3.1
Having set out the broader context of the proposed reforms to the Safeguard Mechanism in the previous chapter, this chapter outlines stakeholder views on specific provisions of the Safeguard Mechanism (Crediting) Amendment Bill 2022 (the bill).
3.2
Most of the evidence received on specific provisions was from stakeholders who suggested the bill could be improved through a variety of proposed amendments. The following sections consider:
the use of offsets under the Safeguard Mechanism;
amendments to the objects of the National Greenhouse and Energy Reporting Act 2007 (NGER Act);
provisions relating to the coverage of the scheme and the treatment of new entrants;
provisions relating to ministerial discretion in Rule-making;
grandfathering of deemed surrender;
provisions around penalties for excess emissions and providing false or misleading information; and
requirements for reporting and transparency.
3.3
The chapter concludes with the committee's views on the bill.
Use of offsets
Unlimited use of Australian Carbon Credit Units
3.4
In line with their view that 'good climate policy should be premised on a mitigation hierarchy', a number of environmental organisations proposed additional provisions to reduce the use of offsets under the Safeguard Mechanism. In relation to the proposed amendments to the NGER Act the Climate Council of Australia (Climate Council) recommended:
adding an amendment to the NGER Act to require facilities to report on emissions reduced through 'onsite projects', and/or investments and initiatives that will lead to 'genuine emissions reduction in future';
adding a requirement for facilities to 'surrender SMCs alongside [Australian Carbon Credit Units (ACCUs)] when doing so for the purpose of reducing net emissions'; and
'expressly' including in the legislation that the Minister can use regulation to establish 'the total share of prescribed carbon units able to be surrendered against a facility's obligations'.
3.5
These suggested amendments were echoed by other environmental groups. The Climate Council argued these amendments would send 'a clear signal to industry that unlimited use of offsets will not be a permanent feature of the scheme'.
3.6
The Australia Institute said placing a limit on the use of ACCUs 'would actually drive more decarbonisation', by making offsets 'less available', and leading to price increases and 'scarcity'. Climate and Energy Program Director, Ms Polly Hemming suggested allowing 'unfettered offsets' under the legislation could ultimately prevent Australia meeting its 43 per cent reduction target.
3.7
The Environmental Defenders Office (EDO) said failing to insert 'a clear power' into the Act that would allow the Minister to place a cap on the use of ACCUs would result in a 'business as usual' situation, where 'real abatement' does not happen. The EDO referred to analysis it has conducted of overseas emissions trading schemes and 'the lessons learned in other jurisdictions', noting specifically:
the use of offsets has been 'banned' in the European Union;
offsets were initially 'capped at 4.5 per cent' under the Swiss scheme, then banned from 2020;
offsets are now capped in New Zealand;
Korea's scheme caps offsets at five per cent, and Mexico's caps offsets at 10 per cent; and
the cap under the scheme in California was initially eight per cent, and has been 'ratcheted down to four per cent'.
3.8
The EDO went on to state 'the only country' which allows facilities to use offsets to account for 100 per cent of its requirements is Kazakhstan:
Without a ministerial power of some way to limit the use of offsets, we are not aligned with international best practice and, in reality, we're not going to achieve what we need to do domestically.
3.9
Asked which other countries have schemes allowing unlimited use of offsets, the Department of Climate Change, Energy, the Environment and Water (the Department) said it understands that the Canadian province of British Columbia does not have a limit, and Alberta 'has a scheme where it has a limit of 60 per cent that it is increasing to 90 per cent'. Provinces not covered by their own schemes apply Canada's federal Output-Based Pricing Scheme. That scheme allowed unlimited use of domestic offsets until 16 February 2023, at which point a new obligation was introduced requiring facilities 'that have an excess emissions situation [to] meet their compliance obligation with a minimum 25 per cent excess emissions payment'. The remainder can be offset.
3.10
Ms Suzanne Harter from the Australian Conservation Foundation (ACF) suggested the conversation around the use of ACCUs did not need to be 'binary'; imposing 'strict limits' or allowing 'unfettered access'. The ACF proposed limits could be imposed by sector, or 'set on a percentage basis', or be 'phased in over time'. It was argued that such solutions would actively decrease the use of offsets, while carving out hard-to-abate industries.
3.11
As an alternative to requiring facilities to surrender SMCs alongside ACCUs, the Climate Action Network Australia (CANA) recommended the bill be amended to require facilities to use SMCs first (before accessing ACCUs), 'given their higher integrity and more direct equivalence in emissions reduction'.
