Federal Government seeks feedback on proposed reforms to Safeguard Mechanism
29 August 2022
29 August 2022
The new Federal Labor Government has published its Safeguard Mechanism Reforms Consultation Paper, which sets out its proposals to reform the Safeguard Mechanism to drive emissions reductions from Australia's biggest emitters, in line with Australia's commitment under the Paris Agreement of reducing CO₂-e emissions to 43% below 2005 levels by 2030.
The Consultation Paper is wide reaching and canvasses options to: reset the current baselines to remove existing headroom, consider the pace of baseline reductions over time, allow Safeguard Facilities that have emissions below their baseline to be issued with Safeguard Mechanism Credits that can be traded to other Safeguard Facilities that exceed their baselines and considers options to manage the impacts of the changes on 'emissions-intensive trade-exposed' facilities that have difficulty in passing on costs incurred because of the changes.
Companies with facilities covered by the Safeguard Mechanism should review the Consultation Paper and evaluate whether they have an emissions reduction strategy that is aligned with any of the proposals set out in the Consultation Paper.
Consider making a submission before the consultation period closes on Tuesday 20 September 2022.
The Federal Government's Climate Change Bill 2022 has passed the House of Representatives and is expected to be passed by the Senate later this year. Once enacted, it will enshrine Australia's commitments under the Paris Agreement to reduce Australia's national CO₂-e emissions to:
The Powering Australia policy sets out the Government's plan to achieve net zero by 2050.
As part of the implementation of that plan, the Federal Government has released its Safeguard Mechanism Reforms Consultation Paper (Consultation Paper), which is open for submissions from industry and the public until 20 September 2022.
The Consultation Paper is wide reaching and uses technical language. Terms that are italicised in this article are used in the same way as they are defined in this helpful Glossary published by the Clean Energy Regulator.
The Consultation Paper considers reforms to the Safeguard Mechanism to achieve a reduction in emissions that is proportionate to contribution made by Safeguard Facilities.
There are around 215 facilities covered by the Safeguard Mechanism (facilities that emit more than 100,000 CO2-e of scope 1 emissions each year). This group of facilities produces approximately 28% of Australia's CO₂-e emissions in 2020-21 (or 137 Mt out of 489 Mt of CO2-e from Australia's total scope 1 emissions in 2020/2021).
The Consultation Paper estimates that the aggregate emissions from Safeguard Facilities will need to fall to about 99 Mt CO2-e in 2030, if they are to contribute their proportionate share of Australia's 2030 target.
The Federal Government is proposing three key changes to the Safeguard Mechanism:
We discuss these in turn below.
One of the key problems identified by the Consultation Paper is that the aggregate total of all baselines under the Safeguard Mechanism (180 Mt CO₂-e in 2020-21) is significantly higher than the aggregate total of covered emissions (137 Mt CO₂-e) from Safeguard Facilities, and that this headroom is distributed unevenly across facilities covered by the Safeguard Mechanism.
The Consultation Paper indicates that baselines need to be reset to remove this aggregate headroom. To do this, the Government proposes that all baselines will be set by one of the following three possible methods:
The Government considers it critical that this aggregate baseline headroom is removed to ensure that Safeguard Facilities are incentivised to reduce their emissions below their baseline.
The Government proposes that baselines will decline over time but notes that the "baseline decline rates" will be finalised once other policy settings have been finalised. The Government will consider whether the baseline decline rate should:
The Government is seeking comments on its proposals to change the way that Safeguard Facilities can reduce their Scope 1 emissions by:
The Consultation Paper seeks feedback on the tailored treatment of EITE industries, being industries that may have higher costs in reducing emissions and are less able to pass on such costs because its product price is set in global markets, such as steel and aluminium producers.
The Government proposes assessing EITE eligibility based on:
Initial responses from industry have also been in favour of the facility-specific option, with industry participants warning that if the industry-average approach is adopted, facilities sitting below their industry average would automatically be provided with SMCs for no reduction in emissions, meaning that in practice, SMCs will not necessarily equate to a tonne of actual abatement.
In addition, the Government has proposed the following tailored treatments of EITE facilities for consideration:
A key challenge for Government in determining the treatment of EITE facilities is the tension between protecting the international competitiveness or Australian export industries while ensuring that all industries contribute to achieving Australia's emission reduction targets.
The Government has ambitiously proposed:
Before then, though, industry stakeholders are encouraged to make a submission in response to the Consultation Paper. Submissions close on Tuesday 20 September 2022.
We recommend that companies with facilities covered by the Safeguard Mechanism:
Climate change policy has become a much more active space since the federal election, and industry should expect plenty of commentary about the Consultation Paper in the weeks to come. We will look at what key commentators are saying about the Government's proposed reforms in a further article next month.
Authors: Jeff Lynn, Partner; Sophie Westland, Senior Associate; Fergus Calwell, Lawyer; and Alice Jiang, Lawyer.