Safeguard Mechanism 2.0: emitters face first 2024 carbon compliance milestone

Key components of the emissions-intensity determination 5 min read

Existing emitters under the Safeguard Mechanism will face their first major compliance milestone under the revamped regime, with applications for emissions-intensity determinations due on 30 April 2024.  

The amended Safeguard Mechanism rules, effective from 1 July 2023, introduced mandatory net carbon emissions limits on around 215 facilities in Australia across the mining, manufacturing, transport, oil & gas and waste sectors.

While regulatory filings for new Safeguard facilities are not due until early 2025, the Clean Energy Regulator has put existing facilities under the regime on notice following the release of the updated emissions-intensity determination guidelines (the Guidelines).

In this Insight, we outline the key components of the emissions-intensity determination and explain what compliance entities for existing facilities need to be considering now.

Safeguard 2.0 recap

The Safeguard Mechanism comprises a baseline and credit scheme where emitters are incentivised to ensure their net emissions are less than their target (baseline) emissions. Facilities accrue a carbon cost if their net emissions exceed their baseline, to be acquitted by surrendering carbon credits, while facilities can earn carbon credits if their net emissions are below their baseline.

Baselines are determined either on an industry-wide benchmark basis or on a facility-specific basis (which, for some emitters, will be more generous).

With this deadline fast approaching, compliance entities should consider now whether to apply for a facility-specific determination.

Compliance entities for existing facilities, which are mostly facilities that operated in any financial year between FY17/18 to FY22/23, may apply for an emissions-intensity determination with the Clean Energy Regulator to set a baseline unique to the facility for FY23/24. To do so, an application for an emissions-intensity determination must be submitted before 30 April 2024.

With this deadline fast approaching, compliance entities should consider now whether to apply for a facility-specific determination.

Once an emissions-intensity determination is made, a facility's baseline will comprise a weighted blend of the industry-average default values and the determined facility-specific emissions-intensity values (referred to as the 'hybrid emissions-intensity number' in the Guidelines). Importantly, the determined facility-specific emissions-intensity value will account for 90% of a facility's baseline in FY23/24, while the industry-average emissions-intensity value will contribute 10%. The 'hybrid' baseline will then be reduced on an escalating scale in subsequent compliance periods until FY29/30, when the industry-average emissions-intensity number will account for 100% of the baseline. It is important for compliance entities to weigh up the impacts and benefits associated with this determination.

Voluntary or mandatory

While a facility-specific determination is, in theory, available on an 'opt-in' basis, in many cases it will, in effect, operate as a mandatory requirement. Compliance entities should assess whether applying for a determination is necessary for their facility, or desirable from a compliance and carbon trading strategy perspective, including in light of the following considerations.

Eligibility for carbon credits

In broad terms, an existing facility will only be eligible to earn Safeguard Mechanism Credits in a compliance period if the responsible entity holds an emissions-intensity determination for that period.¹ This is a relevant consideration from both a future compliance and carbon-cost perspective, which may arise in subsequent compliance periods, as well as potential carbon trading strategies and revenue opportunities.

An illusory choice?

If a facility does not obtain a facility-specific emissions-intensity determination for a compliance period, its baseline will be determined in one of two ways.

• In some cases, a best-practice emissions-intensity will be used by the Clean Energy Regulator for baseline calculations. Where this applies, the best-practice emissions-intensity is likely to be more onerous than a facility-specific determination.
• Alternatively, if a best-practice value is not available under the Safeguard Rules (which currently is the case for most activities), then, in theory, the industry-average emissions-intensity will apply.

However, there are some trade-offs for existing facilities that intend to rely on this fallback position.

• A facility can only earn Safeguard Mechanism Credits (that is, as a reward for over-achievement) if the facility holds a facility-specific determination.
• Draft amendments to the Safeguard Mechanism Rules released in December 2023 propose to amend the fallback position such that if there is no best practice emissions intensity number for a historical production variable, and the facility has not sought a facility-specific emissions intensity determination for that production variable, the emissions intensity number will be zero (rather than the industry average). This would be an adverse outcome for any existing facilities.

Application checklist for compliance entities

If an existing facility elects to opt in for a determination, it must comply with the steps set out in the Guidelines. The key requirements are summarised below.

	Consider disclosure obligations It is important for compliance entities to assess the breadth of disclosure requirements to the Clean Energy Regulator (including identifying relevant production outputs).
	Ensure adequate record-keeping Existing facilities should ensure adequate measures are implemented for record-keeping and document storage, noting the application requires data from FY17/18 to FY21/22.
	Engagement with regulator​ If an applicant is unable to meet an application deadline, compliance entities may apply for an extension of up to 45 days with the Clean Energy Regulator before 30 April 2024.
	Plan early​ The application requirements contain various long lead time items, including  provision of an audit report, collation of current and historical emissions data and submission of any supporting documents.

What's next?

Applications for facility-specific determination must be lodged by 30 April 2024. Given this is a formal regulatory filing, compliance entities should ensure they allow adequate time to complete their governance processes.

These processes should consider:

• Alignment with carbon strategy: in line with the design of the 'hybrid' emissions-intensity baseline model, which is intended to provide facilities with sufficient time to prepare for increased carbon costs, compliance entities should take steps to plan any longer-term emissions reduction initiatives, noting the progressive transition to the industry average benchmark in subsequent compliance periods.
• Accuracy of historical data: compliance entities should be mindful to ensure that any historical productions and emissions data submitted to the Clean Energy Regulator for determination is up to date. The amended Safeguard Rules provide for various clawback and anti-avoidance provisions, indicating close examination by the regulator.