Under current Australian arrangements, the "Safeguard Mechanism" requires Australian facilities that produce over 100,000 tonnes of carbon annually (or an equivalent amount of greenhouse gases), known as "Safeguard Facilities", to keep their net emissions below a baseline (or ceiling), which has been determined on a facility specific basis.
To meet its international commitments to achieving net zero emissions by 2050, the Australian government has proposed changes to the operation of the Safeguard Mechanism with the effect of reducing carbon emissions over time. Those proposed changes have now been extended to secure the political support required to enable the passage of these legislative reforms through federal parliament.
In November 2022, the Australian government introduced a bill to parliament to amend the existing safeguard arrangements1 to:
- require Safeguard Facilities to gradually decline their baseline settings, to require a cut of carbon emissions by an average of 4.9% each year to 2030;
- enable the creation of "Safeguard Mechanism Credits" (SMCs) - being a new type of carbon credit to incentivise Safeguard Facilities to reduce emissions beyond the reduced baseline which can be held or traded between Safeguard Facilities;
- prevent Safeguard Facilities generating Australian Carbon Credit Units (ACCUs) where SMCs are generated, to avoid double counting of emission reductions; and
- enable Safeguard Facilities to purchase ACCUs from the Commonwealth government at a capped price of AUD 75 per tonne for 2023 - 2024.
To secure the support of The Australian Greens party,2 which the Labor government is relying on for the passage of these legislative reforms to proceed through the federal Senate, the government has agreed to the following further amendments (among others):
- expressly legislating the government's "policy intent" (and variously referred to as a "hard cap") to cut carbon equivalent emissions from existing Safeguard Facilities and new entrants from 140 million tonnes to 100 million tonnes by 2030 (as measured on a rolling average);
- the Climate Change Minister will be required to assess a new or expanded project's impact on the hard cap and net carbon budgets - having regard to approvals given under the Environment Protection and Biodiversity Conservation Act 1999 (Cth), advice from the Climate Change Authority and the Clean Energy Regulator;
- new gas fields supplying existing liquefied natural gas facilities will be treated as new facilities so that they are given international best practice baselines for the CO2 in their new fields (noting that best practice is "zero" given the existence of low-CO2 fields and carbon capture and storage opportunities);
- all new gas entrants in the Beetaloo basin (in the Northern Territory) will be required to have net zero Scope 1 emissions from entry;
- while no limits will be placed on ACCU use to ensure flexibility for industry, where Safeguard Facilities are using over 30% offsets to meet requirements, the operators of those facilities will need to explain this choice to the Clean Energy Regulator;
- methane and nitrous oxide emissions are to be publicly reported, with the Climate Change Authority tasked with updating the measurement, verification, implementation of any improvements by 1 July 2024;
- targeted funding of at least AUD 1 billion for the manufacturing sector and trade-exposed industries, with a view to providing inputs to clean energy industries and focusing on decarbonisation;
- specific treatment for hard-to-abate, value added manufacturing (meaning that their year-on-year carbon emission reductions are likely to be less than the 4.9% required of other industries); and
- establishing a review into potentially creating an Australian carbon border adjustment mechanism to halt "carbon leakage" from overseas competitors operating without carbon cost impacts.
While the amended legislative regime (which reflects the changes described above) has not yet been put to or passed the federal Senate vote, the federal government has advised that it will now finalise the detailed "Safeguard Rules" by April 2023 with a view to the updated Safeguard Mechanism scheme being operational as of 1 July 2023.
We will continue to provide updates on these ongoing developments.
1 As provided for in the National Greenhouse and Energy Reporting Act 2007 (Cth).
2 Which has been critical of the proposed changes and alleged that they did not go far enough to meaningfully address climate change issues.