The Safeguard Mechanism is now law – here’s your to-do list for Australia’s new carbon rules

08 August 2023

The Federal Government has reformed the Safeguard Mechanism to put Australia’s largest industrial emitters on a pathway to net zero by 2050. The updated scheme commenced on 1 July 2023, capturing around 219 facilities responsible for almost a third of the nation’s emissions.

Here’s your to-do list, and a brief explainer for those new to the legislation. Whether you operate a safeguard facility or not, it’s important to understand the implications. The Safeguard Mechanism will affect the voluntary carbon market, and a review could see it expand in coverage in coming years.

We can help - please get in touch with one of the authors or your usual KWM contact.

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To Do List

Determine a monitoring and compliance strategy.
Consider whether you should take advantage of any of the flexible compliance options (eg the borrowing adjustment on its baseline or multi-year monitoring period arrangements).
Consider eligibility for classification as a manufacturing or non-manufacturing ‘trade-exposed baseline-adjusted facility’ because these facilities can benefit from a discounted decline rate.
Will you need a supply of ACCUs (Australian Carbon Credit Units) for compliance purposes? Consider the implications of the Government’s proposed arrangement to provide safeguard facilities a fixed purchase price for ACCUs ($75 in 2023-24, increasing with CPI+2% each year).
If you need to surrender ACCUs equal to more than 30% of your baseline, think about the written explanation you will need to provide to the Clean Energy Regulator of why you did not carry out more abatement. Remember that the regulator will publish your explanation and stakeholders are likely to scrutinise it.
Net zero baselines exist for reservoir CO2 in new fields supplying existing LNG facilities and for shale gas projects. Ask the question: Will the project designs for these new fields need to include carbon capture and storage?
Consider the opportunity to generate and trade SMCs (Safeguard Mechanism Credits).
If you play in the voluntary carbon offset market, consider the potential increased demand for ACCUs and the opportunities this presents.
New facilities (excluding reservoir carbon dioxide feeding existing LNG) will have baselines set at international best practice levels, adapted for an Australian context. International best practice emissions intensities have not yet been determined (apart from reservoir carbon dioxide feeding existing LNG). Engage with the Department of Climate Change, Energy, the Environment and Water on the setting of these “best practice emissions intensities”.
The government is finalising the funding rules for the Powering the Regions Fund and National Reconstruction Fund. If you are a “trade exposed facility” consider whether your facility may be eligible for assistance.
Look out for future amendments to the Safeguard Rules and the government’s review of the policy settings in 2026-27.

Which facilities are covered and what are the emissions targets?

The Safeguard Mechanism applies to the largest industrial facilities in Australia, which it labels safeguard facilities. Safeguard facilities have a total amount of Scope 1 emissions (that is, direct emissions from its own activities) of greenhouse gases of at least 100,000 tonnes of CO2 equivalent in a financial year. These emissions are referred to as ‘covered emissions’ (some Scope 1 emissions are excluded, but these are niche).

The safeguard facility operator must limit emissions to below a baseline amount of CO2 equivalent.

Source: Clean Energy Regulator

There are around 219 safeguard facilities, including in the mining, manufacturing, transport, oil, gas and waste sectors. These facilities contributed 28% of Australia’s national emissions in 2020-21.

The objective of the Safeguard Mechanism when it was originally enacted in 2016 was to ensure that emissions reductions credited under the ACCU scheme (then known as the Emissions Reduction Fund) were not displaced by a significant rise in emissions in other parts of the economy.

As part of the reforms to the Safeguard Mechanism in early 2023, this objective was tightened and enshrined in legislation. The legislated safeguard objectives now include three emissions targets:

Net emissions budget - the total net safeguard emissions for all financial years between 1 July 2020 and 30 June 2030 must not exceed 1,233 million tonnes of carbon dioxide equivalence.
Net emissions caps - net safeguard emissions must decline to no more than 100 million tonnes of carbon dioxide equivalence for the financial year beginning on 1 July 2029, and zero for any financial year to begin after 30 June 2049.
Gross limit on emissions - the 5-year rolling average safeguard emissions for each financial year that begins after 30 June 2024 must be lower than the past 5-year rolling average safeguard emissions for that financial year.

Where the Safeguard Mechanism fits within Australia’s climate initiatives

The core requirement: Keeping net emissions </= Baseline

The core requirement that is imposed on operators of safeguard facilities is found in the National Greenhouse and Energy Reporting Act:

A person that has operational control for a safeguard facility is required to ensure that the “net emissions number” does not exceed the “baseline number” in relation to the safeguard facility for the relevant monitoring period.

