First tranche of Safeguard Mechanism reforms made

Background

The Safeguard Mechanism was established in 2016 and creates a framework through which Australia’s largest emitting industrial facilities (those with scope 1 emissions of more than 100,000 tonnes of carbon dioxide equivalent per year) must ensure their greenhouse gas (GHG) emissions do not exceed baselines (known as emissions limits). If the scope 1 emissions of a facility exceed the nominated baseline, the operator of the facility may surrender Australian Carbon Credit Units (ACCUs) in order to offset the emissions exceedance. The Safeguard Mechanism is currently applicable to around 219 large industrial facilities, all of which are owned by large corporations.¹

On 10 January 2023, the Federal Department of Climate Change, Energy, the Environment and Water (Department) opened consultation on proposed reforms to the Safeguard Mechanism. The reforms require Australia’s largest emitting facilities to reduce their GHG emissions at a pace necessary for Australia to meet its legislated commitment of reducing national emission to 43 per cent below 2005 levels by 2030. A summary of the proposed reforms can be found in our previous legal update here.

Safeguard Mechanism credits framework

The SMC Bill establishes a framework for the issuance of Safeguard Mechanism Credits (SMCs). Under this new framework the Clean Energy Regulator (Regulator) can issue SMCs to facilities whose emissions are below their baseline limits. The process for application and determination of SMCs will be prescribed in the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Safeguard Rules).

Applications for the issuance of SMCs must be made to the Regulator, who must consider the application as soon as reasonably practicable after receiving it. If the Regulator is satisfied (amongst other things), that:

• the baseline emissions for the facility for the financial year are greater than the number of tonnes of carbon dioxide equivalent of covered GHG emissions from the operation of the facility, and
• the number of ACCUs (if any) by which the net emissions number for the facility for the financial year is increased,

then the Regulator may issue SMC units for the difference.

In other words, there is no need to establish that the emissions reductions have been achieved as a result of any particular activity or project, as there is in order to receive ACCUs.

SMCs can be traded by facilities that create them and used by other facilities to reduce their net emissions by ‘surrendering’ those SMCs.

If SMCs are issued on the basis of false or misleading information the Regulator has the power to require the relinquishment of those units.

Amendments obtained by the Greens

In order to pass the SMC Bill in the House of Representatives the Albanese Government struck a deal with the Australian Greens. The most significant amendments to the SMC Bill achieved by the Greens were:

’Hard Cap on Pollution’

The Greens successfully negotiated a ‘hard cap on pollution’ by amending the second object of the NGER Act to ensure that the following outcomes (known as safeguard outcomes) are achieved:

“the total net safeguard emissions for all the financial years between 1 July 2020 and 30 June 2030 do not exceed a total of 1,233 million tonnes of carbon dioxide equivalence

net safeguard emissions decline to no more than 100 million tonnes for the financial year beginning 1 July 2029, and zero for any financial year after 30 June 2049 [ie net zero from 2050]”.

The following outcomes were also included in order to ensure Australia’s GHG emissions reduction targets are achieved:

“the 5 year rolling average safeguard emissions for each financial year that begins after 30 June 2024 are lower than the past 5-year rolling average safeguard emissions for that financial year

the responsible emitter for each designated large facility has a material incentive to invest in reducing covered emissions from the operation of the facility; and

the competitiveness of trade-exposed industries is appropriately supported as Australia and its regions seize the opportunities of the move to a global net zero economy”.

Any Safeguard Rules must be consistent with the first three outcomes listed above, and take into account the last two outcomes. The Minister is required to publish reasons to demonstrate that these outcomes have been obtained in any Safeguard Rules.

Further amendments made following negotiations with the Greens are designed to ensure that individual facilities can be targeted if their covered emissions are not reducing in line with the above safeguard outcomes. In this instance, the Secretary to the Department can advise the Minister that amendments to the Safeguard Rules may be required, and the Minister must undertake public consultation in relation to whether amendments are required in order to achieve the safeguard outcomes.

Greater Transparency Requirements

The Greens also negotiated greater transparency requirements on the material that must be disclosed under the Safeguard Mechanism framework.

The Regulator will be required to publish information relating to the total amount of covered emissions of GHGs from a covered facility, including:

1. a breakdown of the emissions according to whether they were carbon dioxide, methane and nitrous oxide:
2. the number of SMC units issued for the financial year;
3. the number and type of carbon units (if any) surrendered for the purpose of reducing the net emissions of the facility; and
4. if the carbon units were ACCUs the methodology determination that applied to the project from which the ACCUs were generated.

The Regulator will also be required to publish:

• The total amount of covered emissions of all covered facilities for the financial year;
• The total amount of net covered emissions of all covered facilities for the financial year;
• The 5-year rolling average safeguard emissions for the financial year; and
• The total safeguard emissions for all of the financial years between 1 July 2020 and the end of the relevant financial year.

Next steps

The amendments to the NGER Act will take effect from 1 July 2023.

Further changes will be effected through amendments to the Safeguard Rules, which we will report upon in due course.

How can we assist you?

If you would like more information on the SMC Bill or the reforms to the Safeguard Mechanism please contact a member of our climate change and sustainability team.