Policy and legislation

Safeguard Mechanism reforms: Consultation on draft legislation

When the Federal Government announced a review of the Safeguard Mechanism, it released a consultation paper highlighting three key areas for amendment. The proposed changes were described as “Gradually reducing baselines to help Australia reach net zero emissions by 2050; introducing credits for facilities that emit less than their baseline; and providing tailored treatment to emissions-intensive, trade-exposed (EITE) facilities so businesses are not disadvantaged compared to international competitors and emissions do not increase overseas.” Below is Energetics’ submission.

Consultation paper response – Energetics Pty Ltd

Energetics welcomes the opportunity to respond to the Safeguard Mechanism reform: consultation paper.

Energetics is an expert climate risk and energy transition consultancy. Our vision is to unite the most innovative, passionate, and experienced minds for a 1.5°C world. Keeping global warming to this level significantly reduces the costs and risks of climate change to Australia’s people, economy and ecosystems. Australian industry is capable of playing its commensurate part in achieving this global goal, and the Safeguard Mechanism is a primary lever in the national decarbonisation policy framework.

We have advised entities under the Safeguard Mechanism since its inception and are well aware that its current settings are too complex and too ineffective. It is critical that the next iteration of the scheme does not continue to give facilities excessive optionality in the baseline setting process, allow facilities to increase their emissions without penalty, or undermine the ability for both participants and observers to track the scheme’s effectiveness.

Covered entities will not be the only organisations in Australia required to reduce emissions to achieve the national targets of 43% below 2005 levels by 2030 and net zero by 2050. The rest of the economy must also pull its weight. Non-Safeguard companies need to be confident that Safeguard baselines ensure entities under the Mechanism do their share. For these reasons, transparency and simplicity should be core principles of the Safeguard Rule to create broader stakeholder trust in the Mechanism.

This is important also because covered entities all face different decarbonisation opportunities and challenges and have varying capacities to reduce their emissions. Companies’ management of their baselines will necessarily be very different and for these reasons we support the following:

• Absolute baselines for each entity that clearly set out an uncompromising path toward the 2030 target and net zero by 2050, and are consistent with the carbon budgets associated with each point target

• High flexibility in baseline compliance – access to crediting, trading in SMCs and ACCUs, and potentially international units, and wide access to multi-year monitoring periods

• Financial assistance to companies facing significant barriers to decarbonisation

• The introduction of a targeted carbon border adjustment mechanism (CBAM) for those trade-exposed sectors where baselines may reasonably be expected to impose a competitive disadvantage over the coming decades

• New entities must share the sectoral carbon budget. Instead of creating additional free emissions for new facilities, which transfers the abatement burden away from the responsible companies, new facilities must be required to manage their emissions within the allowances and targets established for the Safeguard sector upon commencement of scheme reforms.

Below we set out the key points of our position on the proposed reform of the Safeguard Mechanism.

1. The Safeguard Mechanism’s share of the national abatement task should be proportionate, at minimum

We commend the consultation paper’s consideration of a proportionate share of national abatement and a carbon budget for Safeguard Mechanism entities. It is important to ground the development of individual baselines on these concepts, to ensure that each facility is responsible for reducing its emissions, and its abatement task is not transferred to another company, or to the public.

We note that a proportionate split of the abatement effort based on the national emissions profile is not necessarily the most efficient or fairest effective measure. As a starting point, facilities covered by the Safeguard Mechanism should be required to decarbonise collectively on a trajectory and in a timeframe proportionate to the national targets. However, this abatement share should be reviewed in light of in-depth analysis of decarbonisation projections and opportunities across the rest of the economy and over time to 2050, to consider whether Safeguard Mechanism entities or sectors therein should have more ambitious baselines pre-2030 to ensure an orderly transition of the economy to net zero by 2050. Inadequate abatement by covered facilities will have to be met by other companies if Australia is to meet its international commitments.

2. Absolute emissions are the most credible baseline metric

As the 1.5C goal and Australia’s national targets can only be achieved through absolute emissions reduction, the baselines under the Safeguard Mechanism should be defined in absolute terms and start from companies’ actual past emissions.

We note that the consultation paper provides as arguments in favour of emissions-intensity baselines that they do not penalise business output and that they have a lower impact on production costs. However, a facility that maintains or even lowers its emissions intensity but increases its absolute emissions creates an additional abatement burden that must be addressed somewhere in the economy for Australia to achieve its targets. This may lower production costs compared with an absolute baseline but does so in a way that transfers costs elsewhere.