Some of the detail (such as production variables and industry average emissions intensity values) is being finalised, with a consultation ongoing as at the date of this article.

	Description of baseline	INDIVIDUAL	Example uses 2
Existing facilities	Baselines will be set using a hybrid model initially weighted towards the use of site-specific emissions intensity values (which facilities have to apply for), transitioning to industry average emissions intensity values by 2030.
New facilities	Baselines will be set at international best practice levels, adapted for an Australian context. Note international best practice emissions intensities have not yet been determined (apart from gas facilities).
New gas facilities	New gas fields supplying existing liquefied natural gas facilities will be treated as new facilities and given international best practice baselines, which is zero because of low-CO2 fields and opportunities for carbon capture and storage. New shale gas projects will be required to have net-zero scope 1 emissions from the outset.
Landfill facilities	Landfill facilities have different coverage and baseline setting arrangements to other facilities. This is calculated from a default capture efficiency rate of 37.2 per cent.
Electricity facilities	A single ‘sectoral’ baseline where individual grid-connected electricity generators are not covered, provided total emissions from grid connected electricity generators do not exceed the sectoral baseline of 198 million tonnes CO2 equivalent.

How the baselines will decline over time

The Safeguard Mechanism provides for baselines to decline each year.

The decline rate will be 4.9% each financial year to 2030. From 2030, the default decline rate is proposed to be 3.285%.

Facilities that export significant volumes and face an increased risk of carbon leakage (Trade Exposed Baseline Facilities) will be eligible to apply to the Clean Energy Regulator for a discounted decline rate based on a scheme impact metric. For these facilities the minimum decline rate is 1% for manufacturing facilities and 2% for facilities in other sectors.

But there is some flexibility built into the Safeguard Mechanism…

The scheme affords operators of safeguard facilities some flexibility in the obligation to keep its emissions below a declining baseline.

	What does it mean?	INDIVIDUAL	Example uses 2
Surrendering ACCUs	Operators may surrender ACCUs if they exceed their baseline. Safeguard facilities that have exceeded their baseline can purchase Australian Carbon Credit Units (ACCUs) from the government at a fixed price of AU$75 in 2023-24, increasing with CPI plus 2% each year. This flexibility mechanism is subject to a disclosure obligation where a facility surrenders ACCUs equal to more than 30% of its baseline. If this happens, the operator must submit a statement to the Clean Energy Regulator setting out (amongst other matters): whether limitations in available technologies affected the level of carbon abatement undertaken at the facility during the period whether there are barriers to undertaking carbon abatement, and information about future opportunities for undertaking carbon abatement at the facility. The regulator will make this information publicly accessible.
Crediting and trading SMCs	Safeguard facilities can generate tradeable Safeguard Mechanism Credit units (SMCs) when their emissions are below their baseline and trade these SMCs with other designated large facilities. Facilities can surrender SMCs to meet the safeguard baseline obligation or bank them for future years. Unlimited banking of SMCs will be allowed to 2030 and their eligibility for use after 2030 will be considered in a review to be carried out by the government in 2026-27.
Borrowing from future baselines	The operator of a safeguard facility may ‘borrow’ from its future baseline. They can do this by applying to the Clean Energy Regulator to have the facility’s baseline increased in a particular year, and then decreased by a corresponding amount (plus interest) in the following year. Borrowing of up to 10% of a facility’s baseline each year will be allowed to 2030, with an interest rate of 2% in the first two years, and then 10% in subsequent years.
Declared multi-year periods	The operator of a safeguard facility may consider applying to the Clean Energy Regulator for the declaration of a multi-year monitoring period of up to 5 years ending no later than 2030 on application. This may be helpful for a safeguard facility that may exceed its baseline in one year but plans to average out the exceedance over the multi-year period.

Further changes may follow

The policy settings of the Safeguard Mechanism will continue to be subject to review and adjustment.

For example the government has indicated that it expects to review the following issues this year:

Whether the Safeguard Mechanism should recognise international offsets.
Policy options to address carbon leakage, including an Australian carbon border adjustment mechanism for the steel and cement industry.

The government will also review the policy settings of the Safeguard Mechanism in 2026-27.

For more on the Safeguard Mechanism, see our related insights: