Glossary

Purpose and structure of the Bill

The purpose of the Safeguard Mechanism (Crediting) Amendment Bill 2022 (the Bill) is to amend several existing Commonwealth climate change laws, to place obligations on Australia’s largest greenhouse gas emitters to reduce their greenhouse gas emissions in line with newly legislated targets introduced by the Climate Change Act 2022.

The Bill, in conjunction with amendments to numerous legislative instruments, provide for a system of tradeable credits (safeguard mechanism credit units; (SMCs)). SMCs will be issued to a covered facility if the facility emits less scope 1 covered emissions than their baseline, as determined by the procedure established in a legislative instrument. The baselines of covered facilities will be reduced by 4.9% each year. Emissions-intensive, trade exposed facilities (EITEs), which may have hard-to-abate emissions, will be able to apply for smaller rates of decline to mitigate against scheme cost impacts and carbon leakage.

Laws to be amended include:

• the National Greenhouse and Energy Reporting Act 2007 (NGER Act)
• the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act)
• the Australian National Registry of Emissions Units Act 2011 (ANREU Act)
• the Clean Energy Regulator Act 2011 (CER Act)
• the Clean Energy (Consequential Amendments) Act 2011 (CE(CA) Act).

The Bill also makes consequential amendments to related laws, including the Income Tax Assessment Act 1997.

The Bill has four Schedules:

• Schedule 1 has three Parts:
  • Part 1 amends the NGER Act to provide for a system of SMCs and set out details of registration, transfer and compliance obligations, including relinquishment. Notably, these:
    • provide for SMCs to be used to reduce the net emissions of safeguard facilities
    • enable entities other than designated large facilities to voluntarily register to participate in the Safeguard Mechanism, enabling them to generate SMCs
    • provide for a percentage of all SMCs to be issued into a Commonwealth Registry account to be used at the discretion of the Commonwealth
  • Part 2 amends the Income Tax Assessment Act 1997 to provide tax treatment for SMCs that is equivalent to the treatment of other specified units, such as Australian carbon credit units
  • Part 3 sets out a range of application provisions for the amendments in Part 1
• Schedule 2 amends the ANREU Act to enable SMCs to exist in the Australian national registry of emissions units (the Registry) and establishes arrangements for recording dealings with SMCs, as well as a requirement to publish information about holdings and cancellations of SMCs
• Schedule 3 amends the CER Act, the CE(CA) Act, and the NGER Act to ensure consistent protection of information held by the Clean Energy Regulator (CER)
• Schedule 4 amends the CFI Act to provide that the Rules may prevent the CER from entering into carbon abatement contracts that reduce covered emissions from facilities covered by the Safeguard Mechanism and to ensure that the CER considers the Safeguard Mechanism when assessing the regulatory additionality of proposed offsets projects.

Background

The Safeguard Mechanism is one of three existing components of the Emissions Reduction Fund (ERF). The ERF has been one of the central policy tools supporting the achievement of the Australian Government’s emission reduction targets in accordance with its nationally determined contribution (NDC) under the Kyoto Protocol and, more recently, the Paris Agreement.[5]

History of the Emissions Reduction Fund[6]

The ERF was established in 2014 following the repeal of the Carbon Pricing Mechanism[7] during the Abbott Government, as part of the implementation of its ‘Direct Action Plan’.[8] Prior to the ERF, a voluntary offsets scheme—known as the Carbon Farming Initiative (CFI)—allowed companies to offset their obligations under the Carbon Pricing Mechanism by purchasing Australian Carbon Credit Units (ACCUs) from the land sector and landfill projects under the CFI.[9] The CFI operated from 2011 to 2014.

Components of the Emissions Reduction Fund

The ERF has three 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 ACCUs; emissions reduction projects can now be in the land sector or industrial projects including carbon capture and storage, energy efficiency, and landfill and alternative waste treatment
• a process to purchase emissions reductions (via competitive reverse auctions run by the CER, whereby the Regulator enters into carbon abatement contracts with successful bidders) and
• the Safeguard Mechanism (see explanation below).

While referenced in both the then Government’s Emissions Reduction Fund Green and White Papers, the Safeguard Mechanism was not included in the Carbon Farming Initiative Amendment Bill 2014 as introduced into Parliament.[10] Rather, Senator Nick Xenophon proposed amendments which were agreed to by the Senate and resulted in the Part 3H being added to the NGER Act—establishing the mechanism. The mechanism commenced on 1 July 2016.

Much of the detail relating to the Safeguard Mechanism is set out in the National Greenhouse and Energy Reporting Regulations 2008 and the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Safeguard Rules). Section 22XD of the NGER Act provides a simplified outline of the Safeguard Mechanism.

What does the existing Safeguard Mechanism do?

The Safeguard Mechanism, in operation since 2016, operates by setting emissions baselines, or regulatory limits, for ‘designated large facilities’ (hereafter ‘facilities’) that emit more than 100,000 tonnes of carbon dioxide equivalent (tCO2-e) in one year.[11] It applies only to covered emissions which are defined as scope 1 (or direct) emissions. By implication, the coverage definition excludes scope 2 and scope 3 emissions which are indirect emissions such as emissions from the use of sold products and services.

Baselines were initially established based on historical emissions data for facilities (referred to as reported baselines) by determinations made by the CER under the Safeguard Rules. However, subsequent changes to the Safeguard Rules allow for calculated and production-adjusted baselines which reflect the current operations of the facility.

At present, if a facility’s scope 1 emissions exceed its baseline, the facility can apply for a new baseline, or surrender carbon offsets (ACCUs) to offset excess emissions, or apply for a multi-year monitoring period, or apply for an exemption.[12] An increasing number of facilities (at the time of writing, 18.9%)[13] are now covered by a multi-year monitoring period, which allows a facility to reduce average net emissions over a two–to–three year period.

In practice, the mechanism applies to facilities mainly in the electricity generation, mining, oil and gas, manufacturing, transport, construction and waste sectors. The mechanism does not apply to smaller enterprises that fall below the reporting threshold in the NGER Act. There are also four categories of statutory exclusion from the mechanism.[14]

A specific sector-wide baseline applies to grid-connected facilities in the electricity generation sector and it is acknowledged that this baseline is highly unlikely to be exceeded due to the transition to renewable electricity generation (for example, wind, solar, battery storage) that is occurring, driven by a range of other factors.

