What is the Safeguard Mechanism?
Context
Total carbon dioxide equivalent emissions in Australia were 488,000 Mt CO2-e for the year to December 2021, up 4.1% on the previous year. [1] They come from eight sectors (see graph below) and are tracked by the Department of Climate Change Energy Environment and Water, (DCCEEW) so that we can measure progress towards our Paris commitments. Australia is a signatory to the UN Framework Convention on Climate Change, the Kyoto Protocol and the Paris Agreement, which require our Government to reduce, track and report CO2 emissions.
Graph: Screenshot from Dept of Climate Change, Energy, Environment and Water. [1]
It is important to also track the trajectories of the eight sectors, to ascertain the efficacy of various actions. DCCEEW does this by producing the National Greenhouse Gas Inventory Quarterly Update which reports on Australia’s greenhouse gas emissions. (1) The graph below uses the NGGI December 2021 data and shows how sectors have progressed between 1990 and 2021
Where does the Safeguard Mechanism fit in?
The SGM is a federal government policy designed to reduce carbon emissions produced by Australia’s largest emitters. The scheme draws a ‘line in the sand’, the baseline for emissions for each individual company. Each entity’s emissions should remain under its agreed baseline.
It was put in place by the Abbott Coalition Government in July 2016, after the repeal of the Clean Energy Act. Some of the eight sectors mentioned above could see a path to emissions reduction, but if large industrial companies continued to emit greenhouse gasses, the overall effect would be diminished, so the SGM was established to manage this.
The threshold for coverage by the SGM is 100,000 tonnes of carbon dioxide equivalent per annum. It covers 212 entities which emit 28% of Australia’s emissions. [2] Many of them fall in the Stationary Industry Sector, although there are some in other sectors such as the Transport sector, for example aviation companies.
These 212 entities can be found on the Clean Energy Regulator website. [3] They are largely mining, manufacturing and oil and gas facilities. Electricity generators are excluded.
The largest emitters include companies such as Bluescope in New South Wales and Chevron in Western Australia. At the other end of the spectrum is Alliance Aviation Services in WA, which emits just over the 100,000 tonnes of CO2 equivalent per annum.
Great! So by how much has the SGM reduced emissions? None to date! In fact, emissions have even gone up.
The Problem
In 2020-21, Safeguard Mechanism facilities reported a total of 136.9 million tonnes CO2-e.[4] Reputex which analyses information about carbon and electricity markets, states in its Economic Impact of the ALP’s Powering Australia Plan that emissions have grown 7% since the scheme’s commencement in July 2016 and 17% on 2005 levels. [5]
The Commonwealth 2021 projections indicate that emissions covered by the Safeguard Mechanism will grow to 151 Mt by 2030, or 27% above 2005 levels. [5] This is at a time when most sectors are beginning to reduce their emissions and is obviously not in line with the Paris Agreement.
RepuTex has also examined the National Greenhouse Gas Inventory data and produced the graph below which compares Australia’s electricity generation emissions and the Safeguard Mechanism facility emissions, with a forecast out to 2030, under a “business as usual”’ scenario. [5] Obviously, the entities covered by the Safeguard Mechanism are not performing as well as the electricity generation sector is.
Why are emissions increasing instead of decreasing if they are covered by the Safeguard Mechanism?
Renew Economy says “Growth in covered emissions has been driven by the mining, oil and gas industries, in particular the rapid expansion of liquefied natural gas (LNG) export capacity, combined with the design of flexible emissions baselines under the current safeguard scheme.” [6]
This latter point of allowing emitters’ baselines to be flexible has meant that in practice, some businesses have been allowed to raise their baselines, which renders the Safeguard Mechanism ineffective. If baselines are not gradually lowered, there can be no emissions reduction.
There are several options available to emitters, to avoid having to reduce emissions. They are outlined on the Clean Energy Regulator’s page on Baselines [7]
Emitters can vary their baselines using in-built processes, some of which are:
production-adjusted baseline related to actual production and emissions intensity
calculated baseline related to production and emissions intensity forecasts
multi-year monitoring where emitters apply to have emissions rolled over into a subsequent year.
Apart from applying for variations to baselines, emitters can purchase offsets from the Government’s Climate Solutions Fund. The problem here is that these offsets, known as Australian Carbon Credit Units (ACCUs) have recently been questioned due to a lack of integrity. The Government is conducting a review of them.
Also, businesses that do actually reduce their own emissions can bid for funds from the Climate Solutions Fund to help pay for the costs of this.
All of these factors mean that the Safeguard Mechanism, as it has been operating from 2016 to 2022, has been ineffective in reducing emissions. The obvious consequence is the 7% growth in greenhouse gas emissions, contrary to Australia’s commitments to the Paris Agreement.
Last year (2021) Reputex in their paper called “Safeguard Mechanism: Toothless Tiger or …Sleeping Dragon” [8] wrote “In line with current policy, compliance demand from the Safeguard Mechanism is currently negligible, with net demand of just 88,000 ACCUs in FY20 due to the transition of covered entities to Calculated Baselines, determined based on forecast production and emissions intensity. This creates headroom for covered facilities to increase their emissions without exceeding their baselines.”
