The Safeguard Mechanism is the final, critical component of the Emissions Reduction Fund, the centrepiece of the current Government’s climate change and emissions reduction policy.
The goal of the Safeguard Mechanism is to prevent emission reductions achieved through projects funded under the Emissions Reduction Fund from being countered or reversed by increases in emissions in other parts of the Australian economy. It achieves this by establishing a ‘baseline and credit’ emissions trading system, whereby large emitters are required to either keep emissions below a baseline, or to purchase Australian Carbon Credit Units to offset emissions which exceed their baseline.
As we approach the commencement of the Safeguard Mechanism on 1 July 2016, further guidance has emerged on its operation. It is clear from this material that, at least initially, the mechanism will not act as a hard ceiling on emissions. It will provide businesses with a range of flexible compliance arrangements, including the ability to have their baselines varied to accommodate business expansion. However, the Federal Environment Minister Greg Hunt has indicated that the Safeguard Mechanism has the flexibility to be tightened in the future, to drive reductions in the country’s emissions.
The Safeguard Mechanism will apply to all ‘responsible emitters’ – entities that have operational control of one or more facilities that report under the National Greenhouse and Energy Reporting (NGER) Scheme and have ‘covered emissions’ of more than 100,000 tonnes of carbon dioxide equivalence (t CO2-e) per year (Covered Facility).
Special rules apply to grid-connected electricity generators, transport companies and landfill operators.
The Government has estimated that the 100,000 t CO2-e threshold will cover around 140 large businesses, accounting for about half of Australia’s total emissions.
The impact of the Safeguard Mechanism on business activities will differ from business to business. Some of the matters for consideration in preparation for the commencement of the Safeguard Mechanism include:
Baseline strategy: The baseline determination methodologies are complex and there may be alternative options available to a responsible emitter in having its baseline determined. Responsible emitters should consider the alternative methodologies and , put in place a strategy to manage the entity’s interactions with the Clean Energy Regulator in relation to their initial and future baselines.
Offset strategy: It is not yet clear what impact the Safeguard Mechanism will have on the market for ACCUs, although the flexibility of the scheme suggests that it is unlikely to stimulate large demand for ACCUs. Nevertheless, any entities expecting to exceed the baseline in the initial compliance years should establish an offset strategy, which may involve internally-generated offsets or third party offsets. The strategy should be flexible enough to account for the uncertainties around the future of the Safeguard Mechanism arising from the upcoming federal election and the Coalition Government’s scheduled review.
Revisit operational control: Participants in joint ventures and other arrangements where there is more than one entity involved in the operation of a Covered Facility should consider which entity has operational control, and will therefore be a responsible emitter under Safeguard Mechanism. This may or may not be the same entity that has reporting obligations under the NGER Scheme.
Arrangements between entities with ‘financial’ and ‘operational’ control: Unlike the now-repealed Carbon Pricing Mechanism (CPM), the Safeguard Mechanism does not provide for the transfer of liability from an entity with operational control to an entity that has financial control of a Covered Facility. Responsible emitters should consider whether it is necessary to seek changes to arrangements with contracting parties with financial control over their facilities, who are likely to have control over capex and other decisions which will affect the responsible emitter’s exposure to offset costs.
Cost pass-through clauses: Consideration should be given to whether cost pass-through clauses in existing contracts could be activated in connection with the Safeguard Mechanism. Consideration should also be given to whether carbon cost pass-through clauses should be incorporated into new contracts.
Remain alert: Emissions intensive industries that are outside the coverage of the Safeguard Mechanism should remain alert to possible changes in the scale and design of the Safeguard Mechanism or, if there is a change of government, the introduction of an altogether new emissions trading scheme which may be broader in scope.
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