Government's Safeguard Mechanism reforms get the green light

Key takeaways 5 min read

• Parliament has passed the Government's long-anticipated Safeguard Mechanism reforms following a watershed Labor-Greens deal.
• The new reforms include a cap on overall net carbon emissions through to 2030 and a so-called 'pollution trigger' engaged by EPBC approvals.
• Further details will emerge in subordinate legislation set to be finalised in the coming month.

Amendments to the Safeguard Mechanism scheme

Following extensive negotiations, 30 March 2023 saw the passage of the Safeguard Mechanism (Crediting) Amendment Act 2023 (the Act) through both Houses of Federal Parliament, legislating concrete action toward the Government's plan to cut Australia's carbon emissions by 43% by 2030.

Alongside the Act, the Government expects to finalise the revised Safeguard Rules in the coming month to effect the reforms before launching the scheme on 1 July 2023.¹

An Allens Insight published in January 2023 looked into the then-architecture of the Safeguard Mechanism scheme based on the Government's position paper. Among other things, we provided an update on the proposed methodology for calculating emissions baselines for Australia's top emitting facilities covered by the Safeguard Mechanism regime, and outlined the scheme's new tradeable carbon credit—the Safeguard Mechanism Credit (SMC)—to be administered by the Clean Energy Regulator.

Given the opposition's resistance to the reforms, Government relied on extensive negotiations with the Greens to secure the passage of the Act. In this Insight, we focus on the key amendments to the Safeguard Mechanism scheme's architecture that brought the reforms over the line.

Emissions cap is set

A consistent feature of the Government's proposed reform package has been the setting of emissions baselines for the 215 or so highest-emitting facilities in the resources and industrial sectors. Those baselines will be ratcheted down annually in line with Australia's climate goal to reduce national emissions to 43% below 2005 levels by 2030, and to achieve net zero emissions by 2050. In previous iterations of the Safeguard Reforms, however, there was no overall legislated cap on emissions from facilities covered by the scheme.

In a significant step, the Act introduces a hard cap on overall net carbon emissions through to 2030. The cap will be set in the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act). This will establish an overall carbon budget of 1,233 million tonnes CO₂-e for the decade through to 30 June 2030, and limit emissions for the financial year beginning 1 July 2029 to 100 million tonnes CO₂-e. The Act also sets a cap of net zero tonnes CO₂-e for any financial year beginning after 30 June 2049. The NGER Act also now specifies that the five-year rolling average safeguard emissions for each financial year from 30 June 2024 must be lower than the applicable 'past five-year rolling average safeguard emissions' for that financial year.

The 'five year rolling average' for a financial year will be one-fifth of safeguard emissions for the previous five financial years. The 'past five year rolling average' will be one-fifth of safeguard emissions for the five financial years ending three years before the current financial year (through to 30 June 2026). This will thereafter be one-fifth of the safeguard emissions for five financial years ending two years before the current financial year. This mechanism allows flexibility in overall emissions from year to year, but forces an overall downward trajectory in emissions between the point-in-time emissions targets.

The Greens have claimed that this cap will prevent at least half of proposed coal and gas projects from going ahead,² though a number of proponents have disputed this assertion.³

It is pertinent to note that the Safeguard Mechanism is confined to regulating scope 1 emissions, capturing the majority of emissions at some industrial facilities, but capturing a small proportion of overall emissions in the mining and oil and gas extraction sectors, where scope 3 emissions typically constitute the majority of emissions.

Pollution trigger

In a substantial development that seeks to preserve the emissions cap, the Act amends the Climate Change Act 2022 (Cth) to include a so-called 'pollution trigger'.

Where the Minister for Environment and Water grants an approval under the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act) to a new or expanded Safeguard facility, the Minister will be required to give an estimate of the facility's scope 1 emissions to the Minister for Climate Change, the Climate Change Secretary and the Climate Change Authority. The Minister for Climate Change will then be required to undertake public consultation regarding whether the Safeguard Rules require amendment and, if necessary, correspondingly amend the Safeguard Rules, which we expect may involve tightening baselines amongst covered facilities.

This is a significant development. Successive governments have resisted pressure to introduce a climate trigger into the EPBC Act, a concept that has been on the national radar since 1999—the year the Act was first passed.

The new provisions will not establish a true climate trigger in that it will not impact the Minister for Environment and Water's decision-making under the EPBC Act at a project level, nor will they specifically establish a legislative regime for the assessment of climate impacts at a project level. However, the consultation trigger will set the stage for public (and ministerial) scrutiny of new proposals with material scope 1 emissions, and their impact on the country's overall emissions trajectory. 

Offset justification

The Government has emphasised that, in the interests of industry flexibility, the Safeguard reforms do not seek to limit Safeguard facilities' use of Australian Carbon Credit Units (ACCUs).⁴ However, where facilities rely on offsets to meet more than 30% of their emissions reductions requirements, they will be required to justify their reason for doing so to the Clean Energy Regulator. The Government's press release cites cost and availability of technology as example justifications.

Details of the offset justification process are not included in the Act, so we anticipate these will appear in the April Safeguard Rules. It remains to be seen whether this process will have teeth; whether the 30% threshold includes SMCs (it appears from the above press release that this is likely not the case); and the extent to which the threshold will pose any challenge to Safeguard facilities—given that modelling has already forecasted 74% of emissions reductions to be derived from on-site reduction projects by 2030.⁵

Zero reservoir carbon

As noted in our January Insight, emissions baselines for new facilities will be calculated using 'international best practice'.

The reforms will involve treating new gas fields that supply extant Safeguard facilities as new facilities, thus subjecting them to the requirement to meet international best practice baselines.

For new gas fields' reservoir carbon emissions, best practice will be deemed to be zero net greenhouse gas emissions. Again, we expect this will be reflected in the April Safeguard Rules. Given the carbon intensity of gas reserves across the country varies significantly, the impact of the reforms will differ widely between gas extraction proponents. For example, the CO₂ content of gas at prominent projects across Australia reportedly ranges from around 0.5% to 18%, resulting in a significantly varied abatement and/or offset burden between projects.

The requirement for net zero reservoir carbon, combined with the benchmark expectation that no more than 30% of emissions reductions be achieved through offsetting, suggests that carbon capture and storage is likely to be a significant element of the abatement solution for those oil and gas projects that do proceed. 

Next steps

While monitoring for the release of the revised Safeguard Rules, organisations can:

• commence exploring the known aspects of the Safeguard Mechanism reforms on existing facilities and project proposals;
• update compliance frameworks (eg legal compliance registers and environmental management systems) to account for new incoming obligations;
• update due diligence frameworks to address new, material obligations;
• explore the interaction between the Safeguard Mechanism reforms and any emissions abatement obligations under state and territory laws;
• consider the potential implications of the Safeguard Mechanism ratchet down mechanism on new contractual arrangements going forward, including potential cost pass through clauses;
• explore opportunities to abate emissions to contribute towards safeguard compliance, noting in particular the need to justify more than 30% of emissions abatement being achieved via carbon offsets; and
• develop offset acquisition and/or generation strategies to underpin compliance when the ratchet down mechanism commences.

Please contact any of the people below if you need advice, or require more information about these and/or other aspects of the reforms.