The ability to alter baselines and to apply for government funds as reimbursement for emissions reduction costs helps create the weak demand for ACCUs and provides no incentive for emissions reduction. This sits at the heart of the ineffectiveness of this instrument.
Is the Safeguard Mechanism a form of carbon pricing
The Safeguard Mechanism is like a “cap-and-trade” emissions trading system but calls itself “baseline-and-credit” to sound less like the carbon price it was designed to replace back in 2014. It would become an effective carbon price if baselines were progressively lowered, thus requiring companies to reduce emissions or buy offsets. The new Labor government intends to start lowering baselines as part of its climate policy.
CCL will be able to support this as a form of carbon pricing, albeit inadequate due to its coverage of only a percentage (28%) of emissions. Unfortunately the mechanism will have little impact on the $50 billion/year fossil fuel subsidies that will effectively undermine some or all of the emissions the safeguard mechanism abates. And if it continues to need taxpayer funds to create ACCUs through the Climate Solutions Fund, it will effectively add further subsidy to fossil fuels.
Where to from here? Can the Safeguard Mechanism be improved?
The Albanese Government intends to use the Safeguard Mechanism as a major element of its climate policy. As part of the reforms, it will require all 212 entities to reduce aggregate emissions by 5 million tonnes a year, to collectively achieve net-zero emissions by 2050. They will negotiate individually with the Clean Energy Regulator to determine their contribution.
Reputex stated that improvements to the Safeguard Mechanism are projected to deliver 213 Mt of GHG emissions reductions by 2030. [5]
Australia’s Climate Change Authority is a government organisation that provides independent, expert advice on climate change policy. It says that the Safeguard Mechanism could be improved and recommends that the government remove access to further baseline increases. This would be a step towards a more reliable carbon pricing system.
Advice from other bodies, including the Australian Business Council supports the use of the Safeguard Mechanism to help achieve Australia’s net zero by 2050 legislated target. Jennifer Westacott recently said “If we get this right, an enhanced Safeguard Mechanism will help send clear signals to the market, drive investment and deliver more opportunities and stronger regions, while still protecting jobs from carbon leakage.” [9]
CCL Australia will carefully watch the progress of the Safeguard Mechanism reform: consultation paper which closes late September 2022.
Conclusion
Although the SGM is not yet a carbon price, we at CCL Australia, are broadly supportive of the new government’s intention to make it work by steadily lowering baselines.
An issue we have is that of the time needed for actual reduction of CO2-e emissions to occur.
In a recent address, Minister for Climate Change and Energy, Chris Bowen pointed out that we have just 89 months to get Australia’s emissions down by 43% on 2005 levels by 2030. With the schedule now set out for the Reformed Safeguard Mechanism, there will be another 10 months of business-as-usual emissions before transition Phase 1 comes into effect on 1 July 2023 and another 24 months of partial reforms before the full Phase 2 commences on 1 July 2025, leaving just 55 months to reach the target. This is obviously problematic as we are now in the critical decade for effective climate action.
CCL Australia’s preferred policy, climate dividends would capture all emissions from fossil fuels in a comprehensive manner and leave the Safeguard Mechanism to tackle the non-fossil fuel related emissions from processes like steel and cement production. Carbon pricing at source would be fairer, simpler and easier to implement.
The Safeguard Mechanism does not protect households from industry passing on the costs that will flow from their compliance in the scheme. Our preference for a dividend is critical to enable low-to-middle income households manage the transition.
CCL Australia’s Australian Climate Dividend policy would lower emissions more quickly and at lowest cost, with greater transparency and simplicity. In addition, it would provide co-benefits, such as better health outcomes and relief from cost of living pressures. Australia needs a market mechanism which all sides can get behind to put us on a glide path to a decarbonised economy. The Australian Climate Dividend can deliver that. [10]
[1]National Greenhouse Gas Inventory Quarterly Update: December 2021 - DCCEEW
[3] Clean Energy Regulator SGM Reported Emissions
[4] Clean Energy Regulator NGER News and Updates
[5] Reputex Economic Impact of ALP's Powering Australia Plan
[6] Renew Economy What's Next for the Safeguard Mechanism
[7] Clean Energy Regulator SGM Baselines
[8] Reputex Toothless Tiger or Sleeping Dragon
[9] Business Council of Australia Safeguard Mechanism Reform
[10] Citizens Climate Lobby Australia Policy
For more information, see
What is the safeguard mechanism? - Australian Conservation Foundation (acf.org.au)
Submission: Climate Change Authority Review of Emissions Reduction Fund - The Australia Institute
Author: Joyce Erceg, 6th September, 2022.
Author Credentials:
Approved by: (e.g. Will Dayble), Citizens’ Climate Lobby (CCL) Australia
Contributors:
Graphics:
Edited by: Joyce Erceg & Jennifer Delmarre
Date published:
(Date updated:)
