10 years after the repealing of Julia Gillard’s carbon tax, Anthony Albanese has reached a climate consensus in his long-awaited passing of the Safeguard Mechanism Crediting Amendment, with the new arrangements taking effect from 1 July 2023. The mechanism effectively applies a carbon price on emissions of industrial facilities above baselines set at the average of the facility’s four-year average emissions intensity (emissions per unit of production).
What is the Safeguard Mechanism?
The “Safeguard Mechanism” is one of the three main components of the Emissions Reduction Fund (ERF), which is a policy scheme managed by the Department of Industry, Science and Resources. The fund’s main objective is to help achieve Australia’s greenhouse gas (GHG) emissions reduction target of 43 per cent below 2005 levels by 2030. The Safeguard Mechanism first came into effect in July 2016 and was last amended in March 2019. On 10 January 2023, the Albanese government proposed further amendments and these amendments were passed by the parliament on 30 March 2023 under the Safeguard Mechanism (crediting) Amendment Bill 2023.
The Safeguard Mechanism places a limit (known as a baseline) on emissions produced by Australia’s 215 biggest polluting facilities; those which produce more than 100,000 tonnes of carbon dioxide a year. Together, these facilities are responsible for producing 28 per cent of national emissions. Baselines are set by the Clean Energy Regulator in consultation with facility owners; however, they have not historically been abided by, with many facilities exceeding thresholds. In the past, once an emitter exceeded their baseline, they had the option of changing the baseline, aggregating the baselines over several years and/or purchasing carbon credits. As such, companies never faced real consequences for exceeding thresholds and therefore the mechanism has been viewed as a “toothless tiger” as it has provided a free pass for Australia’s largest polluters.
The Safeguard Mechanism (crediting) Amendment Bill 2023 specifies two key changes. First, it sets an absolute hard cap on carbon emissions on a national level. Second, it mandates a 4.9% annual emissions reduction target for the 215 biggest polluting facilities. While these new measures will help to achieve emission targets set for 2030, they are set to hinder new proposed coal and gas projects across the country.
Source: ACCR
What is Wrong with the Safeguard Mechanism?
While the Safeguard Mechanism may be a positive step in decarbonising the Australian economy, its implementation thus far has been riddled with missteps. The primary issue with the Safeguard Mechanism’s execution has been the Government’s poor communication with both local and global stakeholders on the mechanism’s impact on their business. A clear example has been the concern of Australia’s key strategic partners about the energy security of the region upon the Safeguard Mechanism’s implementation. Japan’s Inpex, who operate their nation’s largest foreign direct investment in Ichthys LNG, has made a rare public comment criticising the lack of clarity surrounding the Safeguard Mechanism’s impact on their development of nearby gas fields. While it may be easy to demonise the interests of gas companies, it is important that companies like Inpex and Mitsui are at the front lines of Australia’s investments in hydrogen and green steel. A global change in perspective towards Australia’s country risk fundamentally threatens our status as a trading nation.
The second key issue arising from the Safeguard Mechanism is the demonising of gas in its construction. The onerous provision of the evaluation of projects against an “absolute” emissions cap ultimately places key new gas projects in jeopardy. While gas has been quickly demonised by climate activists, the Australian Energy Market Operator has offered a sobering reflection on the clear shortage of gas that is expected within the coming decade. However, the Labor Government, despite recent comments, have been acting against the development of new gas projects throughout their tenure. Gas is ultimately critical for the renewable energy transition, as it is a firming fuel for the development of renewables. Gas peaking plants are far lower emissions than coal and can turn on at short notice during the evening peak when rooftop solar is no longer producing electricity. This ultimately enables Australia’s energy transition. While an emissions cap is required for the effective operation of the Safeguard Mechanism, this should be a “net” emissions cap that incorporates the impact of key decarbonisation technologies (such as Carbon Capture and Storage) that generate Australian Carbon Credit Units (ACCUs), rather than reducing absolute emissions, but ultimately result in the same net emissions impact.
The government’s poor economic understanding has also driven their decision to place a A$75/t cap on both ACCUs and Safeguard Mechanism Credit Units (SMCs). While it may seem to be a concession to large emitters, the cap fundamentally distorts investments in decarbonisation and low emissions technology by major industrial emitters. The A$75/t cap is neither sufficient to encourage offshore Carbon Capture and Storage and Direct Air Capture (which the US IRA has subsidised at US$85/t and US$180/t respectively) nor hydrogen. Therefore, it will only encourage greater demand for offsets, which all stakeholders agree is not the best way for companies’ to reach their emissions obligations. The government’s clear inability to both appropriately legislate a carbon solution and interact with its key stakeholders has left the Safeguard Mechanism as ultimately an ineffective solution that demonises Australia’s key trading partners.
