Safeguard Mechanism Amendment Rules

We would like to acknowledge the contribution of Benjamin Hicks.

During May 2023, the Federal Government has continued to make announcements on its strategy to support the safeguard mechanism and deliver its commitments toward net zero carbon emission reduction under the Climate Change Act 2022 (Cth) and Powering Australia. To read about the changes being introduced by the Safeguard Mechanism Bill and an overview to the Federal Government’s strategy are in the article available here.

On 5 May the Federal Government released the safeguard rules and sub-ordinate legislation to complement the Safeguard Mechanism (Crediting Amendment) Act 2023 (Cth) commencing on 1 July 2023. Three sets of rules have been released:

• National Greenhouse and Energy Reporting (Safeguard Mechanism Amendment (Reforms)) Rules 2023 (Cth) (NGER Rules)
• Carbon Credits (Carbon Farming Initiative) Amendment (No 2) Rules 2023 (Cth) (CC Rules)
• Australian National Registry of Emissions Units Rules 2023 (Cth) (SMCU Rules),

collectively the Safeguard Mechanism Amendment Rules.

On 9 May the Federal Government delivered its second reading of the Appropriation Bill (No. 1) 2023-24 (Budget) and released complementary documents, which appropriated monies and provides strategic direction toward reducing carbon emissions and the renewable energy transition as outlined in Powering Australia and the Climate Change Act 2022 (Cth).

The provisions of the CC Rules and SMCU Rules have already commenced. The NGER rules and the Budget will commence on 1 July 2023.

This update provides background to the Safeguard Mechanism Amendment Rules (including comparison to the Safeguard Mechanism Bill, the initial consultation paper and exposure draft sent to stakeholders) and those parts of the Budget that support the safeguard mechanisms and Federal Government’s strategy outlined in Powering Australia and the Climate Change Act 2022 (Cth).

Safeguard Mechanism Amendment Rules

The Safeguard Mechanism Amendment Rules largely adopts the proposed approach to safeguard mechanism outlined in the Federal Government’s position paper and exposure draft legislation released in January 2023 following six months of consultation with industry stakeholders.

NGER Rules

The NGER Rules are made under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) and key changes include baseline setting arrangements for existing and new facilities, declining baselines over time so that safeguard facilities contribute a proportional share of the national emissions reduction task, flexible compliance options including below-baseline crediting, interactions with ACCU projects and tailored treatment for trade-exposed facilities.

Baseline setting arrangements for new and existing facilities

The Federal Government has stated that it prepared the emissions baselines for new and existing facilities in line with international best practice, adapted for an Australian context. This is achieved in the NGER Rules by introducing a ‘best practice emissions intensity’ and a ‘best practice emissions intensity number’, as defined in the NGER Rules, which are implemented into production variables used to calculate a baseline for the existing facility, landfill facilities and new facilities (other than a landfill facility).

Regulating SMCUs

The NGER Rules provide rules for the issuance SMCUs. The requirements for issuing of SMCUs are different for a financial year and a declared multi year period. Both however require the responsible emitter to make a written application that specifies certain information to the CER and the CER must then consider the application and determine the number of units to be issued, which is contingent on the CER being satisfied of certain specified matters. The number of SMCUs is determined based on a formula.

Application for multi-year monitoring period

A facility may apply for a multi-year monitoring period of up to five years. The benefit outlined in the exposure draft is that the facility can develop and implement longer term emissions reduction projects and smooth out abatement trajectories by allowing facilities to average out an exceedance in an initial year (or years) with below-baseline emissions in later years, after a facility has implemented a project.

The NGER Rules provide how a facility can apply to become a multi-year monitoring period facility, which includes setting out how it can reduce its net emissions number, and an ability for the CER to determine and vary the length of the multi-year monitoring period where the plan is not implemented. A multi-year monitoring period facility is treated differently under the NGER Rules including in relation to the application for and issuance of SMCUs; it is not eligible for a borrowing adjustment; and cannot be a facility that is a trade-exposed baseline-adjusted facility.

