With the publication on 26 March 2015 of the Federal Government’s Emissions Reduction Fund: Safeguard Mechanism Consultation Paper (Safeguard Consultation) we now have one of the final pieces to complete the Emissions Reduction Fund jigsaw.

The Safeguard Consultation contains few surprises. Instead, it puts more flesh on the bones of the emissions safeguarding policies canvassed in the March 2014 White Paper and builds on the Safeguard Mechanism high-level architecture contained in the implementing legislation.

The aim of the Safeguard Consultation is to firm up the policy positions that will underpin the legislative rules setting out the detail of the safeguard mechanism.

What we already know

In the White Paper, the Government decided that the safeguard mechanism (which is tabled to commence on 1 July 2016) will apply to facilities with direct emissions of more than 100,000 tonnes of carbon dioxide equivalent (CO2-e) a year (covered facilities).

This represents approximately 140 large facilities which already report their emissions under the National Greenhouse and Energy Reporting Scheme (NGER Scheme) and represent approximately 52% of Australia’s greenhouse gas emissions. Industries likely to have covered facilities include power generation, mining (coal and metal ores) , oil and gas extraction, gas supply, manufacturing (including metals, cement and lime), transport (air, sea, rail and road), heaving and civil engineering construction and waste.

From 2014-15 onwards, each facility is required to report its emissions separately.

The business with operational control of a covered facility will be responsible for meeting the safeguard requirements.

A covered facility’s baseline will be set using the highest level of reported emissions for that facility over the historical period 2009-10 to 2013-14 (baseline period).

The covered facility must maintain its future emissions output below its facility baseline. This can be achieved by implementing emissions reduction measures or by purchasing Australian Carbon Credit Units (ACCUs) equivalent to the amount by which the facility’s emissions exceed its facility baseline.

If the operator of the facility does not comply with its safeguard obligations, the Clean Energy Regulator has access to a range of increasingly punitive enforcement options to encourage the operator to comply. Enforcement options include the issuing of infringement notices, accepting enforceable undertakings and seeking injunctions. The final sanction is a court imposed civil penalty, the maximum amount of which is still to be set by regulation.

What’s new - establishing baselines

The Government has identified three key issues for which a policy approach is required in relation to the setting of historical baselines.

Minimum baseline – 100tCO2-e

To address the situation where a facility’s emissions are consistently below the coverage threshold of 100,000 tonnes CO2-e between 2009-10 and 2013-14 but then increase to trigger the coverage threshold after 1 July 2016, the Government proposes to set a minimum baseline amount of 100,000 tonnes CO2-e. This will ensure that the facility cannot have a baseline that is lower than the coverage threshold.

Changes to facility reporting methods

If there are changes to official global warming potentials which are used to calculate the ‘carbon dioxide equivalent’ emissions for different greenhouse gases, the Government proposes that the Clean Energy Regulator have the ability to recalculate baselines without requiring any additional reporting from facilities.

If a facility has previously been reported as part of a vertically integrated production process or if a facility’s boundaries have changed (eg two separate facilities become one facility), the Safeguard Consultation proposes that the facility operator could have the option of retrospectively reporting historical data over the baseline period that is consistent with current reporting methods.

If the operator of a facility cannot or elects not to provide revised historical data, then the Clean Energy Regulator will not recalculate the baseline where the emissions of the facility were previously reported as a vertically integrated production process unless the Clean Energy Regulator is able to determine the emissions over the baseline period on a pro-rata basis using the reported 2014-15 disaggregated data.

Similarly, where the facility boundary has changed, the Clean Energy Regulator will not recalculate the baseline unless it is able to determine the emissions for the missing baseline years on a pro-rata basis using the most recent year’s data.

Baselines reflecting inherent emissions variability – natural resources and reserves

The Government recognises that the method for determining a facility’s baseline may not be appropriate for operations that are associated with exploiting natural resources and reserves.

For these operations, it is likely that facility emissions will exceed the historical baseline as a result of the natural resource grade or depth and that the operator will have limited ability to control the emissions. As a result, using an historical high point may not accurately reflect expected ‘business-as-usual’ emissions.

The Safeguard Consultation canvasses addressing this issue by permitting the operator of the facility to apply to the Clean Energy Regulator in the first year of the safeguard mechanism (ie 2016-17) to adjust the facility baseline using the ‘independent assessment’ approach described below under ‘investments already underway’.

