On 10 October 2022, the Department of Industry, Science and Resources (DISR) opened submissions on exposure draft legislation to reform the Safeguard Mechanism under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act). DISR is seeking feedback on two draft amendments: the Safeguard Mechanisms Reforms (Crediting) Amendment Bill 2022 and the Carbon Credits (Carbon Farming Initiative) Amendment (Safeguard Facility Eligibility Requirements) Rules 2022. Consultation on this Bill and the Rules is open until 28 October 2022.
These amendments form part of the Powering Australia plan and are aimed at reforming the Safeguard Mechanism to actively reduce emissions by gradually lowering baselines of greenhouse gas emitters subject to the Safeguard Mechanism.[1] The proposed reforms are intended to support Australia to meet its updated Nationally Determined Contribution (NDC) under Article 4 of the Paris Agreement. Australia has committed to reduce our national emissions to 43 percent below 2005 levels by 2030, and has reaffirmed Australia’s commitment to achieve net zero emissions by 2050.
These amendments follow consultation on the Safeguard Mechanism Reforms through the Consultation Paper released on 18 August 2022 and on which submissions closed on 20 September 2022. This was covered in detail in our earlier Insights article.
This amending legislation only addresses a limited number of reforms considered in the Consultation Paper, including creation and trade of Safeguard Mechanism Credits (SMCs) and limiting the use of ACCUs for reducing direct (scope 1) emissions unless the facility has an existing eligible offsets project, as Safeguard facilities will instead be able to generate SMCs. Further amending legislation will be required to address reforms associated Safeguard facility baselines, treatment of emissions-intensive trade-exposed (EITE) facilities and use of international units, toward transforming the Safeguard Mechanism into a baseline-and-credit scheme.
The Safeguard Mechanism
The Safeguard Mechanism applies to facilities emitting more than 100,000 tonnes of ‘covered’ scope 1 CO2-e emissions per year. Under the Safeguard Mechanism, facilities are given a baseline which is the reference point against which net-emissions levels will be assessed. Net-emissions are the ‘covered’ emissions from the operation of the facility plus any Australian carbon credit units (ACCUs) issued in relation to abatement activities occurring at the facility, minus any ACCUs surrendered for the facility, for that year. Facilities must keep their net emissions at or below their baseline.
Around 215 large industrial facilities are covered by the Safeguard Mechanism. This includes facilities in the mining, manufacturing, transport, oil, gas, and waste sectors.[2] These facilities contributed 28 per cent of Australia’s national emissions in 2020-21.
The Consultation Paper outlined four main areas proposed for reform (outlined in our previous Insights article):
1. Contribution of Safeguard Mechanism facilities to Australia’s climate change targets
2. Development, implementation and administration of baselines for Safeguard Mechanism facilities, including:
- fixed (absolute) vs production-adjusted (intensity) baselines;
- the need to remove ‘headroom’ from baselines;
- setting baselines for new entrants
- new technologies
- indicative baseline decline rates
3. Emissions trading and carbon credits, including:
- Safeguard Mechanism Credits
- ACCUs and Eligible Offsets Projects under the ERF
- International offsets
4. Treatment of “hard to abate” facilities that have trade exposure.
The draft Safeguard Mechanisms Reforms (Crediting) Amendment Bill 2022 provides for the introduction of Safeguard Mechanism Credits.
Draft Safeguard Mechanisms Reforms (Crediting) Amendment Bill 2022 (SMR Amendment)
The SMR Amendment would allow for the creation of a new unit type called Safeguard Mechanism Credits (SMC). SMCs will represent one tonne of emissions and allow for crediting and trading between Safeguard Mechanism facilities with relatively low-cost abatement and Safeguard Mechanism facilities whose abatement options are more costly or limited. The SMR Amendment would provide for the making of rules relating to interactions between the Safeguard Mechanism and the Emissions Reduction Fund (ERF).
The SMR Amendment does not propose to modify sections 22XL and 22XQ of the NGER Act, which specifies how baselines are set.
