With the passing of the Safeguard Mechanism (Crediting) Amendment Bill 2023 (the Safeguard Bill), on 30 March 2023, the new-look Safeguard Mechanism moved from being a compliance piece to an item central to an entity’s decarbonisation and climate change strategies. In Energetics’ last article on this topic, we looked at the details of the baseline design changes covered by the proposed Safeguard Rule and the implications for responsible emitters. Today we consider the broader changes to the principles introduced by the Safeguard Bill to the Acts and their potential flow-on into changes for responsible emitters.
The six safeguard outcomes
We now have six “safeguard outcomes” that are legislated, which explicitly outline the purposes of the Safeguard Mechanism.
(a) Net covered emissions do not exceed their baseline
For each facility covered by the Safeguard Mechanism, its net covered emissions must not exceed the baseline applicable to that facility.
(b) Total cumulative net safeguard emissions from FY21-FY30 inclusive do not exceed 1,233mtCO2-e
For all facilities covered by the Safeguard Mechanism from FY21-FY30 (including new entrants), the total net emissions (using global warming potentials in force for FY24) will not exceed this value.
(c) Net safeguard emissions must be 100mtCO2-e in FY30, and zero from FY50 onwards
In addition to the budget cap on net emissions in outcome (b), point in time caps for FY30 and FY50 onwards have also been specified.
(d) For each year from FY25 onwards, the 5-year rolling average emissions are lower than the past 5-year average for that year
This outcome requires an overall reduction in emissions from Safeguard entities over time. The five year requirement will be discussed further below.
(e) Responsible emitters have a “material incentive to invest in reducing covered emissions from the operation of the facility”
While not a limit on the number of offsets that can be used to meet a baseline requirement, this outcome requires there to be a sufficient incentive for on-site abatement to occur, and provides certainty to emitters that this will be available.
(f) Competitiveness of trade exposed industries is appropriately supported as Australia moves to a net zero economy
A broader review of carbon leakage mechanisms is underway, however the inclusion of this outcome also results in these impacts being central to the objectives of the Safeguard Mechanism.
Outcomes (a), (b) and (c) refer to net emissions, which consider the emissions after the surrender of Australian Carbon Credit Units (ACCUs) ACCUs and/or Safeguard Mechanism Credits (SMCs) for the facility has been accounted for, while outcome (d) refers to total emissions, meaning the absolute emissions from the facility prior to accounting for any surrendered units.
There are two other significant changes to watch:
- Whenever new Safeguard Rules are published, the Minister must also publish on the Department’s website their reasons for being satisfied these new rules are consistent with (b), (c) and (d) above and take into account (e) and (f). This increases overall transparency and accountability for decisions made in the design of the scheme.
- As part of the annual climate change statements now required under the Climate Change Act, the Climate Change Authority must also comment on whether any amendments to the Safeguard Rules are required to achieve these outcomes if the gross or net emissions are not declining. This will all then be reviewed as part of the usual five yearly review cycle in FY27.
Expect scrutiny with an increase in publicly available data
The Clean Energy Regulator will now publish, alongside the current facility-level data, the following items for the broader Safeguard sector for each financial year:
- The total Safeguard emissions (excluding carbon offset units surrendered)
- The net Safeguard emissions (accounting for units surrendered)
- The five-year rolling average Safeguard emissions for that financial year
- The total Safeguard emissions for all financial years between FY21 and the end of the financial year being reported on.
This will provide insight into the progress towards outcomes (b), (c) and (d) and a signpost to potential changes to baseline determination methodologies if it appears that these outcomes may not be achievable with current settings.
At the facility level, in addition to the information that is currently made public under the existing legislation, for any ACCUs surrendered the methods under which those units were generated will also be published, as well as reasoning for using ACCUs and not implementing on-site abatement projects if a volume of ACCUs equal to 30% or more of the baseline number is surrendered to meet obligations.
While there is limited legislation on new facilities to date, some expectations have been set
The implications specific to new facilities are predominantly contained within the Safeguard Rule, rather than the Act, the full details for which have not yet been finalised. The most current version of the Rule came in force 3 May 2023. Based on this version of the Rule and the announcement from Chris Bowen regarding the passage of the Safeguard Bill, it can be expected that:
- New gas fields supplying existing LNG facilities will be considered “new facilities” and subject to the best practice baselines, which includes zero reservoir CO2 emissions
- All shale gas facilities (including the Beetaloo basin) are required to have net zero scope 1 emissions from into the Safeguard Mechanism
- Any projects that go through EPBC Act approvals and will be covered by the Safeguard Mechanism will have emissions estimates provided to the Department. Consideration will then be given if the Safeguard rules need to be changed to ensure the Safeguard outcomes outlined above can be met.
Further information as to the best practice emissions intensities for use by new facilities is not yet available.
How can ACCUs be used in Safeguard Mechanism compliance?
While not specifically part of the Safeguard Bill, the Chubb Review recommendations around ACCU integrity are in the process of being implemented. There are some relevant inclusions in the Bill however, including that a new ACCU generation method cannot be legislated unless “the Minister is satisfied that the determination complies with the offsets integrity standards”. These standards have existed previously but were more side considerations, rather than explicitly legislated. There is also now the requirement that the Chair of the Emissions Reduction Assurance Committee (ERAC) can’t engage in any other paid work outside ERAC while they are chair – potentially to more clearly manage potential or perceived conflicts of interest.
What should responsible emitters be aware of?
- Understand potential for on-site abatement – there are incentives
Through outcomes (e) and (f), the signal is clear that on-site abatement is to be incentivised through the Safeguard Mechanism, however the precise means for this, outside commitments made under the Powering the Regions Fund, are currently unknown. A robust decarbonisation pathway will give confidence in decisions made and options available for emissions reduction at each facility, giving the ability to quickly access funding (if available) and be able to respond to the Regulator regarding reasons for offset surrender if required.
- Take care when selecting offsets. Have a strategy
As methods by which surrendered units are generated will be made public, and potentially under scrutiny, responsible emitters should consider their sources for any ACCUs to be used in meeting their Safeguard obligations.
- Understand possible revenue streams for below-baseline crediting in net zero pathways
Demand for units will be present from facilities with hard-to-abate emission sources, particularly in the short term before new technologies become commercially viable. The potential revenue stream for the generation of SMCs may shift the project financials on some decarbonisation projects.
- Watch the published Safeguard data each year
If the Climate Change Authority advises that Safeguard emissions are not declining in line with the rate required by the legislated outcomes, the Minister may be obliged to amend the Safeguard Rule, which may impact baseline determinations applicable to each responsible emitter. Being aware of the published Safeguard data, and the associated likelihood of updates to the Rule, will allow facilities to be responsive to any legislative changes.