3.12
Similarly, Ms Harter stated a hierarchy of abatement options should be implemented because SMCs are a 'more reliable, more genuine' option than ACCUs. This is because they 'exist within the safeguard' and keep emissions reductions in the scheme. In this way, SMCs provide 'an important signal' to encourage industry to reduce onsite emissions, including by investing in technology. The ACF was, however, concerned that SMCs are 'automatically generated' under the legislation:
So, if the headroom that currently exists in the production-adjusted baselines isn't totally removed, we do have a bit of an issue there because they'll be generated for abatement that doesn't occur. But philosophically we do support the safeguard mechanism credits being part of the safeguard mechanism.
3.13
On this issue, CANA argued a simple mechanism could be constructed which obliges facilities 'to look at the market, track the market for SMCs…before pursuing ACCUs'. Ms Harter added that facilities could be required to report 'steps that have been taken on site' to the Clean Energy Regulator (CER), and the regulator could audit these reports.
3.14
The Government's Safeguard Mechanism Reforms Position Paper (Position Paper), released in January 2023, confirms that the current arrangements allowing Safeguard facilities to surrender unlimited ACCUs, 'as an alternative to reducing their on‑site emissions', will remain unchanged. The position paper states that access to ACCUs allows businesses to achieve the 'lowest cost abatement outside the scheme', and meets the Government's commitment to ensuring businesses have 'a range of options available to [support] scheme efficiency'. While it does not impose any limits on the use of ACCUs, the bill makes it possible for the Minister to make Rules limiting how facilities use ACCUs and SMCs in the future.
3.15
The position paper also notes that the arrangements set out in the bill retain flexibility for businesses in how they reduce emissions, which helps to constrain compliance costs, while providing the legislative framework for further reductions in future.
3.16
The Department suggested that, despite retaining access to ACCUs, there are:
…strong incentives under the Safeguard Mechanism for facilities to undertake emission reductions on-site, and for the industrial sector to decarbonise, even with the ability to surrender ACCUs to meet obligations.
3.17
By establishing 'predictable and gradual baseline declines', the Department argued the reforms will incentivise facilities to 'bring forward implementation of on-site emissions reduction technologies because they know it can provide long-term benefits'. The Department stated that the policy stability created would also make onsite abatement more attractive than ACCUs, which carry additional risks:
When operating within a carbon constraint, exposure to market credit prices represents a potential liability compared to onsite abatement which remains within the facility’s control. To manage any expectations of future increases in prices of ACCUs and SMCs, facilities are incentivised to reduce their potential exposure though on-site abatement activities.
3.18
The Department was asked if it had commissioned modelling on the likely proportion of abatement that would occur onsite under a reformed Safeguard Mechanism. Officials confirmed that modelling was provided to government, however the Minister for Climate Change and Energy, the Hon Chris Bowen MP, declined to provide it to the committee on the basis that the modelling was prepared to inform cabinet deliberations. The Minister also stated that the disclosure would not be in the public interest 'due to market sensitivities relating to the Government's role as a purchaser of ACCUs':
Providing Government forecasts of ACCU market demand would be a signal to the market, creating the potential risk of significant flow-on effects for the operation of future auctions for Government purchase of ACCUs.
3.19
As an alternative, the Department referred the committee to public sources of data, such as RepuTex modelling. Modelling from energy market analysists, RepuTex Energy, released in February 2023, suggests that reforms to the Safeguard Mechanism, along with state and federal low-cost financing programs, will 'accelerate' industrial abatement projects. According to RepuTex’s analysis, this has the potential to lead to up to three-quarters of Safeguard facility emissions reductions being delivered through on‑site abatement by 2030:
The earlier, larger scale of on-site actions by industry could lead to increased SMC issuance, and weaker demand growth for offsets, with potential for up to three-quarters (74%) of all emissions reductions to be derived from on-site actions by 2030. This is despite industry having unfettered access to carbon offsets, with on-site actions favoured as a permanent hedge against ongoing offset costs, and higher forecast offset prices.
3.20
Deputy Secretary of the Department, Ms Jo Evans noted that 'other scenarios' put the likely onsite abatement as being 'somewhat less than [74 per cent]'. However, the Department expects it to be 'somewhere in that range'.
3.21
The Department explained that it has estimated the Safeguard Mechanism reforms will reduce projected emissions from Safeguard covered facilities from a projected 146 Mt CO2-e in 2030 to 100 Mt CO2-e in 2030. These projections 'assume that 9 Mt CO2-e out of the 46 Mt CO2-e emissions reduction in 2030 will be met through ACCUs already included in the baseline projection'. In other words, approximately 20 per cent of emissions reduction are expected to be met through offsets in 2030. The department further clarified the projections stating:
The baseline scenario included ACCUs generated from existing offset projects and new projects supported by future auctions under the Powering the Regions Fund. To avoid double counting, the emission projections only included abatement from the reforms to the Safeguard Mechanism that were not already included in the baseline.
