3 December 2018
PDF version [296KB]
Sophie
Power
Science, Technology, Environment and
Resources Section
This guide explains Australia’s climate
safeguard mechanism, which is an important component of Australian’s central
climate change policy, the Emissions Reduction Fund.
What is the safeguard mechanism?
The Emissions
Reduction Fund is the Australian Government’s central climate change policy
tool. The Fund’s objective is to help achieve Australia’s greenhouse gas (GHG) emissions
reduction targets of 5% below 2000 levels by 2020 and 26 to 28 per cent below
2005 levels by 2030. The Government has provided $2.55 billion to the Emissions
Reduction Fund, with ‘further funding to be considered in future budgets’. The
Fund is administered by the Clean
Energy Regulator.
The Fund has three key components:
- a voluntary scheme to credit emissions reductions, whereby
emissions reductions delivered by registered emissions reduction projects using
an approved methodology can be issued with credits, known as Australian Carbon
Credit Units
- a process to purchase emissions reductions (via
competitive reverse auctions run by the Clean Energy Regulator, whereby the Regulator
enters into contracts with successful bidders) and
- the ‘safeguard mechanism’.
This guide focusses on the last component, the safeguard
mechanism, the key aim of which is to ensure that emissions reductions
purchased through the Emissions Reduction Fund are not displaced by
significant increases in emissions elsewhere in the economy.
The legislative framework for the safeguard mechanism is set
out in Part 3H of the National Greenhouse
and Energy Reporting Act 2007 (the NGER Act). Part 3H was
inserted by the Carbon
Farming Initiative Amendment Act 2014, which also established the
Emissions Reduction Fund following the repeal of the carbon pricing mechanism. Notably,
the safeguard mechanism was the result of amendments put
forward by Senator Xenophon and agreed to by the Senate.
Much of the detail relating to the safeguard
mechanism is set out in the legislative rules, including the National
Greenhouse and Energy Reporting Regulations 2008 and
the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule
2015 (Safeguard Rule). The safeguard mechanism
commenced on 1 July 2016.
How does the mechanism work?
Part 3H of the NGER Act states that the object of the
safeguard mechanism is to ensure ‘that net covered emissions of greenhouse
gases from the operation of a designated large facility do not exceed the
baseline applicable to the facility’. This statement reveals a number of key
concepts that are crucial to the operation of the safeguard, and which are
explained further below.
What does the safeguard mechanism
apply to?
Only large facilities are covered
The safeguard mechanism only applies to ‘designated large
facilities’. Under section 22XJ of the NGER Act and section 8 of the
Safeguard Rule, these are facilities where the total direct greenhouse gas
emissions from the operation of the facility during a financial year exceed a
threshold of more than 100,000 tonnes of carbon dioxide equivalence (t CO2-e).
This 100,000 tonne threshold limits the coverage of the safeguard
mechanism in practice to large‑emitting industry sectors such as
electricity generation, mining, oil and gas extraction, manufacturing, and
waste. However, the cumulative effects of multiple small emitters are not
contemplated by the mechanism: in other words, sectors such as agriculture and
much of the transport sector (where a large proportion of emissions are from
individual light vehicles) are not covered by the mechanism.
As a result of the 100,000 tonne threshold, the
mechanism applies to facilities which collectively account for around half of
Australia’s GHG emissions. However, as is discussed further later, the
electricity sector is treated differently as a result of baselines set under
the mechanism.
The mechanism only covers direct emissions
The safeguard mechanism applies to facilities with direct
emissions of more than 100,000 tonnes of carbon dioxide equivalence (t CO2-e) a
year. Only direct or scope
1 emissions are included in this threshold: that is, greenhouse gas
emissions released into the atmosphere as a direct result of an activity
undertaken at that facility. This includes, for example, direct emissions from
fugitive emissions (that is, leaks and other uncontrolled releases) and
emissions from fuel combustion, waste disposal and industrial process such as
cement and steel making.
Some scope 1 emissions are not covered by the safeguard
mechanism. Under section 7 of the Safeguard Rule, these include, for example,
legacy emissions from the operation of a landfill facility (that is, emissions
from waste deposited at the landfill before 1 July 2016) and emissions
which occur in the Greater
Sunrise unit area or Joint Petroleum Development Area.
Indirect emissions (known as scope
2 and 3 emissions) are not included in this threshold. Indirect emissions
include, for example, emissions associated with the consumption of electricity
produced at a separate facility.
