It’s time to get serious about the Safeguard Mechanism

Author Dr Gordon Weiss

Date October 2017

The announcement of the new National Energy Guarantee (NEG) was notable for the two headline requirements on energy retailers: a reliability guarantee and an emissions reduction guarantee. However, beyond these headlines, little detail is known.  While we await clarification, greenhouse emissions are rising across the economy and the Safeguard Mechanism, as Australia’s key climate policy instrument, all but lies dormant.  Whatever the relationship with the NEG, the Safeguard Mechanism offers a route to driving economy-wide action at a time of rising emissions. In this article we re-cap the features of the Safeguard Mechanism and the value it can offer as the centrepiece of Australia’s climate policy suite.

The potential power of the Safeguard Mechanism

As we know, Australia has significant international climate change commitments to deliver 26-28% reductions on 2005 emissions levels by 2030.  We are also required to make deeper cuts to meet both our obligations under the new global climate agreement of limiting warming to within 2oC on pre-industrial levels and, as a member of the ‘High Ambition Coalition’, to work towards limiting warming to within 1.5oC.  With the announcement of the NEG we understand that “retailers and some large energy users” will be required to meet emissions reduction requirements in the purchasing of electricity from 2020.  What that means and how it will apply in practice is yet to be revealed.

However, what we have in the Safeguard Mechanism is a flexible policy option for driving Australia’s largest emitters to deliver further reductions. 

The flexibility of the Safeguard Mechanism is one of its most talked about features, as the ability to set emissions baselines is set out in the Safeguard Mechanism Rule rather than an Act of Parliament. Therefore amendments to the Rule can be implemented without an Act of Parliament. The Minister for Energy and the Environment is therefore able to reduce, at any time, both the baselines that define maximum allowable emissions from facilities covered by the Safeguard Mechanism and also the threshold for coverage.

Our abatement modelling work for the Department of the Environment shows that the Safeguard Mechanism and Emissions Reduction Fund (working in conjunction to create a market for Australian Carbon Credit Units (ACCUs)), have the potential to deliver more than 50% of the emissions reductions required if Australia is to reach its 2030 target of reducing emissions to 26-28% on 2005 levels. 

The Safeguard Mechanism currently covers an estimated 50% of Australia’s reported emissions and facilities that emit more than 100 000 tCO2-e of Scope 1 emissions per annum. This threshold could be dropped and coverage widened, and the broader coverage will lead to a more economically efficient mechanism that will deliver abatement at a lower cost. This potentially is the greatest advantage that the Safeguard Mechanism has over the Emissions Guarantee – greater coverage (even now) leading to lower costs.

Should it be an intensity based scheme, which is favoured by business, this would also ensure that better performers which have already worked to lower their carbon intensity are recognised and rewarded. Businesses focussed on reducing their emissions can create offsets from which they can derive a financial benefit.

Also, building on the framework of the Safeguard Mechanism would allow the Australian Government to establish a carbon pricing scheme without a requirement to introduce any new legislation into Federal Parliament. In March of this year, Opposition Minister Mark Butler indicated that the Safeguard Mechanism with changes to coverage and the lowering of baselines could work for an ALP administration should they win office in the future.

Energetics’ recommendations

  • Understand your risk profile under the Safeguard Mechanism – establishing the link between national emissions trajectories and impact on your business.
  • Establish a process for monitoring, refining and updating greenhouse gas forecasting on an ongoing basis.
  • Review your greenhouse gas emissions forecast for each facility against your Safeguard Mechanism baseline to understand whether your business is likely to exceed its baseline. Businesses that exceed their baselines will be required to acquire and acquit ACCUs or other offsets.
  • Assess whether there are other emission reduction opportunities at your facilities, which would help to reduce your business’ expected liability and exposure to future changes in the Safeguard Mechanism that could result in increased liability.
  • Develop a carbon offset strategy to ensure your business can generate or acquire sufficient ACCUs to offset any residual liability.
  • Maintain a watching brief on potential changes to the Safeguard Mechanism rules and regulations.

Energetics can help your business to efficiently and accurately navigate the more complex elements of complying with the Safeguard Mechanism.  Please contact any one of our experts.