At the time of writing, the mechanism applies to 212 facilities whose emissions collectively contributed 137 million tonnes of carbon dioxide (MtCO2) (or 28%) of Australia’s total emissions in 2020–21.[15] For scale, the top 5 emitting facilities collectively have roughly the same total covered emissions as the 137 covered facilities with the lowest covered emissions.[16] In addition, grid­connected electricity generation facilities covered by the electricity sector baseline contributed 148 MtCO2 (or 30.0%) of Australia’s total emissions in 2020–21.[17]

The Safeguard Mechanism was intended to ensure that the emissions reductions purchased through the ERF were not displaced by significant increases in emissions elsewhere in the economy.[18]

However, the Safeguard Mechanism has been allowed to operate in a manner such that the emissions of covered facilities have increased in accordance with ‘business-as-usual’.[19] It has essentially operated as an additional reporting mechanism, rather than requiring covered facilities to reduce operational emissions. More specifically, the emissions of covered facilities have increased by 7% since the commencement of the Safeguard Mechanism in 2016.[20] Emissions are projected to increase further by 2030 (to 151 Mt; an increase of 13.3% on 2016–17).[21]

Professors Jotzo and McKibbin observed:

Companies must cover the excess of actual emissions over a counterfactual ‘baseline’ by purchasing emissions credits. However, to date the Safeguards Mechanism has been largely ineffective as baselines are in most cases higher than actual emissions, and have been adjusted upwards in some cases. During the 2019-20 reporting year, just 0.25 MtCO_2-eq of excess emissions were covered through surrendered credits, compared to total emissions covered of 143 MtCO_2-eq.[22]

Previous reviews of the Safeguard Mechanism

Over the past 6 years, there have been several reviews of the Safeguard Mechanism and its role in reducing Australia’s emissions.

Turnbull Government review

In 2017, the Turnbull Government published a review of Australia’s climate change policies, including the ERF and Safeguard Mechanism. The review—based on feedback from stakeholders—suggested the need for greater flexibility in setting baselines, potentially allowing baselines to be ‘regularly updated to reflect actual production’, and to simplify the operation and administration of the scheme.[23]

The Government released a consultation paper in February 2018, outlining ‘an approach to refine the Safeguard Mechanism to make it fairer and simpler, and bring baselines up-to-date’.[24] The Government then released draft amendments to the Safeguard Rules, confirming:

• all facilities would transition to calculated baselines over 2018–19 and 2019–20
• the application process would be simplified by giving businesses the option of using Government-determined ‘production variables’ and default emissions-intensity values for calculating baselines
• baselines would be updated annually, so they continued to reflect facility circumstances and enable growth
• access to multi-year monitoring periods would be increased.[25]

Amendments to the Safeguard Rules in order to implement these changes were first made in March 2019, with additional amendments to the Rule made later in 2019 and in 2020.

Climate Change Authority reviews of the NGER Act

The Climate Change Authority (CCA) is required to review the operation of the NGER Act and legislative instruments made under the Act every 5 years; the Authority can also conduct special reviews at the request of the Minister or the Parliament.[26]

In August 2016, the CCA’s special review on Australia’s climate goals and policies recommended an enhanced role for the Safeguard Mechanism, ‘as an effective, pragmatic and durable way of reducing emissions across a range of industrial, manufacturing and resource sectors’.[27] The CCA observed that the use of the Safeguard Mechanism to reduce direct combustion, industrial process and fugitive emissions was not in theory as cost effective as a well-designed market mechanism.[28] The Authority recommended lowering the threshold for included facilities to 25,000 tCO2-e and progressively strengthening the mechanism (by the adoption of linearly declining baselines) in line with Australia’s NDC to the Paris Agreement.[29]

In December 2018, the CCA’s first statutory review of the NGER Act reported that the Safeguard Mechanism was working as intended—that is, as a reporting mechanism. The Authority reiterated its earlier recommendations, as well as recommending incentivising reductions in indirect emissions and removing ‘deemed surrender’ provisions.[30]

The CCA’s next review of the NGER Act is due by the 31 December 2023.

King Review

In October 2019, the then Minister for Energy and Emission Reduction appointed an Expert Panel (Expert Panel examining additional sources of low cost abatement; also known as the King Review) to inquire and report on how best to unlock low cost abatement opportunities across the economy. The Expert Panel recommended establishing:

a ‘below-baseline crediting arrangement’ for large facilities using the Safeguard Mechanism architecture. The arrangement would provide credits to facilities who reduce their emissions below their Safeguard baselines by undertaking ‘transformative’ abatement projects.[31]

The Expert Panel considered that—as a voluntary and short-term measure—this would ‘help realise abatement opportunities in industrial facilities that are not being accessed by the ERF’, with crediting ‘targeted at reductions in emissions intensity to avoid crediting reduced production or facility closures’.[32] The Expert Panel noted the limited uptake of ERF projects at safeguard facilities, as well as challenges posed by a requirement for additionality (that is, that emissions reductions would not occur without the incentive provided by the ERF).[33]

The Government agreed to the Expert Panel’s recommendation, with the then Department of Industry, Science, Energy and Resources (DISER) later releasing a Discussion paper on the King Review Safeguard Crediting Mechanism.[34] The paper proposed ‘a low-emission technology deployment incentive scheme’, supported by an allocation in the 2021–22 Budget of $280 million over 10 years.[35]

Recent policy commitments and consultations

On 3 December 2021, in the lead up to the 26th Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC),[36] the then Opposition Leader Anthony Albanese and then Shadow Minister for Climate Change and Energy Chris Bowen released the Australian Labor Party’s Powering Australia plan.[37]

As well as committing to reduce Australia’s greenhouse gas emissions by 43% on 2005 levels by 2030, and to net zero by 2050, the Plan proposed to improve the Safeguard Mechanism by requiring emission baselines to be reduced predictably and gradually over time.[38] This reflected a recommendation of the Business Council of Australia, and was supported by the Australian Industry Group and experts such as the Grattan Institute and Carbon Market Institute. Modelling accompanying the Plan projected that the changes would ‘deliver 213 Mt of GHG [greenhouse gas] emissions reductions by 2030’.[39]

In September 2022, Parliament enacted the Climate Change Act 2022, which set out national emissions reduction targets of a 43% reduction from 2005 levels by 2030 and net zero by 2050.