Cap on ACCUs surrendered

The NGER Rules limit the total ACCUs a responsible emitter may surrender to the CER for a facility at no greater than 30% of the baseline emissions number to reduce the net emissions number of the facility during the period.

Declining baselines over time

The baseline emissions reduction for each of the existing 215 facilities was outlined in the exposure draft required each to fall by 4.9% each year to 2030, in order for Australia to meet its NDC.  This figure contains a contingency for new entrants and a reserve to ensure the Safeguard Outcomes established under the Safeguard Mechanism Bill will be met.

The NGER Rules provide this figure in a baseline decline schedule for regular facilities by the defined “default emissions reduction contribution”.

Where a facility is a regular facility for the financial year and was not a trade-exposed facility for the financial year this default emissions reduction contribution is applicable (which until 1 July 2030 has a default decline rate of 0.049 (or 4.9% per year)).

However, if the facility is a regular facility and was a trade-exposed facility (which includes a trade-adjusted baseline facility) for the financial year, then a formula applies to calculate the emissions reduction contribution, which can lower the baseline decline rate to further moderate potential cost impacts. The formulas vary depending on how impacted a particular facility is and is calculated based on cost impact and default decline rate.

The exposure draft outlined the discount will start applying when the ‘cost impact’ metric first exceeds 3% and is capped when the cost impact metric reaches a maximum discount value of 8%. The minimum baseline decline rate for most impacted trade-exposed facilities is 2% - so it is expected that a 2.9% point discount will apply on the standard decline rate of 4.9%.

The CER publishes details on calculating baselines and is currently in the process of updating its website to summarise the changes introduced by the NGER Rules.

Below-baseline crediting (borrowing adjustment)

The NGER Rules establish that a responsible emitter can apply to the CER for a borrowing adjustment of up to 10% for the facility for a financial year and provide for how an application is to be made by the responsible emitter and determined by the CER.

The CER can make or refuse to determine a borrowing adjustment and the CER must not make a determination unless satisfied that:

• no SMCUs have been issued in relation to the facility for the financial year
• the first financial year is not included in a declared multi-year period for the facility
• it is likely a designated large facility in the financial year immediately following the financial year, and
• the number proposed as the borrowing adjustment number in the application is not greater than 10% of the unadjusted baseline for the facility for the financial year. An unadjusted baseline is defined to mean either:
  • if a borrowing adjustment determination specified a borrowing adjustment number for the facility for the previous financial year—the baseline emissions number for the facility for the relevant financial year worked out using that borrowing adjustment number, or
  • otherwise—the baseline emissions number for the facility for the relevant financial year if the borrowing adjustment number for the facility for the relevant financial year were 0.

A determination for a borrowing adjustment from the CER must be in writing and will be published on the CER website. Where refused, the CER must give written notice and reasons.

Establishment as a trade-exposed facility

The NGER Rules establish that a responsible emitter may be a defined ‘trade exposed facility’ based on underlying activities prescribed in a schedule or may apply to be a trade-exposed baseline-adjusted facility through an application process and obtain a determination from the CER. The Government has stated that this measure comes as a response to address carbon leakage.

A responsible emitter for a facility may apply to the CER for a determination that the facility is a trade-exposed baseline-adjusted facility in a particular financial year and for the next two financial years. The CER will then either make the determination, which requires that the CER be “reasonably satisfied” having regard to any EBIT Guidelines in force and any other matter the CER consider relevant to establish specified criteria and additionally received an audit report that meets certain specified criteria, or if not satisfied, the CER may refuse to make a determination.

The CER determination is notified to the parties and published on its website. Where refused, the CER is to give reasons for the refusal. The CER can vary or revoke a determination at the request of a responsible emitter. If the responsible emitter revokes the trade-exposed baseline-adjusted facility, it will be required to have at least one financial year as a regular facility before it can reapply to the CER for status as a trade-exposed baseline-adjusted facility.

The benefits of being a trade-exposed baseline-adjusted facility or a trade exposed facility are:

• the different treatment of a discounted baseline formula (outlined above) for the minimum baseline decline rate, and
• the ability to access support from Safeguard Transformation Streams (STS) of the Powering the Regions Fund (PRF) (see Budget below for details) funding of which is to be excluded for EBIT purposes.