Moreover, the impact on production costs is driven by the level and the rate of decline of the baseline rather than the metric in which it is expressed. Absolute baselines can be translated into intensity terms and vice versa. The key advantages of setting baselines in absolute terms are that the metric is more closely aligned with Australia’s targets, and baselines can be more easily monitored individually and collectively for progress toward them.

Finally, many Australian organisations are taking independent steps to reduce their emissions profile outside of regulated frameworks. An important part of this process involves establishing emissions reduction targets, for example aligning with the Science Based Targets initiative or achieving net zero in a future year. An organisation that has made a public commitment to an absolute emissions reduction target may be unable to also manage its emissions on an intensity basis that allows for growth, depending on the timeframe of absolute targets and whether growth would allow re-baselining under the target framework.

3. Baselines should immediately start to decline in line with the 2030 target and sectoral carbon budget

We support the consultation paper’s intention to remove ‘headroom’ and believe this can be done most rationally by revising the starting point of each facility’s baseline to reflect an average of its past three years of actual emissions.

From there, facility baselines should decline according to transparent formulas (e.g. X% of base year emissions per year) that are aligned with Australia’s targets and a sectoral carbon budget. Given the ambition of Australia’s national target, the decline in baselines should start immediately. If entities need a ‘soft start’ this can be delivered through flexibility in compliance, not by postponing part of the abatement task.

4. Compliance with baselines should be highly flexible without creating undue risk to their achievement

While baselines should be firm and not adjustable for production, compliance with the baseline should be highly flexible and allow entities freedom in regard to how they comply with mandated reductions. This will be particularly important for sectors facing significant barriers to decarbonisation within the 2030 timeframe.

Companies should be able to access crediting and trading, domestic offsets, and credible international units

Energetics supports crediting, trading, and banking of SMCs and the ability to surrender both SMCs and ACCUs to meet abatement obligations. These are fundamental flexibility mechanisms that will be necessary for organisations to manage their emissions in line with the Safeguard Mechanism’s share of the national abatement task. Consistent with this position, we support entities gaining access to international units for a share of their liability if eligible units are rigorously screened for credibility criteria, particularly additionality and the avoidance of double counting.

We support the position that covered facilities should not be able to register ERF projects and generate ACCUs via deemed surrendering for scope 1 emissions reduction activities. Decarbonisation will become part of ‘business as usual’ operations under declining baselines; therefore, abatement projects will not satisfy the additionality criteria as necessary to generate ACCUs. ‘Grandfathering’ of existing ERF projects at covered facilities is likely to be the simplest approach in transitioning from existing practices to a crediting and trading process by way of SMCs. The impact of this should be explored in consideration of alternatives, such as transitioning existing ERF arrangements to require generation of SMCs rather than ACCUs, to ensure all abatement captured within the Safeguard sector remains there.

The timing of compliance should be flexible for sectors facing significant barriers to decarbonisation

Energetics supports the availability of MYMPs for facilities covered by the Safeguard Mechanism. Multi-year averaging is a simple and effective means for managing excess emissions and allowing time for the development and implementation of low emissions technology where available. It is necessary that MYMPs do not extend beyond 2030 in order to ensure the Safeguard Mechanism’s share of the national 43% reduction target is met.

We note also that MYMPs do create a build-up of risk both to the entities involved and to Australia’s carbon budget.

5. Emissions-intensive, trade-exposed (EITE) businesses may need targeted assistance

Energetics does not support tailoring baselines for EITE businesses and facilities to reduce their share of the national abatement task. We re-iterate the requirement for a simple, transparent scheme which can be monitored for fairness and effectiveness, and the need for robust, absolute baseline reductions.

We understand that, due to technological immaturity and difficulties in implementing low carbon production processes, certain EITE sectors and facilities may struggle to reduce emissions prior to 2030 and may be fully or mostly reliant on offsetting emissions. As a result, measures need to be implemented to prevent abatement costs from driving industry to lower cost offshore alternatives where emissions intensity may be even higher (“carbon leakage”). Each of the following may play a role in managing this risk:

• Funding and/or financing for investments in pre-commercial decarbonisation technologies

• Targeted carbon tariffs on imported products that do not face emissions reduction requirements in their jurisdiction of production.

A targeted carbon border adjustment mechanism (CBAM) would likely be the simplest and most effective way to level the playing field between domestic and offshore production. Similar to the process adopted by the European Union, the CBAM should target imports of carbon-intensive products of designated EITE activities that are manufactured overseas, where climate change policies may be less rigorous or ambitious.