Following its election in May 2022, the Albanese Government reconfirmed its commitment to reforming the Safeguard Mechanism. In August 2022, the Department of Climate Change, Energy, the Environment and Water (DCCEEW) released a consultation paper and three explanatory ‘fact sheets’. There were over 240 submissions to the consultation paper, 181 of which have been published.[40] This was followed on 10 October 2022 by Exposure Drafts of the Bill and the Carbon Credits (Carbon Farming Initiative) Amendment (Safeguard Facility Eligibility Requirements) Rules 2022 and an associated explanatory document. There were over 50 submissions to the exposure draft, 40 of which have been published.[41]

The 2022 consultation paper set out options for setting and reducing baselines in a predictable and gradual way, with possible rates of decline between 3.5 and 6% per year through to 2030 and further decline rates to be set in 5-year blocks aligned with updates to Australia’s NDC. The paper canvasses a range of issues, including:

• the Safeguard Mechanism’s share of the national abatement task (exclusive of the sectoral baseline for electricity generation facilities)
• the setting of baselines to achieve an equitable distribution of costs and benefits, including consideration of a fixed (absolute) versus production-adjusted (intensity) framework, the removal of ‘headroom’, and the setting of baselines for existing—and new—facilities
• the creation of tradeable Safeguard Mechanism credits, and consideration of international offsets
• treatment for emissions-intensive, trade-exposed businesses (EITEs)
• availability of multi-year monitoring periods, in light of variation in availability of emissions reduction technologies.

The consultation paper observes:

Consistent with the legislative framework for the Safeguard Mechanism, the details of the reformed scheme, including baseline setting and baseline decline rates, will be implemented through subordinate legislation, including the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (the Safeguard Mechanism Rule). Primary legislation will be needed to implement crediting and related changes.[42]

On 9 January 2023, the Minister made the Carbon Credits (Carbon Farming Initiative) Amendment (No. 1) Rules 2023 (with effect from 12 January 2023). The Rules amend the Carbon Credits (Carbon Farming Initiative) Rule 2015 (CFI Rule) so that ACCUs purchased by the Commonwealth under a carbon abatement contract are no longer required to be cancelled as soon as practicable.[43] The purpose of the amendment is to build a stock of ACCUs that the Commonwealth can use to support its proposed cost containment measure whereby facilities would be able to purchase ACCUs capped at $75 (plus indexation) to then surrender in an excess emissions situation.[44] The Rules also amend the eligibility requirements for ERF projects at covered facilities (see ‘Prohibiting new ERF projects at covered facilities’ in the Key issues and provisions section).

On 10 January 2023, the Government released the Safeguard Mechanism Reforms – Position Paper and a series of draft legislative instruments:

• Australian National Registry of Emissions Units Rules 2023
• Carbon Credits (Carbon Farming Initiative) Amendment (No. 2) Rules 2023
• National Greenhouse and Energy Reporting (Safeguard Mechanism) Amendment (Reforms) Rules 2023 (draft Safeguard Mechanism Amendment Rules)
• Safeguard Mechanism Legislation Amendment (2023 Measures No 1) Regulations 2023.

The Position Paper sets out the Government’s proposed approach, with the draft rules providing the regulatory detail – as is provided for by the amendments in the Bill. The Position Paper states that the Government intends to finalise the legislative reforms by April 2023, with the reforms and draft rules intended to commence on 1 July 2023.[45]

Independent Review of ACCUs

On 1 July 2022 the Minister for Climate Change and Energy, Chris Bowen, announced an independent panel would review the integrity of Australian Carbon Credit Units. This followed the raising of significant concerns about the integrity of ACCUs generated by certain ERF methods.[46] The Panel, headed by former Chief Scientist Professor Ian Chubb, provided its Final Report (referred to as the ‘Chubb Review’) to the Government in mid-December 2022 and it was released, along with the Government’s response, on 9 January 2023. The review received over 200 public submissions, 162 of which have been published.[47]

The Panel concluded that the ACCU scheme ‘was fundamentally well-designed when introduced’ but makes 16 recommendations focussed on enhancing governance arrangements and transparency.[48] These include:

• separating the multiple roles of the Regulator and increased transparency of administrative rulings
• re-establishing the Emissions Reduction Assurance Committee (ERAC) as the Carbon Abatement Integrity Committee (CAIC), with changes in its governance and function, and a six-month review by the CCA to determine whether the CAIC should instead be a statutory authority
• amending the CFI Act to:
  • maximise transparency, data access and data sharing
  • remove conditional registration of projects on Native Title lands prior to obtaining consent
• transiting to ‘proponent-led’ method development, including provision for ‘modular’ methods
• clearly defining the Offsets Integrity Standards, including refocusing of the ‘newness’ requirement
• introducing a scheme-level buffer (mandatory cancellation of a percentage of ACCUs generated under the scheme)
• modifying 2 contentious methods and ceasing the ‘avoided deforestation’ method
• requiring accreditation and regulation of carbon service providers.

The Government accepted all of the Panel’s recommendations ‘either in principle – for those that need legislation and budget treatment – or in full – for those that can be implemented immediately’.[49] At the time of writing, however, it is unclear whether the Government will seek to table amendments to the current Bill or will table a separate Bill in due course.

