Australian Government locks in final details of the Safeguard Mechanism reforms

Reformed Safeguard Mechanism set to launch on 1 July 2 min read

The Government has released its slate of detailed subordinate legislation that will support the reformed Safeguard Mechanism scheme.¹ This means the Government has now issued the full suite of initial Safeguard Mechanism reforms set to launch on 1 July 2023.

Regulating Australia's highest-emitting facilities in the resources and industrial sectors, the reformed Safeguard Mechanism seeks to contribute to Australia's climate goal to reduce national emissions to 43% below 2005 levels by 2030, and to achieve net zero emissions by 2050.

In this Insight, we consider the key mechanics clarified by the newly released Revised Safeguard Rules, with a focus on the National Greenhouse and Energy Reporting (Safeguard Mechanism) Amendment (Reforms) Rules 2023 (NGER Amendment Rules), and discuss broader issues for companies to keep in mind as the Safeguard reforms become part of day-to-day business.

Key takeaways 

• Companies should keep broader opportunities and compliance issues in mind as the Safeguard Mechanism reforms come into force from 1 July 2023.
• The reforms confirm technical detail on how emissions baselines will be calculated and the narrow protections available to trade-exposed, production-adjusted facilities.
• The new Safeguard landscape is likely to bolster investment in emissions reduction processes and technology, and will stimulate a significant source of new demand for Australian Carbon Credit Units (ACCUs).
• With confirmation that offset justification statements will be published online, companies relying on offsets to meet 30% or more of their emissions reduction requirements will need to keep misleading and deceptive conduct risks front-of-mind.

Revised Safeguard Rules

The Revised Safeguard Rules are broadly in keeping with the Safeguard Mechanism proposals and amendments that have been progressively sketched out since August 2022, and confirm technical detail on how emissions baselines will be calculated against a production-adjusted (intensity) framework and ratcheted down over time.² This January 2023 Insight and this April 2023 Insight looked into the architecture of, and key green amendments to, the Safeguard Mechanism reforms.

The release of the Revised Safeguard Rules has provided further clarity on key aspects of the Safeguard Mechanism scheme that were not captured in March's Safeguard Mechanism (Crediting) Amendment Act 2023.

• Declining baselines: The pathway to net zero is established for most covered facilities via declining emissions intensity baselines (targets) using a combination of two levers. First, facilities will be subject to a 'blended average' baseline of both facility-specific emissions intensity and industry-wide default emissions intensity, where the (usually more generous) facility-specific emissions intensity has a 90% weighting in FY 24, but this declines quickly to be 20% in FY 29 and nil thereafter. Second, the default emissions intensity itself reduces by 4.9% each year (and by 3.3% from FY 31).
• Offset justification: The NGER Amendment Rules confirm that, where a Safeguard facility relies on offsets from ACCUs to meet 30% or more of its emissions reduction requirements, it will be required to submit a written explanation to the Clean Energy Regulator on why more carbon abatement was not undertaken.³ Relevantly, this 30% offset threshold does not include Safeguard Mechanism Credits (SMCs), being the new form of carbon unit that can be traded between Safeguard facilities. Written statements should address whether limitations in available technologies and other barriers (including regulatory barriers) affected the level of carbon abatement at the facility, and consider future opportunities for carbon abatement.⁴ The statement will be published on the Clean Energy Regulator's website, excluding any commercially sensitive information identified by the facility.⁵
• Reservoir carbon emissions: In our April Insight, we noted that new gas fields—including new gas fields supplying existing Safeguard facilities—will be required to meet the international best practice requirement of zero reservoir carbon emissions. The NGER Amendment Rules define reservoir carbon dioxide from new gas fields, and clarify that 'new gas fields' are those that did not undertake commercial hydrocarbon extraction before 1 July 2023.⁶ Further, the NGER Amendment Rules confirm that the default and best practice emissions intensity—being inputs into the formula for calculating emissions baselines—for reservoir carbon dioxide from new gas fields is zero.⁷ In practice, this means that Safeguard facilities supplied by new gas fields will have lower emissions baselines than they would otherwise.⁸
• Trade exposed entities: The Revised Safeguard Rules establish a fairly narrow set of protections for trade-exposed, baseline-adjusted (TEBA) facilities. Facilities in a qualifying sector (listed in the Rules) may apply for a higher TEBA baseline and lower baseline decline rate, provided they are subject to a 'material' carbon cost. This is defined as 3% of earnings before interest and tax for manufacturing facilities and 3% of revenue for all other sectors. As a result, it is likely that many trade-exposed facilities will not qualify for a TEBA adjustment for several years, when a combination of declining baselines and increasing carbon prices mean they will satisfy the materiality test.

Business in the new Safeguard landscape

As businesses prepare for the reformed Safeguard scheme to come into play, a number of broader issues and opportunities should be kept in mind.

• Market demand: The Safeguard Mechanism's resetting and annual decline of baselines against a hard emissions cap is likely to significantly increase market demand for ACCUs. This, in turn, will likely drive investment in emissions reduction processes and technology to generate and trade in ACCUs and SMCs. As the suite of Safeguard reforms has now been finalised, companies should be in a position to model the number of ACCUs/SMCs that they likely require from year to year, in light of any relevant internal carbon offset acquisition strategies.
• Offset justification and climate reporting: The offset justification statement described above represents an additional layer of compliance for facilities relying on ACCUs to meet 30% or more of their emissions reduction requirements. Facilities' offset narratives will interact with companies' voluntary and mandatory climate reporting obligations. This space is continually developing, particularly with the rapid growth of customer and investor expectations of corporate alignment with the Task Force on Climate-Related Financial Disclosures and the Government's proposal for mandatory climate-related disclosures.⁹ As Australian regulators and activists continue to crack down on greenwashing, companies will further need to keep misleading and deceptive conduct risks front-of-mind when framing offset justification statements.
• Other compliance issues: SMCs will constitute financial products under the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth), and will broadly be treated under federal laws in the same way as ACCUs.¹⁰ As with ACCUs, companies trading in SMCs will need to consider their interaction with financial services laws under the Corporations Act 2001 (Cth) (including whether they require an Australian Financial Services licence) and anti-money laundering legislation. Companies should also consider greenwashing and bluewashing risks arising from sustainability claims relating to offsets.
• Contractual considerations: Companies may wish to explore the potential implications of the Safeguard Mechanism ratchet down mechanism on contractual arrangements going forward, including potential cost pass-through clauses.

What's next?

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