Source: Michael West Media
Improvements to the Safeguard Mechanism
The Safeguard Mechanism may be a step in the right direction, but alone it is not sufficient to “solve” climate change. Excess polluters are allowed to use ACCUs to offset their emissions under the Safeguard Mechanism (National Greenhouse and Energy Reporting, 2023). Carbon Credits have generally been understood to be a very weak measure which allows us to play with the accounting and contribute far more environmental destruction than is equitable, fair, or ethical on a global scale (Australia Institute, 2023). As there are certainly going to be a surplus of project proposals that cannot all be accepted without exceeding the new hard cap, the Minister for Climate Change and Energy will be responsible for making the tough decisions about which competing projects are allowed to go ahead under the new legislation. Adam Bandt, Leader of the Australian Greens and Federal Member for Melbourne, stated in an interview that if the Minister fails to hold emissions below the hard cap and meet the required reductions each year, then they will be failing to uphold the law under the Safeguard Mechanism (Australia Institute, 2023). Furthermore, Dr Jennifer Rayner (Climate Council, 2023) asserts that we must regulate emissions offsetting more stringently, implement and enforce bans on greenwashing by fossil fuel companies, and stop government subsidisation of fossil fuel projects, if we wish to have robust emissions policy as a nation.
Carbon Pricing: Part of the Solution?
Carbon pricing is a key policy which should be used to even the playing field and support renewable energy by internalising the externalities caused by the pollution of fossil fuels; that is, it will ensure that those polluters who cause the damage will actually pay the social cost for their actions, rather than implicitly spreading that cost to the general public. A carbon price will discourage pollution and encourage further growth in cleaner industries by making them relatively more appealing to investors. Carbon taxes in practice can actually be highly successful – for example, Sweden implemented a carbon tax in 1991 and their emissions have since been reduced by over a quarter (Council on Foreign Relations, n.d.). Despite critics suggesting that such a policy would likely cause great harm to their economy, Swedish gross domestic product (GDP) has in fact more than doubled (2.3x) in the time since the policy was introduced, remaining on par with the growth in GDP of their neighbours in Finland over the same timeframe (Macrotrends, 2022). Back home, the controversial carbon tax implemented by the Gillard government in 2012 was successful in decreasing emissions; however, when in 2014 the Abbott government, alarmingly, decided to replace the tax with a fossil fuel subsidy, national emissions almost immediately returned towards their prior increasing trajectory (Verrender, 2021).
A Price On Carbon. This image was created with the assistance of DALL·E 2, an AI system by OpenAI.
In summary, the Safeguard Mechanism has historically been viewed as a toothless tiger, but with the recent passing of the Safeguard Mechanism (crediting) Amendment Bill, it is now being perceived as a sleeping dragon. With more stringent mandates set to be put into place, Australia is on track to reach its emissions targets by 2030. However, the Safeguard Mechanism and its proposed amendments are not without scrutiny. The primary issue with its execution has been the Government’s poor communication on the mechanism’s impact on external stakeholders. The second key issue is that the mechanism demonises gas in its construction. As such, we conclude that the mechanism is not sufficient on its own to “solve” climate change and that more consideration should be given to carbon pricing as a key instrument in reaching net zero.
References
Australia Institute. (2023, April 4). The Safeguard Mechanism: What You Need to Know. The Australia Institute. https://australiainstitute.org.au/event/adam-bandt-the-safeguard-mechanism-what-you-need-to-know/
Climate Council. (2023). Safeguard Mechanism win: big polluters on notice as Australia’s era of climate gridlock ends. Climate Council. https://www.climatecouncil.org.au/resources/safeguard-mechanism-win-big-polluters-on-notice-australias-era-of-climate-gridlock-ends/
Council on Foreign Relations. (n.d.). How Do Governments Combat Climate Change? How Do Governments Combat Climate Change? Retrieved April 3, 2023, from https://world101.cfr.org/global-era-issues/climate-change/how-do-governments-combat-climate-change
Macrotrends. (2022). Macrotrends | The Long Term Perspective on Markets. Www.macrotrends.net. http://www.macrotrends.net/
National Greenhouse and Energy Reporting. (2023). The Safeguard Mechanism. Clean Energy Regulator. https://www.cleanenergyregulator.gov.au/NGER/The-safeguard-mechanism
Verrender, I. (2021, July 25). How the carbon tax has come back to haunt the Australian government. Australian Broadcasting Corporation. https://www.abc.net.au/news/2021-07-26/carbon-tax-has-come-back-to-haunt-the-government/100322396
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