Last minute Safeguard Mechanism Reforms introduce new obligations

The Environment and Sustainable Development team
03 Apr 2023
Time to read: 4 minutes

Following an historic agreement between the Australian Government and the Greens, major greenhouse gas emitters in Australia will face new emission reduction obligations from 1 July 2023.

On 27 March 2023, the Commonwealth Minister for Climate Change and Energy, Chris Bowen, and the Greens announced that they had agreed on significant amendments to the Safeguard Mechanism, paving the way for the passage through Parliament of the Safeguard Mechanism (Crediting) Amendment Bill 2023 on 30 March. The Bill is now awaiting assent, and together with key amendments to subordinate instruments, the enhanced Safeguard Mechanism is expected to commence on 1 July 2023.

The legislative and policy changes which the Government and the Greens agreed will have significant implications for the operation of the Safeguard Mechanism and Australia's drive to meet its targets to reduce greenhouse gas (GHG) emissions by 43% below 2005 levels by 2030, and net zero by 2050.

The key change is a legislated cap on combined annual GHG emissions from "covered facilities", reducing over time.

The impacts of these changes are likely to be most significant for existing and new coal and gas projects. However, it is too early to say whether existing projects will struggle or new projects will not go ahead.

Building on our recent coverage of the Safeguard Mechanism, this article focuses on key points of the Government-Greens agreement, and their implications for Australian energy and resources projects.

Recap on the Safeguard Mechanism

The Safeguard Mechanism commenced operation in 2014 and applies to facilities that emit more than 100,000 tonnes of scope 1 GHG (ie. CO2-e) per financial year. The Safeguard Mechanism was designed to limit emissions growth from these "covered facilities", by setting an emissions baseline for each facility. It currently covers about 215 of the nation's biggest resources, manufacturing and industrial GHG emitters.

In simple terms, the Safeguard Mechanism required each covered facility to emit no more than its applicable baseline GHG emissions in any given year. This requirement applied to net emissions, meaning that a facility operator who exceeded the facility baseline could offset the exceedance by purchasing and retiring carbon offsets, such as Australian Carbon Credit Units (ACCUs). The proposed changes to the Safeguard Mechanism will result in the scheme delivering a substantial proportion of the Government's emission reduction target, by setting tighter baselines for each facility which reduce over time.

The changes to Safeguard Mechanism will be implemented through a variety of Commonwealth Acts (many of which the Bill will amend), regulations and the proposed National Greenhouse and Energy Reporting (Safeguard Mechanism) Amendment (Reforms) Rule 2023 (Safeguard Amendment Rule), as well as administrative policies for key regulators such as Australia's Clean Energy Regulator.

Changes to previously proposed reforms

Tougher regulations on GHG and hard cap on gross emissions

Following agreement with the Greens, the Bill now includes a hard cap on scheme-wide GHG emissions with a ratchet down formula. This means that the gross emissions will not be able to exceed the current level of 140 million tonnes per annum (which must decrease over time) in the first year of operation, and that cap will reduce to 100 million tonnes by 2030.

Under the Government's previous proposal, actual GHG emissions from covered facilities were forecast to rise from 140 million tonnes to between 155-184 million tonnes in 2030. Now, the Minister will be required to take actions (including seeking legislative or rule changes) if scheme-wide five-year rolling average emissions are not reducing.

Further, the changes include a requirement to incentivise onsite abatement to ensure facilities are actively encouraged to reduce emissions instead of offsetting them. The Climate Change Authority will also conduct a review in 2026-27 which will look at the use of offsets and will implement measures to restrict their use if on-site abatement is not occurring to satisfactory levels.

In addition, echoing a recent focus on regulation of GHGs other than CO2, methane and nitrous oxide emissions will now have to be publicly reported separately. The Climate Change Authority will review how methane is measured, verified, and reported, and will introduce new requirements by 1 July 2024.

Availability and use of carbon offsets

The use of ACCUs to offset GHG emissions will remain unrestricted as originally proposed. However, to promote accountability and transparency, covered facility operators will be required to publicly justify their use of offsets to the Clean Energy Regulator if they use 30% or more offsets to meet their baseline. This is intended to incentivise greater use of abatement technologies than might have occurred under the original proposal.

Further, in an attempt to improve the integrity of ACCUs, there will be a freeze on the issuing of Human Induced Regeneration project ACCUs (which were the focus of recent criticisms of Australia's carbon credit scheme) until they are subject to an independent audit. This will reduce the availability of ACCUs in the short term and so may drive the ACCU price higher, providing further incentive to the deployment of new emission reduction technologies at covered facilities.

Funding and other key changes

The Government's Powering the Regions fund will not be available to fund coal or gas projects. Instead, the Government will increase transition support to decarbonise hard-to-abate industries, including steel, cement and aluminium, from $600 million to $1 billion. The Government will also develop special treatment for companies in these industries and conduct a review into potentially establishing an Australian carbon border adjustment mechanism to halt "carbon leakage".

In addition, sectoral emission reduction plans being developed by the Climate Change Authority could make it harder for emission intensive projects to get finance.

Potential impacts on future projects

All new gas fields supplying existing LNG facilities will be treated as new entrants and will be required to have "zero reservoir carbon" during development, in line with international best practice.

A "pollution trigger" is also being introduced to require the Climate Change Minister to test the impact of any new or expansion projects on the hard cap and net carbon budgets. Approval requirements under the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act) (Australia's national environmental law) and advice from the Climate Change Authority would trigger the assessment, as would any assessment of emissions data and forecasts by proponents. The Greens have long advocated for the inclusion of a trigger of this kind in the EPBC Act.

If the assessment finds that a project would contribute to exceeding the cap or budget, the Minister must ensure that the project meets the Safeguard Mechanism goals, by either consulting and recalibrating the rules (such as by limiting ACCUs, reducing the value of ACCUs or adjusting the decline rates of baselines) or imposing conditions on new entrants. This may mean that the Government will need to choose between imposing greater GHG emission reduction requirements on existing industries or blocking new projects.

In commenting on the changes, Greens' leader, Adam Bandt, suggested that the hard emissions cap would 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. The claim was rejected by the Australian Government soon after it was made and was challenged by several developers and other stakeholders.

Next steps for the Safeguard Mechanism

While the agreed changes are substantial, they do not go as far as the Greens' prior demand that the Government veto all new coal and gas projects.

Nonetheless, it is possible that some project proponents will see the changes agreed with the Greens as adding significant risk to projects.

The Commonwealth Government is set to finalise the Safeguard Amendment Rules in April, and the updated Safeguard Mechanism scheme is intended to be in operation from 1 July 2023.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.