Critics have however argued that the Chubb Review failed to adequately address the integrity concerns raised by scientific experts.[50]

International developments, including carbon border adjustment mechanisms

At the 27th Conference of the Parties to the UNFCCC, held in Egypt in November 2022, the international community reaffirmed its commitment to achieving the goals of the Paris Agreement, with the primary temperature-based goal of ‘holding the increase in the global average temperature to well below 2˚C above pre-industrial levels and pursuing effects to limit the temperature increase to 1.5˚C above pre-industrial levels’.[51]

However, while ‘around 140 countries had announced or are considering net zero targets, covering close to 90% of global emissions’ (as at November 2022),[52] recent assessments indicate that far more ambitious action will be required to achieve the goals of the Paris Agreement and to limit the worst impacts of climate change.[53]

In support of its climate targets, the European Union intends to introduce a carbon border adjustment mechanism (CBAM) to ‘equalise the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS) and the one for imported goods’.[54] The scheme works by:

obliging companies that import into the EU to purchase so-called CBAM certificates to pay the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS.[55]

The CBAM will apply from 1 October 2023, with an initial transitional period ending on 31 December 2025, and will apply to key current Australian emissions-intensive exports, including cement, iron and steel, and aluminium, and potential future exports such as hydrogen. The scheme will also apply to ‘indirect emissions under certain conditions’ and will be expanded to all goods covered by the EU’s ETS by 2030.[56]

The EU states that its CBAM will be World Trade Organisation (WTO) compliant.

Other countries, including the USA, UK, Japan and Canada, are reported to be considering similar mechanisms.[57] In the absence of effective mechanisms to reduce emissions in Australia, this could have implications for Australia’s export industries.[58]

Committee consideration

Senate Standing Committee on Environment and Communications

The Bill has been referred to the Senate Environment and Communications Legislation Committee for inquiry and report by 2 March 2023. Details of the inquiry are available on the Committee’s Inquiry homepage.

Senate Standing Committee for the Scrutiny of Bills

At the time of writing, the Senate Standing Committee for the Scrutiny of Bills had not yet commented on the Bill.

When referring to the Government’s reform package, the Minister for Climate Change, Chris Bowen, is reported to have said that ‘almost all of it will be regulation ... the only element that requires legislation is below the baseline credit’.[59]

Therefore, with the Bill relying on the parallel making of at least 5 legislative instruments (regulations and rules),[60] there is some chance that the Scrutiny Committee will ask whether the Bill offends Principle (iv): Inappropriate delegation of legislative powers, specifically where significant matters are included in delegated legislation rather than in the Bill. Notably,

The committee ... has significant scrutiny concerns with framework provisions, which contain only the broad principles of a legislative scheme and rely heavily on delegated legislation to determine the scope and operation of the scheme.[61]

Policy position of non-government parties/independents

Liberal-National Coalition

The Opposition Leader, Peter Dutton, has described Labor as weaponising the Safeguard Mechanism ‘as a battering ram for its legislated emissions reduction target’ and as ‘another tax by stealth’. [62] Mr Dutton said:

As a Coalition, we believe strongly that the most effective way to reduce emissions is to drive down the cost of low-emissions technologies, making them cost competitive with higher-emitting alternatives, and thus more feasible for business to adopt.[63]

The Opposition spokesperson for climate change and energy, Ted O’Brien, has argued that ‘changes to the Safeguard Mechanism ... will impact regional Australia and traditional industries that have been central to Australia’s competitive advantage’, increasing the cost of doing business in Australia.[64]

It was reported on 11 January 2023 that the Coalition would oppose the Government’s reforms, with the reforms viewed as a reintroduction of a ‘carbon tax that would hurt businesses and consumers’.[65]

Australian Greens

The Australian Greens leader Adam Bandt has consistently telegraphed the importance of the Safeguard Mechanism in addressing greenhouse gas emissions from new coal and gas projects, particularly in light of the absence of a climate trigger in the Environment Protection and Biodiversity Conservation Act 1999. In October 2022, Mr Bandt was quoted as saying:

Although the safeguard is far from our preferred way of cutting pollution, the Greens are open to supporting a Safeguard Mechanism that treats genuine Australian industry differently to coal and gas, because while the former can expand, the latter cannot.[66]

More recently, Mr Bandt said:

We want to work with the government to ensure the Safeguard Mechanism delivers real and deep cuts to pollution, not just fake offsets and an excuse for coal and gas to expand and keep polluting.[67]

It has been reported that the Greens want a limit on the ability of emitters to use credits to offset their emissions — rather than ‘unlimited trade-offs’.[68]

House Independents and Senate Crossbench

Independents Kate Chaney, Dr Monique Ryan, Dr Sophie Scamps and Zali Steggall each made submissions to the Consultation Paper.[69] All support reforms to the Safeguard Mechanism to ensure there is a genuine reduction in emissions from industrial facilities. For example, Zali Steggall considers reform of the Safeguard Mechanism as critical to ensuring it is ‘effective in constraining the carbon emissions of the biggest polluters in Australia’.[70]

The Independents make varying recommendations with respect to different aspects of the proposed reforms – most notably regarding appropriate baselines. However, recommendations in common – and most relevant to the Bill – include:

• the immediate or progressive lowering of the threshold for inclusion in the Safeguard Mechanism to cover a greater proportion of Australia’s emissions[71]
• a 5% cap on the use of SMCs and ACCUs to offset emissions[72]
• annual or at least regular reviews to consider the effectiveness of the mechanism and interaction with emissions reduction activities in other sectors of the economy.[73]

The Independent Member for Goldstein Zoe Daniel considers it ‘critical that gaps are closed’ and that significant penalties are included for companies that exceed pollution caps.[74] Ms Daniel supports targeted financial support to help exporters to shift to cleaner technology.

Senator David Pocock has also expressed a view that the Safeguard Mechanism is critical to reaching the Government’s emissions reduction targets and has ‘called on the government to ignore the fossil fuel lobby’s wishlist’.[75]

At the time of writing, the Jacqui Lambie Network Senators Lambie and Tyrrell had not stated their position.[76]

Position of major interest groups

As noted above, there were a large number of submissions to the Consultation Paper and the Exposure Draft of the Bill. The submissions addressed a broad range of issues under the proposed reforms, many of which will be dealt with by amendments to the existing Safeguard Rules or new instruments. This is consistent with the current regulatory framework for ACCUs.[77]

Numerous stakeholders have raised concerns about the staggered release of the Exposure Draft of the Bill, proposed legislative instruments (including amendments to existing instruments) and the Chubb Review, which has limited their ability to thoroughly consider the implications of the proposed reforms.[78] This is because many of the detailed operational elements of the proposed reforms will be contained in legislative instruments.