Applications to the CER for status as a trade exposure facility (including trade-exposed baseline-adjusted facility) are expected before the end of October 2023.

CC Rules

The CC Rules are made under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) and provide a fixed price for Australian Carbon Credit Units (ACCUs).

ACCU fixed price

Commonwealth ACCUs will be sold at a fixed price of $75.00 per ACCU during the financial year commencing 1 July 2023. The price is to be indexed from 1 July 2024 at a rate calculated according to the All Groups Consumer Price Index, plus 2%.

SMCU Rules

The SMCU Rules are made under the Australian National Registry of Emissions Units Act 2011 (Cth). They provide further information for the registry and issuance of Safeguard Mechanism Credit Units (SMCUs), with details of the evidence and declaratory criteria for the transmission of the SMCUs.

SMCUs are also defined to be an ‘eligible international emissions unit’. This is significant since that means it is a regulated emissions unit that falls within the meaning of a ‘financial product’ and is regulated under Chapter 7 of the Corporations Act 2001 (Cth).

It is therefore anticipated that ASIC will release updates shortly regarding the regulation for SMCUs, such as to Regulatory Guidance 236 and Information Sheet 156, which covers AFS license requirements to participate in carbon markets and how to apply for or vary an AFS license.  

It is worth noting that SMCUs will differ from ACCUs in they are not a carbon offset because they are within a regulated emissions limit (the sum of all baselines under the safeguard mechanism). The role of SMCUs is to safeguard entities so that they can stay within the regulated safeguard emissions limit and may be used:

• to sell to other Safeguard facilities for example, when one facility emits less than its baseline it can sell a credit to another that emits more than that facility’s baseline
• to be surrendered to the CER to meet Safeguard compliance obligations (which the CER will calculate the quantity of SMCUs required at the time just after the emissions reports have been verified and the baseline for relevant compliance period has been calculated), or
• to be banked by the facility for future use.

The NGER Rules provide complementary changes to the SMCU Rules for SMCUs to establish market value and how and when the SMCUs will be issued.

Market value for the SMCUs will be released at the end of the financial year beginning after 30 June 2023, published by the Secretary on the Department’s website in the form of an estimate of the average price of a prescribed carbon unit known as the “Safeguard Mechanism default prescribed unit price”.

The Budget

Appropriating monies for renewable energy transition

A total of $4 billion will be appropriated to boost renewable energy generation through a newly established Capacity Investment Scheme. Under this Scheme there will be a focus on the East Coast renewable energy transition where there will be auctions delivered by AEMO (in South Australia and Victoria) and the Federal Government (New South Wales) for contracts of clean renewable generation and storage. This will take the form of current auctions but is separate from and will not affect existing auctions. It is expected the new auctions under the scheme will generate a further $10 billion investment in clean renewable energy. Further details of the auctions under the scheme will be released in the coming months. 

Circa $2 billion will be appropriated to Hydrogen Headstart to help Australia become a world leading hydrogen producer including:

• $2 billion to provide revenue support for investment in renewable hydrogen production through competitive production contracts, including funding for ARENA and the Department of Climate Change, Energy, the Environment and Water (Department) to support the development and operation of the program
• $2 million over two years from 2024-25 to establish a fund to support First Nations communities to engage with hydrogen project proponents and planning processes, and
• $5.6 million to analyse the implications for Australia of intensifying global competition for clean energy industry, and to identify actions before the end of 2023 to further catalyse clean energy industries, ensure Australian manufacturing competitiveness and attract capital investment.

There will also be $38.2 million over four years from 2023-24 (and $6.5 million per year ongoing) to establish a Guarantee of Origin Certificate scheme to track and verify emissions associated with hydrogen and other lower emissions products and provide an enduring mechanism to certify renewable electricity.

