Proposed reform of the Safeguard Mechanism needs improvement
Australians elected the 47th parliament with a mandate for real and ambitious action on climate change. Reform of the Safeguard Mechanism is an opportunity to take significant steps towards fulfilling that mandate. But the proposed reform, while progressive on the previous 10 years of inaction, needs significant improvement to reflect the scale and gravity of the challenge we face.
The design of the mechanism is complex and poses significant risks. Few economists believe that a baseline and credit scheme is the best tool for addressing the immense challenge of industry decarbonisation. Most agree that it would be far better to develop a cap and trade mechanism and build on the lessons learned in other jurisdictions.
The ambition built into the proposed changes is mediocre at best. Few, if any, scientists would agree that the proposed changes are adequate for Australian industry, and particularly the fossil fuel industry, to do its fair share of the global burden in holding warming to 1.5℃.
The political courage needed to address these fundamental issues remains lacking. I hope that there will soon be a renewed appetite for greater ambition and a willingness to take the political risks necessary to avoid climate catastrophe.
Despite the significant drawbacks, I believe that a reform of the Safeguard Mechanism that places integrity at its heart will result in significant real abatement of greenhouse gases. In considering the Safeguard Mechanism (Crediting) Amendment Bill 2022 (the bill), and any subsequent Safeguard Mechanism Rule, I am focussed on improvements that will increase real abatement, avoid blowing the Safeguard Mechanism carbon budget, and minimise financial risk to the taxpayer.
However, I am particularly concerned about proposed equal treatment of the fossil fuel industry and every other facility under the Safeguard Mechanism. Improvements need to be made to prevent the fossil fuel industry from buying their way out of decarbonisation using offsets.
Equally, improvements need to be made to promote decarbonisation of strategically important industries, and the industries of the future, without unnecessarily risking carbon leakage. We need industries like steel, aluminium and cement, and we need to move swiftly to establish conditions for those industries to transition.
Although the subject of this inquiry is the bill, it must be considered in the context of broader reform of the Safeguard Mechanism. I have not made submissions in previous consultations on the broader proposed reform due to resource constraints. As such, these additional comments make recommendations in relation to both the bill and the broader proposed reform.
The bill should pass subject to the adoption of additional recommendations as set out below.
Integrity and the treatment of new entrants
The Safeguard Mechanism must have integrity—it has to do what it is designed to do. The government’s Position Paper is clear on what this is: a reduction in net emissions of CO₂-e from safeguard facilities ‘to no more than 100 million tonnes [per annum] by 2030 and [a carbon budget] capped at 1,233 million tonnes between 2021 and 2030’.
There is a substantial risk that new fossil fuel facilities will blow the safeguard mechanism carbon budget. This risk was raised by many throughout the committee process.
Ms Suzanne Harter, Climate Change and Energy Policy Adviser, Australian Conservation Foundation (ACF), warned that if the reserve is not large enough emissions will exceed the cap:
The problem really is that the analysis that has created the reserve is a little bit murky, so we don't know exactly what has been included in those new entrants. But when we have commissioned some pieces of work—one by ERI, another that was a WA case study, and we have one underway right now—we see a couple of things. One is that there is, in fact, a pipeline of new projects, particularly new coalmines and gas facilities, that will be bringing new emissions under that cap. So that's an issue with regard to either blowing out the cap, if the reserve isn't big enough, or putting a cost impost on all of those 215 facilities that are in safeguard currently.
Dr Barry Traill, Director, Solutions for Climate Australia, Climate Action Network Australia (CANA), echoed these concerns, explaining that multiple analyses have forecasted that new entrants would significantly increase emissions, risking Australia’s ability to reach its target as well as reduce availability of credits in the mechanism for other participants:
There are now three separate analyses which show that new entrants would bring significantly more emissions into the pipeline and risk blowing out the safeguard mechanism in a whole range of ways, not only affecting our ability to reach the 43 per cent target, which is fundamental, but also flowing through to wipe out the supply of ACCUs [Australian Carbon Credit Units] for other participants in the mechanism. I really want to flag that strongly. All these analyses are based on a series of assumptions about new entrants, but I would flag that they're different from the government's analysis. If we're not working on a firm foundation of agreed facts, that is of concern when we're trying to nail down the best outcome.
The Australia Institute gave similar evidence that the expected emissions from new facilities are expected to overwhelm the budget and impede Australia reaching its target:
Given the determination of the proponents of fossil fuel projects to open large new facilities whose emissions will be far more than the 100,000 tonnes per year threshold of the Safeguard Mechanism there is a significant risk that new entrants will overwhelm the budget and place greater burden on either other covered facilities or other parts of the economy. They might also prevent the achievement of the legislated
43 percent target.
The Australia Institute questioned how the emissions budget would be balanced with new entrants as it is unlikely that the emissions profiles from existing facilities would be similar to new facilities:
It is unclear how the emissions budget will be balanced with new entrants. While it is possible that emissions from existing facilities that close before 2030 have a similar emissions profile to the new mines, gas wells and factories that might choose to begin polluting before 2030, there is no reason to expect that such a coincidence will occur.
