The final pieces in Australia’s Emissions Safeguard Mechanism reforms

The Federal Government has delivered the final legislative pieces in Safeguard Mechanism reforms to regulate Australia's largest carbon emitters, by registering a suite of final legislative rules which provide the detailed components of the reforms in May 2023.

This follows the passing of the Safeguard Mechanism (Crediting) Amendment Bill 2023 (Cth) (Safeguard Amendment Act) in April 2023, and the public consultation on a position paper and draft legislative rules that occurred earlier this year.

The rules are:

• the National Greenhouse and Energy Reporting (Safeguard Mechanism) Amendment (Reforms) Rules 2023 (Safeguard Amendment Rules), which will commence on 1 July 2023, and contain the technical details of the reformed Safeguard Mechanism scheme;
• the Carbon Credits (Carbon Farming Initiative) Amendment (No. 2) Rules 2023 (Carbon Credits Amendment Rules No 2), which commenced on 6 May 2023; and
• the Australian National Registry of Emissions Units Rules 2023 (ANREU Rules), which commenced on 6 May 2023.

In this article, we have focused on the Safeguard Amendment Rules. We have outlined below their key features and how they differ from the exposure draft which was released for comment earlier this year.

Safeguard Amendment Rules

Baseline setting

The Government has retained its proposed approach to set baselines for existing facilities using a hybrid approach involving both facility-specific and industry-average emissions intensity values. To reduce the “emissions headroom”, the facility-specific component will reduce over time while the industry average component will increase, so that, by 2030, all facilities will be subject to the industry average intensity values.

Safeguard Mechanism - covered facilities need to apply to the CER by 30 April 2024 for an emissions intensity determination that specifies the financial year beginning on 1 July 2023 as the first financial year to which the determination would apply.

The Government is still yet to finalise the production variables and industry-average emissions intensity values that will be used to calculate baselines. However, the Government has indicated that it will consult with covered facilities to finalise these before the reforms commence.

Baselines for new facilities (including extensions of existing facilities) will be determined based on "best practice emission intensity" values, with the Government indicating a preference for an international best practice approach adapted for Australian circumstances. The same approach will apply to existing facilities that begin to produce new products.

Baseline decline and treatment of EITE facilities

Consistent with what was proposed in the exposure draft rules, a baseline decline rate of 4.9% per year to the 2029-2030 financial year will apply for most covered facilities. Certain eligible emissions-intensive, trade-exposed (EITE) facilities (ie. those with a higher risk of carbon leakage, known as trade-exposed, baseline adjusted (TEBA) facilities) will be able to apply for a reduced baseline decline rate (if they are not relying on borrowed SMCs or multi-year monitoring periods). Manufacturing TEBA facilities will be able to access a lower minimum decline rate of 1% (as opposed to 2% for non-manufacturing TEBA facilities).

The impact on manufacturing TEBA facilities will now also be calculated by reference to earnings before interest and tax (EBIT), whereas the impact on non-manufacturing TEBA facilities will be measured according to their gross revenue. Applicants for reduced decline rates will need to provide the CER with documentation to support their statements of EBIT / gross revenue.

New Schedule 2 of the Safeguard Rules provides a key basis for defining whether a facility is a "trade-exposed baseline-adjusted facility", by categorising trade-exposed production variables into manufacturing production variables and non-manufacturing production variables.

Other flexibility mechanisms

The Safeguard Amendment Rules allow facilities to borrow credits for up to 10% of their baseline amount each year until 2030. However, the borrower will have to pay back the credits the following year with 10% interest. New section 47 in the finalised Safeguard Amendment Rules lowered this interest rate to 2% until July 2026 to provide facilities with time to adjust to the new arrangements and encourage early investment in abatement technologies.

To account for emerging technologies, facilities may also apply to the CER for multi-year monitoring periods (MYMP) of up to five years in length, provided that these will not continue after 30 June 2030. However, emitters who apply for a MYMP will be required to formulate a plan that sets out a credible basis for how the facility will utilise technology to reduce the facility’s cumulative emissions below the facility’s baseline within the declared MYMP. The registered Safeguard Mechanism Rules introduce the ability for the CER to reduce the length of a MYMP if a facility is failing or unable to implement its plans.

Importantly, the finalised Safeguard Amendment Rules clarify that a facility cannot rely on both borrowed SMCs and a MYMP in a financial year.

As was previously proposed, the Safeguard Amendment Rules still allows for the uncapped use of ACCUs to meet baselines. However, to promote accountability and transparency, the Safeguard Amendment Rules provide that companies will be required to publicly justify their use of offsets to the CER if they use offsets for more than 30% of their baseline, including justifying why emissions could not be reduced onsite.

Carbon Credits Amendment Rules No 2

In January 2023, the Government introduced amendments to the Carbon Credits (Carbon Farming Initiative) Rule 2015 (Carbon Credits Rule) which removed the ability for Safeguard Mechanism - covered facilities to register new projects to generate Australian Carbon Credit Units (ACCUs). The Carbon Credits Amendment Rules No 2 amend the Carbon Credits Rule to:

• prevent the Clean Energy Regulator (CER) from entering into new carbon abatement contracts for the purchase of ACCUs generated from eligible offsets projects at Safeguard-covered facilities. This will also affect contracts entered into in March 2023 which were subject to a revised Code of Common terms giving the CER the ability to suspend deliveries and terminate the contracts if the Carbon Credits Amendment Rules No 2 were made;
• implement a cost containment measure which allows the CER to sell Commonwealth-held ACCUs into the market at a set price of $75 per tonne, indexed yearly from 1 July 2024 at the consumer price index plus 2%; and
• amend the project eligibility criteria to prevent existing registered offset projects from being issued ACCUs for undertaking a new "activity" that results in carbon abatement of covered emissions from the operation of a Safeguard facility. This is a new feature that was not contained in the exposure draft of these Rules.

ANREU Rules

The ANREU Rules specify that a Safeguard Mechanism Credit (SMCs) is an "eligible international emissions unit", and provides for SMCs to be treated similarly to ACCUs.