Federal Government’s safeguard mechanism reforms: facilities required to reduce emissions intensity by 4.9%

By Meg Lee and Luke Denham

The Federal Government’s proposed overhaul of the Safeguard Mechanism is part of a suite of measures to deliver on Australia’s current Nationally Determined Contribution (NDC) of a 43% reduction in emissions by 2030 (compared to 2005 levels), and a ‘net zero’ position in 2050.

How the Government will overhaul the ‘safeguard mechanism’ policy introduced by the Coalition in 2016 to limit emissions from the country’s largest 215 industrial facilities (covering around 28% of national emissions) (Safeguard facilities) is outlined in the Safeguard Mechanism Reforms Position Paper, released by the Federal Minister for Climate Change on 10 January.

The new emissions reduction requirements

From 1 July 2023, new and existing industries that are Safeguard facilities will be required to cut their ’emissions intensity’ – emissions per unit of production – by 4.9% per year below their site-specific baseline until 2030 (baseline decline rate). According to the Position Paper, the baseline decline rate should cut total emissions from Safeguard facilities in Australia by at least 30% between 2021 and 2030 (from 143m tonnes per year to no more than 100m tonnes).

Notably, the focus is on the emissions intensity of industrial operations, as opposed to overall emissions. This is intended to encourage businesses to adopt ‘cleaner’ practices rather than to move their production (wholly or partly) to other countries.

Graduated rollout of baselines

Initially, large-emitting facilities will be issued with site-specific emissions intensity limits (‘baselines’) which reflect local circumstances, before the new system moves to industry-wide baselines by 2030.

New facilities including coal and gas mines will also be subject to the annually reducing emission intensity requirements, with their baselines set to reflect international best practice and their ability to access the latest clean technology. There are currently 114 coal and gas projects seeking approval in Australia.

Industries that are considered ‘trade-exposed’ – at risk of losing business to overseas competitors that are not required to cut emissions – will be able to apply to cut their emissions more slowly, and to access the $600 million set aside by the Commonwealth Government under the Safeguard Transformation Stream of the ‘Powering the Regions Fund’ to help them adopt cleaner technology.

A Carbon Border Adjustment Mechanism is also being considered, similar to that which has been proposed to apply from 2026 in the European Union. If adopted, this would introduce an import tariff and potentially an export rebate on trade with countries without equivalent climate policies but will not be in place on commencement.

Options for meeting the reduction requirements

Options for companies to reduce their baseline emissions include the following:

• reducing on-site emissions;
• purchasing credits, known as ‘Safeguard Mechanism Credits’ (SMCs) from other Safeguard-covered facilities;
• buying and surrendering offsets from other sources (Australian Carbon Credit Units, which represent the avoidance or removal of one tonne of carbon-dioxide equivalent GHGs (ACCUs);
• ‘banking and borrowing’ up to 10% of carbon offsets, allowing companies to defer immediate cuts to their emissions in exchange for a 110% reduction of the amount banked at a later point in time; and
• applying for (up to five) multi-year monitoring periods, during which they can average their cuts, until 2030.

If the baseline decline rate is not met, a maximum civil penalty of $275 (indexed to CPI) per tonne of excess emissions per year will be applied, up to a maximum of 150,000 tonnes (nearly $42 million per year). However, while other means of cost reduction (such as buying ACCUs at the current spot price of $35 per tonne) remain more cost effective, the need to issue such penalties is expected to be rare. Anti-avoidance measures will also be introduced to prevent a business from defining, or redefining, a facility with the intention of avoiding Safeguard Mechanism obligations.

A review of Safeguard Mechanism policy settings is proposed to be undertaken in 2026-27.

No limits on use of offsetting credits

As noted above, industries will continue to be able to use ACCUs from the existing system, in addition to the new SMCs.

SMCs will be issued to companies that emit below their individual emissions baseline and can be purchased by companies that are above their baseline to assist them to meet their target. The legislation creating this safeguard crediting system – the Safeguard Mechanism (Crediting) Amendment Bill 2022 – was introduced by the Federal Government to Parliament on 30 November 2022, but is yet to be debated.

To give businesses certainty about maximum compliance costs, the Government will issue Government-held ACCUs at $75 per tonne and increasing (by CPI plus 2% per year) each year. This compares to the current spot price of market-traded ACCUs at approximately $35.

The extent to which industry should be able to rely on carbon credits to ‘offset’ their emissions is a key area of contention. A UN group established last year to investigate and clamp down on the ‘greenwashing’ of net-zero pledges argued that governments should prioritise reductions in absolute emissions by 2030 (to limit global heating to 1.5°C) and that credits should be used only to reduce emissions beyond that.

The report of the Independent Review of Australian Carbon Credit Units, led by a former chief scientist Prof Ian Chubb and published recently recommended significant changes to how ACCUs are regulated, but dismissed claims the system lacked integrity and was not delivering genuine climate action. However, Prof Andrew Macintosh, a former head of the Emissions Reduction Assurance Committee, who has alleged that more than 70% of carbon credits might not represent legitimate cuts, said the review panel had not addressed many of his criticisms.

Feedback and associated legislation

The Position Paper was informed by more than 280 submissions on the Safeguard Mechanism Consultation Paper and the exposure draft of the legislation (Safeguard Mechanism (Crediting) Amendment Bill 2022) and at workshops and seminars held nationally in August and September 2022.

Business groups, including the Business Council of Australia and the Australian Industry Group, have given qualified support for the proposed reforms. Meanwhile, the Greens and environment groups, including the Australian Conservation Foundation, argue that it does not go far enough and have particularly criticised the ability for Australian producers of coal and gas (from which overseas emissions are far greater than domestic emissions) to access unlimited offsets.

What’s next?

An exposure draft of new subordinate legislation, which will amend the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Safeguard Mechanism Rule) and other required subordinate legislative amendments, has been released alongside the Position Paper.

The Government is inviting feedback on the proposed design of the reforms set out in the Position Paper and the exposure draft of the subordinate legislation, until 24 February 2023.

The Government will finalise legislative instruments to implement Safeguard Mechanism reforms by April 2023, so the reforms can commence on 1 July 2023.