The reformed Safeguard Mechanism commenced on 1 July 2023. Relevant facilities are now subject to a decline rate to their emissions baselines and able to receive Safeguard Mechanism Credits.
Partner James Plumb and Special Counsel Elizabeth Harvey from HopgoodGanim’s Resources and Energy team provide an update on what large emitters need to consider now that the reforms have taken effect.
Background
The Safeguard Mechanism applies to facilities that emit more than 100,000 tonnes of carbon dioxide equivalent (CO2-e) in a year. There are currently around 215 designated large facilities across the mining, manufacturing, transport, oil, gas, and waste sectors which have set emissions baselines.
As part of its climate commitments, the Albanese Government has built off the existing framework by applying a decline rate to facilities’ baselines as a means to require real emissions reductions. Amendments from the Greens and independents for the passage of the legislation led to an emissions cap, with objectives added to the National Greenhouse and Energy Reporting Act 2007 to achieve the following outcomes:
- total net safeguard emissions between 1 July to 2020 to 30 June 2023 to not exceed 1,233 million tonnes of CO2-e; and
- net safeguard emissions to decline to no more than 100 million tonnes CO2-e by 1 July 2029 and to zero by 1 July 2049.
The reforms:
- impose a 4.9% per year baseline decline rate for most covered facilities;
- permit the Clean Energy Regulator to automatically issue Safeguard Mechanism Credits (SMCs) to facilities with emissions below their Safeguard Mechanism baseline;
- expand access to flexible compliance arrangements through the introduction of tradeable credits, banking and borrowing, and extended multi-year monitoring periods; and
- provide tailored treatment for emissions-intensive, trade-exposed (EITE) facilities to ensure businesses are not competitively disadvantaged.
What do you need to know about changes to the baselines?
The Safeguard Mechanism retains the existing production-adjusted (intensity) baseline framework, which allows baselines to grow and fall with production.
Existing facilities
With the reforms, all facilities will be on production-adjusted baselines, and the reported, calculated and fixed baselines will no longer be available.
Baselines for existing facilities will be set using a hybrid model which takes into account both the site-specific emissions intensity values and the industry average emissions intensity values. This is initially weighted towards the use of site-specific emissions intensity values, transitioning to 100% industry average emissions intensity values by 2030.
All existing facilities will have a site-specific emissions-intensity value set using historic data. Facilities need to apply for site-specific emissions-intensity values by 30 April 2024.
New facilities
All new facilities will be given baselines set at international best practice levels, adapted for an Australian context.
DCCEEW has released a draft Guideline on how international best practice benchmarks will be set. Consultation on the Guideline is open until Friday 11 August 2023.
The approach proposed by the draft Guideline is as follows.
- Identify potential best practice facilities.
- For each potential best practice facility, collect data and divide emissions by production to work out its emissions intensity, ignoring any offsetting. If necessary, the emissions intensity will be adjusted for Australian conditions, checking to see that this doesn’t alter the facility being a potential best practice facility.
- Calculate a production-weighted average emissions intensity, using at least two facilities and ensuring their combined annual production is at least 10% of the combined annual production of all relevant Safeguard facilities
- Compare the emissions intensity calculated in step 3 to the top 10% Australian performance and select whichever value is lower.
- For fossil fuel production variables, compare the value to relevant methane standards. If the standards are more stringent than the benchmark, adjust to account for the international standard.
Oil & gas projects
Shale gas extraction facilities are subject to a zero baseline emissions number.
Importantly, exploration of a geological formation that contains shale gas may also be deemed to be an extraction facility if total emissions (including scope 3 emissions) from the extraction and use of gas from the formation target, if fully exploited, would likely exceed 100 million tonnes of carbon dioxide.
Gas produced from a new gas field (that is, a field that commenced commercial production after 1 July 2023) will be subject to a zero baseline for reservoir carbon dioxide if the gas is processed by a liquefied natural gas (LNG) facility, unless the gas has been purchased from the domestic wholesale gas market.
Credits and offsets
All safeguard mechanism facilities except landfills will be able to generate SMCs from 1 July 2023 if their emissions are below their baselines.
SMCs can be surrendered to meet compliance obligations or banked for future use in any year until 2030.
Until 2030, borrowing of up to 10% of a facility’s baseline in each year will be permitted. However a 10% interest rate applies in the year after borrowing occurs (reduced to 2% for the first two years of the reformed Safeguard Mechanism to support early investment in onsite abatement).
Facilities can still purchase and surrender Australian carbon credit units (ACCUs) to meet compliance obligations, however a facility that surrenders ACCUs equal to more than 30% of its baseline must submit a written explanation to the Regulator of why more carbon abatement was not undertaken at the facility during the period.
A cost containment mechanism has also been added under the Carbon Credits (Carbon Farming Initiative) Rule 2015, allowing the Regulator to sell ACCUs to be used for compliance with the Safeguard Mechanism at a set price of $75 per tonne, indexed yearly at CPI plus 2%, effectively setting this as the maximum carbon price in Australia.
International offsets are not able to be used at this time. The Government intends to consult in late 2023 on the possibility of establishing the legislative framework for international units.
Emissions intensive trade exposed (EITE) facilities
Trade exposed facilities are those facilities whose main production variable is trade exposed.
Trade exposed baseline adjusted (TEBA) facilities are a subset of trade-exposed facilities facing an elevated risk of carbon leakage. TEBA facilities will be eligible to apply to the Regulator for a discount on the 4.9% baseline decline rate.
EITE businesses can access support from the dedicated $600 million Safeguard Transition Stream within the Powering the Regions Fund. The Round 1 grant opportunity will open on 7 August 2023, providing grants of up to $50 million to cover up to 50% of eligible project expenditure. This does not apply to new or expanded coal or gas production facilities.
For more information, please contact HopgoodGanim’s Resources and Energy team.
Thank you to vacation clerks Sarah Jones and Zoe Rodgers for their assistance with this article.