by Jasmin Arnell-Smith, Michelle Bennett, Naomi Bergman, Jillian Button, Caitlin Dagher, John Hedge, Leighton O'Brien, Paige Pittorino, Jacqui Rowell, George Salter, Tom St John
Decarbonisation and the pathway to net zero
The Federal Government has committed to various initiatives to decarbonise our national economy and support the energy transition. In 2022, Australia's greenhouse gas emission reductions targets were legislated under the Climate Change Act 2022 (Cth), including achieving a 43% reduction in Australia's 2005 emission levels by 2030. To achieve these targets, the Government is developing six key sectoral decarbonisation plans, including for the electricity and energy sectors, with the ultimate goal of reaching net zero emissions by 2050.
In addition to regulating and reducing emissions, governments around the world, including in New Zealand, the United Kingdom and Singapore, are moving at pace to implement reporting regimes that require internationally aligned, climate-related financial disclosures from certain companies. With Australia's own mandatory climate disclosure regime set to be phased in from 2025, many businesses will need to prepare for greater transparency and accountability as to their climate-related information.
Companies, across all sectors, are increasingly looking for green energy solutions to deliver on their own carbon-reduction commitments. Critical minerals are also set to play a central role in facilitating the energy transition, and the Government's recently published Critical Minerals Strategy 2023–30 aims to position Australia as a leading clean energy player. However, ensuring that mineral production and processing decarbonises in an efficient and effective manner presents some challenges given the conventional reliance on diesel haulage fleets and remoteness from the grid, often making electrification a challenge and requiring transportation of products over significant distances.
Electricity buyers should be well underway in preparing for detailed emissions reporting that align with their stated carbon reduction goals. Developers, too, face increased scrutiny under the Safeguard Mechanism and need to integrate decarbonisation into their projects to secure funding. Investors must adapt to new reporting standards and explore opportunities in carbon abatement and renewable technologies while staying aware of emerging trends like carbon border taxes and low-carbon product premiums.
What's the challenge?
Mandatory climate-related financial disclosure regimes are now up and running in several jurisdictions, including the European Union, the United Kingdom and New Zealand. The specific disclosure requirements of each regime vary, meaning multinational entities may find themselves grappling with the need to report simultaneously under several similar, but nonetheless inconsistent, frameworks.
Meeting these increased demands across a variety of regimes will require significant capacity and capability building within organisations and across service sectors, including as to emissions reporting and accounting, climate risk assessments and assurance.
In Australia, the Government introduced the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) (the Bill) to Parliament on 27 March 2024. As at 22 August, the Bill is currently before Parliament. If passed, Schedule 4 will introduce Australia's first mandatory climate-related financial reporting regime, which will require entities that meet statutory sustainability reporting thresholds to report and maintain records regarding climate-related financial risks and opportunities.
The specific content of disclosures is being developed by the Australian Accounting Standards Board, with draft standards (ASRS 1 and 2) indicating that this will include greenhouse gas emissions, climate-related governance, climate risk management and emissions reduction targets. The obligations to make climate-related financial disclosures will be civil penalty provisions similar to the current financial disclosure requirements under the Corporations Act 2001 (Cth).
Separately, although initially subject to modified liability, entities will also be required to report on scope 3 emissions. Entities should begin to develop an understanding of the third-party data currently accessible to them and identify information gaps for the purposes of scope 3 emissions reporting. To do so, they can develop a scope 3 data collection strategy, and consider taking steps to agree with third parties' contractual arrangements regarding data provision in advance of the Australian regime commencing.
Australia has had to contend with a myriad of policy challenges and regulatory dilemmas on its path to net zero, and chief among them is the complexity of tapering the nation's emissions profile without jeopardising the financial viability of new and existing facilities. Policymakers are busy with major overhauls to Australia's climate policy framework (eg recent changes to the operation of the Safeguard Mechanism) that seek to address the concerns of industry stakeholders while also satisfying the overwhelming public desire for a rapid decarbonisation of Australia's economy.