3.22
The Minerals Council of Australia (MCA) agreed that the introduction of SMCs will incentivise onsite abatement. However, many facilities in the minerals industry, which makes up around half of all Safeguard facilities, will initially be unable to rely on onsite abatement, as they await technological advancements over the next decade. The MCA suggested that, without access to ACCUs, some facilities would face 'a very steep decline', and may have to close:
The ability to credit facilities in the safeguard bill is a critical tool as well because it incentivises those who are in the safeguard and who have relatively low-cost abatement opportunities to deploy those technologies or to take that action and then potentially sell those to those above the baseline. So it creates the right incentives to lever down the technology emissions reductions that are required.
3.23
The Grattan Institute pointed out that imposing a restriction on the use of ACCUs would put some facilities in an impossible position, as they may not be able to achieve emissions reductions without these offsets, and would essentially have to break the law, or close down.
3.24
Professor Andrew Macintosh, a member of the Australian National University and the University of New South Wales, Canberra Emissions Reduction Fund (ERF) research team, maintained that offsets are an 'important' part of the scheme, as many facilities have limited options for onsite abatement. While Professor Macintosh believed a simple 'penalty price' would be more effective, in the absence of that approach, he argued that access to high-quality offsets will be needed; companies will implement energy efficiency measures where they can, but will still have a 'heavy reliance on a penalty price or offsets for an interim period'.
3.25
Mr Tennant Reed, Director of Climate Change and Energy at AiGroup highlighted the challenges ahead for Australian industries in adapting to a 'net zero emissions global economy', saying 'a lot of investment' will be required, with the 'vast bulk' being provided privately, despite government schemes. Business will need to make 'transformative investments' in their facilities across new technology, new production processes, and major capital equipment purchases. The bill would provide 'some degree of confidence' to firms to support them in making these investments. Mr Reed added:
There's a balance to be struck between the amount of detail that goes into a bit of legislation and the amount that goes into regulations, but the strongest guarantee of all for durability is broad political support for an overall policy direction.
3.26
The Business Council of Australia (BCA) maintained that companies understand 'they need to decarbonise as soon as possible'. However, 'technology gaps' mean there is still 'a critical role for credible offsets' in the short to medium term:
The cost of ACCUs [is] forecast to rise over the short to medium term, while the cost of new low emissions technology is expected to fall.
This means the best hedge for a corporate against rising forward ACCU prices, is to invest in the development and deployment of low emission technologies on site.
There is no medium to long game for any business that relies solely on offsets to reduce their carbon footprint, they simply won’t be viable.
3.27
This assertion was supported by evidence from oil and gas company, INPEX, which told the committee it will need access to ACCUs and/or SMCs for the rest of the decade to 2030, despite 'moving as fast as [it] possibly can with actual decarbonisation'. INPEX maintained that it is 'not planning on just relying on offsets', but will need them in the short to medium term.
3.28
The BCA noted the extensive work that it, and its members, have done over the last two years to outline 'a 7-point climate policy architecture' to support the transition to a net zero economy and said:
Business does not underestimate the difficulty of the emissions reduction task, but policy certainty is crucial.
No one can afford a repeat of the mistakes of the past. The perfect cannot be the enemy of the good; too much is at stake.
Our approach must be gradual, technology neutral, maintain reliability of the energy system and supply feedstock for industry.
If we attempt to push the system too hard and too fast, we risk falling short.
3.29
These sentiments were echoed by the Mr Daniel Walton, National Secretary of the Australian Workers Union (AWU). Mr Walton highlighted the need to balance 'reducing our carbon footprint and also protecting our industries' and protecting Australian jobs. Achieving this will require all industries to have access to offsets and 'access to the pool of funding available to transition':
There are, unfortunately, a lot of myths that float around in this place about how quickly we can make that transition. It isn't going to be overnight; for some industries it will be the best part of a decade. So having reasonable access to credits during that journey is going to be incredibly important.
International offsets
3.30
The Australian Workers' Union and Mining and Energy Union (AWU and MEU) recommended the integrity of offsetting be protected by requiring that 'only domestic credits and offsets…be available for compliance with the safeguard mechanism at the commencement of the reforms'. This proposal was echoed by the Smart Energy Council.
3.31
International offsets are not included in the reforms initially, and the Government has stated they will not be available to offset emissions under the scheme. This is because the reforms are designed to 'transform the domestic economy, delivering jobs and enhancing Australia's international competitiveness as the world moves to net zero'. There are also concerns about the integrity of the market for international offsets, and 'details of the rules and accounting issues for cross‑border transfers are still being developed'. However, government has signalled that high integrity international offsets may be a feature of the scheme in future, and intends to consult on this issue in 2023.
