Labor secures support for its Safeguard Mechanism reforms

Following the agreement reached between the Federal Labor and Greens parties in relation to Labor’s emissions reduction plan, the Safeguard Mechanism (Crediting) Amendment Bill 2023 (Cth) (Bill) was passed by the Commonwealth House of Representatives on 27 March 2023. The Bill was introduced into the Senate on 28 March 2023 and has been subject to a number of proposed amendments by Labor, the Greens and certain independents.

This article sets out some of the key matters arising from the Bill, the agreement reached between Labor and the Greens in order to allow the Bill to be passed by the Commonwealth House of Representatives, and the amendments that Labor has proposed to the Bill in the Senate.

Overview

The Bill proposes amendments to the ‘Safeguard Mechanism’ established under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) and associated subordinate legislation,[1] as well as amendments to other legislation to facilitate and give effect to the amendments to the Safeguard Mechanism.[2]

The Safeguard Mechanism applies to a ‘designated large facility’, being a facility that emits more than 100,000 tonnes of carbon dioxide equivalent covered emissions (i.e. scope 1 emissions) a year. There are approximately 215 designated large facilities under the Safeguard Mechanism.

Currently and in broad terms, the Safeguard Mechanism ensures that a designated large facility does not exceed the emissions baseline set for the facility pursuant to the Safeguard Mechanism. The emissions baselines for designated large facilities have essentially been set at ‘business-as-usual’ levels. As such, the Safeguard Mechanism is not, in its current form, designed to reduce the emissions of designated large facilities.

In 2022, the Commonwealth Parliament passed the Climate Change Act 2022 (Cth) (CC Act), which legislated Australia’s commitment to achieve net zero emissions by 2050, as well as a reduction in Australia’s net greenhouse gas emissions to 43% below 2005 levels by 2030. The amendments that will be made to the Safeguard Mechanism by the Bill, together with other initiatives proposed by Labor, are being implemented to achieve those legislated emissions reduction commitments.

The amendments to the Safeguard Mechanism to be made by the Bill are intended to commence on 1 July 2023, and Labor has a self-imposed deadline for the Bill to be passed by Commonwealth Parliament on or before 31 March 2023.

Reduction in baseline levels

The Bill, as initially proposed by Labor, contained amendments to the objects of the NGER Act to ensure that one of the objects of the Act was to reduce the aggregate net covered emissions from the operation of designated large facilities. As part of the agreement reached between Labor and the Greens, Labor agreed that it would legislate its policy intent to reduce the aggregate greenhouse gas emissions from designated large facilities to no more than 100 million tonnes of carbon dioxide equivalence per annum by 2030.[3]

In accordance with that agreement, Labor has introduced amendments to the Bill in the Senate which provide that the objects of the Act include ensuring that:

(1)          total net covered emissions of all designated large facilities for all of the financial years between 1 July 2020 and 30 June 2030 do not exceed a total of 1,233 million tonnes of carbon dioxide equivalence; and

(2)          net covered emissions of all designated large facilities decline to no more than 100 million tonnes of carbon dioxide equivalence for the financial year beginning on 1 July 2029 and zero for any financial year to begin after 30 June 2049.

In announcing the agreement it had reached with the Greens, Labor indicated that this emissions reduction would be achieved through the measurement of a five-year rolling average and that there will be specific beneficial treatment for hard-to-abate, value-added manufacturing.

The amendments to the Bill proposed by Labor in the Senate will give effect to use of the five-year rolling average mechanism to reduce the covered emissions from designated large facilities, and include specific provisions in relation to how the five-year rolling average is determined.

The beneficial treatment for manufacturing includes reducing the minimum annual baseline decline rate for applicable manufacturers to 1%, which will be below the proposed 4.9% default baseline decline rate for designated large facilities.[4] In this regard, draft exposure material released by the Commonwealth Government earlier this year indicated that a default baseline decline rate of 4.9% per financial year would apply to most designated large facilities until 30 June 2030.[5] We expect the beneficial treatment for applicable manufacturers to be introduced through the amendments to the subordinate legislation that contains the detailed provisions in relation to the operation of the Safeguard Mechanism.

Safeguard Mechanism Credit Units

One of the reforms to the Safeguard Mechanism to be made by the Bill to assist achieving a reduction in the aggregate net covered emissions from designated large facilities is the introduction of the framework with respect to Safeguard Mechanism Credit Units (SMCUs). SMCUs will be able to be issued in respect of a designated large facility which has covered emissions below its baseline levels. While the detail around the creation of SMCUs will be included in the applicable subordinate legislation, it has been envisaged that each SMCU will represent one (1) tonne of carbon dioxide equivalent emissions and that SMCUs will be able to be traded to responsible emitters and used to reduce the net emissions of their designated large facilities.[6]

The SMCU framework has been included in the Safeguard Mechanism to incentivise designated large facilities which have covered emissions below their baseline levels to reduce their emissions if opportunities to do so exist. In effect, it will do this by allowing relevant persons that are able to reduce the covered emissions of designated large facilities below their baseline levels to access revenue from the sale of the SMCUs that they are issued in a similar way to revenue generated by projects that create and trade Australian Carbon Credit Units.

