Designing the Safeguard Mechanism: a snapshot of the key features

01 May 2015Archived News Megan Born Climate Change Matters

The draft consultation paper on the proposed structure and operation of the Safeguard Mechanism was released by the Government on 26 March. In this article Energetics looks at the proposed design features of this new policy measure and consider its potential role. Safeguarding could provide a way of driving emissions reductions in the future – particularly post 2020.

Major features of the Safeguard Mechanism

There are four aspects of emissions management under the mechanism:

  • facility emissions are to remain below baselines

  • a ‘net emissions’ approach will be employed for offsetting

  • exemptions will be available for facilities where emissions are from exceptional circumstances

  • there will be an option for a civil penalty for non-compliance

The Safeguard Mechanism will cover facilities with emissions greater than 100,000tCO2-e per annum:

  • For most facilities the baseline will be the highest NGER reported Scope 1 emissions in the period 2009-10 to 2013-14.

  • Should a facility be below 100,000tCO2-e in this period but later exceed this amount, the baseline will be set as 100,000tCO2-e.

Draft legislation will be released in July 2015, with the Safeguarding Mechanism to take effect 1 July 2016.

How will the Safeguard Mechanism work?

  • Averaging over a multi-year monitoring period has been proposed. This would allow a business to exceed its baseline in one year, providing its emissions are below its baseline in the subsequent two years. As such on average over the three years, the facility emissions would be below the baseline. The business would have to apply to the Clean Energy Regulator to be eligible for this option.

  • Facilities will be able to reduce their emissions by surrendering Australian Carbon Credit Units (ACCUs), either through a Carbon Abatement Contract (CAC) from the Emissions Reduction Fund or from the secondary market. In order to ensure emissions are not double counted, facilities that have ACCUs sold to the Government as part of a CAC will have these added on to their facility’s emissions for the emissions level subject to safeguarding to be calculated.   See Figure 1 below.   Facilities which sell ACCUs on the secondary market will not be able to surrender these units; these units will instead be surrendered by the buyer.

Figure 1:  Process for managing emissions through the creation and sale of ACCUs

  • Should a facility experience ‘exceptional circumstances’ that affect emissions such as natural disasters, criminal activity, or in the case of electricity generators being directed to generate electricity by market operators in response to a one-off event, the facility can apply to the CER to have these emissions excluded from the safeguarding mechanism.

  • To encourage compliance, the Regulator may issue infringement notices, accept enforceable undertakings and seek injunctions to rectify an emissions exceedance. As a last resort, a civil penalty may be imposed. The Regulator has the discretion to select an appropriate enforcement option.

  • Special treatment for the electricity sector.  In the electricity sector, a sectoral baseline approach based on average industry-wide generator emissions over a historical period has been proposed. Should this sector-wide baseline be exceeded, facilities with emissions greater than 100,000tCO2-e and with an intensity greater than the sector average, will be given an individual baseline and the sector baseline would not be returned

  • Information proposed to be made publicly available.  This includes, facilities covered by the safeguard mechanism, facility baselines and applications for new investments, covered emissions and surrendered offsets, facilities with multi-year monitoring, operators whose emissions exceed their baseline and facilities declared exempt from safeguard obligations.

  • Coverage.  See Table 1.

  • Exemptions.  Joint Petroleum Development Area (JPDA) and Sunrise gas fields will not be covered. This contrasts with the Clean Energy Act where facilities in these areas could be liable entities (albeit with significant, particular assistance provided under the JCP/EITE program).

Table 1: Overview of the Safeguard Mechanism: the industries covered, how baselines are set, and the treatment of expansion

ERF-Safeguard-first-auction-table.png

 

Could we see the Safeguard Mechanism play a role in reducing Australia’s emissions?

As with most questions of this nature, the answer is, ‘it depends’. The Safeguard Mechanism covers approximately half of Australia’s emissions, leaving the remaining half of the inventory with very little incentive to reduce emissions. The remaining half is comprised of smaller emitters, with perhaps less opportunity and less capacity to participate in the Emissions Reduction Fund than the large emitters.

It also depends heavily on the final definitions used for the electricity sector’s obligations under the Safeguarding Mechanism, given that emissions from this sector alone constitute more than half the emissions of those covered by the mechanism.   At face value, the approach of applying a sectoral average baseline to the electricity sector seems reasonable however no mention is made in the consultation paper of shifting the baseline downwards over time.

Finally, given that the baselines for the non-electricity sector facilities will be set at the historical maximum over a period where there was no carbon price or other scheme in place to reduce emissions (2009-10 to 2013-14), the sum of these baselines is likely to far exceed the current level of emissions.  This suggests that the Safeguard Mechanism is only intended to impose a limit on excessive emissions growth, rather than drive emissions reductions. 

Questions include:

  • Is this proposed mechanism equitable to all sectors?

  • Will the Safeguard Mechanism manage any emissions increases? References to the application of penalties in the consultation paper are vague.

  • With the “flexible compliance obligations” and rolling averages for baselines - is this safeguard mechanism robust enough?

It is particularly worth noting that the government’s consultation paper doesn’t indicate a role for the Safeguard Mechanism beyond 2020.  Will supplementary measures be required if we fail to meet our international targets?  Until we understand the government’s targets and planned mitigation activities beyond 2020, a risk management issue remains for business.

Energetics can help your business assess the implications for your business of the safeguarding mechanism.  Please contact one of our experts for advice.  

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