Safeguard Mechanism reform

On 27 March 2023, the Australian Government announced it has now obtained the political support it needs to pass legislation imposing a “hard cap” on emissions under Australia’s existing Safeguard Mechanism. This alert provides an overview of this legislative change.

 

What is the Safeguard Mechanism?

The Safeguard Mechanism currently applies to all facilities (both onshore and offshore Australia) that emit more than 100,000 tonnes CO₂-equivalent pollution in a year. Around 215 of Australia’s highest emitting facilities are subject to the Safeguard Mechanism. A responsible emitter who has operational control of the facility must ensure that the facility’s net emissions do not exceed the baseline determined by the Clean Energy Regulator.

Scope 1 emissions are counted towards the facility’s compliance, and any facilities that emit more greenhouse gases than allowed by their baseline are required to either reduce their own emissions, buy emissions reductions from another Safeguard facility or buy Australian Carbon Credit Units (ACCU).

To date, baselines have been calibrated to track “business as usual” operations. The Australian Government is reforming the Safeguard Mechanism as part of its “whole-of-economy plan” to reduce emissions to meet its legislated emissions reduction target of 43% from 2005 levels by 2030 and net zero emissions by 2050 under the Climate Change Act 2022 (Cth) (Climate Change Act). The Climate Change Act reflects Australia’s updated Nationally Determined Contribution under the United Nations Framework Convention on Climate Change. Should you wish to learn more about the potential implications of the Australia’s Climate Change Act on the private sector you can read our insight article here or reach out to the DLA Piper team below.

 

What is the “hard cap” under the Safeguard Mechanism?

The “hard cap” sets an absolute ceiling on actual (gross, not net) emissions to ensure future emissions are never higher than the current level of emissions – 140 million tonnes of CO₂-equivalent pollution per year. Over time, this limit will be progressively lowered until Australia reaches net zero. The intention is that, as a result, high emitters will be forced, under law, to make cuts to their emissions, and invest in technology and solutions that will decarbonise facilities, and not just by buying safeguard credits or ACCUs. The alternative is extensive penalties, charged per tonne of CO₂-equivalent emissions produced.

 

What other amendments to the Safeguard Mechanism have been agreed?

The following amendments to the Safeguard Mechanism have also been agreed and may also be relevant to your business:

• A “pollution trigger” in the Safeguard Mechanism will require the Climate Change Minister to test a new or expanded project’s impact on the hard cap and net carbon Budgets. If the assessment finds that the project would contribute to exceeding the cap or Budget, the Minister must consult and recalibrate the rules (such as by limiting ACCUs, reducing the value of ACCUs or adjusting the decline rates of baselines) or impose conditions on new entrants. Approvals under the Environmental Protection Biodiversity Conservation Act and advice from the Climate Change Authority would trigger the assessment, as would assessment of emissions data and forecasts. The Minister's action or lack of action would be subject to legal enforcement.
• All new gas fields for LNG export will need to have “zero reservoir carbon” during development. This means new gas projects will be required to have net zero CO₂ emissions from their first day of operation. Specifically, in relation to the Beetaloo basin, all new gas entrants in the basin will be required to have net zero scope 1 emissions from entry.
• Methane and nitrous oxides must be publicly reported and distinguished from CO₂ The Climate Change Authority will review methane measurement, verification and reporting and implement any improvements to take effect from 1 July 2024.
• There will be powers to ensure reductions in scope 2 emissions are not used to misrepresent net emissions of a facility (by the removal of ACCUs as counting towards “net” emission targets).
• A new requirement for relinquishment of safeguard mechanism credit units or ACCUs if there is false or misleading information provided by an emitter (including, for example, in a report issued by the emitter to the Minister).
• The Powering the Regions Fund, established to support facilities in the Safeguard Mechanism to transition to cleaner operations, will not be directed to coal and gas projects.
• Corporations will be required to justify their use of offsets if they use offsets for more than 30% of their baseline.
• By 2027, the Climate Change Authority will review the use of offsets and implementing measures to restrict their use if onsite abatement is not occurring to satisfactory levels.

These amendments to the Safeguard Mechanism and associated Rules are now to be drafted into a detailed regulatory package, to be released in coming weeks. The updated Safeguard Mechanism scheme will commence on 1 July 2023.

 

Looking ahead

The new policy will prevent future projects from emitting past a certain level and, therefore, will affect the profitability of projects, particular in the oil & gas space. Greens leader, Adam Bant, has suggested the “hard cap” will make it unviable for 116 new coal and gas projects in the pipeline because they would be unable to get their emissions below the limit. However, Energy Minister Chris Bowen has indicated the Safeguard Mechanism will not prevent the development of new coal or gas projects even with the change, as the rate of emissions reduction exceeds the cuts needed to achieve Australia’s legislated emissions reduction target in the Climate Change Act.

It is notable that the reforms also include targeted support for so-called “future-focused industries” such as green cement, critical minerals such as cobalt and green iron ore, and green hydrogen. The Australian Government has indicated it will provide an extra AUD400 million in transition support, increasing its commitment from AUD600 million to AUD1 billion, through the Powering the Regions Fund to decarbonise industries such as steel, cement and aluminium.

 

Relevant contacts

Should you have any queries regarding the changes to the Safeguard Mechanism or any potential impacts on your business, please reach out to Tom Fotheringham, Jack Brumpton or Claire Robertson.