Australia's revamped emissions scheme to cut industrial emissions by 4.9% every year

Australia has outlined reforms for its revamped compliance emission trading scheme, called the Safeguard Mechanism (SM), under which net emissions covered will fall from a projected 143 million mtCO2e in 2022-23 to no more than 100 million mtCO2e by 2030, according to a consultation paper published Jan. 10.

The reforms introduce a baseline decline rate as one the most important structural changes to meet emissions reduction goals, at 4.9% each year to 2030, with post-2030 decline rates set in five-year blocks, after updates to Australia's Nationally Determined Contribution (NDC) under the Paris Agreement, the paper said.

Decline rates for 2030-31 to 2034-35 would be set by July 1, 2027, and to maintain progress to net-zero by 2050 indicative annual decline rates would be set for 2030-31 to 2049-50, the paper said.

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The reforms are significant because they position the Safeguard Mechanism, which covers more than 200 of Australia's most emissions intensive facilities, as a major tool to meet national emissions goals. Launched in 2016, the Safeguard Mechanism has been criticized for failing to reduce emissions and put sufficient controls on industrial emissions in the long-term.

The reforms will allow the Safeguard Mechanism to contribute to 28.14% of the national emission abatement target, in line with the share of the industries covered by the scheme. Feedback to the latest proposals closes Feb. 24, 2023 and the reforms are expected to commence from July 1, 2023.

One of the key proposals is the introduction of a new type of carbon credits, called Safeguard Mechanism Credits or SMCs, which will be issued to facilities that emit below their baseline emissions and can be sold to facilities that emit above their baselines.

The government will introduce Safeguard crediting and trading from July 1, 2023, the paper said.

The entities covered by the Safeguard will be able to continue to buy Australian Carbon Credit Units or ACCUs to offset their emissions, as they were doing before the reforms were proposed, but will not be able to generate new ACCUs from any new project to avoid double counting and integrity issues, according to the paper.

The government also said that it found support for the use of high-quality international voluntary carbon credits from market participants under the Safeguard Mechanism and that it would consider their use in meeting Australia's international climate targets.

"In 2023 the Government will consult on amending legislation that enables high integrity international units to be included in the Australian National Registry of Emissions Units and provide a mechanism for such units to be used for compliance at a future time if warranted," the paper said.

Addressing price volatility

One of the main concerns about the proposed reforms was price volatility in the existing market of Australian carbon credits or ACCUs, as the industries shift towards generating the new Safeguard Mechanism credits.

"The Government will introduce a cost containment measure by selling Government-held ACCUs to give businesses certainty about maximum compliance costs. Any funds received from the sale of ACCUs would be used to support additional decarbonization," the paper said.

To tackle price volatility due to shrinking ACCU supplies, the government also proposed a price cap of A$75/mtCO2e ($51.08/mtCO2e) in 2023-24, for ACCUs sold to entities that need them for compliance, increasing with the Consumer Price Index plus 2% each year. The cost containment measure will be reviewed in 2026-27, the paper said

On Jan. 9, the spot ACCU price was at A$33.80/mtCO2e ($23.36/mtCO2e), according to investment firm Jarden.

The government said that flexible compliance arrangements will allow the emission goals to be met through a combination of on-site and external emission reductions, and technological developments and efficiency improvements will evolve between 2024 and 2030.

"For the remaining abatement task, a sufficient supply of SMCs and ACCUs is expected to be available to meet Safeguard demand, with Safeguard crediting, existing ACCU projects and new ACCU projects all expected to contribute to a growing, liquid market, supporting price stability," it added.

This dovetails with the understanding that emissions must first be reduced, before the use of offsets.

Another major concern addressed by the reforms is carbon leakage, where Australian industries could become less competitive due to tighter emissions goals, and there was a need to ensure businesses are not competitively disadvantaged in global trade.

To address this, the government has proposed financial assistance, such as funding of an initial A$600 million under the Safeguard Transformation Stream of the Powering the Regions Fund to support decarbonization activities.

The paper said that many stakeholders identified a carbon border adjustment mechanism (CBAM) as their preferred approach for managing trade competitiveness impacts, referring to a carbon tax on traded goods, and it would consider CBAMs as one of the potential responses to carbon leakage.