Australian Safeguard Mechanism - Key Reform Features
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The Australian Safeguard Mechanism (ASM) is a national policy established through the National Greenhouse and Energy Reporting Act 2007 (Cth) that aims to reduce greenhouse gas emissions from Australia's largest emitting facilities. The ASM was introduced in 2016 and applies to facilities that emit more than 100,000 tonnes of carbon dioxide equivalent (CO2-e) per year. It presently covers approximately 215 of the highest emitting facilities typically in the mining, oil and gas production and processing, manufacturing and transport and logistics sectors.
The ASM operates by setting a limit on the total amount of emissions that a facility can emit, called an emissions baseline. The person with operational control of a covered facility is required to manage its net scope 1 emissions so as not to exceed the emissions baseline set for the facility. Greenhouse gas emissions may be managed directly through abatement or indirectly via carbon credits that offset emissions. Failure to manage emissions leave a responsible emitter open to a number of discretionary enforcement options at the hands of the Clean Energy Regulator (CER) (including civil penalties up to $2.75million).
In March 2023, the Australian Government announced that it had brokered a deal with the Greens to implement major reform to the ASM through the Safeguard Mechanism (Crediting) Amendment Act 2023 (Cth).
Key Features of the new Australian Safeguard Mechanism
The following is a summary of key aspects of the reforms which take effect on 1 July 2023:
- Reduction in baselines: Most covered facilities will be required to reduce their net greenhouse gas emissions (i.e., their baselines) by 4.9 percent each year until 2030. This aligns with the trajectory for reducing Australia’s net greenhouse gas emissions to 43% below 2005 levels by 2030 established by the Climate Change Act 2022 (Cth). An initial fund of $600MM will be available to support decarbonisation activities of trade exposed facilities, with further relief provided for facilities that are particularly vulnerable to carbon leakage through a reduced annual decline of their baselines (but not less than 2% per annum).
- Hard cap: The ASM will impose a ‘hard cap’ of 1,233 million tonnes of CO2-e for all financial years between 2020 and 2030. If the ‘hard cap’ is breached the Minister for Climate Change must review the effectiveness of the ASM and consider whether any further changes are required to keep Australian on track to meet its climate change objectives.
- Baseline calculation: The baseline calculation will adopt a hybrid approach for how baselines are calculated, using a formula that weights site-specific and industry-average emissions intensity before transitioning to industry average levels by 2030. New facilities will have their baselines et by reference to international best practice adapted to the Australian context, emissions intensity benchmarks. The framework for this calculation model is still being developed. This means that the baseline for each covered facility will be calculated based on a combination of its own emissions intensity and the emissions intensity of other facilities in its industry.
- Price cap on ACCUs: The Australian Government has committed to a $75 price cap (until 2026-27) for all government held ACCU’s, indexed at 2% per annum. This provides covered facilities some certainty about the cost of the ASM in the early years of the new model. However, where facilities use ACCUs and SMCs (see below) to offset more than 30% of their emissions they will be required to provide a report on why more abatement is not being achieved in respect of the facility.
- Trading abatement – Safeguard Mechanism Credits: The ASM will allow covered facilities to generate and trade Safeguard Mechanism Credits (SMCs), which can be used to offset emissions. SMCs are created when a covered facility reduces its emissions below its baseline. Covered facilities can then trade these credits with other facilities that need to offset their emissions.
Summary
The Australian Safeguard Mechanism is a national policy that aims to reduce greenhouse gas emissions from Australia's largest emitting facilities. The ASM has been credited with reducing Australia's emissions by an estimated 20 million tonnes of CO2-e since it was introduced. The Australian Government has also committed to increasing the ambition of the ASM in the future.
The reform of the ASM is expected to make the ASM more effective and efficient, and to ensure that it is consistent with Australia's international climate commitments.
The ASM has a number of benefits, including reducing greenhouse gas emissions, creating a market for carbon credits, providing funding for low-emissions projects, driving innovation in low-emissions technologies, and helping Australia meet its international climate commitments.
The ASM also faces a number of challenges, including the cost of compliance, complexity, enforcement, and making Australian industries uncompetitive on the international stage.
Despite these challenges, the ASM is an important policy that is helping Australia reduce its greenhouse gas emissions.
For more information or to have a confidential discussion about the implications of the Australian Safeguard Mechanism contact James Bruining or Yvonne Jansen at Grondal Bruining
Phone: +61 8 6500 4300
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