Mr Tony Wood, Program Director, Energy and Climate Change, Grattan Institute, argued for tightening the safeguard mechanism carbon budget, noting the difficulties faced in accurately forecasting projects:
We've suggested that that budget be even tighter, that the budget for the safeguard mechanism should be in the rules to make sure that that's firm so that, if a new facility does enter, its emissions are counted within that cap and not from another part of the economy. The issue then becomes: how big is this reserve? Inevitably, there is a risk. A point we made in our submission is that there are several risks in the way the safeguard is designed at the moment. Some of them are very difficult to foresee because we know from history that lots of projects that have been proposed just don't go ahead, so trying to forecast how this is going to work is close to impossible.
A legislated Safeguard Mechanism budget
The issue of risk to the Safeguard Mechanism budget was discussed in the majority report, but no solution was proposed.
Organisations including the National Environmental Law Association (NELA), Australian Projections, Carbon Market Institute (CMI) and the ACF all proposed that the bill be strengthened to include a reference to specific emissions reduction targets. As noted in the majority report, CMI submitted that the ‘question of new entrants’ could be addressed in the bill by incorporating the carbon budget ‘into the regulatory framework’, overtly. This would require decision-makers to calculate potential impacts on Australia's emissions reduction budget when considering approvals for new heavy-emissions projects, or ‘significant expansion of facilities’.
I note that the bill includes a proposed new object for the National Greenhouse and Energy Reporting Act 2007 (NGER Act), which requires that ‘aggregate net emissions from the operation of [Safeguard] facilities decline’. This is a vast improvement on the existing objects of the Act, under which emissions from Safeguard facilities have continued to increase. However, it is not strong enough.
As NELA recommended, I propose that the new object should ‘prescribe a rate at which emissions should decline overall’. Specifically, the Act should specify that emissions from Safeguard facilities should decline at a rate required to achieve Australia's greenhouse gas emissions reductions targets under 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.
The bill also seeks to amend the NGER Act to place an obligation on the minister and regulator to make Rules that are consistent with the objects of the Act. The proposed provision prevents the minister making Safeguard rules ‘unless satisfied that those rules are consistent with the second object of the NGER Act’. In other words, the minister can only make Rules that result in aggregate net emissions from Safeguard facilities declining. However, without reference to the rate of decline required, this amendment is likely to be ineffective.
Recommendation
Amend the objects of the National Greenhouse and Energy Reporting Act 2007 (NGER Act) to set out key objectives of the Safeguard Mechanism, including:
that the industrial sector makes a requisite proportional contribution to meeting Australia’s overall emissions reduction targets; and
that aggregate net covered emissions from the operation of designated large facilities decline in line with the provisions of the Climate Change Act 2022.
In line with this, the NGER Act should be amended to require that the Minister must be satisfied that the Safeguard Rules are consistent with those objectives when making or amending the Safeguard Rules.
Recommendation
Put a carbon budget of 1,233 million tonnes CO₂-e emissions between 2021 and 2030 in legislation or regulation as an absolute cap on scheme emissions.
Monitoring and reporting on the Safeguard Mechanism budget
Several submitters and witnesses supported regular reporting on the Safeguard Mechanism emissions budget, and the size and use of the reserve designed for new entrants. For instance, Ms Rachel Walmsley, Head of Policy and Law Reform, Environmental Defenders Office (EDO), argued for greater transparency in the system, particularly around how new entrants will fit within the budget:
But one of the other things that we've seen in our analysis of climate law is a real gap between linking targets, goals and objects to the carbon budget that we have remaining. What we need is absolute transparency on how we're tracking against our 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 to be able to track how Australia's carbon budget is looking, and whether any new entrants will fit within that carbon budget. We need to see how any innovations we have in other areas—transport, energy efficiency—raises our budget. We need a far more transparent system of how to track and link all these legislative things to our actual carbon budget.
The Grattan Institute suggested the bill could be amended so that:
…the regulator has to publish, every year, how much of the safeguard budget has been consumed and how much remains, alongside the information of how much everyone's exactly measured, and then people can take one number off the other and see what the reserve is.
Recommendation
Require the Clean Energy Regulator to report annually on the size and use of the Safeguard Mechanism budget and reserve, including the drawdown of the reserve by category (new entrants, expanded production, and unacquitted exceedance of baselines).
Treatment of new entrants
As detailed above, many submitters and witnesses raised concerns about the need for cautious treatment of new entrants, and in particular new fossil fuel facilities.
The Australia Institute argued that without greater clarification on how new entrants are accommodated, there is effectively no cap within a cap-and-trade scheme:
It remains unclear how new entrants to the Safeguard Mechanism will be treated and accommodated. Without specifying how new entrants will be limited or how the 1,227 million tonnes (Mt) carbon dioxide equivalent (CO₂e) carbon budget for the Safeguard Mechanism to 2030 will be
re-distributed when they enter, the advent of SMCs [Safeguard Mechanism Credits] effectively creates a cap-and-trade scheme with no cap.
