Recent reforms to the Safeguard Mechanism are helping keep Australia on track to meet its emissions reduction target, as well as stimulating new renewables solutions, writes Clean Energy Regulator chair David Parker.
Leading suppliers in Australia’s clean energy sector will recognise the market opportunities the recent Safeguard Mechanism reforms have created. The facilities covered by the emissions legislation will increasingly need to source clean energy technological solutions, large and small, to achieve and surpass the Federal Government’s emissions reduction targets.
The Safeguard Mechanism has been in operation since 2016. However, for 2023-2024, the system has been tightened to drive down emissions in Australia’s industrial sector.
The Safeguard Mechanism applies to facilities that emit more than 100,000 tCO2-e of covered emissions in a financial year. It covers Scope 1 emissions – including direct emissions from fugitive emissions – and emissions from fuel combustion, waste disposal and industrial processes such as cement and steel making.
Scope 2 emissions, such as those associated with electricity sourced from the grid or from hydrogen produced offsite, are not covered under the mechanism.
Approximately 28 per cent of Australian greenhouse emissions come from facilities covered under the mechanism from sectors of the economy including mining, oil and gas extraction, manufacturing, transport and waste.
Earlier in 2023, Federal Parliament passed reforms to the Safeguard Mechanism, which came into effect on 1 July and apply to the 2023-2024 compliance period. The reformed Safeguard Mechanism will contribute to Australia’s goal to reduce greenhouse gas emissions by 43 per cent below 2005 levels by 2030, and to reach net zero by 2050.
The mechanism requires and incentivises Australia’s largest industrial facilities to reduce their emissions to help meet these targets. It aims to deliver more than 200 million tonnes of abatement by 2030. This is equal to taking two-thirds of the nation’s cars off the road during the same period.
The reforms introduce a declining emissions limit – called a baseline – that facilities are required to stay below each year. The baseline of each facility will lower by 4.9 per cent annually through to 2030. Some trade-exposed facilities, such as cement manufacturing, may apply for flexibility to secure a reduced baseline decline rate if they meet a cost-impact metric test. New facilities will have their baselines set to tighter international best-practice emissions-intensity levels.
The reforms also introduce Safeguard Mechanism Credit units (SMCs), which will be issued to facilities that do not exceed their declining baselines. The structure of these incentives means those who reduce emissions faster and at the lowest cost will be rewarded. The first SMCs are likely to be issued in early 2025 to facilities whose emissions are lower than their baselines in the year to June 2024.
SMCs may be on-sold for financial benefit or retained for use against a future liability.
Facilities that don’t have commercially available emissions reduction opportunities have options to meet their baselines. Facilities could choose to bring forward capital investments, and doing so will reduce emissions and generate SMCs. They may borrow a portion of their baseline from a future compliance year, apply for a Multi-Year Monitoring Period (MYMP) or purchase and surrender SMCs or Australian Carbon Credit Units (ACCUs).
To promote accountability and transparency, facilities will be required to publicly justify their use of offsets if they use ACCUs equivalent to 30 per cent or more of their baseline to meet their obligations.
I believe the reformed scheme will stimulate demand for large-scale and small-scale clean energy solutions. Many Safeguard facilities are remote and have onsite electricity generation that could be transitioned from diesel to firmed renewables.
Other potential changes may include the electrification of industrial processes, or the production of renewable-electricity based “green” hydrogen to displace the use of natural gas for heat-based processes.
The economic incentives are now in place for facilities to seek cleaner energy solutions. The mature and innovative Australian clean energy sector is well placed to supply Safeguard facilities with the solutions they are looking for.
The Clean Energy Regulator (CER) administers the National Greenhouse and Energy Reporting (NGER) scheme and Safeguard Mechanism. CER oversees facility registration, reporting and obligation management. Information about covered Safeguard facilities are available at cleanenergyregulator.gov.au.
David Parker AM has been chair of the Clean Energy Regulator since July 2017. With a career spanning more than 25 years with Commonwealth Treasury, he has worked across financial sector liberalisation, tax reform, macroeconomic forecasting and policy, competition policy, energy policy and international economics.