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What do reforms to the Safeguard Mechanism mean for your business?

A photographic portrait of Fiona Hancock
Fiona Hancock

Partner, Climate Change and Sustainability Services, Ernst & Young, Australia

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4 minute read 20 Feb 2023
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Sustainability
Climate change and sustainability services

With reforms to the Safeguard Mechanism set to roll out on 1 July 2023, the EY Net Zero Centre has released fresh analysis to cut through the complexity and help companies navigate the next steps.

In brief

  • What is the Safeguard Mechanism and why does it matter?
  • How will reforms change the Safeguard Mechanism? And what does this mean for emissions-intensive industries?

In January 2023, the Albanese Government revealed planned reforms of the Safeguard Mechanism to ensure Australia meets its 43% emissions reduction target by 2030, and remains on the road to net zero emissions by 2050.

The Safeguard Mechanism, introduced in 2016, imposes limits on Australia’s largest greenhouse gas emitting industrial facilities – those that release at least 100,000 tonnes of Scope 1, or direct, emissions each year.

The reforms will directly impact the roughly 215 facilities that account for 28% of Australia’s emissions – among them the nation’s largest listed companies.
The release of the Australian Government’s position paper answers some questions. But other questions remain unanswered, and many details are unsettled.

The EY Net Zero Centre’s climate change strategists have dug into the detail and prepared a new paper to help EY clients to make the right decisions as the reforms roll out.

How fast and how far will emissions cuts go?

The Safeguard Mechanism requires Australia’s largest greenhouse gas emitters to keep their net emissions below an emissions limit, called a ‘baseline’.

The Australian Government’s position paper suggests baselines will be reduced by an average decline rate of 4.9% each year to 2030. This would cover all facilities – but there are some notable exceptions which we outline in our paper.

EY has modelled various scenarios to understand what this baseline will mean for emissions reduction and for the companies captured by the Safeguard Mechanism.

Download the full report here 

 

PDF (713KB)
For the Safeguard Mechanism to achieve its objective, the total emissions across covered facilities will need to be below 100Mt CO2-e each year by 2030. We estimate total emissions from the covered facilities will amount to 90Mt CO2-e – leaving little room for increases to production or new market entrants.

What will the changes mean for carbon offsets?

Heavy-emitting facilities that don’t cut their pollution will be required to buy either Australian Carbon Credit Units (ACCUs) or Safeguard Mechanism Credits (SMCs) equivalent to the volume of carbon emissions that exceed their cap.

A cost containment measure which will see the Australian Government make ACCUs available to liable entities at $75 per tonne CO2-e in 2023-24, increasing with CPI plus 2%, has effectively set a price ceiling – at least initially. Companies that don’t meet their emission reduction targets and fail to buy offsets could face fines of $275 a tonne.

The cap provides some assurance, but EY report Essential, expensive and evolving (2022) has found reaching net zero will require a 30- to 40-fold increase in volumes of high-quality carbon credits.

What are the implications to emissions-intensive, trade-exposed industries?

Emissions-intensive, trade-exposed, or EITE, industries or sectors use energy-intensive processes and are vulnerable to competition from overseas producers who may face fewer environmental regulations.

 

To ensure EITEs remain internationally competitive, eligible facilities will be eligible for grant funding to support on-site decarbonisation activities. Facilities which face significant impacts will also be able to apply for a lower baseline decline rate, which could be as low as 2% for the most significantly impacted.

 

The government has also indicated, for the first time, that it would consider introducing carbon border adjustment tariffs on imports from other countries which do not have a carbon price. This could be similar to the European Union’s new Carbon Border Adjustment Mechanism.

 

Starting from 2026, the European Union’s Carbon Border Adjustment Mechanism will put a fair price on the carbon emitted during the production of carbon intensive goods – including iron, steel, cement, aluminium, electricity and hydrogen – that enter the EU.

While some questions about the future of the Safeguard Mechanism are easy to answer, many more questions are complex, and the unknowns overshadow the knowns. The decarbonisation opportunity can take you through the next step as you steer your company on the road to net zero.

Summary

Reforms to the Safeguard Mechanism won’t just impact the 215-or-so facilities that account for 28% of Australia’s emissions. The reforms will reverberate throughout the economy as the Safeguard Mechanism drives industrial emissions towards net zero. The best time to start planning was yesterday. The next best time is today.

About this article

A photographic portrait of Fiona Hancock
Fiona Hancock
Partner, Climate Change and Sustainability Services, Ernst & Young, Australia
Climate change leader, passionate about decarbonisation. Engineer, women in STEM advocate, vigneron and amateur ceramicist.

Contributors

Related topics
Sustainability
Climate change and sustainability services

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