In a relatively recent consideration of what impact new shale gas facilities should have on greenhouse gas emissions, the Hon Justice Rachel Pepper recommended that:
That the NT and Australian governments seek to ensure that there is no net increase in the life cycle GHG emissions emitted in Australia from any onshore shale gas produced in the NT.
Recommendation
New entrants must have a net zero impact on emissions and no access to Australian Carbon Credit Units (ACCUs) to comply with baselines.
Anti-avoidance definitions and new facilities
Several submitters and witnesses raised concerns that anti-avoidance provisions risk allowing significant extensions to be undertaken and not fall into the definition of a new entrant.
As an example, Mr Gavan McFadzean, Manager, Climate Change and Energy Program, ACF, expressed concerns that Woodside would treat the Scarborough project as an expansion of its existing facilities:
We have one additional concern, which comes back to Suzanne's earlier point about the need to tighten anti-avoidance definitions in the bill. What Woodside will, very likely, intend to do is treat the Scarborough project as an expansion or an extension of its existing operations on the Burrup Peninsula because of the existing infrastructure it has there and not treat it as a new entrant, which it should be. We still think this is a problem with this bill. That's an area that definitely needs to be tightened.
Ms Harter from the ACF, argued for a clear definition of ‘facilities’ as there is currently uncertainty around how expansions of existing facilities will be treated under the scheme:
A further uncertainty is how expansions of current facilities will be treated and how extensions of current facilities will be treated, because there are also those under a production adjusted baseline which moves up and down with production—an intensity baseline. That means an existing facility that somehow manages to tap into a new gas reserve, for example, will bring those emissions into the safeguard under an existing facility. This all hinges around how new facilities are defined, which is a point that we have put into our submission. A new definition or a very clear definition of 'facilities' will be very, very important for us to better understand those emissions that are going to come into the scheme and whether that reserve is even close to being adequate, alongside what we feel are new requirements needed for new entrants.
Recommendation
Clarify that any facility expansion or extension that will be responsible for over 100,000 tonnes of CO₂-e a year is classified as a new entrant.
Incentivise real abatement through a carbon mitigation hierarchy
The proposed reform of the Safeguard Mechanism does not, at present, provide the right incentives to maximise real abatement. The mechanism must have a carbon mitigation hierarchy embedded in its design. There must be market incentives for facilities to first avoid, and then minimise their emissions. As noted by many submitters, offsets should be used only as a last resort. In the words of Professor Ian Chubb, ‘offsets can’t be a device which big emitters use not to change their behaviour not to do something about reducing emissions’.
Limits on the use of ACCUs
The Safeguard Mechanism reform as proposed would place Australia alongside Kazakhstan as the only two countries with a market mechanism for carbon and no limit on the use of offsets as a source of abatement.
The Australasian Centre for Corporate Responsibility (ACCR) submitted that Australia's ‘unlimited use of land-based offsets is poor science and poor policy’, and noted that Australia is ‘out of step with international practice’. The ACCR observed that, under schemes in other national jurisdictions, the use of offsets is generally limited to 10 per cent of emissions reduction obligations, or less. The ACCR provided the graph below, which compares Australia's Safeguard Mechanism limits on offset use, relative to other national carbon prices:
Source: ACCR, Submission 7, p. 8.
A limit on the proportion of abatement that can be achieved through ACCUs would create a significantly higher incentive for facilities to decarbonise rather than relying on offsets.
A large number of submissions recommended a cap on the proportion of abatement that can be achieved using ACCUs. As noted in the majority report, the 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 Lock the Gate Alliance likewise noted that ‘the unrestricted use’ of ACCUs and Safeguard Mechanism Credits (SMCs) will ‘at best delay critical action to decarbonise industry, and at worst mean that a considerable fraction of claimed abatement will not actually occur’.
The Australia Institute was also supportive of a cap, proposing a mitigation hierarchy and a limit of 5 per cent on the use of ACCUs Safeguard facilities. Meanwhile, the submission from the Australian National University and University of New South Wales, Canberra Emissions Reduction Fund research team proposed that a quantitative limit on the use of ACCUs ought to be ‘set as a percentage of any annual exceedance above the applicable baseline’.
Concerns were raised in some submissions and by some witnesses that hard-to-abate industries did not have access to technologies that would allow them to decarbonise and so access to ACCUs is necessary. The Climate Council of Australia suggested that the use of ACCUs ‘be progressively phased down to a set percentage of a facility’s total baseline’ over time. The Climate Council also proposed 'differential percentages' be applied across different sectors, depending on 'the available technology options for achieving genuine emissions reduction'.