Treatment of new gas fields

In announcing the reforms to the Safeguard Mechanism that it had secured, Labor indicated that it had agreed with the Greens that new facilities will need to meet international best practice to ensure that emissions reduce over time. It also indicated that new gas fields supplying existing liquefied natural gas facilities will be treated as new facilities and that, given the existence of low-CO₂ fields and opportunities for carbon capture and storage, such new gas fields will need to begin as zero emissions projects. While this detail is not set out in the Bill, it will likely be contained in the subordinate legislation that will be introduced to give full effect to Labor’s reforms to the Safeguard Mechanism. While it is expected that such requirements for new gas fields will likely affect project economics, it remains to be seen whether they will stymie the development of new gas fields.

Increased civil penalties for failing to meet baseline levels

A significant change to be made by the Bill is that it will include in the NGER Act new civil penalty provisions under the Safeguard Mechanism that could potentially result in a responsible emitter facing substantial fines should it fail to ensure that the covered emissions from its designated large facility are below the facility’s baseline level.

The new civil penalty provisions will apply where a responsible emitter fails to resolve an ‘excess emissions situation’, broadly referring to a situation where a designated large facility’s net emissions (covered emissions minus surrendered prescribed carbon units) are above its baseline level. Currently, the maximum penalty for an excess emissions situation is 100 penalty units per day that the excess emissions situation persists up to a maximum of 10,000 penalty units. Given the monetary value of a penalty unit is currently $275,[7] the maximum civil penalty that can be imposed in respect of an excess emissions situation is $2.75 million.

The new civil penalty for an excess emissions situation will be calculated at the rate of 1 penalty unit multiplied by the size of a designated large facility’s excess emissions situation. Consequently, the responsible emitter for a non-compliant designated large facility risks significantly greater fines. However, it should be noted that the civil penalty payable by a responsible emitter will not exceed the total covered emissions for its designated large facility. The explanatory material for the Bill indicates that the Commonwealth Government considers that the increased penalties better reflect the scale of contravention and its impact on achieving Australia’s emissions reduction targets and climate change.[8]

Extra time to source units but potential limits on the surrender of units

The amendments to be made to the NGER Act by the Bill will allow responsible emitters an extra month to resolve an excess emissions situation (from 1 March to 1 April following the applicable monitoring period), with this new compliance date first applying on 1 April 2025.

One way in which a responsible emitter will be able to resolve an excess emissions situation is by sourcing and surrendering prescribed carbon units (e.g. ACCUs and, once they come into effect, SMCUs).  

However, Labor has indicated that as a consequence of amendments secured by the Greens during negotiations, a responsible emitter which uses prescribed carbon credits to offset more than 30% of the covered emissions of its designated large facility will be required to justify to the Clean Energy Regulator why it is relying on carbon offsets instead of directly reducing emissions.[9] Currently, it is unclear what ramifications a responsible emitter would face should the Clean Energy Regulator be unsatisfied with the emitter’s justification. In light of this uncertainty, potential responsible emitters should consider whether their projects will be viable without requiring carbon offsets greater than the 30% of the projected baseline emissions.

Increased transparency and accountability

Under the CC Act, the relevant Minister is required to prepare an ‘annual climate change statement’ for each financial year which tracks the progress made during that year towards achieving Australia’s greenhouse gas emissions reduction targets.

In line with its agreement with the Greens, Labor has proposed amendments to the Bill in the Senate that will amend the CC Act and require the annual climate change statement to state whether aggregate net covered emissions from designated large facilities are declining consistently with the objects of the NGER Act.

As part of this increased transparency framework, Labor has also proposed amendments to the Bill in the Senate that will broadly have the effect of ensuring that the Minister responsible for the CC Act, the Secretary of the Department responsible for the administration of the NGER Act, and the Climate Change Authority will have visibility over the estimated scope 1 emissions of an action approved under the Environment Protection and Biodiversity Conservation Act 1999 (Cth) that is, or is likely to be, a designated large facility.

Ultimately, the inclusion of these amendments demonstrates that Labor is intending to abide by its commitment to implement the Chubb Review in principle, which found “to be effective, abatement has to be real, and it has to be known to be real”.[10]

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).