Managing excess emissions situations under the reformed Safeguard Mechanism

Introduction

Australia has legislated targets to reduce net greenhouse gas (GHG) emissions to 43% below 2005 levels by 2030, and to reduce net GHG emissions to zero by 2050. A key component of Australia’s plan to reduce GHG emissions in line with the 2030 target is the reformed Safeguard Mechanism. It seeks to contribute to the emissions reduction task by setting decreasing emissions baselines for certain large GHG emitting facilities.

The Safeguard Mechanism applies to all facilities that emit more than 100,000 tonnes carbon dioxide equivalent (CO2-e) of covered emissions in a financial year. Currently 219 facilities are covered by the Safeguard Mechanism, responsible for 138.7 million tonnes CO2-e or 29% of Australia’s emissions. The Safeguard Mechanism therefore plays a significant role in the emissions reduction task.

In 2023 reforms were introduced that required facility baselines to reduce by 4.9% per year until 2030 in most cases.¹ The 2023-24 financial year was the first monitoring period this reduction applied to.

This article considers the flexibility methods available for managing a situation where GHG emissions from a Safeguard Mechanism facility exceed the baseline for that year (known as an excess emissions situation).

Summary of relevant deadlines

A facility’s baseline

Currently, facility baselines are set in several ways. The electricity generation sector has a sectoral baseline which measures the total emissions from all grid-connected electricity generators. Other facilities have their baselines determined annually by the Clean Energy Regulator (CER) based on that facility’s production multiplied by an emissions intensity value.

For existing facilities covered by an emissions intensity determination, their baselines will transition from emissions intensity measured for the facility to industry-average values based on average Australian industry emissions performance. This will occur gradually between now and 2030.

In August 2024, the National Greenhouse and Energy Reporting Legislation Amendment (Best Practice Emissions Intensities Update) Instrument 2024 came into force, aligning the emissions intensity values for new facilities and new processes to international best practice.

Existing facilities with existing production may still apply annually for a determination of their emissions-intensity.² Applications to the CER for an emissions intensity declaration for the 2024-2025 financial year are due by 31 October 2024. If an application is not made, emissions-intensity variables will default to international best practice values.

What happens if a facility is going to exceed its baseline?

The first decline in baselines of 4.9% applied to financial year 2023-2024. The Safeguard Mechanism requires all covered facilities to ensure their emissions do not exceed the baseline for each monitoring period (a monitoring period being a financial year unless a multi-year period has been declared).³ Failure to keep emissions below the baseline can result in a penalty of $275 for every tonne of excess emissions over the baseline.⁴

However, the Safeguard Mechanism reforms included a series of mechanisms to allow facilities to meet their emissions obligations in flexible ways. The following sets out how facilities can use flexibility mechanisms to manage an excess emissions situation.

Surrendering ACCUs and SMCs

Facilities can manage an excess emission situation by surrendering an equivalent CO2-e amount of Australian Carbon Credit Units (ACCUs) to the CER.⁵ These can be purchased from a number of sources, including the developer of an ACCU project, the secondary market via a bank or broker, or from the CER. Where a facility seeks to surrender ACCUs exceeding 30% of their baseline emissions number, a written explanation containing certain information will need to be supplied to the CER.⁶

In anticipation of the first compliance date since the reforms were passed, purchasing activity of ACCUs has significantly increased and there is likely to be ongoing interest in securing ACCU volumes by Safeguard Mechanism facilities. It is expected that given the current spot price is around $35 and the CER will only sell ACCUs at a set price of $75, there will be no purchases from the CER in the first compliance year.

The Safeguard Mechanism also allows for Safeguard Mechanism Credit Units (SMCs) to be used to meet compliance obligations.⁷ SMCs are credits generated by facilities that produce emissions that are less than their baseline for a given year. Facilities can bank SMCs to use for future monitoring periods or they can be sold to other covered facilities to use to meet their obligations. SMCs were created as part of reforms in 2023⁸ and are unlikely to be generated until early 2025.

To count against the 2023-2024 financial year monitoring period, ACCUs and SMCs will need to be surrendered to the CER by 31 March 2025.

Trade-Exposed Baseline-Adjusted (TEBA) declaration

The Safeguard Mechanism provides protections for trade-exposed businesses to ensure that they remain competitive by reducing the baseline decline rate for up to three years. A trade-exposed facility is one that has exceeded its baseline, has a primary production variable listed in Schedule 2 of the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015, and has suffered a cost impact above a certain threshold.⁹ Where this has occurred, a facility can apply to the CER for a TEBA declaration to reduce that facility’s baseline in a manner that aims to offset the trade impact.

Applications for TEBA declarations in relation to the 2023-2024 financial year must be lodged with the CER by 31 October 2024.

Baseline borrowing

A facility may also apply to borrow up to 10% of its baseline for the next financial year.¹⁰ Borrowing from the next financial year will result in a steeper baseline decline for the next financial year and will incur 2% interest for the 2024-25 and 2025-26 financial years and 10% interest thereafter.¹¹ This may be advantageous in certain scenarios, for example where a capital upgrade to reduce emissions is due in the next financial year.

Applications to claim baseline borrowing in relation to the 2023-2024 financial year must be submitted to the CER by 28 February 2025.

Multi-year monitoring period (MYMP) declaration

The declaration of a MYMP allows a facility flexibility to make emissions reductions at an alternative pace. The facility will still need to achieve reductions equal to the total it would be required to make across the consolidated years (up to 5) and will need to show on its application that it has a credible plan to achieve the reduction over this period.¹²  A failure to meet the MYMP can still be remedied through the surrendering of ACCUs and SMCs.¹³ If a MYMP is applied for over a period for which a borrowing adjustment declaration was made, that declaration will be revoked.

Applications for a MYMP to extend the 2023-2024 financial year must be lodged with the CER by 15 November 2024.

Exemption declaration

There are limited circumstances in which the CER may exempt a facility from complying with its baseline obligations. These are limited to where an exceedance is a direct result of a natural disaster or criminal activity.¹⁴

Applications for an exemption in relation to the 2023-2024 financial year must be submitted to the CER by 31 October 2024.

Looking ahead

The flexibility arrangements under the Safeguard Mechanism will be reviewed in 2026-27 with a view to considering whether they should be extended beyond 2030. Currently a MYMP declaration cannot be made or extended beyond 2030.¹⁵ Whether banking and borrowing will be permitted beyond 2030 will also be the subject of this review.

In addition, the final report of Australia’s Carbon Leakage Review is due imminently. This report considered the TEBA mechanism as part of its scope. The results of these reviews may feed into the Australian Government’s Net Zero 2050 plan, currently under development, which aims to build upon existing policy programs such as the Safeguard Mechanism to produce an economy-wide emissions reduction plan.

How can we assist you?

If you would like more information on the Safeguard Mechanism or in managing an excess emissions situation, please contact a member of our climate change and sustainability team.