In many industries—particularly those in remote areas, such as mine sites—the default power sources have been diesel and gas. The economic imperative of ensuring the continuity of operations in all circumstances (ie the ability to run operations 24/7) meant that the lowest-risk and most reliable power solutions were adopted. However, with many companies increasingly focused on decarbonisation and the need to manage their exposure to volatile energy prices (particularly for diesel and gas), renewable sources of power are increasingly being sought.
The transition from fossil fuels to renewable sources of power will be complicated (and will, invariably, be linked to governments' ability to fund and execute network changes), requiring multifaceted solutions that allow companies to reduce their carbon footprint while maintaining power security.
What's happening now?
As of 15 May 2024, the Bill has been referred to the Federation Chamber for consideration and reporting. It must then pass the House of Representatives and proceed through the Senate before it becomes law. The Bill is before Parliament at time of publishing. Reporting for Group 1 entities is slated to begin from the first financial year that commences after 1 January 2025, followed by reporting for Group 2 entities (for financial years commencing after 1 July 2026), and Group 3 entities (for financial years commencing after 1 July 2027). Entities should review the reporting thresholds to ascertain their applicable reporting group.
First introduced in 2016 as a pillar of Australia's climate change policy, the Safeguard Mechanism establishes site-specific emissions baselines for the country's highest-emitting facilities in the resources and industrial sectors. As of July 2023, the Safeguard Mechanism underwent significant reforms, imposing a 4.9% year-on-year reduction of each covered facility's emissions baseline up to 2030 (with a slightly lower rate of decline after 2030), legislating a 'hard cap' on emissions from around 215 covered facilities, and introducing a new emissions credit and offset mechanism for facilities with annual emissions below their baseline (known as a Safeguard Mechanism Credit (SMC)).
While the implications of the annual ratcheting down of emissions baselines remain to be seen, we expect there will be growing opportunities for businesses offering compliance-driven, carbon-abatement strategies and carbon offsets, in addition to consequences for contracting and trading in existing carbon offset markets as a result of the introduction of SMCs.
The key things happening at a federal level to support and/or encourage decarbonisation of various sectors are:
- The Government's National Reconstruction Fund will support the energy transition, with $1 billion earmarked for 'value-add in resources', and $3 billion earmarked for 'renewables and low emission technologies' priority areas.
- The Clean Energy Finance Corporation, Australian Renewable Energy Agency and Northern Australia Infrastructure Facility are playing leading roles in accelerating investment in decarbonisation, through project finance, debt market solutions such as green bonds, and equity instruments.
- The Australian Securities and Investments Commission has emphasised company directors' responsibility to ensure appropriate governance structures, with reliable and useful information being disclosed, while warning against 'greenwashing'.
The development of an internationally aligned framework to track and verify emissions from clean energy products has been in the works since 2021, in part driven by the emergence of the hydrogen market as a potential path to decarbonising various Australian industries. These efforts have culminated in the proposed introduction of the Guarantee of Origin scheme: a landmark proposal that will provide a mechanism to verify emissions associated with hydrogen and other low-emissions commodities produced in Australia.
In addition, the planned introduction of the Renewable Energy Guarantee of Origin Certificate opens the door for an ongoing renewable energy certificate framework designed to support the ongoing energy transition. This is especially relevant, given the Renewable Energy Target scheme is due to sunset in 2030 and take with it the large-scale generation certificates created by eligible generators under that scheme. With policy consultation and trial workshop phases now in the rearview mirror (and $38.2 million allocated to the creation of the scheme in the 2023–24 Federal Budget), the Government is developing the legislation and methodology, with a view to commencing the scheme's operation in 2024.
What's next?
