Safeguard Mechanism Reforms: what you need to know in the race to net-zero
Against the backdrop of a decarbonising global economy and as part of Australia’s commitment to the Paris Agreement (now enshrined in Commonwealth legislation), the National Greenhouse and Energy Reporting (Safeguard Mechanism) Amendment (Reforms) Rules 2023,[1] are set to come into force on 1 July 2023. These reforms have been designed by the Federal Government to drastically transform carbon footprint management by Australia’s largest emitters with a specific focus on the net emissions of any large industrial facility (of which there are currently around 215) that emit the equivalent of 100,000 tonnes of carbon dioxide annually (Facilities). Importantly, at this stage the Safeguard Mechanism only applies to scope one emissions.
Given the looming 1 July implementation date, it is important that Facilities consider the potential impacts and meaning for them and their commercial arrangements moving toward 2030 and beyond. Specifically, Facilities will shortly become subject to legislated emission limits (known as Baselines), that are set to both tighten and reduce annually up to 2030 and beyond.
These reforms will have significant financial consequences for many impacted Facilities as deliberate action will be necessary to decarbonise these Facilities in a relatively short period of time. Across various industries, substantial capital investment in new technologies will be required to deliver reduced emissions, otherwise Facilities will be left with no other option but to purchase and surrender carbon credits in some form. In view of the announced changes to the Safeguard Mechanism Rules and the ongoing uncertainty and concern among industry proponents, we set out below a few key takeaways for consideration:
Baselines are now calculated differently depending on whether Facilities are existing or new
For existing Facilities, several factors will be multiplied according to a set formula to determine the relevant Baseline for that Facility.
A facility-specific production-weighted, average emissions intensity value will be set using the facility’s historical emission and production data from 1 July 2017 to 30 June 2022. Existing Facilities must apply to the Clean Energy Regulator for a site-specific emissions intensity value by 30 April 2024.
By 2030, the Government intends that all Facilities will have emissions intensity values that are industry-averaged, rather than site-specific. Over time this will standardise Baselines across similar Facilities, including any outlying Facilities with historically high emissions.
To introduce reduction obligations in manageable increments, on an annual basis from 2023 through to 2030, the emissions intensity value will be transitioned from being facility-specific to industry-average according to the following ratios:
| 2023-24 | 2024-25 | 2025-26 | 2026-27 | 2027-28 | 2028-29 | 2029-30 | |
| Facility-Specific: Industry-Average | 90:10 | 80:20 | 70:30 | 60:40 | 40:60 | 20:80 | 0:100 |
The emissions intensity value will be multiplied by a production variable. Both industry-average emissions intensity values and production variables for existing Facilities will be determined by the Federal Government in consultation with industry prior to the commencement of the program on 1 July 2023.
For new Facilities that commence operations after 1 July 2023 or Facilities that begin producing new products after this date, Baselines will be set at international best practice levels, adapted for an Australian context.
Whilst international best practice emissions intensities have not yet been determined, the process of adaption for an Australian context will involve:
- adjustment for variables in differing energy sources;
- contemplation of the types of metal ores that are processed in Australia; or
- consideration of the effect of technologies implemented in Australia and overseas, including renewable energy, low emissions technologies and electrification.
Whilst it remains to be seen what international best practice levels will look like, projects should expect that Baselines set against international best practice levels will be tighter than the Baselines that will apply to existing Facilities.
Baselines will now change over time
From 1 July 2023, most Baselines will decline by 4.9% each year until 2030, subject to some exceptions outlined below.
New gas fields
New gas fields supplying existing liquefied natural gas facilities, including shale gas projects within the Beetaloo Basin, will be required to have net-zero emissions from their outset. This is due to the existence of low-CO2 fields and the opportunities for carbon capture and storage.
Electricity generators
Grid-connected electricity generators are not subject to a facility-specific Baseline. Rather, grid-connected electricity generators are subject to a ‘sectoral’ baseline that is set at 198 million tonnes of carbon dioxide equivalent, which is not expected to be exceeded.
Landfills
Landfill facilities have different arrangements to other facilities which are calculated from a default capture efficiency rate of 37.3%. To date, only one landfill facility has been covered by the Safeguard Mechanism regime and any future landfill facilities are expected to have net emissions well below their Baselines which will decline at the same rate as other facilities.
Emissions-intensive, trade exposed businesses (EITE)
EITE businesses fall into two categories, being Trade Exposed Facilities and Trade Exposed Baseline-Adjusted Facilities (TEBA Facilities).
To fund their transition to lower emissions technology, EITE businesses will be able to access a portion of the $1.9 billion Powering the Regions Fund, being the $600 million set aside for the Safeguard Transformation Stream. EITE businesses that provide critical materials for the clean energy industry will also be granted access to the $400 million Critical Inputs Fund.
TEBA Facilities will not contribute the same emissions reductions relative to other Facilities, to support the competitiveness of trade-exposed industries and due to carbon leakage risks. TEBA Facilities will be able to apply to the Clean Energy Regulator for a reduced Baseline decline rate for three years, depending on whether they are designated as manufacturing (minimum 1% Baseline decline rate per year) or non-manufacturing (minimum 2% Baseline decline rate per year).
