New Credits for Reducing Emissions Below Baseline in Australia

What you need to know

• On 23 August 2021, the "Discussion Paper: King Review Safeguard Crediting Mechanism" was released by the Department of Industry, Science, Energy and Resources. 
• The proposal enables facilities that reduce emissions below their regulated baseline to receive "Safeguard Mechanism Credits" (SMCs). 
• SMCs can be sold to the Commonwealth Government, or purchased by third parties to meet either a mandatory obligation under the Safeguard Mechanism or a voluntary carbon commitment, as an alternative to Australian Carbon Credit Units (ACCUs) in each case.  
• The Commonwealth Government has committed $279.9 million over 10 years to support purchases of SMCs. The proposal provides financial incentives to undertake "transformative" abatement projects, including by deploying low-emissions technology or process changes. 
• The Consultation is open until 5 October 2021, with enabling legislation targeted to be in place by 1 July 2022.  

What you need to do

• If your business has Safeguard Mechanism obligations or makes voluntary carbon commitments, consider the way forward in creation or procurement of SMCs (in addition to ACCUs and other carbon credits).
• As the landscape for making voluntary carbon commitments continues to receive public scrutiny, consider ways in which SMCs may assist with the credibility of these commitments.
• Review the Safeguard Crediting Mechanism Paper and consider other potential implications, and opportunities, for your business.
• You can make a submission before 5 October 2021 at https://consult.industry.gov.au/.

On 23 August 2021, the Department of Industry, Science, Energy and Resources released its "Discussion Paper: King Review Safeguard Crediting Mechanism" (https://consult.industry.gov.au/climate-change/safeguard-crediting-mechanism-discussion-paper/user_uploads/safeguard-crediting-mechanism-discussion-paper.pdf) (SCM Paper).

The SCM Paper outlines a proposed design for a Safeguard Crediting Mechanism (SCM), which was one of the recommendations of the King Review published in February 2020 (https://www.industry.gov.au/sites/default/files/2020-05/expert-panel-report-examining-additional-sources-of-low-cost-abatement.pdf).

In summary, the SCM will enable facilities that reduce their emissions below their regulated baseline under the Safeguard Mechanism to receive "Safeguard Mechanism Credits" (SMCs), which can then be sold to the Commonwealth Government, or purchased by third parties to meet either a mandatory obligation under the Safeguard Mechanism or a voluntary carbon commitment.  The SCM is intended to incentivise facilities that are covered by the Safeguard Mechanism to undertake "transformative" abatement projects.

The key features of the SCM being consulted on include the following.

• The SCM will be a "low-emissions technology deployment incentive scheme", and similar in that way to the Renewable Energy Target scheme, rather than an offset scheme.
• The Commonwealth Government will be able to purchase SMCs in a similar way to the current framework for purchasing ACCUs from projects registered under the Emissions Reduction Fund (ERF) – the Commonwealth Government has already committed $279.9 million over ten years to support purchases of SMCs.
• A 2-3 year pilot phase will be implemented, with a preferred start date of 1 July 2022 and a review at its conclusion to determine whether to continue past the pilot phase.
• The approach for determining how many SMCs a facility receives would be to credit reductions in emissions intensity.  The reference level for the facility would be the production metrics published in the Safeguard Rule, but not the emissions intensity values used to set Safeguard Mechanism baselines (these reflect forecast or industry average values that are unlikely to be appropriate for crediting purposes).
• Crediting under the SCM would require the facility to invest in new low-emissions technologies, or undertake process changes that lead to emissions reductions, and would not occur simply because a facility’s emissions are below its existing Safeguard Mechanism baseline. 
• A facility will be credited for abatement relative to a new reference level based on historical emissions intensity performance.  The historical emissions intensity could be based on the most recent year (s) before the emissions reductions commence, or a fixed year prior to the commencement of the SCM, which would be the same for all facilities regardless of when the emissions reduction took place.  The Government's preference is to use a past, fixed year (s) period to avoid gaming to generate artificially high reference levels.  Reference levels for new facilities (if included in the scheme) would need to be different due to the absence of historical data, perhaps based on the average of the top 30% or 50% emissions intensities of existing facilities. 
• Shorter crediting periods for SCM-accredited projects than projects registered under the ERF may be appropriate. A 5 year crediting period for the pilot phase is suggested, with a mechanism for adjusting this to be longer or shorter depending on participation levels and the SMC price.  A 5 year period is consistent with some international offset standards and is considered to provide sufficient incentive to encourage investment in more efficient technologies.
• There would be an adjustment to Safeguard Mechanism baselines using site-specific emissions intensity values where investments that reduce emissions have been credited under the SCM, in order to ensure that emissions reductions are not reversed after the crediting period.
• There will be mechanisms to ensure that the SCM delivers a genuine abatement, such as: (i) discounting or use of a buffer (i.e. crediting only a portion of the calculated emissions reduction); (ii) minimum crediting thresholds; (iii) transformation statements describing the technology proposed and its impact; and (iv) time limits on use of SMCs.

The SCM Paper includes two worked examples. One example shows that assuming a 15% discount factor, a 5 year crediting period and a baseline adjustment for facilities using a site-specific emissions intensity, a facility producing 100,000 tonnes of apples per year which improves its emissions intensity level from 1.5 tonnes of CO2-e per tonne of apples to 1.3 tonnes of CO2-e per tonne of apples could generate 85,000 SMCs over the 5 year crediting period.

The SCM will be legislated through changes to the existing National Greenhouse and Energy Reporting Act 2007, Australian National Registry of Emissions Units Act 2011 and Carbon Credits (Carbon Farming Initiative) Act 2011, and it appears that the existing legal framework applying to ACCUs (e.g. conferring property rights) will also apply to SMCs.  The SCM Paper does not discuss whether this will include extending the concept of a "financial product" under the Corporations Act 2001 to SMCs, so it remains to be seen whether trading in SMCs is subject to the same financial services regulation considerations as ACCUs. 

The SCM Paper acknowledges that if SMCs can be used by an entity to satisfy an obligation under the Safeguard Mechanism as well as ACCUs, there may be an impact on the market for ACCUs (which are currently trading at record spot prices).  However, the SCM Paper notes an expectation that this impact will be low in light  of the current demand for ACCUs and anticipated demand for SMCs.  

There is also likely to be an impact on the voluntary market for carbon credits, which is rapidly growing in demand.  It will be interesting to see how SMCs will be perceived as to quality and demand, if compared with ACCUs or voluntary carbon credits such as Verified Carbon Units or Gold Standard Verified Emission Reductions to meet voluntary carbon commitments. It is also not yet clear whether SMCs will qualify for use for Climate Active certification of carbon neutral products, services and organisations.

The Consultation is open until 5 October 2021 and enabling legislation is targeted to be in place by 1 July 2022.  Submissions can be made at https://consult.industry.gov.au/.

Authors: Caroline Lindsey, Partner; Cassandra Wee, Partner; Madeleine Agar, Lawyer.