Reformed Safeguard Mechanism a step forward for net zero ambition

15 May 2023 5 min. read
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Australia has set itself the ambition to reach net zero emissions by 2050. While recent legislative updates by the government have laid strong foundations for the pathway, more still should be done, writes Danielle de la Cour, Senior Managing Consultant at climate consultancy South Pole.

The legislation to strengthen the national emission reduction scheme, the Safeguard Mechanism, combined with the assurance of the Chubb Review into the carbon crediting scheme, will help Australia enter a new era in its efforts to decarbonise as a nation and its highest emitting companies.

This progress should be celebrated – but there is definitely room for increased ambition and improvements to ensure the intended results are realised.

Reformed Safeguard Mechanism a step forward for net zero ambition

Concerns raised about the Safeguard Mechanism include that it does not address Australian companies exporting their products and emissions, and the fact that facilities can rely on offsetting instead of actually reducing emissions. Best practice climate science is clear on the need for both decarbonisation (approximately 90% by 2050) and financing climate action through the use of carbon credits.

Having offsetting without decarbonisation will lead to an underachievement of global climate ambitions.

While we wait to see how Australia’s highest emitters respond, the positive policy signals are expected to continue driving action and investment from the wider corporate sector on their own net zero journeys. Recent developments also signal a positive outlook for Australia’s carbon market which has a key role to play in positioning Australia as a global climate leader.

What is the Safeguard Mechanism?

From July 1, 2023, Australia’s top 215 emitting facilities – owned by around 170 companies and collectively responsible for about 28% of the country’s emissions – will be subject to the reformed Safeguard Mechanism.

The reformed scheme will introduce a hard cap on overall net emissions through to 2030 and will reduce the overall budget over time using a ‘five year rolling average’ calculation. The impact of this is expected to affect the viability of future coal and gas projects.

Facilities have their own emission baseline which also ratchets down over time to ensure reductions. There are financial penalties in place for companies that do not meet their targets, but the new scheme encourages the use of offsets to cover the shortfall in on-site reductions.

Facilities that achieve their reduction targets are issued tradable Safeguard Mechanism Credits (SMCs) and these can be purchased by other facilities to offset any shortfalls in their own reductions. Australian Carbon Credit Units (ACCUs) can also be used for this purpose and are expected to be relied upon in the short-term ahead of any SMCs being generated.

What is the role of carbon credits?

It is widely acknowledged by climate experts that ‘beyond value chain mitigation’ – companies channelling additional climate finance towards mitigation activities outside of their value chains – is a critical action in the fight to halt global emissions growth.

However, it is important that carbon credits are not relied upon by companies instead of actually reducing emissions. Unfortunately, the current structure of the Safeguard Mechanism reinforces this practice of companies paying for their lack of reduction by offsetting using carbon credits. It also suggests that a company buying a carbon credit for offsetting purposes is the same as or equivalent to them reducing their emissions, which it is not.

Both ACCUs and SMCs represent emissions avoided or reduced but using carbon credits to offset is not the same as a company reducing its own emissions and therefore shouldn’t be counted towards an emission reduction or net zero target, but rather recognised as funding for climate action.

In current debates and future improvements of the Safeguard Mechanism legislation, it will be important that the nuance of responsible carbon offsetting is understood.

What does it mean for the ACCU market?

The announcement of the Australian Greens’ support for the Safeguard Mechanism reform and the subsequent passing of the legislation in early April saw a predicted but dramatic rise in ACCU spot prices. Since then, prices have stabilised.

The Australian Government has imposed a cap of $75 per tonne in 2023-2024 for credits required within the scheme, which will rise with inflation. However, it has not signalled a cap in the ACCU price for the secondary market for voluntary purchases outside the Safeguard Mechanism.

This may mean that companies included in the scheme will rely on ACCUs in the short-term, and buyers outside the scheme will likely face challenges in uncapped rising prices and expected supply constraints.

For developers or owners of ACCU projects, rising prices will be welcomed. Those with contracts locked in at a specific price – such as Carbon Abatement Contacts with the Government – may look to renegotiate or sell their carbon credits on the voluntary market to take advantage of higher prices. Price rises and policy certainty may also prompt further new project development and investment in new climate technologies.

The Australian carbon market has recently been under scrutiny, leading the Australian Government to commission a formal review last year into ACCUs. The Chubb Review found Australia’s carbon credit scheme was “fundamentally well designed” and “essentially sound”. The review panel said the system could be improved through integrity assurance, regulation, administration and transparency – a view that has been echoed in global voluntary carbon markets.

Where to go from here?

Recent developments are a positive step forward for Australia. They acknowledge that our highest emitters must play their part in decarbonising the economy and that strong, transparent, and innovative carbon markets are a critical tool for tackling climate change.

But policies alone will not solve the climate emergency and we need to see greater ambition from governments and businesses. The Safeguard Mechanism will need further strengthening to impose meaningful financial penalties on companies that fail to cut their emissions and reduce reliance on offsetting. And to ensure carbon credits remain a credible tool in the fight against global climate change, markets and systems must evolve to maintain the highest integrity standards.