Last week saw the Federal Government reach a significant milestone toward implementing reforms to the Safeguard Mechanism, with both houses of Parliament finally passing the Safeguard Mechanism (Crediting) Amendment Bill 2023 (Bill). The principal function of the Bill is to amend the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) and Australian National Registry of Emissions Units Act 2011 (Cth) to establish a framework for creating Safeguard Mechanism Credits (SMCs), including how SMCs will be issued, transferred and surrendered in the Australian National Registry of Emissions Units (ANREU).

The Safeguard Mechanism reform process began last year with the release of an initial consultation paper (see G+T’s article 'Safeguard Mechanism reform: consultation paper released for feedback'); followed by the release of the Bill and accompanying legislative rules in exposure draft form for public consultation (see G+T’s article on this development 'Safeguard Mechanism reform: Government publishes draft Safeguard Mechanism Credits legislation'); and later in January this year, publication of further exposure draft rules and a Position Paper (Position Paper) setting out the detailed design elements of the proposed reforms.

Following an inquiry into the Bill by the Senate Environment and Communications Legislation Committee, and a series of amendments following protracted negotiations with the Greens, the Bill was finally passed by Parliament on 30 March, in the last sitting week before the May budget. The Greens’ support for the Bill was contingent on a number of amendments that are principally directed toward ‘capping’ the total emissions of facilities covered by the scheme, disincentivising new coal and gas activities, and requiring increased transparency of offset use by covered facilities. Industry groups such as the Carbon Market Institute have broadly supported the intent of the amendments.

In this article, we recap on the Bill’s key features, and canvas the amendments made to the Bill since its introduction into Parliament. We also look ahead to further changes to the Safeguard Mechanism reform design which we expect to see in the final legislative rules.  

Safeguard Mechanism Reform: Key features of the Bill

The Bill inserts into the NGER Act a framework for SMCs to be issued to covered facilities whose emissions fall below their baseline levels, and provisions enabling legislative rules to set out the details of how SMCs will be issued by the Clean Energy Regulator (Regulator). Each SMC will correspond to one tonne CO2e, and will be able to be traded and used by other facilities to reduce their own net emissions.

Meanwhile, the Bill amends the Australian National Registry of Emissions Units Act 2011 (Cth) (ANREU Act) to enable SMCs to be traded in the ANREU, and enable legislative rules to prescribe SMCs for the purposes of the definition of ‘eligible international emissions units’, with the effect that SMCs will receive the same tax treatment as Australian carbon credit units (ACCUs) and will be treated as financial products under corporations legislation.

Aside from setting out a framework for the issuance of SMCs and their legal treatment, the Bill also amends the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act) so that legislative rules can prevent the Regulator from entering carbon abatement contracts for ACCUs from projects that reduce emissions at Safeguard Mechanism covered facilities.

Key amendments following parliamentary scrutiny 

Amended objectives of the NGER Act will introduce a ‘cap’ on emissions  

Following negotiations with the Greens, the final Bill will expand the objects of the NGER Act (at section 3 of that Act) to include the objects of ensuring that a number of ‘safeguard outcomes’ are achieved, including:

• total net emissions of covered facilities between 1 July 2020 and 30 June 2030 do not exceed a total of 1,233 million tonnes of carbon dioxide equivalence (this has been referred to as an overall ‘cap’ on the emissions of covered facilities);
• net safeguard emissions decline to no more than 100 million tonnes of carbon dioxide equivalence for the financial year beginning on 1 July 2029; and decline to zero for any financial year to begin after 30 June 2049 (i.e. achieving net zero by 2050).  
• the 5‑year rolling average safeguard emissions for each financial year after 30 June 2024 are lower than the past 5‑year rolling average safeguard emissions for that financial year. The effect of this addition will be to embed in legislation the requirement for overall emissions of covered facilities to decline over time.

These amendments, which will commence the day after the Bill receives royal assent, essentially enshrine in legislation the policy that the Government set out in its Position Paper earlier this year. In that paper, the Government had proposed that covered facilities contribute to a proportional share (estimated at around 28%) of achieving Australia’s national greenhouse gas emissions reduction targets for 2030, and that the reforms put covered facilities on a broad trajectory to net zero by 2050.

Separate to the outcomes negotiated with the Greens, two final ‘safeguard outcomes’ will be introduced into the NGER Act through amendments to the Bill, which are directed toward incentivising investment in emissions reductions and supporting competitiveness of trade-exposed industries. Specifically, new section 3(2)(e) and (f) of the NGER Act will set out the objectives of ensuring that:

• the responsible emitter for each covered facility has a material incentive to invest in reducing covered emissions from the operation of the facility; and
• the competitiveness of trade‑exposed industries is appropriately supported as Australia and its regions seize the opportunities of the move to a global net zero economy.

