Exposure Draft Rules released for Safeguard Mechanism

On 2 September 2015, the Federal Government released the Exposure Draft of the proposed rules to support the Safeguard Mechanism (Safeguard Mechanism rules).  The proposed rules align with the main aspects set out in the Government’s March Consultation Paper on the Safeguard Mechanism,  details of which can be found in our legal update here.

The Safeguard Mechanism is intended to ensure that emissions reductions purchased through the Emissions Reduction Fund (ERF), see our previous legal update here, are not displaced by increased emissions elsewhere in the economy.

The role of the Safeguard Mechanism rules is to set out some of the key aspects which underpin the Safeguard Mechanism, such as the threshold for coverage, the procedure for establishing, and types of, baselines and the administrative processes for demonstrating compliance with the Safeguard Mechanism.

In addition to the Safeguard Mechanism rules, proposed amendments to the National Greenhouse and Energy Reporting Regulations and the National Greenhouse and Energy Reporting (Audit) Determination have been released.  Of note, the National Greenhouse and Energy Reporting Amendment (2015 Measures No. 2) Regulations 2015 specify that the maximum civil penalty amount for non-compliance under the Safeguard Mechanism is $1.8 million or $18,000 per day for the breach, whichever is the lesser.

The intention is to have the Safeguard Mechanism rules in place by the beginning of October, and the Safeguard Mechanism itself commencing on 1 July 2016.  The key requirement under the Safeguard Mechanism is that large emitting facilities must keep their net emissions below a specified baseline.  

At present, the approach to baselines is unlikely to act as a driver for emissions reduction activities within these facilities.  Indeed, the Explanatory Statement which accompanies the Safeguard Mechanism Rules states that it “is designed to accommodate economic growth and allow businesses to continue to operate at business-as-usual levels”.  Therefore, the Government will need to continue to rely on the Emissions Reduction Fund (which purchases credits from abatement activities registered with the Clean Energy Regulator) as its primary tool for achieving its 2020 emissions reduction target (5% reduction based on 2000 levels).

The draft rules confirm that facilities which emit over 100,000 tonnes of CO2-e will be covered by the Safeguard Mechanism.  Emissions which are counted towards this threshold (known as ‘covered emissions’) include:

• scope 1 (direct) emissions which have a measurement method under NGERS
• non-legacy emissions from a landfill (namely emissions from waste deposited after 1 July 2016)

Emissions from the operation of a grid-connected electricity generator are specifically excluded, as these emissions are treated separately using a sectoral approach.

It is expected that around 140 businesses will be covered by the Safeguard Mechanism and the business with operational control of the large emitting facility will be the entity with responsibility for compliance.

Baseline determinations will be made for a covered facility for a financial year.  If no baseline determination is made, the default baseline will be 100,000 tonnes CO2-e, which is also the minimum number that can be included in a baseline determination.

Baselines will reflect data reported under the National Greenhouse and Energy Reporting Scheme (NGERS), and will generally reflect the highest emissions level reported between 2009/10 and 2013/14.

The types of baseline determinations that can be made include:

• reported-emissions
• calculated-emissions
• benchmark-emissions
• production-adjusted
•  landfill-benchmark

Baselines can also be adjusted if a facility meets the emissions intensity test in a financial year.

In each case, the Regulator will produce a baseline determination, which will be publicly reported on the Regulator’s website.

Reported emissions baseline

A reported emissions baseline determination will be made by the Regulator if:

• NGERS reports have been submitted for 5 financial years commencing on 1 July 2009 (5 year period), and at least one of these reports had more than 100,000 tonnes CO2-e
• NGERS reports were submitted for at least 3 years of the 5 year period, and emissions exceeded 100,000 tonnes CO2-e for at least 3 of the 5 year period, or
• at least one NGERS report has been submitted during the 5 year period, and emissions exceeded 100,000 tonnes CO2-e for at least one year, and the responsible emitter seeks a reported emissions baseline determination from the Regulator prior to 1 August 2016.

The reported emissions baseline will be the highest annual number of tonnes CO2-e set out in the available NGERS reports produced during the 5 year period.  The draft rules contain provisions to assist the Regulator in making its determination, such as the ability to disregard emissions arising from activities which are no longer carried out at the facility, or are reported as part of another facility.  There is also the power for the Regulator to vary the baseline determination if a NGERS report on which it was based is found to be incorrect, it is resubmitted after the determination is made or activities which resulted in significant emissions (more than 5% of the baseline) are no longer carried out at the particular facility.

Responsible emitters will receive advance notification of the baseline which the Regulator proposes to set for a particular facility, and will have the opportunity to make comments on the proposed baseline.  The Regulator must aim to have made baseline determinations by 1 August 2016.  

Calculated emissions baseline

Calculated emissions baseline determinations are for facilities that do not have sufficient historical data for a reported emissions baseline determination or for which historical emission may be a poor indicator of future emissions. It is based on estimates of production at a facility and it expires once actual production data is available.
Calculated emissions baseline determinations last for 3-5 years depending on the size of a facility. A facility may apply for a total of two calculated-emissions baseline determinations.

