Australia to introduce new safeguard mechanism to reduce emissions

The new framework is introduced by the Safeguard Mechanism (Crediting) Amendment Bill 2023, which was passed by the Australian parliament on 31 March. It aims to ‘incentivise’ a number of different industries to reduce emissions in line with Australia’s international commitments.

The safeguard mechanism started in 2016, setting ‘baselines’ on greenhouse gas emissions of Australia’s largest industrial facilities. These baselines will decline gradually in line with the goal to reach net zero by 2050.

Industries that exceed the emissions threshold limit will need to ensure that, moving forward, net emissions are kept below the baseline emissions limit. For most affected entities, the baseline will be set by the Clean Energy Regulator, the government body that administers the mechanism. The main sectors affected are mining, oil, gas, manufacturing, transport and waste.

The safeguard mechanism reforms the previous scheme introduced by the National Greenhouse and Energy Reporting Act 2007. A key element of the reform is to introduce a Safeguard Mechanism Credits (SMCs) scheme which provides an incentive for facilities to emit less than their baselines. SMCs will only be usable within the safeguard mechanism unlike the carbon offset and carbon credits scheme which could be traded on the open market. Each SMC will represent a tonne of emissions and will be able to be traded between participants in the scheme.

Expected impact on the Australian market

As the safeguard mechanism favours lower carbon projects, it is intended to disincentivise investment in new gas and coal projects. While projects with higher emissions can purchase SMCs, this is likely to make new coal and gas projects more expensive and therefore less financially viable. That said, it is still expected that a number of new gas projects which have already been announced, such as Santos’ Barossa gas project, will nonetheless progress, albeit at a higher capital cost.

The safeguard mechanism is part of ‘Powering Australia’ – a suite of funding and legislative changes which collectively focus on reducing emissions and boosting demand for renewable energy generation and storage.

Application of the scheme

The safeguard mechanism applies to different types of emitters. Facilities with ‘scope 1 emissions’, being direct or covered emissions of more than 100,000 tonnes of carbon dioxide per year, comprise around 215 facilities and represent 28% of Australia’s total emissions. Baselines for these facilities can be set under different methods, including based on the actual production, or calculated based upon forecasted production and emissions.

‘Scope 2 emissions’, which are indirect emissions associated with electricity generation, and from transport and waste industries, have baselines set using a sector-specific methodology. Transport facilities have the option to define their baseline on a state or national basis, while waste facilities can apply for a separate landfill baseline.

Trade-exposed facilities, which are primarily manufacturing businesses such as steel and cement producers and aluminium refineries, are set to receive tailored treatment under the safeguard mechanism and a funding boost of over AU$600 million to encourage decarbonisation activities. Not only does this assist with the transformation, but also provides these facilities with support to remain competitive internationally. This was seen as critical given the potential impact of the US Inflation Reduction Act.

Co-written by Rona Goldman and Leanne Olden of Pinsent Masons.