The SMR Amendment contains four schedules that amend the NGER Act, the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act), the Australian National Registry of Emissions Units Act 2011 (Cth) (ANREU), the Clean Energy Regulator Act 2011 (CER Act) and the Clean Energy (Consequential Amendments) Act 2011. The effect of each Schedule is summarised below:
The Safeguard Mechanism applies to the electricity sector in a different way. Instead of each electricity generator having its own separate baseline, the Safeguard Mechanism applies a single ‘sectoral’ baseline across all electricity generators connected to one of Australia’s main electricity grids. Individual grid connected electricity generators are not covered as long as total emissions from grid-connected electricity generators do not exceed the sectoral baseline. The Safeguard Mechanism does cover electricity generators that produces more than 100,000 tonnes CO2-e in a year and are not connected to one of Australia’s main electricity grids.
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SCHEDULE
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AMENDED LEGISLATION
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PURPOSE
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1 |
NGER Act |
Create SMC units and apply the laws about registration, transfers and compliance obligations to SMCs consistent with the treatment of Australian Carbon Credit Units (ACCUs) under the CFI Act. |
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2 |
ANREU Act |
Provides for SMCs to exist in the ANREU and establish arrangements for SMCs in the Registry that mirror the treatment of ACCUs. The amendments aim to increase transparency of information regarding unit holdings and unit types by requiring the Regulator to publish the total number of ACCUs and SMCs in each Registry account at least once per quarter. |
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3 |
CER Act; NGER Act |
Ensure consistent protection of all information held by the Clean Energy Regulator and allow the Regulator to be conferred additional functions by regulations. |
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4 |
CFI Act |
Align CFI Act with the Safeguard Mechanism reforms, so that new carbon abatement projects that reduce covered emissions at Safeguard facilities would no longer be eligible for ACCUs. These projects would generate SMCs instead. |
A summary of the key proposed amendments to the NGER Act are set out in the table below:
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NGER section
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PROPOSED AMENDMENT
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Example
uses 2
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Subdivisions A, B and C of Division 4A (new) |
Provides for issuance of SMCs (including corresponding entries being made in the Registry to reflect the issuance of SMCs), requirements for relinquishment of SMCs issued as a result of false or misleading information or reporting, and compliance with relinquishing requirements, all of which are generally similar to existing provisions in the CFI Act concerning issuance and relinquishment of ACCUs. |
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15B |
Enables an entity, other than a controlling corporation or responsible emitter for a designated large facility, to register to report under the NGER Act. This could be used to allow facilities to continue to generate SMCs if they are no longer covered by the Safeguard Mechanism (which is intended to serve as an incentive to reduce emissions even as facilities’ approach the Safeguard Mechanism threshold). |
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22XK |
Adds back any ACCUs attributable to carbon abatement at a Safeguard facility to that facility’s net emissions number, and enables the Safeguard Rules to provide that ACCUs are only added back to the facility’s net emissions number if they reduce the facility’s Safeguard-covered emissions (which is intended to prevent emissions reductions from offsets projects that take place at existing NGER reporting facilities being double counted). |
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22XM |
Enable facilities to reduce their net emissions by surrendering SMCs. |
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22XN |
Enables the Safeguard Rules to provide for banking of SMCs issued between Phase 1 (operating from 2023-24 and 2024-25) and Phase 2 (operating for 2025-26 to 2029-30). Also enables the Safeguard Rules to either provide that 1) the option for deemed surrender is removed; or 2) the option for deemed surrender is not available for any new carbon abatement contracts. |
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74AA (new) |
Provides for the Safeguard Rules to require audits in relation to crediting or NGER reports from Safeguard facilities. |
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Draft Carbon Credits (Carbon Farming Initiative) Amendment (Safeguard Facility Eligibility Requirements) Rules 2022 (CFI Amendment)
This amendment would clarify the requirements for eligible offsets projects relating to covered emissions at Safeguard facilities. This is currently regulated under s 27(4)(I) of the CFI Act.
Under the CFI Amendment, Safeguard facilities would have limited use of ACCUs for reducing direct (scope 1) emissions unless they have an existing eligible offsets project. Safeguard facilities can instead generate SMCs. The CFI Amendment would prevent new eligible offsets projects from being registered if they reduce covered emissions at a Safeguard facility.
If you have any questions about these proposed reforms, please contact us. We will continue to monitor and prepare future insights on the implementation of further Safeguard Mechanism reforms.