The Environmental Defenders Office (EDO) and Australasian Centre for Corporate Responsibility (ACCR) both noted that there is typically less parliamentary scrutiny of legislative instruments, potentially leaving the Minister or Clean Energy Regulator with considerable discretion in regard to key policy issues.[81] Other stakeholders expressed a view that certain matters – such as key elements of the proposed safeguard mechanism credits, limits on the use of offsets, treatment of new entrants – should be included in the Bill rather than legislative instruments.[82]

The Australia Institute (TAI) considers the Safeguard Mechanism a failure: ‘in practice, the Safeguard Mechanism has safeguarded polluters. This needs to change...’.[83] The TAI views the reforms as falling short, with the changes likely to ‘drive further demand for low integrity carbon credits while keeping the door wide open for new entrants to the Safeguard Mechanism (new coal and gas mining projects)’.[84]

Professor Andrew Macintosh (ANU Law School, a member of the King Review and former chair of the ERAC) and colleagues’ concerns about the integrity of ACCUs prompted the Chubb Review. Professor Macintosh has argued that ‘a post-Chubb review spike in ACCU prices would undermine the goal of the Safeguard Mechanism reforms, which is to manage a complicated and costly decarbonisation of the economy’. Professor Macintosh’s submission to the Chubb Review states:

An interim price cap would help mitigate these risks.... The revenue from the price cap could also be hypothecated to climate initiatives, including in the land sector, to help realise abatement from activities that fall outside the Safeguard Mechanism.[85]

Business groups, industry stakeholders and representative bodies expressed support for reform of the Safeguard Mechanism. For example,

• the Business Council of Australia, having previously argued that the threshold for inclusion of facilities should be significantly lowered,[86] ‘support[s] the necessary mechanical changes to primary legislation to create the architecture for reforming the Safeguard Mechanism’[87]
• BP Australia ‘reiterates its support for reforms to the Safeguard Mechanism to provide incentives for large emitters to reduce their emissions’[88]
• Origin Energy ‘supports the proposed evolution of the Safeguard Mechanism to a type of baseline and credit scheme’.[89]

Industry stakeholders and representative bodies have varying views on different aspects of the reforms, although the specific issues of concern will largely be implemented in legislative instruments rather than the Bill itself.

Stakeholder views relevant to the provisions of the Bill are considered in the ‘Key issues and provisions’ section of this Digest.

Financial implications

The Explanatory Memorandum to the Bill states:

The Bill has no financial impact on the Australian Government Budget. Any financial impacts of rules made under provisions within the Bill would be outlined in the relevant explanatory statement.[90]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible, but acknowledges that the Bill engages with the right to privacy and the right to freedom of expression.[91]

Parliamentary Joint Committee on Human Rights

At the time of writing, the Parliamentary Joint Committee on Human Rights had not yet commented on the Bill.

Key issues and provisions

This section focuses on selected aspects of the Bill only, including those of interest to key stakeholders.

Updating the objects of the NGER Act and ensuring Safeguard Rules are consistent with the Act’s objects

Since 2007, the NGER Act has provided a national framework for corporate reporting of GHG emissions, as well as energy consumption and production by corporations. As noted above, Part 3H of the Act establishing the Safeguard Mechanism has been in force since July 2016.

Item 1 of Schedule 1 amends the objects of the NGER Act. It repeals and replaces subsection 3(2) to explicitly provide that the second object of the Act – being ‘to contribute to the achievement of Australia’s greenhouse gas emissions reduction targets’ – will be achieved by ensuring that ‘aggregate net covered emissions from the operation of designated large facilities decline’.

Section 22XS of the NGER Act provides for the Minister to, by legislative instrument, make Safeguard Rules prescribing matters required or permitted by the Act to be prescribed or necessary or convenient to be prescribed for carrying out or giving effect to the safeguard provisions. Items 36 and 37 amend subsection 22XS(1) and add a new subsection 22XS(1A) to require that the Minister only make Safeguard Rules if satisfied that the Rules are consistent with the second object of the Act.

These amendments were not included in the Exposure Draft of the Bill and reflect – but do not go as far as – the recommendations of environment and climate focused stakeholders.[92] Notably, the Environment Defenders Office’s submission states:

This recommendation is not made symbolically. Objects should be operationalised in decision-making and subordinate instruments. Where the large majority of the Safeguard Mechanism is governed by subordinate legislation, clear legislative objects are a safeguard against the making of rules by delegated authorities that fail to achieve those objects, absent the same parliamentary scrutiny as receives a Bill.

In these circumstances, it is both straightforward and appropriate that the objects should reflect the stated intention of the government in reforming the Safeguard Mechanism.[93]

We note that the subsection 3(2) of the NGER Act was recently amended by the Climate Change (Consequential Amendments) Act 2022 to specifically link the Act to the achievement of Australia’s greenhouse gas emissions reduction targets.

Creation and relinquishment of safeguard mechanism credits

Item 34 inserts a new Division 4A — Safeguard mechanism credit units in Part 3H of the NGER Act. Subdivision A deals with the issuing of safeguard mechanism credit units (SMCs), whilst Subdivisions B and C deal with relinquishment of SMCs and associated compliance requirements (see below).

Division 4A, which provides generally for safeguard mechanism credit units, is modelled on the existing corresponding provisions relating to ACCUs in the CFI Act.[94]

Issuing of SMCs

New subsection 22XNA(1) provides that the Clean Energy Regulator (the Regulator) may issue SMCs to one or more persons in relation to a facility. An SMC is correspondingly defined as ‘a unit issued under section 22XNA’ and is created by the making of an entry in the relevant person’s Registry account.[95] A SMC is not further defined as corresponding to 1 tonne of CO2-e, although this is described in the Explanatory Memorandum as the Government’s intention.[96] Numerous stakeholders argued that key characteristics of the SMCs – specifically that an SMC unit is equivalent to 1 tonne of CO2-e – should be defined in the NGER Act.[97] However, ACCUs are not defined as such in the CFI Act either.[98] Nevertheless the interchangeability (fungibility) of carbon units is a fundamental principle of the design of the Carbon Farming Initiative, the Emissions Reduction Fund and the Safeguard Mechanism.

New subsection 22XNA(2) explains that the Safeguard Rules may provide details of the system for the issue of SMCs.