To be designated a TEBA Facility, the primary production variable must be a trade-exposed production variable according to new Schedule 2 of the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 which identifies a number of manufacturing production variables (for example, certain metals, glass products, chemicals or food products) or non-manufacturing production variables (including certain metals and petroleum products).
How can a Facility stay below the Baseline?
Where a Facility’s emissions rise above their Baseline, the Facility has several options to remain within their emissions target.
Facilities will automatically generate Safeguard Mechanism Credits (SMCs), when their emissions are below their Baseline. Facilities can bank unlimited SMCs until 2030 and can surrender them during any reporting period to meet their own Baseline. SMCs can also be sold to other Facilities.
Facilities can also purchase and surrender Australian Carbon Credit Units (ACCUs). Each ACCU surrendered reduces a Facility’s emissions by one tonne. Where a Facility surrenders ACCUs equal to 30% or more of its Baseline, an explanatory statement detailing why abatement did not occur on site must be submitted to the Clean Energy Regulator. Facilities may purchase ACCUs on the open market or from the Government at a fixed price of $75 in 2023-24, to increase with CPI and by 2% each financial year.
If a Facility exceeds its Baseline but the controlling entity has a firm and credible plan to reduce cumulative emissions over a five year period, then it can apply to the Clean Energy Regulator to average out its exceedance over a five year multi-year monitoring period.
A Facility may also ‘borrow’ from its future Baseline. A Facility may apply to the Clean Energy Regulator to increase its Baseline by up to 10%. In exchange, the following year, the Facility’s Baseline will decrease by the corresponding amount, plus ‘interest’. For the financial years of 2024-25 and 2025-26, 2% ‘interest’ will be added to the Baseline decrease. From 1 July 2026, 10% ‘interest’ will be added.
Though not part of the present reforms, in late 2023 the Government intends to consult on the possibility of allowing access to high integrity international offsets.
What are the consequences of exceeding the Baseline?
The Clean Energy Regulator will publish information reported by Facilities as part of their compliance reporting obligations, including the gross emissions, net emissions, five year rolling average and total emissions of each Facility, and, amongst other things, the volume of emissions that were methane, carbon dioxide and nitrous oxide.
Facilities may be subject to civil penalties where their emissions exceed their Baseline. The maximum civil penalty will be set at 1 penalty unit (being $275 at 1 January 2023) per tonne of excess emissions per year. Civil penalties are likely to be imposed alongside other emissions management restrictions which practically can also have consequences for facilities’ ongoing operation.
Key considerations for Facilities going forward
With 1 July 2023 looming and potentially significant penalties for failure to comply, it is important that proponents remain vigilant in their preparations for stringent and concrete compliance frameworks. Whilst we step out below some suggested compliance framework steps, it is important that reporting entities consider their applicability. We recommend that affected entities:
- maintain transparency and regular communication with the Department of Climate Change, Energy, the Environment and Water to discuss best practice and practicality of any amendments or commercial developments. It should also be noted that by remaining close to governmental communication, companies will naturally become and remain aware of developments in other areas including funding and other assistance initiatives that may be available for their Facilities;
- contemplate their strategies for securing and surrendering SMCs and ACCUs;
- consider and plan for opportunities to utilise international credits (noting the Government’s current plans to consider enacting international credits in 2026); and
- consider any contractual arrangements in place with respect to statutory responsibility for reporting and how that might be impacted by these changes along with other commercial implications like how-to pass-through costs for credits.
The new and improved Safeguard Mechanism is an important piece in the Federal Government’s decarbonisation puzzle. Implemented with an eye to strengthening Australia’s position in the race to 2030, it is important that Facilities and industry proponents continue to monitor the situation and potential expansion of the Safeguard Mechanism in the future.
What’s next
Although the Safeguard Mechanism is only applicable to heavy industrial facilities at this stage, we suspect the first few years of this scheme will be used as a test case to expand it to other sectors and emitters. This would most likely occur by lowering the 100,000 tonne threshold. As such, facilities not currently captured by the scheme should pay close attention to its operation, and continue to look for cost effective ways that currently align with their business strategy to reduce their carbon footprint so that they are not negatively impacted in the future.
If you have any questions, comments or would like to know more about the Safeguard Mechanism and its application to your business, please register for our upcoming seminar on Tuesday, 6 June 2023 where we will be joined by a member of the Clean Energy Regulator to discuss these changes in greater details as well as some of the practical implications around procuring carbon credits and other contractual issues.
NGERS and Safeguard Mechanism Changes Webinar
Tuesday, 6 June 2023 | 12:00-1:00 PM (AEST)
To speak with our team about these changes, contact Kate Swain, Partner, or Louise Horrocks, Partner and Head of McR ESG.
[1] which amend the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015, subordinate legislation to the National Greenhouse and Energy Reporting Act 2007.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.
