The Safeguard Mechanism reforms are set to become law with some amendments, after the Federal Government struck a deal with the Greens to secure their support.
The reforms aim to limit industrial emissions and are a central policy component of the Government’s plan to meet its emissions reduction target of 43% below 2005 levels by 2030. In exchange for the Greens’ support, the Government agreed to several amendments including a cap on actual emissions and a pollution trigger.
How these policy negotiations will be implemented in legislation, rules and other packages will be critical for the market. At this stage, the Government has moved amendments to the Safeguard Mechanism (Crediting) Amendment Bill 2022 (the Bill) in the House of Representatives which action recommendations from the Chubb review. The Government intends to move further amendments to the Bill in the Senate to incorporate some of the negotiated changes. The Government has indicated that it will finalise detailed Safeguard Rules next month.
The Safeguard Mechanism reforms are still expected to commence on 1 July this year.
In this insight, we look at the negotiated changes to the Safeguard Mechanism reforms. The implications for business will depend on the implementation detail. We are closely watching developments.
What has been negotiated into the proposed Safeguard Mechanism amendments?
Some of the key changes to the proposed Safeguard Mechanism reforms are as follows:
- A ‘hard cap’ or limit on gross emissions of the safeguard sector is to be legislated. The intended effect of this is that the safeguard sector will not be able to exceed current pollution levels and the limit will be legislated to decrease over time. Facilities will not be able to use offsets to meet this limit.
- A ‘pollution trigger’ will be introduced, that will require the Climate Change Minister to assess a new or expanded project’s impact on the hard cap and net carbon Budgets. The trigger would be engaged by approvals under the Environment Protection and Biodiversity Conservation Act 1999, advice from the Climate Change Authority, and emissions data and forecasts. If the Minister's assessment finds that the project would contribute to exceeding the cap or Budget, the Minister is required to consult and recalibrate the rules or impose conditions on new entrants. For example, the Minister could limit ACCUs, reduce the value of ACCUs or adjust the decline rates of baselines.
- New measures for disclosure of offsets use will be introduced. Notably, where companies are using over 30% offsets to meet their requirements, they will be obliged to justify this position. Relevantly, no limits will be placed on ACCU use of itself.
- Human Induced Regeneration offsets will be reviewed to address integrity concerns, which is consistent with the recommendations by the recent Chubb Review.
- The NGER Act will be updated to allow the Safeguard Mechanism scheme to deliver a proportional share of the national 2030 target (205 million tonnes by 2030), the Government will update the NGER Act to:
- Clarify that the policy intent is for aggregate emissions to go down over time – through measurement of a rolling average, and
- To not exceed the conservatively estimated 1,233 million tonnes of CO2-e to 2030, or 100 million tonnes in 2030.
- Increased funding to support the decarbonisation for the manufacturing sector and trade-exposed industries including steel, cement, and aluminium. This funding is through the Powering the Regions Fund and the increase will be from $600m to $1 billion.
- A different threshold will apply for hard-to-abate, value-added manufacturers to qualify for a discount on their decline rate. The Government will also reduce the minimum annual baseline decline rate for manufacturers that meet the new threshold to 1 per cent.
- A review will be commissioned of the feasibility of an Australian carbon border adjustment mechanism for the steel and cement sectors (including clinker and lime production).
How these policy negotiations will be implemented in legislation, rules and other packages will be key. For instance, how the hard cap is described to be calculated and the threshold and triggers are described will be determinative as to the implications for the market of these adjustments to the new Safeguard Mechanism. Stay tuned.
What is the Safeguard Mechanism?
The Safeguard Mechanism was a framework introduced by the former Coalition Government in 2016 under the National Greenhouse and Energy Reporting Act 2007 (NGER Act). The existing Safeguard Mechanism requires facilities that produce over 100,000 tonnes of greenhouse gases annually to maintain emissions below a legislated baseline emissions limit. The facilities include fossil fuel operations, steelworks, aluminium smelters, and cement producers. Under the existing Safeguard Mechanism, if facilities exceed their emissions limit, they may purchase and surrender Australian Carbon Credit Units to offset the additional emissions.
The Bill aims to build on the existing Safeguard Mechanism to reduce industrial sector emissions. These amendments form part of the Powering Australia plan and are aimed at reforming the Safeguard Mechanism to actively reduce emissions by gradually lowering baselines of greenhouse gas emitters subject to the Safeguard Mechanism. The proposed reforms are intended to support Australia to meet its updated Nationally Determined Contribution (NDC) under Article 4 of the Paris Agreement.