Appropriating monies for Research & Development into sustainable materials and renewable energy

Circa $1.4 billion will be appropriated for the PRF. The purpose of the PRF is to assist the transition toward net zero emissions by decarbonising existing industries (including rail and aviation), develop new clean energy industries, develop the workforce, and develop the purchasing of carbon credits. The funding from the Budget will go toward:

• $400 million to the industrial transformation stream to support new clean energy industries in regional areas and innovative efforts to decarbonise existing industrial activities, as part of the PRF
• $400 million to critical inputs to the clean energy industries stream of PRF to support the development of capability for reducing emissions for materials including steel, cement, lime and aluminium
• $600 million to the STS of the PRF to support trade-exposed facilities including to reduce on-site emissions (details are in Safeguard Mechanism reform consultation - factsheet 6 January 2023), and
• $14.8 million to establish Powering Australia Industry Growth Centre (PAIGC) to provide advance technology and skills development to businesses looking to locally manufacture renewable energy technologies.

The Federal Government has announced other research and development funding and strategies for sustainable materials and renewable energy including:

• $80 million over 4 years from 2023-24 (and $11.1 million per year ongoing) to support supply of cheap clean and reliable energy through the market including to support AER activities
• $171.9 million funding to develop a plan for the long-term management and disposal of Australia’s radioactive waste from temporary storage sites around Australia
• Partnership with the Queensland Government to fund research and development projects and technology trials to reduce emissions in Australia’s energy resources sector and enhance energy security
• $23.4 million in continuation of the Critical Minerals Office including the Critical Minerals Development Program and the Australian Critical Minerals Research and Development Hub
• $57.1 million to secure strategic and commercial international partnerships in critical minerals supply chains, under the National Reconstruction Fund, and
• the Department has released, in collaboration with partners, a climate projections roadmap for establishing a decommissioning industry for Australia.

Establishing the Net Zero Authority

The Net Zero Authority (NZA) is to be established to assist Australia to “seize the opportunity” of net zero transformation. The purpose of the NZA will be to:

• support workers in emissions-intensive sectors to access new employment, skills and support as the net zero transformation continues
• coordinate programs and policies across government to support regions and communities to attract and take advantage of new clean energy industries and set those industries up for success, and
• help investors and companies to engage with net zero transformation opportunities.

The NZA is expected to work with state, territory and local governments, existing regional bodies, unions, industry, investors and First Nation Groups to help key regions, industries, employer and others to proactively manage the transformation to a clean energy economy.

The executive agency for the NZA is expected to be established from 1 July this year and further details are expected to be released about the role of the NZA in the coming months.

Upgrade of energy efficiency of existing homes and social housing

The Federal Government will appropriate $1.3 billion to establish the Household Energy Upgrades Fund to support home upgrades that improve energy performance and save energy. Funding includes:

• $1 billion funding to low-interest loans for energy efficiency upgrades of existing homes
• $36.7 million to provide access to information on how existing homes can save energy and reduce energy bills, and
• $300 million to state and territories to make energy performance upgrades to social housing, particularly by raising energy efficiency.

Key Takeaways

The Safeguard Mechanism Amendment Rules have provided the details under the Safeguard Mechanism Bill for existing facilities to reduce carbon emissions to meet Australia’s NDC and to ensure new facilities that come into operation after 1 July 2023 do the same. These are largely based on the position paper and exposure draft that were released by the Federal Government in January 2023. A responsible emitter should carefully consider any of its facilities before making application to the CER to ensure the best baseline and approach to emission reduction is selected for their projects.

The Budget additionally proposes to “seize the opportunity” for Australia to transition to a world leader in renewable energy and reducing carbon emissions by appropriating funds for renewable energy projects, research and development into sustainable materials and renewable energy and the operations of existing and new regulatory authorities. The PRF funding particularly ties in the with safeguard mechanisms.

Clients who are (or think they maybe) affected by or would like to utilise the changes being introduced by the Safeguard Mechanism Amendment Rules or Budget (such as applying for a determination to the CER, obtaining carbon credits, checking compliance, eligibility for funding in research and development for renewable energy activity, getting involved in the new auctions for renewable energy) should reach out to our experts for advice.