The modelling of demand for ACCUs has not been made public. What has been said is that in 2030, somewhere around 20 per cent of facilities’ emissions reduction will be achieved using ACCUs.
Recommendation
Legislate a declining limit on the use of ACCUs by Safeguard Mechanism facilities, reducing to 20 per cent of exceedance above baselines by 2030. If the Government is unwilling to implement a hard cap, there should be a discount on the carbon value of ACCUs over thresholds, with the discount on carbon value escalating in proportion to the use of ACCUs on a sliding scale.
SMCs to be used in preference to ACCUs
Many submitters made a convincing case that SMCs should be used in preference over ACCUs, as SMCs represent actual avoided emissions. To operationalise this, there must be a market privilege for SMCs over ACCUs.
Offsets should sit within a hierarchy that starts with avoiding, minimising and mitigating emissions. They should be a last resort until mitigation technologies and operational changes can take effect for hard-to-abate industries. They should not be the primary means of achieving pollution reduction.
The CANA also emphasised this point, recommending that ‘facilities must use Safeguard Mechanism Credits first, given their higher integrity and more direct equivalence in emissions reduction, before facilities are allowed access to Australian Carbon Credit Units’. The Australia Institute agreed, specifically noting that ‘ACCUs should always be seen as a “last resort”’.
In considering how SMCs could be given preference over ACCUs, a variety of ways to establish a mitigation hierarchy have been proposed. As noted in the majority report, the Climate Council of Australia 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’.
The Smart Energy Council (SEC) maintained that for the Safeguard Mechanism to be effective, there needs to be a requirement that SMCs are used before resorting to ACCUs. The SEC stated:
If reasonable steps have been taken to achieve on-site emissions, SMCs must be purchased first, up to a certain threshold. If the threshold of SMCs has been purchased, only then can ACCUs be purchased. This will deliver the real achievement of the Safeguard Mechanism cap.
As noted in the majority report, CANA echoed this suggestion, saying SMCs have ‘higher integrity and more direct equivalence in emissions reduction’.
The Climate Council of Australia proposed that the bill be amended to make further updates Section 22XK and Section 22XM of the NGER Act (along with any necessary consequential sections) in order to:
require covered facilities to surrender SMCs alongside ACCUs when doing so for the purpose of reducing net emissions;
expressly state that the total share of prescribed carbon units able to be surrendered against a facility’s obligations can be determined by the Minister via regulation; and
clarify 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.
Recommendation
Ensure that SMCs are used by Safeguard Mechanism facilities to meet compliance requirements in preference to ACCUs.
The Cost Containment Mechanism
The cost containment mechanism creates an artificial price ceiling and has a distorting effect on the market.
The Grattan Institute raised this concern submitting that:
Because facilities are not liable for 100 per cent of their emissions, the proposed ceiling price for ACCUs of $75 per tonne is a very low effective cost of carbon: about $17/t across the seven years to 2030, and equivalent to a long-term (2050) cost of $105/t. It is well below the average internal carbon price of $96/t disclosed by Safeguard companies. This implies that new projects and expansions will be viable without needing to purchase ACCUs from the government; and that the cap could be higher without imposing significant costs.
How the government manages the supply and demand for ACCUs for the cost-containment measure will be critical to its effectiveness.
The Lock the Gate Alliance added:
In the absence of any other incentive or restriction, the only way profit-maximising companies would choose to pursue direct abatement instead of purchasing carbon credits would be if abatement was cheaper. The cost containment measure interferes in this basic market process and actually looks set to protect polluters from having to pay anywhere close to the full cost of dealing with their pollution. The cost containment measure appears to compare poorly both with IEA carbon price estimates at 2030 to achieve a pathway to net zero, and the internal price of carbon already being factored in by several fossil fuel companies. This proposal becomes even more problematic when it is considered that businesses outside the scope of the Mechanism will be exposed to the volatility of the ACCU market price, despite being smaller-scale emitters voluntarily seeking to offset their emissions.
Should the price of ACCUs exceed the cost containment mechanism, the government would have to sell ACCUs back into the market. It is likely that most, if not all, of the suppliers of contracted ACCUs will have exited their contracts with government long before the price hits that level.
This risks placing the taxpayer on the hook for the difference between the market price of ACCUs and the cost containment mechanism.
The Grattan Institute demonstrated this point:
If the supply of ACCUs available from the government is constrained, the amount that companies are willing to pay will rise to somewhere between $75/t and the penalty price of $275/t, with the exact price reflecting the market’s view on how many ACCUs the government is likely to make available. In this case, the government makes a loss on any sales to Safeguard participants.
Alternatively, the ANU-UNSW ERF research team recommended that a penalty price be used instead:
The cost-containment mechanism is internationally unique. You don't see a cost-containment mechanism like this anywhere in the world. The idea that the government buys offsets and then resells them puts us in a completely different category to everybody else. Every other scheme that I know of has a simple penalty price, and we've always had it under all the schemes that we've run in Australia. Once you hit that price, you can either surrender ACCUs if you want to, or you can simply pay the penalty price.