Climate reporting and mandatory disclosure
Many large electricity buyers and users are already subject to emissions reporting requirements under the National Greenhouse and Energy Reporting Act 2007 (the NGER Act); however, the proposed regime will require far wider and more granular disclosures of climate-related information. The NGER Act will operate alongside the proposed regime, and inform scope 1 and 2 emissions accounting methodologies. Some entities will trigger both mandatory climate reporting and NGER Act reporting, and may find that their reporting periods differ if they have a financial year that differs from the NGER reporting year.
Safeguard Mechanism
Facilities captured by the Safeguard Mechanism should be proactive in pursuing carbon abatement strategies, and ensure reporting and compliance policies are up to date, particularly as the Clean Energy Regulator's remit continues to grow.
For large electricity buyers, the short-term outlook is still relatively uncertain. Emissions in connection with electricity generation are only subject to an overall sectoral baseline, rather than a prescribed baseline for each facility. It is theoretically possible, but in our view unlikely, that the Government will expand the Safeguard Mechanism to impose a carbon cost on the electricity sector.
Decarbonation and green energy solutions
Large electricity buyers should be acting now to ensure they meet their carbon reduction targets.
Carbon-related challenges and consequences can impact project financing/refinancing, access to government grants, and future plans to expand operations or change load profiles. The fundamental task is ensuring that the decarbonisation strategy and green energy solution fit into a project's broader strategic plan.
These issues are complex and time consuming, and a fertile area for delay. Ensuring all internal and external stakeholders are on board early, and brought along on the decarbonisation journey, is vital to ensuring those targets are met.
Climate reporting and mandatory disclosure
Developers may find that investors and offtakers require them to produce additional data to satisfy their mandatory disclosure requirements. For example, they may wish to understand how a renewable energy project is preparing to mitigate climate-related physical risks, to avoid interruptions to supply or asset impairments. Fossil fuel energy projects are likely to attract significant scrutiny from investors on the management of climate-related transition risks.
Safeguard Mechanism
Developers should be cognisant of the so-called 'pollution trigger' under the Safeguard Mechanism bringing increased scrutiny of the emissions profile of a new or expanded safeguard facility. This is because it requires the Government, in deciding whether to grant approvals, to consider and undertake public consultation on the development's estimated carbon emissions. New facilities (or existing facilities that begin producing new products) will have emissions baselines set by reference to 'international best practice levels' adapted for an Australian context. The guidelines for assessing international emissions benchmarks are presently under development.
Decarbonation and green energy solutions
Access to capital to facilitate investment remains a central challenge. Financial institutions are increasingly rewarding decarbonisation with access both to equity and debt finance. Project proponents should view decarbonisation and renewable energy solutions as potential drivers of future value, and not simply as appendages to a larger product.
Australian mining companies increasingly rely heavily on a 'social licence' to operate. Proponents should be aware that emissions (and abatement) are now regarded as presenting real reputational risks. Natural resources companies need to have a clear plan to decarbonise – a failure to do so risks reputational consequences, with lasting economic consequences.
Climate reporting and mandatory disclosure
Investors that are not currently voluntarily reporting climate-related information may require significant and expedited uplift to comply with the incoming Australian reporting requirements. We suggest investors conduct a gaps analysis between current reporting practices and likely disclosures under the new regime, to identify and plan for uplift.
Private capital investors with exposures overseas may also need to navigate overlapping—and, in some cases, inconsistent—reporting requirements between Australia and other jurisdictions.
Safeguard Mechanism
Investors should consider available opportunities in the market for carbon abatement and offset services, as Safeguard Mechanism facilities will be on the lookout for strategies to contend with declining emissions baselines. We are seeing an active M&A market for carbon aggregators and an increased interest in utility-scale battery storage, as well as increased demand in the ACCU market.
Decarbonation and green energy solutions
Discussion of the emergence of pricing premiums for clean, low-carbon products (eg gold) has been building. Investors should be aware that commodities could increasingly be priced according to how they were produced, as would be the case under the proposed introduction of the Guarantee of Origin scheme.
Investors should also be aware that carbon border taxes are being proposed in various jurisdictions to facilitate the transition away from fossil fuels.