Let’s talk Safeguard Mechanism
What is the Safeguard Mechanism and what does it mean for the future of industry in Australia: Reflections from the 2022 Australian Emissions Reduction Summit.
I spent two days at the Carbon Market Institute 2022 Emissions Reduction Summit and there was an overwhelming sense that the government is getting something right.
The national budget, which was announced at the same time as the Summit, laid out a bold plan to transition Australia’s energy infrastructure to a renewable future. The recent Climate Change Act finally provides a legislative basis for our greenhouse gas emissions reduction target of 43% reduction from 2005 levels by 2030 and net zero by 2050. Some say this is not enough but there is a profound sense that we are moving in the right direction, from a ‘soft law’ environment where the onus is on individual companies to a ‘hard law’ environment where the government is working collaboratively with industry to agree on bold targets, limits, and reductions to emissions that will be necessary if we have any chance of meeting our targets before hitting irreversible climate tipping points and ecological collapse.
By far the most serious moves by this government are the proposed reforms to the Safeguard Mechanism and the review of the carbon market through the Chubb Review. This article hones in on the Safeguard Mechanism being something that still elicits confusion among colleagues, clients, and members of the public. I intend to explain what it is, whether it will work, and what it means for industry in Australia.
What is the Safeguard Mechanism?
It could be one of the most profound mechanisms for Australia to enact large-scale climate action, yet the name is a little misleading. As it is now being proposed, it is essentially an emissions trading scheme designed to ensure that the top 215 highest emitting facilities in Australia remain below an agreed level of emissions, otherwise known as a ‘baseline’. The baseline set for each sector or each facility will gradually be reduced from where we are now in 2022 (approximately 137 million tonnes of emissions annually) to where we want to be in 2030 (99 million tonnes annually) so that heavy industry contributes to the national 2030 goal of reducing emissions to levels 43% below what they were in 2005.
To further understand the term ‘Safeguard’, it’s worth introducing the other main mechanism we have in place to meet our climate targets – the Emissions Reduction Fund (ERF) – and explaining how they relate. Established in 2011, the AU$2.5 billion ERF uses tax payer money to buy Australian Carbon Credit Units (ACCUs) from farmers, land managers, communities, and businesses which prevent the release of greenhouse gas emissions or remove (or sequester) them from the atmosphere. The Safeguard Mechanism, as the name implies, was designed to safeguard the significant investment made through the ERF to ensure that emissions abated in one sector of the economy do not leak out via another sector. It aimed to ensure that money used to buy carbon credits is not cancelled out by heavy industry emitting more than they should.
On face value, the reforms to the Safeguard Mechanism (currently being drafted) are intended to work in a simple way. If a given facility or business produces fewer emissions than its agreed limit, or baseline, then it is awarded ‘Safeguard Mechanism Credits’ (SMCs). These credits can then be sold to facilities that emit above their baseline. Through this trading scheme, the Australian Government should be able to ensure that the total amount of emissions are kept below an agreed level each year.
SMCs differ from Australian Carbon Credit Units (ACCUs) in that they are only designed to be traded within the Safeguard Mechanism between the top 215 highest emitting facilities as a way of ensuring overall emissions stay below the agreed level each year. They are not offsets and don’t have the same additionality and integrity requirements that ACCUs do because they don’t need these features in order to function effectively. However, liable entities will also be able to utilise ACCUs to meet their compliance obligations.
Will this mechanism work?
The short answer is yes. It’s a simple and intelligent scheme that has much in common with successful emissions trading schemes operating in Canada, Japan, New Zealand, Switzerland and the United States. The key to it working is the gradual but firm and linear reduction of the baseline amount of emissions each facility or sector is permitted each year. But as is often the case with grand schemes, the devil is in the detail. The Safeguard Mechanism has been around since 2016 but under the previous government, emissions increased rather than decreased. This is because the previous government set generous baselines that allowed plenty of ‘head room’ between what the facility actually emitted and what it was permitted to emit. This head room will likely be removed or substantially reduced by our new government and then ratcheted down year by year as we approach 2030.
Another key to making the whole thing work is the decision of whether or not to establish the emissions baseline using an industry average or to do it on a facility-by-facility basis. If an industry average is used then this will create competition between rival companies, as some companies will receive automatic Safeguard Mechanism Credits for emitting below the industry average, whilst others will be immediately penalised for emitting more than the average allowable emissions for that industry. From a climate action perspective it won’t matter, so long as the aggregate of all emissions are kept below the agreed level and then gradually reduced to meet our targets.
What does this mechanism mean for the future of Industry in Australia?
In short, it means that an organisation’s carbon footprint is now one of its biggest liabilities. The declining emissions trajectory of Safeguard Mechanism-covered facilities should be seen as creating an emissions budget, and every year that an organisation delays action is another year of liability in the emissions budget books.
Gone are the days when carbon can be emitted for free. Along with mounting pressure from the world’s largest capital funds to meet Environmental, Social and Governance (ESG) measures, there will soon be tangible legislation in place to ensure that heavy industry and large emitters move towards net zero. If you scoff at the idea of a big mining company moving towards net zero, believing this transition cannot be possible, then this is the legislation and the mechanism that will make it a reality.
There are visionary companies, some of whom are clients of TEM, who are taking bold steps toward decarbonisation. Increasingly, the move towards net zero is understood to be a necessity as well as a business opportunity with progressive companies ultimately positioning themselves as leaders in a decarbonising global economy. Others are intelligently anticipating the increase in demand for ACCUs that the Safeguard Mechanism could generate and creating large portfolios of high integrity credits whilst they are still available at an affordable price.
TEM recognises that we are in an important moment in history for the mining and resources sector. There are many forms of mining that will be vital to a decarbonised economy. We are moving away from a fuel-based energy system to a minerals-based energy system. Solar and wind farms, updated energy infrastructure and electrified transportation systems will all rely on an abundance of minerals and resources to fuel the transition. We agree entirely that electrification and direct emissions reduction need to be at the core of the mining and resources sector’s move to net zero.
However, high integrity carbon credits are the most effective way to act now whilst technological solutions are developed and put into place. Demand for high integrity credits will soar as they play an essential role in offsetting the hard to abate component of the mining and resources sector. High integrity carbon credits also offer an important opportunity for companies to take advantage of the numerous environmental, social and community benefits that the best forms of carbon credits offer. My role as Partnership Manager – Mining and Resources, connects the mining and resources sector to some of the highest quality carbon offsets in the Australian and international market. If your company has an existing net zero plan or aspirations to develop one, then I encourage you to get in touch so that we can work out how TEM may be able to assist on this vital transition towards a sustainable future.