The beauty of that is that, administratively, it's so simple. But, most importantly, it doesn't expose the Commonwealth to a liability.
This would mean the ‘Commonwealth actually raises revenue, and it can take that revenue and then use it to help with the transition of covered facilities or use it to support other activities, whether it be in the land sector or the agricultural sector’.
Recommendation
Remove the cost containment mechanism. If the government considers the mechanism necessary, it should be implemented as a penalty price, with any revenue directed into the Powering the Regions Fund. The mechanism should be subject to a three-year sunset period.
Improve the integrity of ACCUs
As the majority report highlights, many submitters raised concerns that the ability of the Safeguard Mechanism to reduce Australia’s emissions would be adversely affected if there remain unresolved questions around the integrity of ACCUs.
The committee received compelling evidence that persistent and credible concerns remain over the integrity of a significant proportion of ACCUs.
These concerns were comprehensively set out in the submission and evidence from the ANU-UNSW ERF Research Team. The Research Team’s primary concern about the Safeguard Mechanism is that ‘it allows unfettered access to ACCUs, even though there are significant unresolved integrity issues with existing offset projects…[which] could jeopardise Australia’s ability to meet its emission reduction targets’.
The three main methods of concern include: human-induced regeneration, landfill gas and avoided deforestation projects. The research team’s analysis pointed to the scale of the issue of these methods which indicated that:
…between now and 2030 about 61 million high-risk or low-integrity ACCUs…will be available for use under the safeguard mechanism out of existing human-induced regeneration [landfill gas and avoided deforestation] projects…
…that does not include 139 projects that have not reported. When you include them, it has to be more than 70 million … If you think about it, the safeguard mechanism total estimated abatement is 205 million tonnes. So if we're talking about 70-plus million low-integrity credits that are in circulation, it will cut the effectiveness of the safeguard mechanism almost in half.
The integrity issue with the human-induced regeneration method, the Research Team argued, is that ‘it has not been applied in accordance with its original intent: to incentivise the regeneration of native forests by allowing juvenile trees and shrubs to regrow in areas that were previously cleared’. At the hearing on 27 February 2023, the research team stated:
…what we can say with 100 per cent certainty is that 97 per cent of the project areas of these projects are located in intact native vegetation. We are following every single one of those projects using satellite imagery. What we also know for sure is that the areas that have been cleared in these projects are largely not included in the areas that been credited.
Therefore, the research team recommended that these credits be blocked from existing projects unless ‘they can come across and transition onto a method that limits eligibility to areas that are cleared’.
With regard to landfill gas, the research team recommended that landfill gas projects should be blocked unless they adopt higher baselines. Its submission explained:
Landfill gas projects receive ACCUs for capturing and combusting the methane component of the biogas emitted from solid waste landfills. The integrity problem with the landfill methods is that many of the larger projects are getting ACCUs for combusting methane that they would have combusted anyway because their ‘baselines’ are too low.
Significantly, at the committee’s hearing, the research team added that:
… more than 90 per cent of the landfill gas industry are in full agreement with us that the baselines are too low … They have themselves actually called for the method to be changed. I know they've also met with the department, asking the department to get on with this process, and we haven't seen any action as yet.
As for avoided deforestation, these ACCUs should also be blocked because ‘principally, that the rate of deforestation in the project areas would have to have been much higher than it has been historically for the number of ACCUs that have been issued to be justified’. Professor Macintosh explained:
The simplest way to understand this is to look at the map of where these projects are. These avoided deforestation projects are all located in the west of New South Wales and the vast majority of them—in fact, I think it's 94 per cent of them—are located into the western local land services region. So we are talking way out west. The rates of land clearing out there are very low, for a very good reason—it's dry. It's not economically sensible to clear vast areas of land. There is clearing that goes on out there—absolutely there is—but not on the scale that would make it logical for the areas that are currently being credited for the maths to stack up.
I note that Minister Bowen revoked the avoided deforestation method under the Emissions Reduction Fund on 14 February 2023. However, there are still many ACCUs in the system that were created prior to this time that are of questionable integrity. Furthermore, ACCUs will continue to be created under existing avoided deforestation projects.
Some of the concerns outlined by the ANU-UNSW ERF research team were echoed by GreenCollar, the largest carbon aggregator in Australia, which noted that methods should always be looked to be improved, they should also be moved on from when they reach the end of their life. For example, GreenCollar stated: ‘We absolutely are in support of the end of [the avoided deforestation] method. It's reached the end of life. It was a method written for a specific context that is no longer relevant’.
GreenCollar even volunteered to discount the value of some carbon credits and stated:
We would be supportive of that idea. I don't think it's our job to figure out what that number is, but we do think that that's probably one of the better resolutions here, because it has become such a contested space, and, as I said before, we share concerns.