New subsections 22XNA(3) and (4) state that the Rules may elaborate upon:

• how a person applies for SMCs and for the Regulator to make a determination in relation to the issue of SMCs[99]
• how the Regulator determines the number of units to be issued, including the methodology by which a determination may be made and any information (such as an audit report) that must accompany an application for a determination[100]
• conditions the Regulator may attach to units, including identifying the unit with a year of issue[101]
• review or reconsideration of a decision to issue SMCs.[102]

The Regulator may also issue SMCs to the Commonwealth (new subsection 22XNB(1)), with the Safeguard Rules able to make provision for the transfer of SMCs held by the Commonwealth to another person and for cancellation of SMCs (new section 22XND).

This has raised concerns that the Commonwealth would be able to create a reserve of SMCs that could be provided to emissions-intensive, trade exposed facilities (EITEs), some of which are regarded as having hard-to-abate emissions, in the event that there is a shortfall in the availability of SMCs and/or ACCUs in the future. Stakeholders were opposed to the provision of SMCs to EITEs, arguing that alternate direct forms of assistance should be provided.[103]

Relinquishment of SMCs

In order to ensure integrity in the issue of SMCs, the Bill provides for them to be relinquished either voluntarily or in response to a direction of the Regulator or order of a Federal Court, in situations in which, broadly speaking, false or misleading information or fraudulent conduct has been detected. These provisions largely mirror the existing relinquishment provisions for ACCUs in the CFI Act.[104]

New Subdivisions B and C of Division 4A provide for the relinquishment of ‘relinquishable units’:

• where SMCs were issued by the Regulator based on the provision of false or misleading information (new section 22XNE) or
• where a court is satisfied that the issuance of SMCs is directly or indirectly attributable to a range of dishonesty offences for which a person has been convicted (new section 22XNF).

Item 6 amends section 7 to insert a definition of ‘relinquishable unit’ – which may be an ACCU or an SMC unit. This means that a person required by the Regulator or a Court to relinquish a certain number of ‘relinquishable units' may do so by providing ACCUs or SMCs. The Explanatory Memorandum provides that this is to provide flexibility for the person subject to the relinquishment requirement.[105]

Use of SMCs for compliance purposes

Division 2 of Part 3H of the NGER Act already imposes a duty on responsible emitters to avoid an ‘excess emissions situation’. This is essentially when the net emissions of a facility exceed the facility’s baseline. As noted above, currently, responsible emitters may apply for a new baseline, or purchase and surrender ACCUs to offset emissions, or apply for a multi-year monitoring period, or seek an exceptional circumstances exemption.[106]

The Government’s reform package (that is, the Bill in combination with the amended Rules) proposes numerous changes which increase flexibility for facilities to avoid an excess emissions situation. These are:

• facilities will be able to surrender SMCs, as an alternative to or in addition to ACCUs, as prescribed carbon units (see explanation below)
• facilities will be moved to production-adjusted baselines using site-specific emissions intensity values, with a transition to industry average emissions intensity values by 2030; [107] no other types of baselines will be available[108]
• eligible facilities, who have hard-to-abate emissions but a credible plan to reduce emissions, would be able to access extended multi-year monitoring periods of up to 5 years (but not past 2030)[109]
• facilities will able to borrow up to 10% of their baseline in SMCs through to 2030[110]
• facilities will continue to be able to purchase ACCUs, including from the Government with a capped price of $75/tonne (adjusted for inflation).[111]

There are no changes to the exceptional circumstances provisions in the NGER Act.[112]

The Regulator retains discretion as to whether to commence compliance action and as to what form that might take (that is, issuing an infringement notice or commencing court proceedings). There have been no excess emissions situations under the operation of the Safeguard Mechanism to date.[113]

Duty to avoid an excess emissions situation

Existing section 22XF provides that failing to rectify an excess emissions situation by the required date is a breach of a civil penalty provision. Item 24 amends paragraphs 22XF(1)(c) and (d) to extend the requisite date from 1 March to 1 April of the relevant year. The Explanatory Memorandum states this will provide ‘extra time’ for responsible emitters to resolve the situation.[114] The Explanatory Memorandum states that the new compliance date will first apply from 1 April 2025.[115]

New penalty

The current civil penalty for breaching subsection 22XF(1) is the lesser of 100 penalty units for each day that the excess emissions situation exists and 10,000 penalty units for those other than individuals; or one fifth of the lesser of these figures for an individual (paragraphs 22XF(1)(e) and (f); as prescribed in section 4A.01 of the National Greenhouse and Energy Reporting Regulations 2008).[116]

Item 25 repeals the existing civil penalty provisions and inserts a new civil penalty, being:

The number of penalty units that is equal to the difference between the net emissions number for the facility for the monitoring period and the baseline emissions number for the facility for the monitoring period.

Item 40 adds new subsection 30(2C) to specify the penalty for each day of a continuing contravention under section 22XF (100 penalty units; for up to 2 years).

This change results in a variable maximum penalty, contrary to the recommendation in the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers that ‘each offence should have its own single maximum penalty’.[117] The Explanatory Memorandum states that no responsible emitters are individuals, and that:

In order for civil penalties to be fair, there should be a degree of proportionality between the seriousness of the contravention and the quantum of penalty.... As such, changing the maximum penalty to be based on the size of the excess emission situation represents a proportional scale model of penalty amounts, based on clear and objective criteria. The penalty better reflects the scale of the contravention and its impact on achieving Australia’s emissions reduction targets and on climate change.[118]

This may however result in a much larger maximum penalty for facilities with hard-to-abate emissions who are unable to obtain sufficient ACCUs or SMCs to remedy an excess emissions situation.

Infringement notice

Existing subsection 39(1) provides that the Regulator may issue an infringement notice if the Regulator has reasonable grounds to believe that a person has contravened a civil penalty provision. Existing section 41 specifies the pecuniary penalty that is to apply.

Items 42 to 44 restructure section 41 and add new subsection 41(2) which specifies a new pecuniary penalty for an infringement notice issued in relation to a breach of section 22XF. Accordingly, the pecuniary penalty must be:

equal to whichever is the lesser of the following amounts:

(a) one third of the maximum penalty that a Court could impose on the person for that contravention;

(b) 150,000 penalty units.