3.32
The Australia Institute observed that the Government is being lobbied heavily by the coal and gas industries to allow international offsets, and said it has 'already started drafting amendments to the legislation'. Ms Hemming referred to 'existing [carbon trading] agreements with Fiji and Papua New Guinea'—the majority of which are from 'forest projects' with questionable integrity—and argued these should be definitively ruled out.
Objects of the National Greenhouse and Energy Reporting Act
3.33
Environmental organisations in particular recommended amendments to the bill's proposed insertion of a new object into the NGER Act which would ensure 'aggregate net emissions from the operation of [Safeguard] facilities decline'.
3.34
The National Environmental Law Association (NELA) proposed the new object should 'prescribe a rate at which emissions should decline overall', with the rate proscribed to be 'that required to achieve Australia's greenhouse gas emissions reductions targets and move towards the goal of the Paris Agreement'. Australian Projections suggested the wording should be:
…aggregate net covered emissions from the operation of designated large facilities decline in line with Australia's international commitments, and the provisions of the Climate Change Act 2022.
3.35
Rather than limiting the quantum of aggregate emissions decline to the Rules, NELA argued the 2030 emissions reduction target should be included in bill, though noted that:
After 2030, the development of the [emissions] decline will have to be done through the rules because the work hasn't been done on that yet. But achieving that 2030 goal could actually be included in the objects of the act now.
3.36
The Australian Conservation Foundation (ACF) recommended removing the word 'net', saying:
The removal of 'net' would not preclude the use of carbon credits where necessary (e.g., hard-to-abate industries) but would ensure that ACCUs cannot be relied upon in place of genuine abatement and investment in mitigation technologies.
3.37
The Department explained that the bill 'accounts for previous public feedback on an exposure draft', and that the provisions amending the objects of the NGER Act were added in response to that feedback. Regarding NELA’s suggest to remove the word ‘net’ from the Object, the department maintained that this option:
…would not be consistent with the Safeguard provisions in the Act, which place an obligation on Safeguard facilities to avoid an 'excess emissions situation', which occurs when a facility's net emissions (net of any surrender of SMCs or ACCUs) exceed its baseline.
Coverage and new entrants
3.38
Inquiry participants made a number of recommendations in relation to the coverage of the scheme and the treatment of new entrants.
3.39
The Australian Forest Products Association was concerned about what happens to facilities that are in the scheme but drop below the threshold. It encouraged the Government to address this in the bill. In its Position Paper, the Government proposed to allow facilities to retain access to SMCs for 'five years after they fall below the coverage threshold', retaining an incentive to continue to reduce emissions even when facilities are 'operating close to the threshold'.
3.40
The Carbon Market Institute (CMI) and NELA both proposed there should be an option for smaller facilities to 'opt-in' to the Safeguard Mechanism, which NELA said would 'provide a market-incentive' for these facilities to decrease their emissions, while creating more 'SMC trade opportunities for hard-to-abate facilities'. CMI added that this would also act as a test for 'the potential for dropping the 100 000 tonnes of carbon dioxide equivalent (tCO₂-e) threshold for mandatory inclusion in future phases'.
3.41
The Department responded to these suggestions, saying the 'complexities' involved in allowing smaller facilities to opt-in to the scheme 'would take significant time, resources, and consultation to work through'. It would not be possible to implement the Safeguard reforms on time if this option was pursued in the bill, and 'the increased regulatory burden required for Safeguard participation may act as a barrier to entry for smaller facilities'. In addition, the Department contended that abatement opportunity from smaller facilities would be 'relatively small compared to the projected abatement under proposed reforms'.
3.42
The Climate Council recommended an additional provision be included in the bill to amend provisions around proscribed carbon units in the NGER Act. The amendment proposed would require that 'any coal, oil or gas facilities entering the mechanism after 1 July 2023 may only surrender SMCs for the purpose of reducing their net emissions' (that is no access to ACCUs). This proposal was echoed by the Smart Energy Council. The AWU and MEU did not support this proposal, recommending that both SMCs and ACCUs 'be available for use by all Safeguard facilities, including fossil fuel facilities'.
3.43
CANA recommended that provisions be added to ensure new facilities entering the Safeguard Mechanism be required to meet their baselines without ACCUs; that is, with access 'only to improved practices and technologies and Safeguard Mechanism Credits'.
3.44
CMI submitted the 'question of new entrants' should be 'addressed head on' in the bill. This could be done by incorporating the carbon budget 'into the regulatory framework' and requiring potential impacts on that budget to be considered in relation to new entrants, or 'significant expansion of facilities'.
3.45
The Australian Chamber of Commerce and Industry confirmed its members are concerned that new entrants 'will increase the pressures on other businesses'. Principal Economist, Mr Peter Grist stated:
We would be reluctant for the facilities currently in the scheme to be required to have harsher emissions reductions associated with new entrants… the existing facilities within the safeguard mechanism should have access to some of those [offsets] first.