Amended obligations relating to making and varying safeguard rules

Importantly, the final Bill also introduces into section 22XS of the NGER Act (the section which deals with the making of legislative rules) a requirement that the Minister for Climate Change and Energy (Climate Minister) cannot make these rules unless satisfied that they are consistent with the new objectives of the NGER Act relating to the overall cap, decline in emissions, and 5-year rolling average. The Climate Minister also needs to be satisfied that the rules take into account the additional safeguard outcomes of incentivising emissions reductions by covered facilities, and supporting competitiveness of trade-exposed industries. The Climate Minister must publish reasons for his satisfaction of these elements.

Further amendments to section 22XS of the NGER Act provide that the Climate Minister may need to amend safeguard rules that are in place if advised by the Climate Change Authority (CCA) or by the Secretary to the Department of Climate Change that amendments are necessary to achieve the safeguard outcomes. Where the Climate Minister receives this advice, he is required to consult publicly on the content of any proposed amendments before implementing them. We explain more about the expanded advisory role of the CCA below.

Climate Change Authority to advise on annual Safeguard Mechanism progress

The final Bill amends section 14 of the Climate Change Act 2022 (Cth) (Climate Change Act) to expand the role of the CCA when advising the Climate Minister on the ‘annual climate change statement’. This statement tracks Australia’s progress towards achieving its national 2030 and 2050 targets (among other things).

Under amendments to section 14, the CCA’s role will now include advising about whether safeguard emissions are declining consistently with the new emissions reduction objects in the NGER Act. This advice will need to specifically take into account the impact of any expanded or new covered facilities – and the impact of any expected future expansions or new covered facilities. If the CCA finds that the scheme is not on track to meet its objects, it will need to advise the Climate Minister whether changes to the safeguard rules are needed, and where this happens, the Climate Minister will need to consult publicly before deciding whether to amend the rules.

It should be noted that this annual review is in addition to the more holistic review of the Safeguard Mechanism’s policy settings, which is scheduled for 2026-27, and will follow the update to Australia’s Nationally Determined Contribution under the Paris Agreement in 2025.

A ‘pollution trigger’ for new or expanded facilities under the EPBC Act 

Significantly, the Government also agreed with the Greens to introduce a new section into the Climate Change Act (at section 15A) to require that where the Minister for the Environment and Water approves a new or expanded facility under the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act) and the facility will be covered by the Safeguard Mechanism, they must provide the Climate Minister, Secretary to the Department of Climate Change, and CCA with an estimate of the facility’s scope 1 emissions. Under amendments to section 14 of the Climate Change Act, this estimate will feed into the CCA’s advice to the Climate Minister as to whether safeguard emissions and net safeguard emissions are declining consistently with the objects of the NGER Act.

While the impact of this change on approvals remains to be seen, it can be expected that this ‘pollution trigger’ will pose barriers to approvals for developments with high scope 1 emissions.

Enhanced transparency measures

The Government agreed a number of amendments to the information publication provisions in the NGER Act – and announced measures to be contained in forthcoming changes to the safeguard rules – that are directed toward increasing transparency of emissions and offsets use under the Safeguard Mechanism.

At a scheme level, amendments to section 24 of the NGER Act – which deals with information publication – will require the Regulator to publish information about total Safeguard Mechanism covered emissions and 5-year rolling average emissions (among other things).

With respect to individual covered facilities, further amendments to section 24 will require that following each financial year, the Regulator must publish for each covered facility the total amount of its covered emissions; the amount of these emissions that are carbon dioxide, methane, and nitrous oxide; the facility’s baseline; and how many SMCs were issued to the facility. Further, where the monitoring period for a covered facility ends during the financial year, the facility’s net emissions number and the types of units surrendered for compliance over the period will also be published. Where a covered facility surrenders ACCUs from a carbon project for compliance, the Regulator will also publish the methodology that applied to that project.

Notably, although there will be no cap on the number of ACCUs which can be used for compliance, the Government has announced that where over 30% of a covered facility’s compliance obligation is met with ACCUs, the facility will need to explain to the Regulator why this is the case. This requirement sits outside of the Bill itself, and we expect to see this specified in legislative rules.

This collection of increased facility-level transparency requirements around carbon credit use highlight the importance of covered facilities thinking strategically and over the longer term about their approaches to using credits (both ACCUs and SMCs) for compliance; and looking to minimise reliance on offsets by prioritising scope 1 emissions reduction.

No funding support for new coal and gas

Following negotiations with the Greens, the Government agreed that any funding to support covered facilities from the Powering the Regions Fund (PRF) will be focussed on decarbonisation and not supporting fossil fuel expansion. This requirement sits outside of any amendments to the Bill, but is expected to be contained in the program rules for the PRF when they are released.