A calculated emissions baseline determination can be sought by a responsible emitter if the following criteria are satisfied:

• new facility: the facility is a “new” facility, meaning it has not been covered by a NGERS report during the 5 year period, and it is expected to emit more than 100,000 tonnes CO2-e for a financial year between 2016/17 and 2019/20
• significant expansion: the facility has completed a “significant expansion” (see below)
• inherent emissions variability: the facility undertakes extraction of a natural resource or processes natural gas associated with the extraction of natural gas from a natural gas reserve, and the grade, depth or other properties of the natural resource or natural gas reserve has a direct effect on the emissions of the facility, and the facility has limited ability to control the emissions related to the natural resource or natural gas reserve (these criteria are known as the “inherent emissions variability” criteria)
• initial calculated baseline: the facility has received a reported emissions baseline determination or submitted NGERS reports during the 5 year period, and the facility’s emissions for the 2016/17 financial year are expected to exceed the baseline emissions number (known as the “initial calculated baseline” criteria).

Significant expansion

A facility will undertake a significant expansion if it increases its production capacity by more than 20%, or produces a new product, from the installation of new plant or equipment.    If a significant expansion will take place before 1 July 2020, the operator of the facility may apply for a calculated emissions baseline determination to cover the whole facility.  If the significant expansion will take place after 1 July 2020, a benchmark emissions baseline determination will be made (see below).  This determination will only apply to emissions associated with this expanded capacity, and not to the balance of the facility.

Benchmark emissions baselines

Benchmark emissions baselines determinations are for new facilities and significant expansions which can no longer access calculated emissions baseline determinations. They commence no earlier than 1 July 2020.

Rather than using the responsible emitter’s estimates, a benchmark emissions baseline determination is made using the ‘Benchmark Emissions-Intensity Index’ set out in the legislation.  Existing industry data will be used to develop benchmark emissions intensities that are representative of best practice and where data is limited, international data or independent technical advice will be used.

Production adjusted baseline

A responsible emitter may apply for a production adjusted baseline determination if they were subject to a calculated emissions baseline determination or benchmark emissions baseline determination which has expired (provided that the facility’s covered emissions exceeded        100,000 t CO2-e in one of the financial years that were covered by the determination), or if it was eligible for a benchmark emissions baseline under new facility criteria but never obtained one.
The baseline emissions number is calculated using existing historical data which accounts for changes in production variables and emissions intensity.

Variation of baseline determination for reduction in emissions intensity

If a facility exceeds its baseline but it simultaneously reduces its emissions intensity, the responsible emitter for a facility may apply to the Regulator for a variation of a baseline determination, subject to meeting an ‘emissions intensity test’.

If the application is successful, the baseline is increased to match the facility’s covered emissions for this financial year, after which the facility returns to its original baseline.

An application for variation cannot be made if there is a monitoring period declaration for a multi-year period (see below).

If the facility has only one production variable, the emissions intensity test is a straightforward comparison with the baseline intensity comparison year - the emissions intensity in the variable year must be lower. If there are multiple production variables, it is calculated according to an equation set out in the Safeguard Mechanism rules.

As highlighted above, a sectoral approach has been taken to the electricity sector.  A sectoral baseline of 198 million tonnes of CO2-e has been applied to all grid-connected electricity generators covered by the National Electricity Market, the South West Interconnected System, the North West Interconnected System, the Darwin-Katherine Interconnected System and the Mount Isa-Cloncurry Supply Network.  This baseline reflects the sum of scope 1 emissions in 2009-10.

If this sectoral baseline is exceeded, each generator will have to comply with its individual baseline which will be set at each facility’s highest annual emissions between 2009/10 to 2013/14.  It is intended to review the approach to this sector in 2017/18.

A responsible emitter may apply to the Regulator for an exemption declaration if its emissions exceed its baseline during the relevant monitoring period, and the exceedance is as a result of a natural disaster or criminal activity.  To obtain such an exemption, the responsible emitter will need to prove that it had, before the relevant event, taken reasonable steps to mitigate the risk that the event could result in an excess, or after the relevant event, had taken reasonable steps to mitigate the likelihood of an excess, and in relation to criminal activity, establish that the responsible emitter was not complicit in the criminal activity.

A declaration can also be sought for a multi-year monitoring period, covering a period of two or three financial years, if a facility’s emissions will exceed its baseline.  The usual monitoring period will be one year.  

In deciding whether to grant such a declaration, the Regulator will have regard to:

• whether the responsible emitter has previously had an excess emissions situation;
• whether reasonable evidence has been provided that the multi-year monitoring period would enable the responsible emitter to avoid an excess emissions situation; and
• whether the responsible emitter has proposed to enter into an enforceable undertaking (which would set out measures designed to ensure that there was no excess emissions situation at the end of the multi-year period).

For responsible emitters whose annual emissions from their facility exceed their specified baseline, they will have the option of purchasing credits to offset the exceedance.  At present, only Australian Carbon Credit Units (ACCUs) are specified, but the Explanatory Statement flags that the Government may consider the use of international credits following a review of the mechanism in 2017/18.

Any responsible emitters who currently create ACCUs for activities at their facility, or who wish to do so in the future, will have to ‘net out’ these ACCUs from their emissions total to ensure no double counting.  

The draft Safeguard Mechanism rules, draft National Greenhouse and Energy Reporting Amendment (2015 Measures No. 2) Regulation 2015 and draft National Greenhouse and Energy Reporting (Audit) Amendment Determination 2015 (No. 1) are out for public comment until 21 September 2015.  The Department of the Environment is currently conducting a number of briefing sessions for different sectors, and it is recommended that those companies which will have a covered facility attend one of these sessions.

If you require further information about the Safeguard Mechanism and the content of the consultation documents, please contact a member of our climate change team.