The reinvigoration of Australia’s safeguard mechanism

Since being elected in mid-2022, the Labor Government has acknowledged and taken action to address the risks we face from climate change. After passing the Climate Change Bill 2022 last October, they have engaged the community for consultations, including empowering the Australian Accounting Standards Board to deliver sustainability standards, the implementation of climate-related financial disclosures and, more recently, the concessional treatment of Australian Carbon Credit Units (ACCUs) for primary producers.

The Government also renewed the safeguard mechanism in January this year. But what does that mean for Australian businesses? We take a high-level look.

What is the safeguard mechanism?

The safeguard mechanism is part of the Emissions Reduction Fund, overseen by the Clean Energy Regulator. It incentivises activities that count towards Australia’s international climate commitments. The role of the mechanism is to limit the greenhouse gas (GHG) emissions produced by large facilities in Australia.

It initially came into effect in July 2016, and was subsequently amended in 2019 to make it ‘fairer and simpler’

Despite having endured a number of iterations in its short life, the Australian Government has now introduced the Safeguard Mechanism (Crediting) Amendment Bill 2023, which will come into effect from 1 July 2023. These changes are intended to help Australia meet its GHG emissions target of a 43% reduction from the 2005 levels by 2030, and net zero by 2050.  

What will change?

Criticism of the original safeguard mechanism suggests it has been ineffective in curbing national GHG emissions. There have been limited consequences for large emitters that breach limits, even allowing them to reset ‘limits’ to a higher volume.

The reformed safeguard mechanism emphasises genuine emissions reduction, with stepped targets over time. Key changes proposed include:

  • An annual 5% reduction of emissions from the organisation’s baseline
  • Incentivising producers to reduce their emissions beyond the 5% annual target with the ability to create carbon credits for the surplus, which are permitted to be sold.

Organisations unable to meet their reductions will be able to purchase carbon credits. Still, the scheme encourages investment in technology and innovation, with the genuine reduction of emissions as the primary aim.

Recent amendments

Since January, the Government has been in negotiations on the finer details to finalise the safeguard mechanism. Agreement on these negotiations allowed it to pass on 31 March. Two of the major changes that have come from this negotiation include:

  • A hard cap on emissions (140 MT per annum), and there will be a decreasing cap over time
  • A pollution trigger requiring new or expanding projects to be tested for their ability to meet the scheme’s net carbon requirements. While the Climate Change Minister will have the power to recalibrate the rules in this scenario, the Minister’s action (or lack thereof) can be subject to legal enforcement.

What are carbon credits?

Carbon credits – or ACCUs - are a transferable, certified record representing one tonne of carbon dioxide equivalent that has either prevented or reduced GHG emissions from releasing into the atmosphere or removed existing GHG emissions from the atmosphere. Countries or organisations with emissions ‘to spare’ from their cap can, in turn, sell the surplus to others, driving the need for carbon credit markets in Australia and globally.

Buyers of carbon credits include organisations required to adhere to the safeguard mechanism as well as those voluntarily looking to reduce emissions, and government organisations.

The Quarterly Carbon Market Report - December Quarter 2022 reported 17.7 million ACCUs were issued in 2022, while 23 million ACCUs were traded on the secondary market – triple the volume of 2021.

What does the safeguard mechanism mean for Australian businesses?

Australian facilities producing more than 100,000 tonnes of CO2-equivalent scope 1 emissions yearly will need to comply with the safeguard mechanism. The Government expects the mechanism to cover around 215 ‘large industrial facilities’.

According to the Clean Energy Regulator, a person or body must be registered as the ‘responsible emitter’ at each facility. They will have operational control of the facility. They will be required to ensure it me