3.46
The Department responded to suggestions that the bill should incorporate provisions around the treatment of new fossil fuel projects, stating:
The NGER Act is a framework for reporting and disseminating company information about greenhouse gas emissions, and energy production and consumption. It is not designed to permit or prevent facility operations. The proposed Safeguard Mechanism reforms are designed to reduce net emissions from the industrial sector to contribute to the achievement of Australia's climate targets. There are established Commonwealth and State and Territory approval and licensing processes required for permitting operation of industrial facilities.
3.47
The Department also noted that the reforms will reduce the impact of new entrants and expansions, with estimates suggesting a two-thirds reduction in emissions:
Emissions from new entrants, which includes coal, oil and gas but excludes backfills and expansions for the reasons we talked about at the [13 February 2023 Estimates hearing], are projected to cumulatively total 38 megatons between 2023–24 and 2029–30 in the absence of reforms. The safeguard reforms will reduce aggregate baselines for those same class of facilities to 12 megatons over that same period. So that represents that 26‑megaton abatement task that we spoke about at the last estimates.
Committee view
3.48
The NGER Act is an emissions reporting framework and is clearly not designed to permit or prevent any type of facility operations; it is not an approvals regime. These matters are covered under established Commonwealth, state and territory legislation.
3.49
However, the committee understands the concerns raised by inquiry participants about the potential impact of new entrants on the decarbonisation potential of the Safeguard Mechanism, and the availability of SMCs and offsets for existing Safeguard facilities.
3.50
The reforms in this bill will assist in significantly reducing emissions from new entrants and expansions, projected to be a two-thirds improvement on business-as-usual. However, going forward it is also appropriate that the Government closely monitors the impact of new entrants under the reformed Safeguard Mechanism, with a view to making changes to the regulatory settings in future, if required.
3.51
The Government's existing statutory mechanism for reporting on progress made towards Australia's greenhouse gas emissions reduction targets—the Annual Climate Change Statement—provides an appropriate vehicle for reporting on the performance of the Safeguard Mechanism.
3.52
The committee recommends that the Australian Government continues to monitor the impact of new entrants on the delivery of the Safeguard Mechanism's share of Australia's emissions reduction targets, and reports to Parliament on progress through the Annual Climate Change Statement.
Ministerial Rule-making
3.53
Under existing legislation, the Minister's power to make Safeguard Rules is largely unconstrained. The bill would amend the NGER Act to 'reasonably fetter' the Minister and regulator's discretion and 'safeguard the integrity of SMCs'. The provision would prevent the Minister making Safeguard Rules 'unless satisfied that those rules are consistent with the second object of the NGER Act'. While supporting this provision, NELA argued further reforms were required to 'better guide' the regulator:
To ensure that the issuing of SMCs is consistent with the broader legislative framework, NELA submits that the NGER Act should also prescribe the key elements of SMCs to limit the Regulator’s discretion.
3.54
The ACF recommended the provision be updated to be more 'consistent with stated legislative intent', by removing the subjectivity. Specifically:
The Minister must not make safeguard rules unless those rules are consistent with the second object of this Act [to ensure aggregate net emissions from the operation of Safeguard facilities decline].
Deemed surrender
3.55
As discussed in Chapter 2, some industry stakeholders were concerned about how deemed surrender of offsets would work under the amended Act. Australian-based multinational company, Orica, urged the Government to amend the bill in a way that would protect deemed surrender for existing contract holders, for the life of those contracts.
3.56
Orica has existing carbon abatement contracts that run for seven years and that, it says, were entered into 'in good faith'. Should deemed surrender only be grandfathered for two years as proposed by the reforms, this:
…risks penalising those like Orica who have moved early with voluntary emissions reduction targets and projects that deliver real, measurable emission reductions. This outcome is completely at odds with our shared objective of supporting local industry with transition in line with Australia's international commitments.
3.57
Orica noted that the Government proposed in August 2022 the idea of 'grandfathering for the duration of existing contracts'. This is an option Orica would support.
3.58
The Department submitted:
The deemed surrender provisions allow a facility to reduce their emissions—helping to meet their Safeguard compliance obligations—and generate and sell the resulting ACCUs to the Government. They allow a facility to receive a double benefit for each ACCU – they receive a financial benefit from selling the ACCU, and they receive a benefit from reducing their Safeguard compliance obligation.
3.59
The Government is seeking to end this 'double‑counting' of ACCUs through deemed surrender, as discussed in Chapter 2. The Department was asked to comment on Orica's concerns. Ms Edwina Johnson from the Safeguard Taskforce confirmed that there are currently six projects that will be grandfathered, with Orica's two longer term projects being by far the largest. The Government is proposing to grandfather deemed surrender arrangements for two more years 'to ensure that those ACCUs are not used twice beyond that two-year period'. Ms Johnson said the Department has heard and considered feedback and believes the proposed timeframe gives firms 'sufficient time to re-establish their arrangements'.
