02 Apr 2015

Heading for the baseline: Government opens consultation on greenhouse emissions Safeguard Mechanism

by Brendan Bateman, Graeme Dennis

There are four possible approaches to issues in setting baselines for greenhouse emissions, with different impacts on new investments and the electricity sector.

The Government has released its long-awaited discussion paper on the proposed Safeguard Mechanism.

As the other book-end of Government climate change policy, the Safeguard Mechanism is intended to prevent increases in emissions in the economy while the Government seeks to acquire emissions abatement through the Emissions Reduction Fund (ERF).

The Safeguard Mechanism imposes a penalty on operators of large facilities that in any year exceed their annual emissions baseline (unless they have surrendered sufficient carbon credits to offset the excess).

The Consultation Paper seeks to identify certain key design parameters of the mechanism in advance of its scheduled commencement on 1 July 2016. Many of these design issues were adverted to in the Emissions Reduction Fund White Paper released in April 2014, and therefore will not come as a surprise. These include:

Coverage: the mechanism will apply to facilities with direct emissions of more than 100,000t CO2-e per annum (noting that entities over 20,000t CO2-e per annum will still need to report their emissions under the NGER Scheme);

Baselines: emissions baselines for existing facilities will reflect the highest level of annual reported emissions for a facility over the historical period 2009-10 to 2013-14; that is, there is no averaging of emissions in calculation of the baseline;

New investments: baselines for new facilities and significant expansions will be set at a level to encourage facilities to achieve and maintain best-practice; and

Compliance: a flexible approach to compliance will be adopted.

Under amendments to the National Greenhouse and Energy Reporting Act 2008 (NGER Act) negotiated with the crossbench Senators at the end of 2014 to ensure passage of its ERF package, the Government agreed to certain rules regarding the Safeguard Mechanism, including:

  • a deferred start date of 1 July 2016;
  • liability being imposed on the entity with operational control of the facility, consistent with the reporting framework of the NGER Act;
  • baselines to be set in safeguard rules to be made under the NGER Act;
  • a graduated approach to emissions management – facility emissions must remain below historical baselines, allowing business to use voluntary carbon offsets to set off emissions, and exemptions for facilities in exceptional circumstances; and
  • a civil penalty for non-compliance.

While these elements have been legislated, they are explained in some more detail in the Consultation Paper.

Coverage of the Safeguard Mechanism

The Government estimates that the 100,000t CO2-e threshold will capture about 140 large businesses, representing about 50% of Australia's emissions. Businesses likely to be captured include power generation, mining, oil and gas extraction, gas supply, manufacturing, transport, heavy construction and waste. The electricity sector alone will account for 57% of covered emissions.

Waste sector emissions

Due to the lag between waste disposal and methane generation, it is not considered appropriate to include emissions from waste deposited in landfill before 1 July 2012. Accordingly, landfills will be covered if emissions from "new" waste deposited exceeds the threshold.

Establishing baselines

The Consultation Paper proposes four possible approaches to issues in setting baselines.

Approach 1: the baseline for a facility will not be amended as a result of a change in the estimation method used by a facility. However, the Clean Energy Regulator (CER) may authorise the adjustment of baselines to take into account changes in official global warning potential factors.

Approach 2: where there is a change in facility boundary during or after the baseline periods, then reported emissions may be adjusted. However, anti-avoidance measures will be used to deter businesses from redefining facility boundaries to avoid coverage or avoid exceeding their baseline;

Approach 3: for sectors (such as natural resource sectors) where the historical high point may not reflect expected business as usual emissions, they will be able to apply to adjust the baseline using an "independent assessment" approach (see below);

Approach 4: multi-year averaging to accommodate natural variability so that a facility could exceed its baseline in one year, provided that on average over multiple years, it was below its baseline. The paper suggests averaging over a maximum of three years. The operator will need to apply to the CER for approval to use averaging and will be required to show how emissions will be returned to baseline levels over the monitoring period.

The key new issues covered by the paper concern (1) the determination of baselines for new investments and (2) treatment of the electricity sector. These issues are discussed below.

(1) New investments and significant expansions

The Government acknowledges that where investment decisions have already been made, it is difficult to change the design of a new plant. While various tests could be developed to define when an investment is already underway, the Government proposes a simple cut-off date of 1 July 2020. If a new facility or significantly expanded facility exceeds the coverage threshold by that date, it will be assumed to be a new investment. This means that the baseline for these facilities will be set in a way that accounts for their inherent emissions performance rather than any expectation of best practice.

For new facilities, the paper distinguishes between existing facilities that have less than five years reporting data, facilities for which a final investment decision has been made and are under way but not yet operating, and facilities for which a final investment decision is yet to be made.

Existing facilities that have less than five years' worth of reporting data have a choice between being treated as a new investment (see below), or using the highest reported emissions of their limited data set. However, where a facility has submitted three annual emissions reports during the baseline period that are over 100,000t CO2-e, they must use historical data.

Baselines for new investments that are already underway will be determined by the CER based on the facility's forecast of emissions that will occur in the year that is expected to have the highest production levels in the first three years of operation after emissions first exceed 100,000t per annum. . The forecasts may be subject to independent audit. After three years of operation after first exceeding 100,000t CO2-e per annum, the facility's baselines will be adjusted permanently if the highest level of production is different to the forecast. A default baseline equivalent to the coverage baseline will apply to those that do not apply to the CER for a determination of a baseline.

Where a final investment decision is yet to be made, best practice performance will be encouraged. The paper suggests one way of defining best practice is by reference to the average emissions intensity of production of the top 10% of Australian industry output. Where available data is limited, international data could be adapted to determine best practice emissions intensity.

Baselines for new facilities or significant expansions could set based in the highest expected production in the first three years of operation, multiplied by the relevant best practice emissions intensity benchmark, and aggregated for each relevant output. After three years, baselines could be permanently adjusted to reflect the highest actual production over that period. Significant expansion could be defined as an increase in production capacity of more than 20%.

(2) Electricity sector

The paper sets outs the Government's proposal to treat electricity generators on a sectoral rather than individual facility basis. Key elements of the proposal include:

  • establishing a sectoral baseline for the grid-connected electricity generation sector based on average emissions over a historical period;
  • if the sectoral baseline is exceeded by the industry as a whole, there is the option to apply individual baselines in the following compliance period for facilities that emit more than 100,000t CO2-e, with individual baselines set by reference to a generator's average emissions over the same historical period as the sectoral baseline;
  • off-grid generators would be covered by individual baselines and be subject to the coverage baseline of 100,000t CO2-e;
  • generators could apply to use the multi-year monitoring period to average out any exceedance of the sectoral or individual baseline;
  • discretion of the CER to disregard exceptional events which cause an emissions spike. In the case of the electricity sector, this could be a direction from the market operator to produce electricity;
  • application of the same principles for new investments and significant expansions.

Submissions on the Consultation Paper are open until 27 April 2015.

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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.