Policy and legislation

Australia’s new look Safeguard Mechanism

This week the Department of Climate Change, Energy, the Environment and Water released the draft Safeguard Mechanism legislation following a four month period of consultation on scheme reforms. Amendments to the Safeguard Rule and accompanying documentation affirm the Federal Government’s commitment to reducing national greenhouse gas emissions by 43% by 2030, establishing a trajectory to achieve net zero emissions by 2050. Facilities covered by the Safeguard Mechanism will contribute proportionally to this effort through annually declining baselines.

In its 2022 Consultation Paper the Department sought feedback from stakeholders across Australian industry on the nature of baseline establishment, the treatment of existing and new facilities, crediting and trading, support for trade-exposed entities and future baseline decline rates. Over 280 submissions were received, displaying a range of views on future operation of the scheme and indicating wide support for employing the Mechanism as a primary lever for reducing national emissions. With the landscape shifting for large emitters, this article steps through the headline features and the support Energetics can provide.

Features of the new scheme

• Commencement of reforms on 1 July 2023, incorporating linear baseline reductions of 4.9% per annum.

• Continued use of the existing production-adjusted baseline framework, whereby increased emissions resulting from economic growth will not be penalised.

• A gradual approach to requiring facilities to achieve industry average emissions intensity by FY30.

• Baseline concessions for trade-exposed industries and facilities at risk of offshore carbon leakage.

• Enhanced flexibility mechanisms including longer multi-year monitoring periods, “borrowing” a portion of a future year’s baseline, and the ability to buy and sell Safeguard Mechanism Credits (SMC) which are generated by facilities that achieve baseline headroom in a reporting year.

• A built-in reserve which will allow for higher than expected economic growth and concessions for trade-exposed facilities.

What do responsible emitters need to know?

• All covered facilities will receive new baselines commencing 1 July 2023, irrespective of the existing facility baseline arrangements or expiration dates. Baselines will begin to decline in FY24.

• Complexity in the establishment of facility baselines will be removed. All existing baseline categories (e.g. reported, transitional calculated, production-adjusted), associated transitional pathways and optionality regarding emissions intensities and production variables will cease to exist.

• Emissions intensities used to calculate baselines will initially (in FY24) be weighted 90% facility-specific / 10% industry average. The weighting will gradually shift towards the industry average on an annual basis, achieving a 100% industry average weighting by FY30. All responsible emitters must apply to the Clean Energy Regulator to establish facility-specific emissions intensities for each covered facility. The application deadline is tentatively set at 30 April 2024.

• New facilities will have baselines established according to best practice benchmark emissions intensities which will remain in place for the entire period to FY30.

• Trade-exposed facilities will be eligible to establish facility-specific baseline decline rates. Baseline decline calculations for these facilities will seek to assess “cost impacts”, considering annual facility revenue and the facility’s emissions profile. All responsible emitters of facilities carrying out trade-exposed activities must apply to the Clean Energy Regulator to establish trade-exposed, baseline-adjusted status and receive individually calculated baseline decline rates.

• Facilities that achieve baseline headroom will be eligible to generate Safeguard Mechanism Credits that can be banked for use in future years or sold to other responsible emitters. These will function in the same way as Australian Carbon Credit Units, and can be surrendered to the Clean Energy Regulator to address baseline exceedance.

• ACCU demand will increase from covered facilities as baselines decline. ACCU prices are expected to rise, however this rise will be tempered by the supply of ACCUs in the market currently.

How can Energetics help?

Energetics has extensive experience in helping our clients negotiate Safeguard Mechanism legislation, to establish appropriate baselines for their facilities and to communicate with governing bodies including the Clean Energy Regulator and relevant Federal Government Departments. We are experienced in all facets of the baseline-setting process from legislation interpretation to application and audit support, and are ideally placed to provide guidance around the coming reforms and to translate these into an understanding of the impacts to your facilities and operations.

Energetics has also developed a proprietary model of the ACCU and SMC market that can provide a range of price projections incorporating the proposed legislative changes and the likely sources of ACCU demand across sectors.

The draft legislation is open for consultation until 24 February. Submissions can be made via the Department’s Consultation Hub and by clicking the “Have your say” button. If you would like support in understanding the implications of these reforms to your operations or would like assistance in preparing a formal consultation submission addressing the issues that are most relevant to your business, please contact your Energetics account manager, the author or any one of our experts.