Obligation to avoid excess emissions
The safeguard mechanism then requires the ‘responsible
emitter’ (that is, a person or entity with operational control of a designated large
facility) to ensure that an ‘excess emissions situation’ does not exist in
relation to the facility. An ‘excess emissions situation’ is where the net
emissions exceed the baseline for the facility for the monitoring period. In other
words, designated facilities must keep their net direct emissions within
‘baseline’ levels.
How are baselines set?
Baselines
are therefore an important feature of the safeguard mechanism as they
effectively set limits on GHG emissions. Baselines under the safeguard
mechanism are set through determinations made by the Clean Energy Regulator
under the Safeguard Rule. The baseline set for a particular facility depends on
the individual circumstances of that facility, such as whether data has been
reported for the facility in the past or whether it is a new facility.
Notably, under the safeguard mechanism, baselines can be adjusted
or varied
in certain circumstances and new facilities may be established, or existing
facilities may be expanded, potentially resulting in an overall increase in
emissions. It is notable that there is no overall cap on emissions under the
safeguard mechanism.
There are several different types of baselines under the
mechanism including:
- reported baselines
- calculated baselines
- benchmark baselines
- production-adjusted baselines and
- sectoral baselines.
The different types of baselines are explained further below.
At the time of writing, the Government
recently consulted on proposed amendments to the Safeguard Rule which would
make a number of changes to the baseline-setting process.
Reported baselines
Baselines for existing facilities can be set using data
already reported under the National
Greenhouse and Energy Reporting Scheme. For facilities with five years of
reported data under the NGER Act, the baseline is based on the historic
high point of emissions reported under the NGER scheme between 2009–10 and
2013–14. These are known as ‘reported baselines’. A reported baseline does not
expire and continues to apply unless another baseline is in force.
Calculated baselines
Facilities that do not have sufficient historical emissions
data to make a reported baseline can apply to the Clean Energy Regulator for a
baseline to be calculated on an independent assessment approach. These are
known as ‘calculated
baselines’. Applications for a calculated baseline must be submitted by
certain deadlines, which are set out on the Clean
Energy Regulator’s website.
New facilities, facilities that have ‘significantly
expanded’ or have ‘inherent emissions variability’ can apply to the Clean
Energy Regulator for a calculated baseline. Similarly, facilities for which
historical emissions may be a poor indicator of future emissions (because, for
example, they do not represent normal business operations) were also able to apply
for an ‘initial calculated baseline’. Whether a facility is considered to be
new, significantly expanded or has emission variability is determined using
criteria set out in the Safeguard Rule. For example, a significant expansion
includes increasing the maximum productive capacity of a facility by more than
20 per cent or beginning production of a new product.
Calculated-emissions baselines are set by multiplying the
high-point of the estimated annual production by the estimated emissions-intensity
of that production (t CO2-e per unit of production). A
calculated-emissions baseline generally remains in place for three years, when
it is then replaced by a production-adjusted baseline (see below). Up to 2020,
baselines for new investments will be based on an audited emissions forecast
provided by the facility operator, with a reconciliation of the estimate
against the actual performance of the facility at the end of the forecast
period.
Benchmark baselines
After 1 July 2020, baselines based on ‘best practice’ will
be applied to new or significantly expanded facilities. These are known as
‘benchmark baselines’, which will be based upon emissions-intensity of
production, and will use the best practice for that industry as the guide (that
is, the best, least emissions intensive standard for production) and an
independently audited forecast of production. A benchmark baseline will generally
remain in place for three years.
Production-adjusted baselines
Both calculated baselines and benchmark baselines are
determined using forecasts of production and, once they expire, can be replaced
with a production-adjusted
baseline that reflects actual production from the facility.
A production-adjusted baseline is calculated in the same way
as a calculated-emissions baseline, except that the formula for a
production-adjusted baseline uses the highest actual annual
production during the three year period instead of using estimated production.
Production-adjusted baselines do not expire—they are ongoing unless replaced by
another baseline.
Electricity sectoral baseline
A single
sectoral baseline has been applied to all electricity generators connected
to one of Australia's five main electricity grids (the National Electricity
Market, the South West interconnected system, the North West interconnected
system, the Darwin to Katherine network and the Mount Isa-Cloncurry supply
network). The electricity sector baseline has been set at 198 million tonnes
CO2-e. This baseline represents the high-point in annual emissions
from the electricity sector between 2009–10 and 2013–14.