3.60
Asked if firms will have to 'breach or break' their contracts in two years' time, Ms Johnson explained 'no contracts' will need to be broken:
Four of [the grandfathered projects] can complete their contracts with government within that period, so they would be able to both use those ACCUs to sell to government and use them to surrender under the safeguard mechanism. Then there are two projects for which the government contracts go beyond that two-year period, and those are optional contracts, so there's no question of a forced breakage.
3.61
Orica responded to the Department's evidence, saying the two contracts in question are 'optional delivery' contracts, meaning the company has the option to sell its ACCUs to government, or 'on the secondary market'. However, the Commonwealth is contractually obligated 'to honour the contract and to purchase and accept delivery' of any ACCUs Orica chooses to sell to it:
[I]f Orica exercises its contractual right to sell its ACCUs to the Commonwealth, then the Commonwealth is obligated to purchase them. Secondly, unlike the optional delivery contract which is being used for the next [Emissions Reduction Fund] auction (in March 2023) and which includes new provisions which effectively give the Commonwealth the right to suspend the seller's right to exercise its option if there are changes to the Legislative Rules which affect certain eligible offset projects, our Carbon Abatement Contracts with the Commonwealth do not have any equivalent 'change of law' provision and therefore delivered ACCUs must be accepted.
3.62
Orica noted the new Carbon Credits (Carbon Farming Initiative) Amendment (No. 1) Rules 2023, which came into effect on 12 January 2023, make it 'possible' for the Government to 'on-sell ACCUs it has purchased through contracts, instead of being forced to retire them as was the case prior to 11 January 2023'. Orica argued this means that the Government could purchase its ACCUs and on sell at a higher price; thus preventing Orica 'from claiming an emissions reduction that [it has] created, through real-on site decarbonisation', while 'forcing' the company 'to offset the emissions of another Safeguard facility who is not demonstrating actual on-site abatement'.
3.63
The Department responded to these concerns, and addressed Orica's suggestion that the company was being unfairly targeted. The Department said the proposal to limit grandfathering of deemed surrender arrangements to two years 'was based on the volume of ACCUs affected rather than on which proponents would be affected'. Grandfathering these arrangements for two years would mean 'more than 3 million tonnes of emissions reductions would not need to be sourced from elsewhere', and 'would provide time for businesses to adjust to the new arrangements'.
3.64
In response to Orica's suggestion that the Government may be planning to buy the contracted ACCUs and on-sell them at a higher price, the Department stated that the Government has not made a final decision regarding whether or not ACCUs subject to deemed surrender arrangements, and delivered to the Government, will 'be available to be sold under the cost containment measure or be cancelled instead'. Government will 'carefully consider' this issue, along with other feedback received as a result of the position paper process.
Increased penalties
3.65
Regulation currently governing the Safeguard Mechanism includes a range of enforcement measures for facilities with excess emissions, but the quantum of the penalties are defined in regulations. Amendments proposed by the bill would take the civil penalty amount out of the Regulations and put it into the Act, providing greater Parliamentary oversight. The penalties would also be significantly increased by the amendment, which is designed to 'strengthen enforcement arrangements and ensure penalties are sufficient to deter non‑compliance'.
3.66
According to the Position Paper:
Currently, the civil penalty for an excess emissions situation is based on the number of days of noncompliance, rather than the scale of exceedance. This means that 1 tonne of excess emissions could be judged an equal offence to 100 000 tonnes of excess emissions.
The Government proposes to update the civil penalty to base it on both the quantity of excess emissions and the number of days of non-compliance. This better reflects the environmental impact of the excess emissions situation. The maximum civil penalty will be set at 1 penalty unit per tonne of excess emissions per year... From 1 January 2023, a penalty unit will be set at $275.
3.67
The ACF welcomed the inclusion of strengthened penalties for excess emissions and additional penalties for providing false or misleading information. However, ACF recommended 'a broader range of penalty provisions be considered', and the regulator's discretion around enforcing anti‑avoidance provision be reduced.
3.68
The CER noted that it already has 'a range of compliance powers' for the Safeguard Mechanism and NGER Act, but rarely needs to draw upon them as the schemes have 'very high compliance rates'
(98–100 per cent).
Reporting and transparency
3.69
Stakeholders made a number of suggestions for strengthened reporting and transparency measures to encourage higher emissions reduction activity and greater use of onsite abatement.
3.70
The EDO suggested the bill should include provisions mandating government reporting on how the Safeguard Mechanism is performing against Australia's 'remaining carbon budget':
We've got only seven years to achieve our 2030 goal, so what we need to do—potentially through mechanisms like this and other pieces of legislation—is be able to track how Australia's carbon budget is looking, and whether any new entrants will fit within that carbon budget.