In going some way towards addressing this issue, there is widespread support for full implementation of the Chubb Review from industry, including for instance the AiGroup:
The full implementation of the Chubb recommendations should further bolster confidence that Australian Carbon Credit Units represent real reductions in emissions and real removals of carbon from the atmosphere.
The President of the Business Council of Australia, Mr Tim Reed also endorsed the full implementation of the Chubb review recommendations:
…the work that the minister had Professor Chubb and his colleagues do was very important work, and…we are supportive of the recommendations being fully implemented, because we do believe that integrity is a very important issue.
Recommendation
Prevent Safeguard Mechanism facilities from surrendering ACCUs unless there is a high degree of certainty that the abatement that they offer is real, additional and permanent. This starts with full implementation of the Chubb Review as a matter of urgency.
Another proposal with considerable support from stakeholders was the instatement of ‘rolling vintage windows’ that limit the opportunity for use of ACCUs. This is a design feature of the European Union Emissions Trading Scheme (EU ETS), and other similar markets.
Support for an ACCU vintage window proposal was received from submitters such as Mr Tennant Reed, the Director of Climate Change and Energy at AiGroup who explained:
… it would be sensible to build in some safeguard against that kind of outcome [an unexpectedly large volume of offsets being issued], and that a rolling vintage window for compliance grade units would not be a bad way of going about that. Under that idea, you pick a number—we suggested five years. Units older than that—and we suggested this in relation to domestic offsets, SMCs and international units if and when they are allowed for compliance under the scheme—would not be able to be retired for compliance purposes ... That seems like a reasonable approach not so much to change the expected outcome of the scheme, or expected prices, but to guard against unexpected errors in forecasts.
Support for an ACCU vintage limitation also came from the Climate Markets Institute:
[Vintaging] is one of the discussions being had…in that, if we are to look at some limits, it may be easier to look at some vintage limits. That means you have a certain trailing period of previous years for ACCUs and potentially even SMC's that are available and some other models of five or seven years or so in that framework. That is one of the flexibility mechanisms and options that we think certainly should be considered.
Recommendation
Subject ACCUs, SMCs and any future use of international credits to rolling vintage windows of 3-year timeframe.
Transparency around the use of ACCUs
There was broad support for increased transparency around the creation and surrender of ACCUs and SMCs. The Grattan Institute noted that, at present, ‘the market for ACCUs currently lacks any real transparency and the market for Safeguard Mechanism Credits (SMCs) is yet to be introduced’. The Grattan Institute stated that:
To minimise demand for ACCUs from the cost-containment measure, the government should ensure delivery of the Australian Carbon Exchange currently under development by the Clean Energy Regulator, ideally well before the end of the first compliance year. The major benefits will be greater investor confidence and lower overall cost.
The ACF submitted that ‘transparency and removal of barriers to scrutiny will be critical to ensure the integrity of SMC creation and making relevant documents available will assist in ensuring accountability’ and subsequently stated:
ACF recommends that all documents relied upon for measurement determinations be freely available, and that none be excluded from public view due to paywalls or licensing requirements (which can be addressed). Further to this Bill, measurement determination requirements should be tightened to incorporate relevant international best practice reporting requirements with as much actual and verified measurement as possible. Emissions reduction claims, and even resulting generation of SMCs, should not be the result of broad estimation.
The ANU-UNSW Emissions Reduction Fund research team stated that these issues of transparency were so important that they ought to be legislated:
The Australian Government should ensure there is complete transparency in the operation of the scheme by enshrining comprehensive disclosure obligations in the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act). The Act should also be amended to provide public interest groups and others with standing to seek injunctions to restrain contraventions of the Act and judicial review of administrative decisions made under the Act.
Subsequently, the group called for transparency to be guaranteed:
Ensure the panel’s recommendations for greater transparency are fully implemented by including requirements in the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act) that mandate the disclosure of offset reports, audit reports, carbon estimation areas, any data submitted to evidence compliance with eligibility requirements and all data relied on by the proposed Carbon Abatement Integrity Committee in evaluating and endorsing methods. The offset registry should also be required to include details of the crediting periods for registered projects.
Increased transparency also gained support from industry. Ms Tania Constable, the CEO of the Minerals Council of Australia, told the committee that the MCA has ‘called for greater transparency across the [safeguard] mechanism as a whole’ and that transparency is ‘important for the [safeguard] mechanism for a whole range of reasons’. She went onto explain that the MCA’s member companies ‘embrace transparency and are participating in various transparency measures’.
It is my view that transparency is the only route to accountability and, accordingly, a carbon offset system that achieves genuine abatement. The annual publishing of the details of ACCUs and SMCs can only facilitate these ends, as will the publication of Corporate Transition Plans to ensure that practicable action is being taken.
Recommendation
Require the Clean Energy Regulator to:
Publish the details of ACCUs that are held and that have been surrendered by each facility, including project origin on a yearly basis; and
Publish new data on the Carbon Estimation Areas as often as practicable.
