The framework for the Federal Government’s emissions trading scheme (called the ‘Safeguard Mechanism’) came into force on 1 July 2016.

Introduction

The Safeguard Mechanism is part of the Emissions Reduction Fund under the Coalition’s Direct Action Plan, which has three key components:

  • a program to credit emissions reductions
  • a fund to purchase emissions reductions, and
  • the new Safeguard Mechanism.

The Safeguard Mechanism establishes base emission levels for large emitters. It currently applies to facilities with direct emissions of 100,000 t CO2-e per year. These large emitters are allocated a baseline emissions level and they must ensure their net emissions do not exceed that baseline level.

A range of strategies may be implemented to keep a facility’s net emissions below the baseline number. One method is by purchasing and surrendering Australian Carbon Credit Units (ACCUs), which is why the Safeguard Mechanism may be described as a ‘cap-and-trade’ emissions trading scheme.

Cap reductions

A leading media outlet has reported that caps under the Safeguard Mechanism will start to reduce from next year.[1] Despite media reports, the Coalition has not yet announced any cap reductions but the Government has committed to a full review of the Safeguard Mechanism in 2017 and cap reductions may be investigated as part of that review. Large emitters should ensure their baseline levels are set at an appropriate level to allow for possible future cap reductions.

Setting the baseline level

Many emitters may have already received a proposed baseline number from the Clean Energy Regulator based on the facility’s reported emissions between 2009-10 and 2013-14. The Clean Energy Regulator will notify responsible emitters of final reported baselines in early September 2016. However, the short timeframe allowed for comments on the proposed reported-emissions baseline determination may result in unfavourable determinations.

Emitters who are unsatisfied with a determination based on their reported emissions may apply to have the baseline reset based on estimated production. These special determinations (called ‘calculated-emissions baseline determinations’) are intended for new facilities that do not have adequate historical data but may also apply to established facilities that:

  • have undergone significant expansion (‘significant expansion criteria’); or
  • are subject to inherent emissions variability associated with the extraction of natural resources (‘inherent emissions variation criteria’); or
  • expect to exceed the reported-emissions baseline number (‘initial calculated baseline criteria’).

When the Regulator disagrees

A refusal by the Regulator to reset the baseline number to reflect an emitter’s estimated production is a reviewable decision that can be challenged through judicial proceedings. Alternatively, the emitter may submit a new application putting forward a revised baseline emissions number for approval by the Regulator.