3.71
NELA argued that additional transparency measures—such as requiring facilities to publicly disclose 'the number of ACCUs that a business buys or the number of SMCs that it uses'—would enliven reputational concerns for facilities, ultimately leading to higher emissions reductions.
3.72
The Grattan Institute agreed that it would be reasonable to require that holdings of SMCs and ACCUs be made public:
We understand that is something that the regulator has been pushing for some time, and that's a process already in train. It's important, of course, that it is in place before we see the extension of the full year of this legislation.
3.73
Dr Barry Traill, the Director of Solutions for Climate Australia (CANA), maintained that it would be 'straightforward' for facilities to report levels of onsite abatement, use of SMCs, and use of ACCUs, for wider publication, as they are already required to collate that information:
We see that as quite a straightforward and nonburdensome requirement. Given that the company has to report on their abatement figures and will have done their own mathematics very simply to determine how that was done, we don't see that as burdensome at all.
3.74
Professor Macintosh proposed 'automated disclosure' of abatement methods be implemented by expanding information captured by the Emissions Reduction Fund project register, or through facilities' annual returns:
They're required to submit annual returns. You make them disclose there, because all the ACCUs are numbered, so it could be easily automated. So, in the registry, you could just have that information appear: 'They used X number of credits from X projects, which are Y type'.
3.75
Existing reporting requirements for Safeguard facilities are summarised below:
Emissions from covered facilities are reported through the National Greenhouse and Energy Reporting scheme, by 31 October following each financial year.
Responsible emitters for covered facilities must ensure that they are not in an excess emissions situation on or after 1 March following each reporting year, and have a number of options available to manage any excess emissions.
The Clean Energy Regulator is required to publish information about all covered facilities for each reporting year. Information published includes the baseline emissions number in force for that year, total reported emissions, the responsible emitter(s) for each facility, and any Australian carbon credit units (ACCUs) surrendered.
3.76
Baselines for the Safeguard facilities are published in a table on the CER's website, along with data for facilities with a multi-year monitoring arrangement (currently 21 facilities).
3.77
The committee notes that the bill includes provisions that would allow for the Rules to require the CER to publish information about ACCUs and SMCs in Registry accounts, and their holders, in accordance with specified requirements. The Department further clarified that:
Some facilities covered by the Safeguard Mechanism [currently] report production of outputs that meet definitions of production variables under the Safeguard Rules. Under the reforms, it is proposed all facilities covered by the Safeguard Mechanism would report this information.
It is already the case that the CER publishes, for each facility and each compliance period, the baselines, covered emissions, and the total amount of prescribed carbon units surrendered (prescribed carbon units are currently ACCUs and would also include SMCs under the reforms). This information is published on the CER’s website. Under the reforms, it is proposed that emissions intensity determinations, determinations that a facility is trade-exposed baseline-adjusted, and borrowing adjustments would be published.
3.78
Major emitter, Woodside, was asked if it would disclose the number of SMCs and ACCUs it holds, and the source of those credits. Woodside replied that it 'has not been Woodside's practice to disclose specific details around our carbon credit portfolio for competitive reasons'. Instead, the company reports annually on its 'carbon offsets strategy and the units retired to meet [its] corporate targets', and believes this is 'appropriate'.
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Another transparency measure proposed was to mandate in the Act corporate transition plans for Safeguard facilities. Mr Erwin Jackson from the Investor Group on Climate Change (IGCC) supported this proposal, saying transition plans provide critical information for investors:
What a corporate transition plan can do is show the use of offsets in the context of everything else that the company is doing. For some companies and some facilities, it may be quite difficult for them to reduce emissions… If you've got a good corporate transition plan in place, which is standard practice now and is financial practice in the US, the UK and Europe in terms of their disclosures, it gives them confidence and allows investors to invest with confidence in Australia. In the absence of those plans, we'll continue to have the situation where we see companies, as we've seen in Australia from a number of large emitters, overly relying on offsets. Investors will become less confident in them, divest from them and move their money offshore to other companies that are more efficient.
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In response to this suggestion, the Department stated that 'implementation of any such approaches would need to specify expectations of what these reports would cover and any requirements around assurance of their content'. Further, the Department noted that:
The Treasury has been consulting on the design and implementation of the Government's commitment to standardised, internationally aligned requirements for disclosure of climate related financial risks and opportunities in Australia to enhance transparency. Consideration would need to be given to the potential duplication between these requirements and any associated compliance costs.