What’s new – treatment of new investments

The Safeguard Consultation considers the treatment of new investments and seeks views on how to address three scenarios: (i) new facilities that have not yet commenced operations, (ii) facilities that have recently commenced operations but have insufficient NGER Scheme data to establish a historical baseline and (ii) significant expansions to a facility’s capacity.

Cut-off date – 1 July 2020

The Government proposes setting a universal cut-off date of 1 July 2020 under which it will treat new facilities and significant expansions that first exceed the safeguard coverage threshold before this date as having made a final investment decision. This recognises the fact that a final investment decision limits the scope for a facility operator to make significant changes to the facility to address best practice in achieving emissions reductions.

Under this proposal, existing facilities that have reported for less than five years could choose the approach for investments already underway (outlined below) or use the highest reported emissions of their limited data set between 2009 10 and 2013 14. However, where a facility has submitted three annual emissions reports during the baseline period that are over 100,000 tonnes CO2-e, they will be required to use historical data.

Investments already underway

The Government is proposing that the baseline for a new investment that first exceeds the coverage threshold before 1 July 2020 could be determined by the Clean Energy Regulator and assured by an independent auditor. The baseline would be based on the facility operator’s forecast of emissions in the year with the highest production levels over the first three years of operation after emissions first exceed 100,000 tonnes CO2-e.

The application for assessment could also include a statement outlining how the operator intends to manage greenhouse gas emissions and energy use at the facility.

After three years, a facility’s baseline could be adjusted permanently if the highest level of actual production over the relevant three year period is different from the forecast.

Where a facility does not successfully apply for a baseline, or does not provide the required data to adjust the baseline at the conclusion of the initial three year period, it is proposed that a default baseline of 100,000 tonnes CO2-e should apply.

Investments without a final investment decision

The White Paper stated that new investments that have not taken a final investment decision will be encouraged to perform in accordance with ‘best practice’. The Safeguard Consultation proposes that best practice be defined as the average emissions intensity of production of the best performing 10 per cent of Australian industry output and that the best practice obligation should be applied to new investments that first exceed the safeguard coverage threshold from 1 July 2020.

If there is limited Australian data available (for example, for a technological process new to Australia), international data could be adapted to determine the best practice emissions intensity.

The baseline would be determined in a similar fashion to investments underway. However, to streamline administration, outputs that contribute less than 10 per cent of a facility’s emissions would not be required to contribute to the facility baseline, unless requested by the operator. The facility’s baseline would, instead, be scaled up using the output that contributes the majority of the facility’s emissions.

Significant expansions

The Government proposes defining a significant expansion as an increase in production of capacity of more than 20 per cent as a result of the installation of new plant or equipment.

What’s new - multi-year monitoring period

For facilities where there is a reasonable expectation that a facility’s emissions will exceed its baseline in a reporting year, the Government is proposing that operators with emissions above baselines could apply to the Clean Energy Regulator for a multi-year monitoring period of up to three years. During this monitoring period, the facility could exceed its baseline in one year, so long as its average emissions over the approved monitoring period remain below the baseline.

The Government is also considering requiring the operator to include in its application for an extended monitoring period an outline of how it proposes to ensure that emissions will be returned to baseline levels over the monitoring period.

What’s new - electricity sector special rules

To address electricity industry concerns that the application of absolute historical baselines on individual generators may lead to perverse outcomes in the sector, the Government has consulted closely with industry representatives to develop special rules for the electricity industry. The rules recognise the fact that grid-connected generators behave more like a single entity that coordinates production to meet a given level of demand at any point in time.

The Government’s solution to the unique characteristics of the national electricity market is to propose a sectoral baseline for the grid connected electricity sector based on average emissions over an historical period until such time as the baseline is exceeded.

Once the sectoral baseline is exceeded, the Government has put forward the following two proposals to apply from the NGER Scheme reporting year following the year in which the sectoral baseline is exceeded:

  • individual baselines would apply to all grid-connected generating units; or
  • individual baselines would only apply to individual grid-connected generators that emit more than 100,000 tonnes CO2 e and whose output is more emissions intensive than the average of the sector.

In either case, these individual baselines could be set with reference to a generator’s average emissions over the same historical period as the sectoral baseline.

In all other respects (eg new connections) the electricity sector would have similar rules to the general safeguard emissions.

Timetable

The Safeguard Consultation specifies the following key dates for the safeguard mechanism roll-out:

Click here to view the table

Next steps

The Safeguard Consultation is the penultimate and best chance that large emitters will have to influence the final form of the safeguard mechanism and ensure that their particular industry requirements are addressed.