Flexibility: There are options for flexibility – facilities may be able to borrow up to 10% of their baseline, with an interest rate applied, or can apply to enter multiyear monitoring arrangements.
Acting early: Implementing emissions reductions early, when baselines are high, will mean the ability for facilities to generate more Safeguard Mechanism Credits, which they can save for later in the decade or sell.
Increased focus on carbon accounting: With NGERs data forming the basis for safeguard facilities, carbon accounting accuracy will become very important and under increased scrutiny. Companies should closely evaluate if their NGERs processes or calculations should undergo a review.
What companies reporting to the Safeguard Mechanism should do now:
Understand and build an emissions reduction trajectory: Now is the time to compile your company’s Marginal Abatement Cost Curves. This will determine when, on the baseline decline trajectory, different initiatives will become feasible, and to model your facility’s planned emissions reduction trajectory – understanding the cost of different emissions reduction opportunities and when to implement what.
Prepare and calculate: Now is the time to start thinking about who will support your company to prepare your baseline application, after the reforms commence on 1st July 2023. Companies will have a lot of the data that will be required to do these baseline calculations and should be able to determine their baselines but this is something you should give a high priority to.
Book your auditors well ahead of time: Now is also the time to line up potential auditors for baseline applications – all applications will need to be audited before submission before 30th April 2024, and auditors will be in short demand – make sure to get in early!
Review NGERs: Current approaches to carbon accounting used in NGERs will be under increased scrutiny, as they now will underpin the basis for safeguard facilities emissions calculations, and will have a liability attached. Strong consideration should be given to reviewing current emissions calculations and improving general and assurance processes.
Proposed Safeguard Mechanism Reforms – supporting Australia’s climate targets
The Australian emissions landscape is set to change significantly with the Safeguard Mechanism proposed reforms, from as early as next year. Hopefully, the final touches to these reforms provide clear and effective guidelines to catalyse faster progress on the road to net zero, and an avenue for Australia’s heavy polluters to do their fair share in supporting Australia to meet our climate targets.
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