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The Smart Energy Council highlighted the need for regulators to better review emissions reduction projects. Noting that it may not be 'feasible' to review every project, External Affairs Manager, Mr Wayne Smith suggested an auditing model like that implemented for the Small-scale Renewable Energy Scheme, which provides subsidies for residential rooftop solar:
Through that system, the Clean Energy Regulator actually undertakes, under legislation, inspections of a statistically significant number of systems to ensure that those systems are doing what they say they're doing, so they're delivering results for the customer and for the Australian public as well. You take that kind of concept, in a sense, and broaden it out. You say: shouldn't the Australian government be doing at least a statistically significant number of inspections to ensure that projects are actually delivering what they say they're delivering?
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The Department noted that there are already a number of transparency measures built into the existing climate change framework, including the annual statement to parliament, which 'requires the government to explain what it's policies are [and] what has been achieved in terms of emissions reductions and so on by sector, including the projections'. Ms Evans added that an independent report by the Climate Change Authority will provide further analysis on Australia's progress in meeting its targets, and 'all of that will be in the public domain'.
Committee view
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With strong support from businesses, industry organisations, investor groups, trade unions, civil society groups, and the states and territories, the Government has increased the ambition of Australia's 2030 emission reduction target to 43 per cent below 2005 levels by 2030, and affirmed Australia's commitment to net zero emissions by 2050. These targets have been enshrined in law through the Climate Change Act 2022.
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Achieving these targets will be virtually impossible without reforms to the Safeguard Mechanism.
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The Safeguard Mechanism currently enables limits to be placed on the emissions of around 215 large industrial facilities, responsible for around 28 per cent of national emissions. Under the current arrangements, the Government can set baselines for emissions, but cannot create credits to incentivise covered facilities to reduce their emissions.
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The Safeguard Mechanism (Crediting) Amendment Bill will build on this established framework, creating new, tradable emissions credits that will incentivise heavy industry to reduce emissions in cost-effective ways. The bill also amends the National Greenhouse and Energy Reporting Act 2007 to ensure that emissions from Safeguard facilities go down, instead of up.
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As noted in Chapter 1, flaws in the original implementation of the Safeguard Mechanism, including too much 'headroom' in facilities' emissions baselines, have resulted in continued growth in industrial emissions. The evidence clearly indicates that without reforms to the Safeguard Mechanism, emissions from large facilities will continue to increase.
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The proposed reforms aim to ensure Safeguard facilities deliver a proportional share of Australia's 43 per cent emissions reduction target, while helping those facilities reduce their emissions gradually and predictably over time. Due to the long lead times required to finance and build large industrial scale abatement projects, emissions from this sector cannot be reduced unless reforms to the Safeguard Mechanism are bedded in by July 2023.
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Modelling indicates that, under the proposed reforms, net emissions of Safeguard facilities will fall; from a projected 143 million tonnes in 2022‑23, to no more than 100 million tonnes by 2030. In addition, the reforms in aggregate will deliver around 205 million tonnes of abatement by the end of the decade.
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The bill establishes a flexible framework, leaving many details to delegated legislation, which enables the Safeguard Mechanism to be dynamic, reducing emissions efficiently, and using the lowest cost abatement options.
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Support for the bill and the broader reforms was clear among most inquiry participants, a number of whom highlighted the fact that failure to reform the Safeguard Mechanism now would result in a higher burden of the 43 per cent national emissions reduction target having to be met by the rest of the economy.
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In this report, the committee has canvassed many issues that extend beyond the scope of the bill under inquiry. Across the evidence collected, and substantial public hearings, the committee was able to address a number of concerns relating to the broader reforms of the Safeguard Mechanism, and has made related recommendations designed to improve its effectiveness.
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The committee notes that consultation on the subordinate legislation—which will amend the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015—is currently underway, and many matters raised by stakeholders will be addressed as part of that process.
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The committee also notes with approval the Government's intention to review Safeguard Mechanism policy settings in 2026-27. This will provide an opportunity to ensure the framework is appropriately calibrated, and progress further reforms, if required.
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The time to reform the Safeguard Mechanism is now. The bill before the Parliament has broad support and provides a solid framework to facilitate meaningful emissions reduction by Australia's largest emitters. The bill provides certainty to industry and investors, while building in appropriate levels of flexibility to ensure the Safeguard Mechanism meets its intended decarbonisation aims.
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Of the many issues raised about scheme design, including the use of offsets, on-site abatement, strong compliance and ensuring the scheme contributes to the targets, the bill enhances the flexibility of the reforms to address those matters in both the initial design and to continue to improve the scheme over time. The ability to create Safeguard Mechanism Credits is particularly important for rewarding on-site abatement and reducing the need for offsets from outside the scheme. Without the passage of this bill, the Government’s ability to reduce emissions by amending the Safeguard Rules under the existing Act would be less efficient and effective in meeting our legislated climate change targets.
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The committee recommends that the Senate pass the bill.
Senator Karen Grogan
Chair