The safeguard mechanism - Overview

The Emissions Reduction Fund is central to the Government’s Direct Action Plan to cut emissions to five per cent below 2000 levels by 2020 and to 26 to 28 per cent below 2005 levels by 2030. It comprises an element to credit emissions reductions, a fund to purchase emissions reductions, and a safeguard mechanism.

The crediting and purchasing elements will lower national emissions, while funding businesses to undertake projects that will improve their productivity, for example through more efficient industrial processes, improved household and commercial energy efficiency and improved soil productivity.

The safeguard mechanism will protect taxpayers’ funds by ensuring that emissions reductions paid for through the crediting and purchasing elements of the Emissions Reduction Fund are not displaced by significant increases in emissions above business-as-usual levels elsewhere in the economy.

Background

The final design of the safeguard mechanism has been determined following extensive consultation with businesses and the community. The Emissions Reduction Fund Green Paper was released in December 2013 for public comment, followed by a White Paper in April 2014 outlining key design features. A consultation paper canvassing options for the safeguard mechanism was released in March 2015. The views expressed in over 85 submissions have informed the final design.

The legislative framework for the safeguard mechanism is set out in the National Greenhouse and Energy Reporting Act 2007 (the Act), through amendments included in the Carbon Farming Initiative Amendment Act 2014.

The administrative detail of the safeguard mechanism is set out in the legislative rules. This includes: which kind of facilities will be covered; how emissions baselines will be set; and administrative processes for demonstrating compliance with safeguard obligations. Exposure draft legislative rules were released in September 2015 with submissions received from over 50 interested parties.

The safeguard mechanism is also supported by amendments to related legislative instruments to give effect to the safeguard mechanism, including the National Greenhouse and Energy Reporting Regulations 2008 and the National Greenhouse and Energy Reporting (Audit) Determination 2009.

How will the safeguard mechanism work?

The safeguard mechanism will start on 1 July 2016. It will require Australia’s largest emitters to keep emissions within baseline levels.

Who will be covered by the safeguard mechanism?

The safeguard will apply to around 140 large businesses that have facilities with direct emissions of more than 100,000 tonnes of carbon dioxide equivalence (t CO₂-e) a year. This will cover around half of Australia's emissions.

The entity with operational control of a facility will be responsible for meeting safeguard requirements, including that the facility must keep net emissions at or below baseline emissions levels.

The safeguard mechanism will apply broadly to a variety of business entities, including corporations, partnerships, trusts, and local councils.

Which emissions will be covered by the safeguard mechanism?

The safeguard mechanism will apply to direct emissions (scope 1), including direct emissions from energy production, where a facility’s emissions are above 100,000 t CO₂-e. Electricity generators will be responsible for the direct emissions from electricity production, not the electricity users.

How will baselines be set for existing facilities?

Baselines for existing facilities will be set using data already reported under the National Greenhouse and Energy Reporting Scheme (if data is available). Baselines will reflect the highest level of reported emissions for a facility over the historical period 2009–10 to 2013–14, as shown below.

There is a minimum baseline of 100,000 t CO₂-e to ensure that baselines cannot be below the coverage threshold.

Baselines can be adjusted to accommodate economic growth, natural resource variability and other circumstances where historical baselines will not represent future business-as-usual emissions.

How will baselines for new investments be set?

New investments can occur at existing facilities or through the creation of a new facility. Baselines for new investments will encourage facilities to achieve and maintain best practice. This best practice approach applies to new investments that are operational after 2020. This approach is not applied to investments completed prior to 1 July 2020 because such investments are likely to be already underway and therefore have little scope to change their design in response to best practice baselines.

Up to 2020, baselines for new investments will be based on an audited emissions forecast provided by the facility operator, with a reconciliation of the estimate against the actual performance of the facility at the end of the forecast period.

Benchmarks will be used to determine baselines for new investments whose covered emissions first exceed 100,000 t CO2-e after 1 July 2020. These benchmarks will be based upon emissions intensity of production, and will use the best practice for that industry as the guide.

How will the Government ensure compliance?

Flexible compliance arrangements will give designated large entities access to a range of options for meeting safeguard obligations.

• A ‘net emissions’ approach will allow businesses to use Australian Carbon Credit Units (ACCUs) to offset emissions above the baseline.
• Multi-year monitoring will allow a facility to exceed its baseline in one year, so long as average emissions over two or three years are below the baseline.
• An exemption will be available for facilities whose emissions are the direct result of exceptional circumstances, such as a natural disaster or criminal activity.
• There will be a range of discretionary, graduated enforcement options that the Clean Energy Regulator will be able to apply to deter non-compliance.

How will the electricity sector be treated?

A baseline will apply across the electricity sector, with individual baselines to apply in the event that the sectoral-baseline is exceeded. The sectoral baseline will be set at the high point of sectoral emissions over the period 2009-10 to 2013-14.

Individual baselines will also be set at each facility’s highest annual emissions between 2009-10 and 2013-14. Generators will have access to the same emissions management options as facilities in other sectors, as well as similar baseline adjustments to accommodate economic growth.

Who will administer the safeguard mechanism?

The safeguard mechanism will be administered by the Clean Energy Regulator.

The operation of the Emissions Reduction Fund—including the safeguard mechanism—will be reviewed 2017 to ensure its ongoing effectiveness.

More information

Details about the Emissions Reduction Fund are available at www.environment.gov.au/emissions-reduction-fund.

Note: While the Commonwealth has made reasonable efforts to ensure the accuracy, correctness or completeness of the material, the Commonwealth does not guarantee, and accepts no liability whatsoever arising from or connected to, the accuracy, reliability, currency or completeness of this material. The information provided in this factsheet is based on policy reflected in the National Greenhouse and Energy Reporting Act 2007 (as amended by the Carbon Farming Initiative Amendment Act 2014), the National Greenhouse and Energy Reporting Regulations 2008 (as amended by the National Greenhouse and Energy Reporting Amendment (2015 Measures No. 2) Regulation 2015), and the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (as made on 7 October 2015). Please note that the material in this factsheet is provided for general information only and should not be relied upon for the purpose of a particular matter. Please obtain your own independent professional advice before any action or decision is taken on the basis of any of the material in this factsheet.