In a similar vein, the Government also agreed to the Greens’ proposed amendment to the Bill that will specify at section 33 of the Industry Research and Development Act 1986 (Cth) that programs which subsidise coal or natural gas extraction will be ineligible for funding under that legislation.

Separately, it should be noted that the National Reconstruction Fund Corporation Bill 2023 (Cth) has also passed through Parliament. The final agreed Bill contains a carve out that was proposed by the Greens to prevent the National Reconstruction Fund from directly financing coal or natural gas, or construction of pipeline infrastructure primarily for the extraction of natural gas.

Treatment of new LNG facilities in the safeguard rules

Following discussions with the Greens, the Government agreed that new gas fields supplying existing liquid natural gas facilities will be treated as ‘new facilities’, meaning that they will be subject to international best practice baselines. For these fields’ reservoir carbon dioxide emissions, best practice is zero in light of the existence of low-carbon dioxide fields and opportunities for carbon capture and storage (CCS). Specifically with respect to new gas entrants in the Beetaloo basin in the Northern Territory, the Government agreed that these covered facilities will be required to have net zero scope 1 emissions from entry. We expect to see each of these changes reflected in amendments to the safeguard rules.

These amendments will place operators of new gas facilities under particular pressure to design and operate their facilities in a manner that minimises scope 1 emissions, and will likely prompt increased investment by these sectors into CCS. In response, some industry groups have called for strong government direction on technologies including CCS.

Tailored assistance for hard-to-abate manufacturing facilities

While the Government agreed to limit support for new coal and gas activities, in the process of finalising the Bill, it also announced a number of measures aimed at providing additional assistance for hard-to-abate industries; particularly the manufacturing sector.

Aside from the new safeguard outcomes in the NGER Act which are directed toward incentivising investment in emissions reductions and supporting competitiveness of trade-exposed industries, the Government announced that it will provide at least $1 billion to support manufacturing and trade-exposed industries through the PRF. Specifically, in addition to the $600 million that will be available to assist decarbonisation efforts at EITE facilities (as the Government had proposed in the Position Paper), an extra $400 million will now be available to sectors that provide inputs into clean energy industries, including steel, cement/lime, and aluminium/alumina. Again, we expect the details of these funding arrangements to be contained in the program guidelines for the PRF.

The Government also announced that certain hard-to-abate, value-added manufacturing facilities will be eligible for a reduced annual decline rate as low as 1% per year (in contrast to the 4.9% decline rate that is proposed to apply for most covered facilities). We expect these details to be contained in the safeguard rules. 

While tailored treatment for EITE facilities is one aspect of the Government’s approach to addressing risks of carbon leakage under the reforms, the Government has also committed to commissioning a review into the feasibility of an Australian carbon border adjustment mechanism, with particular consideration to introducing this type of mechanism for the steel and cement sectors (including clinker and lime production). This review is expected to commence later this year, and finish in 2024.

Enhanced integrity of ACCU projects

The final Bill will amend the CFI Act to implement the first stage of the Government’s response to the independent review into the integrity of the ACCU scheme led by Professor Ian Chubb (Chubb Review), after the Government accepted the review’s recommendations in principle earlier this year. Specifically, amendments to sections 106 and 114 of the CFI Act will specify that methods for ACCU projects cannot be made or varied unless they comply with legislated offset integrity standards, and requiring through changes to section 168 of the CFI Act that carbon estimation area information is published for land-based ACCU projects.

Outside of amendments to the Bill itself, following negotiations with the Greens in relation to integrity concerns affecting the Human Induced Regeneration (HIR) method for ACCU projects, the Government announced that consistent with the Chubb Review’s recommendations, HIR projects will be unable to receive ACCUs until an independent audit verifies that they meet a number of criteria directed at ensuring these projects result in real native forest cover and achieve permanent carbon storage.

The Government is yet to release details of how these audits will be undertaken, but it can be expected that they may cause crediting delays for current proponents of HIR projects.

Safeguard Mechanism Reforms to Take Effect on 1 July: What to Expect

With the Bill now passed and awaiting assent, the Government is expected to finalise amendments to the safeguard rule and other subordinate legislation by May 2023, ahead of the reformed Safeguard Mechanism scheme taking effect on 1 July this year. These subordinate instruments are expected to implement the key design elements of the reforms, including the annual baseline decline rate for covered facilities, and treatment of new and trade-exposed facilities.

Covered facilities should monitor closely for the release of these instruments, as 1 July looms closer. Looking ahead, we expect to see the Government’s review into the feasibility of an Australian carbon border adjustment mechanism, as well as the details of funding under the PRF, later in the year.