Key Points:

ustralia's cap on emissions, the Safeguard Mechanism, will commence on 1 July 2016, but it will need to demand more of large emitters to meet likely increases in Australia's international obligations.

The Paris Agreement, with its long-term goal to keep global temperature rise beneath 2 C° of pre-industrial levels and a mechanism for strengthening parties' nationally determined contributions every five years, was signed by 175 countries in New York last Friday 22 April 2016. Under this agreement, Australia has committed to reducing its emissions by 26-28% from 2005 levels by 2030.

The Safeguard Mechanism, due to commence on 1 July 2016, will complement the Emissions Reduction Fund (ERF) to require responsible entities to keep emissions below set baselines.

So, what is the Safeguard Mechanism, will it achieve emissions reductions over and above business as usual scenarios and what flexibility does it contain to respond to potentially more onerous future international emissions reductions obligations?

Background to the Safeguard Mechanism

Under the ERF the Government purchases Australian Carbon Credit Units (ACCUs) through a reverse auction process, from proponents of projects approved under a methodology under the Carbon Farming Initiative. The proponents offer to supply emissions reductions in the form of ACCUs.

The aim of the Safeguard Mechanism is to limit emissions in the economy by keeping emissions at or below business as usual scenarios, so that any emissions reductions purchased as part of the ERF are not undermined.

Amendments to the National Greenhouse and Energy Reporting Act 2007 (NGER) will operate from 1 July 2016, to implement the Safeguard Mechanism. In preparation for its commencement, the Government has developed the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Cth) and is developing a suite of accompanying guidelines.

Facilities, responsible emitters and their baselines

Facilities with direct, scope 1 emissions that exceed the 100,000 t CO2-e threshold, are covered by the Safeguard Mechanism. The Clean Energy Regulator (CER) will make determinations to set baselines for these facilities using the Safeguard Rule. Responsible emitters are accountable for adhering to their set baseline and reporting on their emissions to the CER. Baseline determinations are reviewable in the Administrative Appeals Tribunal.

The baseline set for a particular facility will depend on the individual circumstances of that facility, for example, whether there is NGERs data for the facility, whether it is a new facility, or whether the facility will undergo expansion. The categories of baselines that will operate from 1 July 2016 are:

  • Reported: NGERs facilities with five years of data, based on the historic high point.
  • Calculated: New facilities, facilities that have significantly expanded or have emissions variability can apply to the CER for a baseline to be calculated on an independent assessment approach. Calculated baselines expire after three years, or five years for larger projects, and on expiry, these baselines will be adjusted to reflect actual production.
  • Default: Designated large facilities that are not eligible to apply for a calculated baseline and do not have the required NGERs data to obtain a reported baseline will be assigned the default baseline of 100,000 t CO2-e.

Two further baselines will operate from 2020, for new or significantly expanded facilities being benchmark and landfill-benchmark baselines determined by best practice guidelines. The CER is currently seeking submissions on the draft Emissions Intensity Benchmark Guidelines, for setting emissions intensity benchmarks for facilities that are new or will be expanded after 2020. Consultation closes on 6 May 2016.

Options for complying with set baselines

Under the Safeguard Rule, responsible emitters can manage the compliance of a facility with its baseline using a range of flexible tools. Responsible emitters can:

  • apply to have their baseline adjusted, provided they meet the eligibility criteria. This may assist certain facilities attain a less onerous baseline;
  • apply for a multi-year baseline. This can enable a responsible emitter to spread a baseline exceedance over two or three years, but will not be made if an application for a baseline adjustment has been made and refused;
  • apply for an exception to complying with their baseline, in circumstances where the excess emissions were the result of a natural disaster or criminal activity. Reasonable steps must have been taken to mitigate the risk of increased emissions arising from the event and
  • surrender "prescribed carbon units" or eligible carbon offsets to "pay" for the emissions exceedance. The Safeguard Rule does not presently provide for the use of international credits to offset emissions exceedances, however, the NGER Act keeps that option available to the Government by providing that the Safeguard Rule can prescribe other types of carbon units.

Consequences for failing to meet baselines

The enforcement powers of the CER are varied, and include:

  • enforceable undertakings and injunctions to require a responsible emitter to surrender eligible carbon units to bring net emissions back to baseline levels;
  • infringement notices; or
  • civil penalties, with maximum penalties of $1.8 million.

Safeguarding emissions reductions

Industry commentators predict that the Safeguard Mechanism will not affect the business as usual practices for many large emitters. That baselines are calculated on historical emissions highpoints means that many large emitters may not exceed the baselines set under the Safeguard Mechanism.

At the signing of the Paris Agreement, Greg Hunt indicated that Australia will "meet and beat" its 2020 targets and that Australia is on track to reduce its emissions by 26% by 2030. However, it is currently unclear how the ERF and the Safeguard Mechanism will contribute to Australia's emissions reductions post-2020. Given that the Paris Agreement provides for signatories to increase their level of ambition every five years, Australia may need more onerous Safeguard Mechanism baselines to meet any intensification of its international obligations.

The ERF and Safeguard Mechanism are up for review in mid-2017, with a final report due by 15 November 2017. Internationally, Australia is also obliged to participate in a global stocktake of ambition pledges under the Paris Agreement in 2018, and to submit a revised Nationally Determined Contribution prior to its commencement in 2020. These review processes could provide an opportunity for the Government to demand more of Australia's heavy emitters. For example, the Safeguard Mechanism could have broader application and impose more stringent baselines over time, to match the anticipated intensification of ambition under the Paris Agreement. Whether the Government takes this opportunity remains to be seen.

This review will include an investigation into the options and circumstances under which Australia might adopt an emissions trading scheme. For example, the Safeguard Mechanism could operate as a baseline-credit trading scheme in the future, if baselines are set at a level that creates a demand for the credits required to offset emissions exceedances.