Unpacking the Safeguard Mechanism Reform

The Safeguard Mechanism (SGM) builds on the National Greenhouse and Energy Reporting scheme’s reporting and record keeping requirements. It will ensure the 200 largest emitting industrial facilities (contributing to nearly 28% of Australia’s national emissions) will keep their net emissions below a limit. This limit is called “baseline” or “a reference point”, as part of the scheme. 

SGM applies to facilities emitting over 100,000 tonnes CO2e (scope 1 emissions) in a financial year. It covers a range of industry sectors such as electricity generation, oil & gas, mining, manufacturing, transport, and waste. Like NGER, SGM scheme is also administered by the Clean Energy Regulator (CER). The overall objective of SGM scheme is to:

1. Achieve Australia’s net zero target by 2050

2. Keep Australian businesses competitive in the era of decarboniastion

3. Support largest emitters to reduce emissions by introducing credits for facilities that emit less than their baseline.

Key features of the reform:

Australia’s growing commitment to reduce national emissions to 43% by 2030 and net zero emission by 2050 has emphasised the need to reform the SGM scheme. Further, the sole focus of SGM scheme to reduce emissions from large industrial facilities is yet to be achieved. To make it more efficient, equitable and effective, following changes were proposed:

1. Reduce facility baselines: The aggregated baseline must align with Australia’s net zero commitment, which means that facilities baseline will need to follow the same trajectory. This will push facilities to plan and operationalise decarbonisation strategies and purchase/generate more carbon offsets to comply.

2. Remove headroom: Currently, SGM facilities have higher aggregated baseline than the actual emissions. The need to establish a baseline which removes the headroom is high on the Government’s agenda. Headroom is defined as the difference between baseline and actual emissions. The main benefit of removing headroom is to facilitate crediting and trading as soon as baseline starts to decline.

3. Production-adjusted (intensity) vs fixed (absolute): Complete transition to production-adjusted baseline is preferred by the businesses because:

   It does not compromise on business output and focuses on improving the emission intensity of production. This implies that businesses will not shift their business operations to offshore and there will be a less risk of carbon leakage. On the other hand, establishing fixed baseline framework means reduce the domestic production.

   Having a production-adjusted baseline provides an opportunity to establish the baseline for each additional business output. This will improve the emission intensity at production facility level and will be advantageous for high emission producers.

4. Setting baselines for existing and new facilities: Two main options are proposed under the reform for establishing baselines:

   Option 1: Industry average emission-intensity benchmarks set by the Government and published in SGM Rule; and represent average emissions intensity of production at SGM facilities over 5 years. All facilities making the same product use a common standard which provides a relative advantage to low emissions producers.

   Option 2: Site-specific emission-intensity values are calculated at the facility level and independently audited. The calculated baseline may better reflect differences within industries related to location and technologies used at the facility. As baselines will be tailored to a facility, all facilities would incur additional costs and increased effort to reduce their emissions.

   For new entrants, baselines will be established using emissions-intensity benchmarks based on:

   Best practice: calculated as the average emissions intensity of the top 10% of Australian industry performance

   Industry average: consistent with the option 1 for existing facilities.

   Adopting best practice approach will encourage new entrants to explore best technologies and design features to improve emissions performance.

5. Safeguard Mechanism Credits (SMC): Facilities will receive SMCs automatically once their emissions fall below their baseline. This will create crediting and trading opportunities for facilities within the scheme and help them manage compliance cost.

   Chris Bowen, Climate Change and Energy Minister advised that companies who fail to reduce their emissions reduction target and fail to buy offsets, will face fines. The price of these fines is $275 a tonne1 and is significantly higher than the price of carbon credits to ensure that businesses start to comply.

   The Safeguard reforms will be effective from 1st July 2023.

How can Rennie help?

1. Establish SGM Baseline: Rennie is well positioned to help existing facilities and new entrants in establishing safeguard baselines. It is imperative to understand the implications of SGM for potential entrants who are just under the limit of covered emissions (100,000 tons of CO2e). Rennie team can design a clear pathway for reducing emissions against baseline, benefitting new entrants from generating SMCs since beginning.

2. Establish Decarbonisation Strategy: Rennie has the in-house capability to develop GHG inventory (baseline), identify GHG emission reduction measures and design a decarbonisation strategy. Rennie team can develop Marginal Abatement Cost Curve (MACC) for the identified opportunities to aid decision making.

3. Review Safeguard Mechanism Credits (SMCs): Rennie can undertake a review of the credibility and longevity of available SMCs. It will enable participants to make sound investment decisions.

4. Nature based solutions: Rennie can assist with the screening of land parcels for their ability to generate ACCUs by implementing ERF projects that are best fit for the identified land type.

 Sources:

1: Australia’s biggest polluters forced to reduce emissions by 30 per cent by 2030 | 10th January 2023 | The Sydney Morning Herald | Available at: Australia’s biggest polluters forced to reduce emissions by 30 per cent by 2030