30 June 2023
Reforms to the Safeguard Mechanism commencing 1 July 2023
The reforms ensure Australia’s largest emitters contribute to achieving Australia’s greenhouse gas emissions reduction targets.
What is the Safeguard Mechanism?
The Safeguard Mechanism is established by Pt 3H of the National Greenhouse and Energy Reporting Act 2007 (NGER Act). Details are set out in subordinate legislation, primarily the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Safeguard Rules).
The Mechanism operates by setting emissions limits, called baselines, for ‘designated large facilities’ that emit more than 100,000 tonnes of carbon dioxide equivalence in a year. Currently, around 215 facilities are covered, primarily in the mining, oil and gas, manufacturing, transport, construction and waste sectors. Together, these facilities account for around 28% of Australia’s emissions.
Amendments to the NGER Act require and incentivise emissions reductions
The Safeguard Mechanism Crediting (Amendment) Act 2023 amends the objects of the NGER Act to include contributing to the achievement of Australia’s greenhouse gas emissions reduction targets by ensuring that various outcomes are achieved. These include that net safeguard emissions fall to no more than 100 million tonnes in 2029–30 and that total net safeguard emissions between 1 July 2020 and 30 June 2030 do not exceed 1,223 million tonnes.
New requirements effectively require the Safeguard Rules to ensure gross and net emissions decline in a way that makes a proportional contribution to Australia’s 2030 emissions reduction target. This is reflected in requirements that:
the Minister must not make Safeguard Rules unless the Minister is satisfied that the rules are consistent with particular safeguard outcomes, and take other safeguard outcomes into account (s 22XS(1A)), and
in certain circumstances, including due to information about scope 1 emissions from approvals of new projects, or advice or reporting from the Climate Change Authority, the Minister may be required to consult and amend the Rules or take other policy actions to ensure the safeguard outcomes are achieved (ss 22XS(1C)-(1D)).
Another key reform is the insertion of a new Div 4A of Pt 3H of the NGER Act, which establishes a framework for a new kind of carbon credit called ‘safeguard mechanism credit units’ (SMCs). This aims to incentivise facilities to reduce emissions on-site and to go beyond their baseline obligations. SMCs will be issued where a facility’s emissions are below its baseline. Facilities will be able to sell SMCs to other covered facilities, bank them for future use, or surrender SMCs to reduce their net emissions. Facilities can also surrender Australian Carbon Credit Units, which are issued under the Carbon Credits (Carbon Farming Initiative) Act 2011, to reduce their net emissions.
Amendments to the Safeguard Rules require baselines to decline over time
Amendments to the Safeguard Rules give effect to a range of measures, including:
new methods for setting baselines for new and existing facilities, where baselines grow and fall with production (incentivising facilities to reduce their emissions intensity), and which require facilities’ baselines to decline over time (with a default decline rate of 4.9% per annum)
baseline setting arrangements for ‘trade-exposed baseline adjusted facilities’ – being trade exposed facilities that can demonstrate their costs under the scheme meet a specified threshold – who will be able to apply for a lower baseline decline rate
a baseline of zero for ‘shale gas extraction facilities’, which would include gas projects in the Beetaloo Basin and any similar future projects
flexible options for compliance, including options for facilities to ‘borrow’ up to 10% from baselines in future years (with a stronger obligation to reduce emissions in the following year, akin to interest), as well as provision for facilities to smooth out their carbon abatement obligations with extended ‘declared multi-year periods’ of up to 5 years
other provisions necessary to implement the SMC framework and related measures.
The Safeguard Mechanism does not apply directly to Commonwealth entities. However, designated large facilities subject to the mechanism include large business entities across a range of sectors that have significant levels of engagement across government. The Safeguard Mechanism reforms have also been a significant focus for the states and territories as well as foreign investors and Australia’s key trading partners.
AGS advised on a range of issues during development of the Safeguard Mechanism reforms, and drafted associated legislative instruments.
Important: The material in Express law is provided to clients as an early, interim view for general information only, and further analysis on the matter may be prepared by AGS. The material should not be relied upon for the purpose of a particular matter. Please contact AGS before any action or decision is taken on the basis of any of the material in this message.