As noted above, the maximum penalty is the difference between the net emissions number for a facility and the baseline for that facility (essentially the shortfall) and will vary in each instance. Based on the current value of a penalty unit, 150,000 penalty units is $41.25 million. This exceeds by far the current maximum pecuniary penalty that can be imposed by the Regulator in an infringement notice ($16,500). The Explanatory Memorandum explains that, to date, some facilities have surrendered an average of 18,000 (and maximum of 133,104) ACCUs to avoid an excess emissions situation.[119] The Explanatory Memorandum states that although the introduction of declining baselines could result in an increase in the size of an excess situation and a large penalty, this reflects ‘the potential significance of an excess emissions situation’.[120]

Using SMCs to reduce an excess emissions situation

Existing subsection 22XK(1) states that the net emissions number of a facility is the number of tonnes of CO2-e of the total amount of covered emissions from the operation of the facility for a period. Existing subsection 22XK(2) provides that the net emissions number of a facility may be reduced by the surrender of ‘prescribed carbon units’, but not below zero.

Prescribed carbon units are defined in subsection 22XM(1) as meaning an ACCU or a unit specified in the Safeguard Rules. Item 30 amends subsection 22XM(1) to provide that a safeguard mechanism credit unit is also a prescribed carbon unit (new paragraph 22XM(1)(aa)).

Items 27 and 28 amend subsection 22XK(2), by adding paragraph 22XK(2)(c) and new subsections 22XK(2A) and (2B), to allow the Safeguard Rules to specify how the net emissions number is reduced following the surrender of a particular type of prescribed carbon unit. This would allow the Safeguard Rules to specify that more than 1 prescribed carbon unit is required to reduce the net emissions number of a facility by 1 tCO2-e. The Explanatory Memorandum merely states ‘the rules could account for situations where the units have different supply levels or characteristics or more than one unit needs to be surrendered for each tonne of emissions’.[121] This could potentially provide for scaling of surrendered units over certain volumes or provide lower proportional reductions for the use of certain international credits.

Avoiding double counting and deemed surrender of ACCUs

Under existing arrangements, if a responsible emitter is issued ACCUs for abatement at a facility, and the units were issued to another person, the net emissions number for the facility is increased by the number of ACCUs so issued (subsection 22XK(4)) and if some or all of those units were sold to the Commonwealth under a carbon abatement contract, the units are deemed to have been surrendered (subsection 22XN(6)). This avoids double counting of emissions reductions.[122]

Items 29 and 33 add new subsections 22XK(5) and 22XN(7) respectively which provide that the Safeguard Rules may prescribe circumstances in which subsection 22XK(4) and 22XN(6) respectively do not apply. The Explanatory Memorandum indicates that these ‘mirror provisions’:

would address the potential situation where ACCUs are issued for emissions reductions that do not relate to emissions covered by the Safeguard Mechanism, such as reduction in scope 2 emissions or legacy landfill emissions, are added onto the net emissions number of a Safeguard facility.[123]

It could avoid a potential circumstance where ACCUs are not added to a net emissions number because of rules under subsection 22XK(5), but are still taken to be deemed to be surrendered under subsection 22XN(6).[124]

Anti-avoidance provisions

Item 46 inserts new section 54B which allows the Regulator to declare that an ‘undertaking or enterprise’ is a facility where the Regulator is of the view that the undertaking or enterprise has been structured or is being undertaken in a way to avoid coming within the scope of the Safeguard Mechanism. The decision is reviewable by the Administrative Appeals Tribunal.[125]

The provision is similar in nature to Part IVA of the Income Tax Assessment Act 1936, although in that case ‘scheme’ is specifically defined, and section 852B of the Corporations Act 2001. The Explanatory Memorandum provides examples of potential avoidance schemes (see pp. 26–28).

Inclusion of SMCs in the Australian National Registry of Emissions Units

The ANREU Act established the Australian National Registry of Emissions Units (the Registry). The Registry is administered by the CER who creates Registry accounts, and can issue, exchange or cancel ACCUs and Kyoto units within those accounts. The creation of a new carbon unit – being SMCs – necessitates amendments to the ANREU Act to allow these units to be similarly dealt with.

Schedule 2 of the Bill makes several amendments to the ANREU Act ‘to provide for SMCs to exist in the ANREU and establish arrangements for SMCs that mirror the treatment of ACCUs. The amendments provide ownership and transfer arrangements for SMCs and requirements to publish information about holdings and cancellation of SMCs, consistent with other unit types’.[126]

Item 25 of Schedule 2 adds new Part 4 to the ANREU Act to make provision for safeguard mechanism credit units. This Part sets out the rules about the ownership, transfer and transmission of SMCs. Notably, as provided by new section 48A, SMCs are personal property transmissible by assignment, by will and by devolution by the operation of the law. Part 4 replicates the existing provisions relating to ACCUs in the CFI Act.[127]

Item 32 adds new section 94A which enables the Minister to make legislative rules under the Act.

SMCs and eligible international emissions units

Item 7 amends section 4 of the ANREU Act to add a new definition of safeguard mechanism credit unit as having the same meaning as in the NGER Act.

However, Item 3 amends the definition of ‘eligible international emissions unit’ to include new paragraph (e) which states that an eligible international emissions unit includes ‘a safeguard mechanism credit unit if legislative rules made for the purposes of this paragraph specify that kind of unit’. Item 5 of the exposure draft of the Australian National Registry of Emissions Units Rules 2023 proposes to so specify a safeguard mechanism credit unit.

It is unclear why SMCs are specified as falling within the definition of eligible international emissions unit, other than if the intention is to allow for SMCs to be traded to international buyers for use in other international carbon markets, such as in the EU. The Australian Financial Markets Association (AFMA) expressed the opinion that:

SMCs are by design an Australian product that will be generated by activities in Australia and are not intended to be traded outside of Australia. It is therefore inappropriate for them to be described as international emissions units.[128]

The Explanatory Memorandum states that ‘this helps ensure the treatment of these units under other Commonwealth laws is equivalent to ACCUs’, before naming the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, the Australian Securities and Investments Commission Act 2001 (ASIC Act) and Corporations Act 2001.[129] Eligible international emissions units are also referred to in the A New Tax System (Goods and Services Tax) Act 1999, as eligible emissions units – and which are GST-free.[130]

Notably, ACCUs and eligible international emissions units are ‘regulated emission units’ for the purposes of the ASIC Act and the Corporations Act and are financial products.[131] This has important implications for a person or organisation who provides advice in relation to ACCUs and SMCs: an Australian financial services (AFS) licence is required to carry on a financial services business within, into or from Australia that provides financial services in regulated emission units or emissions-related financial products, whether those services are in relation to the ERF or for another market or purpose.[132]

The proposed drafting appears to seek to avoid making specific amendments to the abovementioned laws.