This is considerably higher than the total reported scope
one emissions from grid-connected generators in 2015–16, which was 179.1
million tonnes CO2‑e. The Government has
acknowledged that it does not expect the electricity sector baseline to be
breached before 2030. However, in the unlikely event that it is exceeded,
individual facility baselines will apply to electricity generators.
Where can I find information about
baselines?
The Clean Energy Regulator publishes a safeguard
baselines table which sets out information relating to emissions baseline determinations.
At the time of writing, the Clean Energy Regulator had published 409 baseline
determinations. Of those, most (333) are reported baselines.
What if a facility exceeds its
baseline?
If a facility's emissions exceed (or are expected to exceed)
its baseline, the facility operator has a number
of options available. These include applying to the Clean Energy Regulator
for:
- a calculated
baseline or variation
to their baseline (as discussed earlier)
- a multi-year monitoring period to allow additional time to reduce
emissions. Multi-year monitoring allows a facility to exceed its baseline in
one year, as long as average emissions over a two- or three-year period are
below the baseline or
- an exemption where emissions are due to ‘exceptional
circumstances’ such as a natural disaster or criminal activity.
This significant level of flexibility which allows baselines
(or GHG emissions limits) to be readily adjusted has led some
critics to question the effectiveness of the safeguard mechanism and
whether it will achieve its aim of ensuring that emissions reductions purchased
through the ERF are not displaced by rising emissions elsewhere. The same
critics claim that the safeguard mechanism ‘gives the green light’ to increase
greenhouse emissions to some enterprises.
Surrendering carbon credits
Finally, facility operators can purchase and surrender Australian
carbon credit units (ACCUs) to offset emissions and stay below the baseline.
The first surrender of ACCUs to the Clean Energy Regulator to avoid excess
emissions situations occurred in February 2018. The Regulator’s safeguard
facilities data for 2016–17 indicates that at least 16 facilities (of
the 203 facilities covered by the mechanism) surrendered nearly 450,000
ACCUs for compliance with the safeguard mechanism.
In the unlikely event that a facility does exceed its
baseline and fails to either seek a baseline adjustment or purchase ACCUs, a
number of discretionary, graduated, enforcement options are available to the Clean
Energy Regulator. As a ‘last
resort’, this includes civil penalties of up to $2.1 million, which
may apply to facilities that do not comply with the duty to avoid an ‘excess
emissions situation’. However, former Minister for the Environment, Greg Hunt, stated
shortly after the commencement of the safeguard mechanism that ‘it is our clear
expectation that no businesses will pay penalties’ under the safeguard
mechanism. This has certainly been true for the first year of the mechanism’s
operation, in which all
safeguard facilities successfully managed to avoid an excess emissions
situation.
Reviews of the mechanism
In 2017, the Government published a review
of Australia’s climate change policies, including the Emissions Reduction
Fund and safeguard mechanism. In relation to the safeguard mechanism, the review
suggested there needed to be greater flexibility in relation to baselines,
canvassing options such as ‘broadening access to baseline increases’ and allowing
baselines to be ‘regularly updated to reflect actual production’.
The review committed to consult with business on these
options with a view to any changes taking effect for the 2018–19 compliance
year. The Government published a consultation
paper in February 2018 which outlined ‘an approach to make the safeguard
mechanism “fairer and simpler” and bring the baselines “up-to-date with current
circumstances”’. The
Government then released draft amendments to the Safeguard Rule for public
consultation. Those amendments would make a number of significant changes to
the baseline-setting process to achieve these aims.
Submissions to the consultation paper indicate that industry
has largely welcomed the proposed additional flexibility, although at least one
business did express concern that the proposals will ‘do little to facilitate
the decarbonisation of the Australian economy’. However, some
commentators have suggested that allowing facilities to increase their
baselines, thereby tolerating increased emissions, would undermine the
Emissions Reduction Fund and therefore defeat the purpose of the safeguard mechanism.
The Climate Change Authority is also currently conducting a
review of the National Greenhouse and Energy Reporting legislation, which will
include an examination of whether the safeguard mechanism is achieving its
objectives. This review is due to conclude by 31 December 2018.
Further resources on the safeguard
mechanism
For copyright reasons some linked items are only available to members of Parliament.
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