On 27 March 2023, the Safeguard Mechanism (Crediting) Amendment Bill 2022 passed the House of Representatives and on the same day the Government announced it has secured the support it needs to ensure all of its proposed Safeguard Mechanism reforms will be operational by 1 July 2023.

The Safeguard Mechanism has been in place since 2016 and provides a legislated framework that limits the emissions of around 215 large industrial facilities (covering around 28 per cent of national emissions) by requiring them to keep their emissions below an emissions limit (a baseline). Facilities that are likely to exceed their baseline have several options to manage the excess emissions, such as purchasing and surrendering Australian Carbon Credit Units (ACCUs). On 12 January 2023, we published a technical update on the Chubb review which summarised planned reforms of the Safeguard Mechanism as well as the recommendations of the Chubb Review into carbon credits.

Overall, these developments mean that previously announced reforms are on track to be in place as planned by 1 July 2023, including the creation and crediting of 'Safeguard Mechanism Credits' by facilities that 'beat their baseline'. A significant element of the new reforms announced on 27 March 2023 is the increased barriers to new entrants to the scheme, including that new gas fields supplying existing LNG facilities will be treated as new facilities, and will be required to comply with tighter initial baselines, as well as a new overall 'hard cap' on emissions covered by the scheme which may limit future emissions intensive developments. There will be no change to the treatment of grid-connected electricity generators under the reformed scheme, which will continue to have access to a sectoral baseline.

New reforms

In order to secure support for the passage of the reforms, the Government and the Greens announced on 27 March 2023 a number of additional measures that will be implemented before 1 July 2023. These include:

• Targeted funding

At least $1 billion in funding for the manufacturing sector and trade-exposed industries through the Powering the Regions Fund, focused on decarbonisation.

• Differential treatment for manufacturing

Differential treatment for hard-to-abate, value-added manufacturing including a different baseline decline rate.

• Addressing risks of carbon leakage

The Government will commission a review to examine the feasibility of an Australian carbon border adjustment mechanism (CBAM).

• Accountability

Updating the National Greenhouse Energy Reporting Act 2007 (the Act) to clarify that the policy intent is:

• for aggregate emissions to go down over time – through measurement of a rolling average; and
• to not exceed the conservatively estimated 1,233 million tonnes of CO2-e to 2030 of 100 million tonnes in 2030.

• Barriers to new entrants:

• new gas fields supplying existing LNG facilities will be treated as new facilities so that they are given international best practice baselines; and
• in relation to the Beetaloo basin, all new gas entrants in the basin will required to have net zero scope 1 emissions from entry.

• Strengthening transparency and accountability:

• the Climate Change Authority must report on progress against emissions reduction goals with specific reference to new entrants and expansions in the preceding and following year;
• the Minister would be required take actions (including seeking changes to the rules or legislation) if the scheme is not on track to meet the updated Objects of the Act (in particular the new 'hard cap' on emissions);
• Where companies are using over 30% offsets to meet their requirements, they will need to explain to the Clean Energy Regulator their decision for doing that; and
• the Government will require methane and nitrous oxide emissions to be publicly reported and will ask the Climate Change Authority to review methane measurement, verification and reporting.

Previously announced reforms

Reforms that were outlined in our previous Chubb review update, which will now form part of the operational scheme from 1 July 2023 include:

• Decline rates

A largely uniform 4.9% decline rate to baselines annually until 2029-30, which will apply to all new and existing Safeguard facilities.

• Baseline setting

A hybrid approach to setting baselines for existing facilities, which would be heavily weighted towards site-specific levels at scheme commencement, with a transition to industry average benchmarks by 2030.

• Compliance flexibility

Providing further flexibility on how facilities can achieve compliance, including:

• introducing 'Safeguard crediting and trading' from 1 July 2023. Under this arrangement, Safeguard facilities will earn tradable credits when their emissions are below their baseline (that is, for over-performing on their individual emissions limit), which can be traded to businesses whose abatement is more expensive;
• continued access to domestic offsets to meet compliance obligations (allowing cost-effective abatement outside of the scheme), with the use of high quality international offsets to be considered further by the Government in 2023 and implemented as part of a separate reform package if appropriate;
• access to banking and borrowing arrangements. Under this arrangement, facilities could bank years where they beat their baseline, or borrow up to 10 per cent of their baseline each year (with a 10 per cent interest rate proposed for such borrowing to encourage its use only when it is genuinely needed); and
• allowing multi-year monitoring periods, where a facility has exceeded its baseline due to a lack of available technology, but has a firm and credible plan in place to reduce cumulative emissions before the end of the five year period. This will allow a facility’s baseline trajectory to match available and emerging technologies within a multi-year compliance period.

• Integrity reforms

These include no longer allowing Safeguard facilities to generate ACCUs in the future, subject to certain transitional arrangements.

• Tailored treatment for emissions-intensive, trade-exposed (EITE) facilities

EITEs that have an elevated risk of carbon leakage due to estimated cost impacts at the facility level can apply for a lower baseline decline rate, reflecting the specific impacts faced by the facility and will be locked in for 3 years.

• Price cap

A carbon price cap of $75 per tonne of carbon dioxide (increasing with CPI plus 2 per cent each year) for Government-held ACCUs available for purchase by facilities. This is proposed as a price cap or cost containment measure and aims to give commercial certainty about maximum compliance costs.

What this means for regulated facilities

As we stated in our previous update, the proposed Safeguard Mechanism architecture means that the winners will be those who take a strategic approach to compliance, working in factors such as:

• facility-specific decarbonisation rates;
• availability of Government funding;
• banking and borrowing Safeguard Mechanism Credits between years;
• multi-year compliance monitoring;
• current and future carbon price expectations;
• interaction with the proposed Nature Repair Market;
• the carbon price cap; and
• potential future reforms such as the inclusion of high quality international offset units and the carbon border adjustment mechanism.

In addition, facilities that actively consider and realise the opportunities presented by the scheme (such as 'beating the baseline' to earn and trade Safeguard Mechanism Credits) will be able to realise the potential commercial upside provided by the scheme.

Our team is ready to assist current and new participants in the domestic carbon market and regulated Safeguard Mechanism facilities to navigate these changes and seize the array of opportunities they present.

Please contact us to discuss how we can support you.