Rules Finalised for Safeguard Mechanism Reforms

Background

The SM Amendment Rule adds further detail to the amended Safeguard Mechanism scheme (amended SM Scheme) created through the passing of the Safeguard Mechanism (Crediting) Amendment Act 2023 (Cth) on 30 March 2023, which amended the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act).  A summary of the changes to the NGER Act can be found in our previous legal update here.  The amended SM Scheme is due to commence on 1 July 2023.

In January 2023 we reported on the initial consultations for the reforms to the Safeguard Mechanism which included an exposure draft of the SM Amendment Rule. Following publication of the consultation documents, negotiations between Labor and the Greens led to several changes being made to the design of the SM Scheme.  As a result of these changes, and consultations with stakeholders, the final SM Amendment Rule has evolved from the exposure draft.

The following update sets out the main changes included in the SM Amendment Rule, as well as other relevant changes made by the Government last week.

Changes for trade exposed facilities

Under the amended SM Scheme, trade exposed industries are eligible to apply to the Clean Energy Regulator (CER) for a discount on the rate their baseline must decline based on the impact of the scheme to their production. The standard decline rate will be set at 4.9% per year up to 2030.

The SM Amendment Rule includes new protections for manufacturing facilities which will be able to access a lower minimum decline rate of 1% (as opposed to 2% for non-manufacturing facilities).¹ The impact on manufacturing will now be calculated by reference to earnings before interest and tax (EBIT), whereas non-manufacturing industries will have their impact measured according to their gross revenue.² Applicants for discounted decline rates will need to provide relevant documentation to the CER to prove their revenue or EBIT.³

In addition, a trade exposed facility can now only apply for a discounted baseline decline rate if it is not relying on borrowed Safeguard Mechanism Credits (SMCs) or multi-year monitoring periods, and a test that emissions must be forecast to exceed the emissions that would have been produced if the discounted baseline was not applied.⁴

Additional provision has been made so that trade exposed facilities may re-apply at any time for a new discounted baseline decline rate.⁵ Presumably this is to accommodate changes in international markets which may have flow on effects to trade exposed industries. A facility may also now request the CER to revoke a discounted baseline, although if a revocation is granted, the facility will not be able to re-apply for a discounted baseline for a full financial year.⁶

Flexibility mechanisms

The amended SM Scheme allows facilities to apply to borrow up to 10% of a facility’s baseline up until 2030. However, 10% interest will be applied to the borrowed SMCs. The SM Amendment Rule softens the introduction of the interest period by providing that for the first two years of operation, the interest rate will now only be 2%.⁷

In addition, the SM Amendment Rule clarifies that a facility cannot rely on both borrowed SMCs and a multi-year monitoring period.⁸ As such, a possible double-dipping loophole has been closed. In order to ensure the effectiveness of flexibility mechanisms, the SM Amendment Rule introduces the ability for the CER to vary multi-year period declarations where facilities are failing to implement their plans, to get back on track.⁹

An item of controversy in negotiations between the Greens and Labor was the uncapped use ofoffsets to meet obligations to reduce emissions. The SM Amendment Rule still allows Australian Carbon Credit Units (ACCUs) to be used to offset a facility’s emissions to ensure compliance with the amended SM Scheme. However, the conditions have been tightened requiring more transparency about the usage of ACCUs.

Where a facility needs to surrender ACCUs for more than 30% of its baseline, it is required to submit a statement to the CER setting out why those emissions cannot be reduced onsite. The statement must address whether the level of carbon abatement has been affected by limitations in available technology or whether there are other barriers, such as regulatory barriers. This explanation will then be published on the CER’s website.¹⁰

Net zero shale gas

Following on from the NT Government’s recent lifting of a moratorium on shale gas extraction in the Beetaloo Basin, the SM Amendment Rule has inserted limits on shale gas extraction facilities that are large enough to be covered by the Safeguard Mechanism.¹¹ Shale gas facilities will be required to have net-zero scope 1 emissions from the day they commence production.¹²

Further details provided on issuance of SMCs

The final SM Amendment Rule also clarifies how SMCs are issued by the CER¹³ and when they are to be issued.¹⁴  In particular, SMCs will be issued with an identifier relating to the relevant financial year in which they are issued.  SMCs are intended to be issued as close as possible to 31 January after the relevant financial year.

Other amending Rules

The package also includes updated amendments to the Carbon Credits (Carbon Farming Initiative) Rule 2015 (Cth)¹⁵ to provide that ACCUs cannot be issued for new activities that are added to an existing eligible offset project which would involve carbon abatement of covered emissions at a SM facility.  Further, the CER is no longer able to enter into a carbon abatement contract in relation to a project that reduces emissions at a SM facility.

The amendments also confirm that the CER may sell ACCUs to the operators of SM facilities at a fixed price of $75 per ACCU (indexed from 1 July 2024 by reference to CPI plus 2%).

Human-Induced Regeneration Direction

In addition to the SM Amendment Rule, the Australian Government also made the Clean Energy Regulator (Human-Induced Regeneration Projects) Direction 2023 (Cth) (HIR Direction).  The HIR Direction is a response to recommendation 8 of the 2022 Independent Review of Australian Carbon Credit Units (known as the Chubb Review).  Details of the Chubb Review report and recommendations can be found in our legal update here.

Recommendation 8 provided that project administration for the Human-Induced Regeneration (HIR) method should ensure all HIR projects conform to its intent, namely that it is reasonable to expect that the project area will become native forest, attain forest cover and permanently store carbon as a direct result of project management activities.

Accordingly, the HIR Direction requires the CER to ensure, to the extent permitted by law, that its interpretation of the HIR method is consistent with that set out in the Chubb Review. That is, the HIR method should be interpreted as requiring evidence of a causal relationship between the HIR activity and suppression methods, demonstrate that these suppressors are directly addressed by the HIR activity and that the application of FullCAM modelling is consistent with the guidelines. 

Further, the HIR Direction requires the CER to publish information suggested by the Chubb Review, being nominated suppression mechanisms, eligible HIR activities, project assessment data and results.

Where to from here?

The SM Amendment Rule will commence on 1 July 2023 with the beginning of the amended SM scheme. However, it is likely that adjustments to the amended SM scheme are likely to continue over the remainder of the decade. 

In mid-2023 the Australian Government will undertake a review to address carbon leakage including consideration of whether to introduce a carbon border adjustment mechanism.  The Government also intends to consult in late 2023 on the possibility for international units to be used for compliance purposes. Between 2023 and 2026, a further review will examine the inclusion of landfills in the Safeguard Mechanism. 

In 2026-2027 a review of the Safeguard Mechanism will be undertaken by the Climate Change Authority which may result in further changes to the scheme.  Given the robust political discussion that occurred in conjunction with the passing of the NGER Act amendments this year, it is likely that there will be continued political pressure on the Australian Government to tighten aspects of the amended SM scheme. 

How can we assist you?

If you would like more information on the amended SM scheme or the SM Amendment Rule please contact a member of our climate change and sustainability team.