Recommendation
Amend the Carbon Credits (Carbon Farming Initiative) Act 2011 to provide for extended standing for judicial review.
More targeted and substantial financial support for manufacturing
Decarbonising the manufacturing industry is a substantial task and is particularly difficult in hard-to-abate sectors. Large capital investments will be needed, with the financing and other challenges often difficult to meet.
To support the transition for emissions-intensive, trade-exposed facilities, the government is proposing a ‘dedicated funding of an initial $600 million will be available under the Safeguard Transformation Stream of the Powering the Regions Fund to support decarbonisation activities’.
Mr Daniel Walton, the National Secretary of the Australian Workers Union, which represents workers in approximately three-quarters of the 215 safeguard facilities, explained that funding available under the Safeguard Transformation Stream needs to increase:
I don't think the $600 million that is being proposed to assist is going to go anywhere near the amount of money that's required to assist a lot of the businesses covered in that 215 lot. We're estimating that three to four times that money is going to be required because the scale of change is significant.
Similarly, Ms Jennifer Westacott, the Business Council of Australia’s CEO told the committee that ‘we think the $600 million is a starting point, and government needs to be open to increasing that amount over time…’.
Recommendation
Increase in the funding available through the Safeguard Transformation Stream of the Powering the Regions Fund.
The majority report did not go far enough in ensuring that the Safeguard Transformation Stream of the Powering the Regions Fund must only be used to support genuine decarbonisation projects. It must not be used to subsidise the fossil fuel industry, or to purchase ACCUs.
Lock the Gate Alliance expressed concerns that money from the Powering the Regions Fund which is supposed to be supporting regional workers and communities to take advantage of the opportunities provided by the clean energy transition, could be funnelled towards fossil fuel companies. Lock the Gate argued that, while the consultation paper for the PRF cites metals, critical minerals, chemicals and cement manufacturing as facility types covered by the Safeguard Mechanism, there is nothing in the paper that suggests that fossil fuel facilities would not be eligible to receive PRF payments like other sectors.
Likewise, Mr McFadzean from ACF, noted there had been significant gains in removing public funding for the fossil fuel sector and that the PRF should not be allowed to be used by the sector to purchase ACCUs:
If we're referring to access of the $600 million allocation in the Powering the Regions Fund, our view would be that that facility should not be allowed to access public money for the purchase of ACCUs, especially the fossil fuel sector. We welcome the federal government commitment thus far, as we saw in the last October budget, to begin to remove public funding for the fossil fuel sector. There were some significant gains there, and we wouldn't want to see a retrograde step where fossil fuel entrants we would like to see exit the Australian economy are able to access public funds in order to purchase access. That would be another subsidy to the fossil fuel sector.
The Grattan Institute echoed these concerns, arguing that the Powering the Regions Fund should not fund expansions of coal or gas use or extraction:
That's a recommendation that applies to any of these funds. While we don't see that the government should be banning new projects, the idea that any of those projects, be they coal, gas or oil, would be financially supported by government is absolutely not what we should be doing. In powering the regions, there are much more valuable things we can do if we're going to reorient our regions where many of the current carbon intensive jobs are. If we're going to reorient those regions towards those industries that will be future focused, we need to make sure we get the biggest bang for our buck—that is, not putting it into oil and gas.
Similarly, Mr Peter Grist, Principal Economist, Australian Chamber of Commerce and Industry, was of the view that the Powering the Regions Fund should be directed towards emissions intensive trade exposed industries.
The Smart Energy Council argued that the fund should be limited to zero emissions technologies of projects that will reduce emissions by at least 43 per cent by 2030, consistent with the Climate Change Act.
When questioned on whether the PRF required additional safeguards to avoid money passing to sunset industries, Mr Erwin Jackson, Director, Policy, Investor Group on Climate Change, argued that companies should be better financially incentivised to achieve zero emissions:
I think it would be quite helpful for the government to do a couple of things in that context. One would be to be very explicit about that. Another would be to make sure they establish a national just transition authority ... I think the biggest issue with the Powering Australia fund is that it's chump change, really. What we need to actually deliver is a strong market signal to those companies that, in the long term, they have to get to zero, which both sides of politics have agreed with—both major parties, sorry, have agreed with. We also need to send them a price signal to actually deliver that and provide them with the financial incentive to do so. The current design of the safeguard mechanism, we believe, overall, delivers that.
The Australia Institute pointed out that 74 per cent of covered facilities are already committed to reaching net zero, therefore an additional incentive (like SMCs) should not be required to encourage greater abatement if the facilities are owned or managed by companies that are already on a decarbonisation pathway.
Regarding Corporate Transition Plans, as was noted in the majority report,
Mr Erwin Jackson, Director, Policy, Investor Group on Climate Change, outlined the benefits of being made public, stating:
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.
Recommendation
Public funding to Safeguard Mechanism facilities should only be provided where it will support genuine business transformation to decarbonise operations. Access to the Safeguard Transformation Stream should be subject to the following restrictions:
Fossil fuel producers should be denied access;
Companies receiving funds must be prevented from using the funds to purchase ACCUs; and
Companies receiving funds must have a publicly available Corporate Transition Plan and complete annual reporting on the implementation of the plan. Such plans should include: what measures are being taken to reduce emissions, identification of verifiable and quantifiable KPIs which track the success of transition actions, and measures that will be taken to ensure transparency.
Proper treatment of methane under the Safeguard Mechanism
As noted in the majority report, methane is over 80 times more potent than carbon dioxide over a 20 period and it is causing massive climate harm. It is the second most abundant greenhouse, and is responsible for about one third of global heating since the Industrial Revolution.
The majority report also rightly notes that methane represents 26 per cent of Australia’s national inventory, with the fossil fuel industry accounting for 40 per cent of Australia’s methane emissions. The reasons for Australia to deal with its fossil energy methane problem are too compelling to ignore.
First, cutting energy sector methane emissions is one of the lowest hanging fruits on the path to decarbonisation. The International Energy Agency (IEA) has repeatedly emphasised that methane abatement can be done cost-effectively: they note that 75 per cent of methane emissions from oil and gas could be avoided using existing technologies, much of that with positive returns. And a 75 per cent reduction in OECD countries’ energy sector methane is also what the IPCC tells us is required to avoid the worst of climate change.
In Australia, analysis from S&P Global commissioned by the Environmental Defense Fund (EDF) found that:
…capturing the methane that is currently wasted by gas and oil companies operating in Australia through venting, flaring and other emissions would profitably provide around 2 billion cubic metres of additional gas to the market. This is around 2.5 times the east coast shortfall projected by the Australian Competition and Consumer Commission in January 2023 (of 30PJ).
Second, Australia is being left behind its competitors and trade partners on methane action, even though we are a major contributor to the problem. The majority report notes Australia's recent signing of the Global Methane Pledge, but Australia continues to lag behind.
Third, it’s simply unacceptable that fossil fuel companies can avoid disclosing to the Australian public their emissions of such an important greenhouse gas as methane. For the Safeguard Mechanism to work effectively, we need an accurate, transparent baselining of emissions. The IEA has raised concerns that Australian methane emissions could be more than 60 per cent higher than government estimates (and company reporting) suggest.
As set out by the EDF, there are three core actions that will set Australia up for cost-effective, rapid methane reductions to address these problems as part of the reforming the Safeguard Mechanism.
First, we must adopt international best practices into the National Greenhouse and Energy Reporting (Measurement) Determination 2008 by requiring coal, gas and oil facilities to conduct direct emissions measurement at both the source and site levels. This should integrate source and site level measurements reconciled using statistically-valid sampling, robust methane measurement technologies, and be consistent with global best practice such as the OGMP 2.0 framework for oil and gas and Metcoal Methane Partnership standards for coal.
Second, reflecting the government’s proposal to integrate international best practice emissions intensities into Safeguard baselines, the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 should be updated to require fossil fuel baselines to meet the global best practice.
These are not radical proposals—the Committee heard from both of the gas companies appearing at the hearing, Woodside and INPEX, that they are confident in their methane reporting accuracy and, in Woodside’s case, that their methane emissions are 0.1 per cent of marketed gas.
Similarly, the Minerals Council of Australia described the extent of methane reporting in Australia:
…we may be one of the only countries in the world that reports on both open cut and underground. All of our underground is reported based on measurement. With open cut it is more difficult but we're seeing more and more mines reporting open cut on methods 2 and 3.
Our legislation needs to keep up with what companies are telling governments and investors that they are already achieving.
And third, given the importance of abating such a potent greenhouse gas, and the opportunity for methane abatement to actually relieve domestic price pressures on energy for Australian families and businesses, the Safeguard Mechanism must limit methane to being tradeable only with other methane, and not being offset with ACCUs. Companies must be prevented from simply buying offsets of lower greenhouse-potency carbon credits to avoid dealing with their methane emissions. Our legislation must set Australia up for rapid, cost-effective and real methane reductions.
Recommendation
Bring methane emissions reporting and methane intensity targets into line with international best practices.
Recommendation
Methane abatement from Safeguard-covered facilities should only be tradeable with methane emissions of other Safeguard-covered facilities, and should be confined to the Safeguard Mechanism Credit market, not the Australian Carbon Credit Market.
The absence of key information
The government has claimed public interest immunity and so has not provided the modelling of ACCU usage as a proportion of total abatement under the Safeguard Mechanism reforms. This makes the consideration of key aspects of the Safeguard Mechanism and the bill far more difficult.
In considering the integrity of ACCUs created under the HIR method, it would have assisted to have Carbon Estimation Areas available for public scrutiny.
Recommendation
The modelling of ACCU usage as a proportion of total abatement under the reform of the Safeguard Mechanism; and
Carbon Estimation Area data.
Senator David Pocock
Participating Member