Publication of information

Existing Part 5 of the ANREU Act provides for the Regulator to publish certain information about the holders of Registry accounts and Kyoto units, as well as the ‘characteristics of eligible international emissions units’.[133]

Item 27 proposes to add new sections 60A and 60B to provide that the legislative rules may require the Regulator to publish on its website information about ACCUs and SMCs respectively and the holders of relevant accounts, in accordance with specified requirements. The Explanatory Memorandum states that the amendments require publication for the purpose of consistency with existing requirements for other types of carbon units, and for the purpose of transparency of information on unit holdings.[134]

These proposed provisions reflect a significant softening of the proposed publication requirements as included in the Exposure Draft of the Bill. Industry stakeholders and representative bodies were opposed to those provisions which required the Regulator to publish information about the number of ACCUs and SMCs held by each Registry account at least once a quarter. APPEA for example stated the proposed provisions ‘risk revealing some commercially sensitive information’ and suggested ‘a public register that is up-to-date and searchable, but does not provide account-by-account holdings’.[135]

Prohibiting new ERF projects at covered facilities

The Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act) currently allows project proponents to apply to the CER for a declaration that a project is an eligible offsets project (that is, an Emissions Reduction Fund (ERF) project). To be an eligible offsets project under the CFI Act, proposed projects must meet a range of criteria, including that the project is covered by a methodology determination made by the Minister, additionality requirements, and other eligibility requirements specified in the regulation or legislative rules.[136]

If the CER makes a declaration, the project may earn ACCUs and the CER may, through an established reverse auction process, enter into a contract to purchase the ACCUs. Alternatively, the project proponent could sell the ACCUs on the voluntary market.

A range of methodology determinations have been made already allowing for eligible offsets projects to be undertaken at facilities under the Safeguard Mechanism, that is ‘covered facilities’.[137] However, uptake of these methods has been very low – at the time of writing they make up just 5% of registered projects.[138]

The purpose of the amendments in Schedule 4 is explained by the Explanatory Memorandum as follows:

To maintain the integrity of Australia’s offsets framework under the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act), and because facilities covered by the Safeguard Mechanism will be eligible to receive SMCs, the Bill contains amendments to enable eligible offsets projects at Safeguard-covered facilities to be phased out.[139]

In broad terms it is evident that the intention of these amendments is to prevent double counting of carbon credits, in order to ensure that credits are genuinely additional and have not previously been counted. The purpose is explained by the EM as ‘ensuring the Regulator considers the Safeguard Mechanism when assessing the regulatory additionality of proposed offsets projects’.[140]

Schedule 4 of the Bill proposes to amend the CFI Act to:

• add new subsection 20C(3) to prohibit the CER from entering into carbon abatement contracts involving eligible offsets projects as specified in the legislative rules
• add new subsection 20G(2A) to allow for the legislative rules to require the CER to exclude certain types of eligible offsets projects from carbon abatement purchasing processes (that is, reverse auctions)
• amend subparagraph 27(4A)(b)(i) to require that the CER also consider the NGER Act in determining whether a proposed offsets project meets the regulatory additionality requirements.

As noted in the Background section, on 10 October 2022 the DCCEEW released an Exposure Draft of the Carbon Credits (Carbon Farming Initiative) Amendment (Safeguard Facility Eligibility Requirements) Rules 2022. The draft rules propose to amend the Carbon Credits (Carbon Farming Initiative) Rule 2015 (CFI Rule) to exclude projects involving ‘carbon abatement of covered emissions ... from the operation of a designated large facility for a financial year’.[141] However, if a responsible emitter implemented a formerly eligible offsets project at a covered facility and it reduced covered emissions below their new baseline, they would earn (and could sell or trade) SMCs.

House Independents and environment and climate focused groups generally support the Schedule 4 amendments.[142] However, industry stakeholders and representative groups who made submissions on the Exposure Draft of the Bill were universally opposed to these amendments.[143] These groups argued:

• the changes would ‘disincentivise continued research, development and investment’,[144] particularly in technologies such as carbon capture and storage (CCS)[145]
• that responsible emitters should be able to generate ACCUs from projects that reduced non-covered emissions (for example, scope 2 emissions) at covered facilities[146]
• for additional amendments or rules allowing responsible emitters to choose between the generation of ACCUs and SMCs.[147]

On 9 January 2023, the Minister made the Carbon Credits (Carbon Farming Initiative) Amendment (No. 1) Rules 2023 (CFI Amendment Rule) which includes a more detailed amendment to the CFI Rule relating to the eligibility of ERF projects at covered facilities. Item 4 of the CFI Amendment Rule repeals and replaces section 20 of the CFI Rule, setting out 3 requirements which essentially allow ERF projects to be undertaken at covered facilities where the project provides carbon abatement of emissions other than covered emissions (for example, scope 2 emissions) and where a methodology determination allows these emissions to be determined. Item 7 adds new section 126 to the Rule to provide for transitional arrangements for existing projects, but no longer—as had been provided in the draft rule—specifies arrangements for applications that had been made but not yet determined at the time of the making of the rule.

Concluding comments

The Bill amends relevant Acts to enable the creation of a new class of prescribed carbon unit, known as safeguard mechanism credit units. The second purpose is to transform the Safeguard Mechanism from a reporting mechanism to an emissions reduction scheme.

However, key operational details will be determined in legislative instruments made by the Minister. Four of these were released in Exposure Draft form on 10 January 2023 for a 5-week comment period, to what may best be described as a mixed reception.[148] With the reforms slated to commence on 1 July 2023, a compressed timeframe for passage of the Bill, finalisation of the legislative instruments and implementation of the recommendations of the Chubb Review, the Government has a considerable task ahead.