The safeguard mechanism could one day grow teeth

14 Sep 2015Archived News Dr Gordon Weiss Climate Change Matters

There is a dilemma for business as they look through the details of the Emissions Reduction Fund Safeguard Mechanism. The draft rules have been criticised as weak. The points given as evidence include the permission given to facilities to use a baseline taken from the highest emissions level for the previous five years, as reported under the NGER program; the ability to average emissions over three years so that a single ‘bad’ year will not necessarily result in a penalty, and the considerable leeway given to large emitters who will be able to move between absolute or intensity baselines. We also see fewer emitters potentially captured under the scheme, and no robust penalties in place for exceeding baselines.

However, it would be unwise to dismiss the safeguarding mechanism as ‘toothless’. Defining the baseline emissions for a facility is done through a Legislative Rule (in this case, the “National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015”), and this allows the Minister considerable flexibility.

In this article Energetics argues that the ability to vary baselines sets the scene for the safeguarding mechanism to one day take a more active role in driving emissions reductions.

We outline the implications for Australia’s large energy users and greenhouse gas emitters and steps that can be taken to mitigate risks and create a future competitive advantage. Noting too that there is a short window within which submissions can be made on the design of the safeguard mechanism.  Submissions must be made by Monday, 21 September 2015 AEST 5pm.

Issues for consideration in making a safeguard mechanism submission

The dilemma for business is deciding at what point a carbon liability is a material risk. In the short term the safeguarding mechanism is designed with significant concessions and not linked to the national emissions target. However, over the longer term the Minister could lower baselines to drive abatement. Business should consider the implications of declining baselines in their risk management strategies.

Certainly in the absence of new significant policy levers, achieving the proposed 26-28% reduction in emissions on 2005 baseline levels will place a heavy burden on the Emission Reduction Fund without constraints on emissions from large facilities.

In short there are risks to Australia not requiring more of the safeguarding mechanism as currently designed. They include:
- We have ‘goal posts’ but no clear pathways in the form of policies or programs to achieving the 2030 emissions reduction target.  Uncertainty for business continues. 

- Long range business investment programs are compromised due to carbon pricing uncertainty. 

- There is a strong consensus that international negotiations under COP21 in Paris will be a success, as major economies would have to back away from their published Intended Nationally Determined Commitments (INDCs) and we do not expect them to do that.  Therefore we will see building of momentum internationally towards greater mitigation activities, carbon trading and disclosure of carbon liabilities and management practices. We may also see trade sanctions imposed by larger economies which make significant INDCs, against those who do not have a price on carbon in some form.

The Australian Government has flagged that a national conversation on the approach to achieving the 26-28% reduction in emissions will begin in 2017-18. The possibility of robust baselines for the safeguard mechanism emerging from this review poses risks to business, as this may lead to a rising demand for Australian Carbon Credit Units (ACCUs) to offset emissions that exceed baselines.  

There are other reasons why we consider this a distinct possibility. 
- Developing a market for ACCUs is both an efficient way of driving emissions reductions and it operates outside the government Budget at a time of declining taxation revenues. 

- The development of a healthy market trading ACCUs has the potential to link more closely to international carbon markets. 

Our advice

- Register your projects so that you can generate ACCUs.

- If you are likely to be liable and have facilities with potential projects, it’s worth assessing the value of registering them, versus considering just undertaking the activities on site without creating ACCUs to avoid the increase in net emissions.

- As well as assessing the risks posed by the current draft rules for the safeguard mechanism, consider the impact to your organisation of baselines that are less than your current emissions.

- Under the draft rules, there is a requirement for liable entities to disclose a significant amount of data, which will be placed in the public domain. Facility level baselines will be made public. You should therefore assess the implications for your business.

A market based mechanism is the most economically efficient way to achieve our 2030 emissions reduction target. Perhaps more importantly it can drive the necessary transition for Australia’s energy mix from coal-fired power to renewables. 

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