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In-depth: Just how safe is the safeguard mechanism?

The Federal Government’s safeguard mechanism is poised to slash Australia’s carbon emissions. But there is an emerging fear that without adequate protections in place, manufacturing – and carbon emissions – will simply be pushed overseas. 

The Federal Government first introduced the Safeguard Mechanism in 2016 to put a cap on emissions growth from largescale industrial activities.

The mechanism applied to activities that produce annual carbon emissions in excess of 100,000 tonnes. The idea was to introduce baseline emissions for individual facilities, which companies couldn’t exceed, or would have to buy carbon credits to offset excess.

But the effectiveness of the mechanism was questionable. Baselines were never lowered, and emissions continued to rise. Now, three years later, the Government is giving it another crack.

In March of this year, Parliament passed the Safeguard Mechanism (Crediting) Amendment Bill 2023, which tightened the belt on emissions in line with the nation’s target to reduce emissions by 43 per cent by 2030 – and the greater goal of net zero by 2050.

The new law will come into effect from July and will enforce baselines on facilities with scope one emissions in excess of 100,000 tonnes per year.

That covers 215 of the country’s top polluters from the mining, quarrying, oil and gas, and a handful of other industries, which account for almost 30 per cent of Australia’s total emissions.

These strict baselines are set to be incrementally lowered each year, with the short-term goal of reducing annual emissions from 140 million tonnes to 100 million tonnes by 2030.

On average, emissions-intensive companies will have to reduce emissions by almost five per cent per year.

But what happens if a company exceeds its emissions baseline?

Key to the regulations are changes to the availability and use of carbon offsets. An Australian carbon credit unit (ACCU) is a unit issued to a person or company by the Clean Energy Regulator. Each ACCU represents one tonne of carbon dioxide stored or avoided by a project. For every project that goes under emissions target, a company will receive an equivalent in ACCU’s.

These ACCU’s have tangible value. They also have a particular function when it comes to the safeguard mechanism. When a company exceeds its baseline, ACCU’s can be surrendered to offset emissions. If a company has no ACCU’s to spare, they can be purchased from other companies.

Companies who exceed their emissions budget and are forced to buy ACCU’s will do so at significant financial cost. While those who cut emissions and earn ACCU’s stand to gain.

And to deter companies buying up ACCU’s to justify massive blowouts in their baselines, the new regulation requires facility operators to publicly justify their use of offsets to the Clean Energy Regulator if they use more than 30 per cent or more offsets to meet the baseline.

The interaction between the safeguard mechanism and ACCU’s is the Government’s way of providing flexibility and incentivising companies to adopt carbon-reducing activities at an operational level, rather than relying on offsetting.

As for what the law will mean for new projects, the situation remains unclear.

The new law includes a ‘pollution trigger’, which requires the Minister for Environment and Water to give an estimate of the scope one emissions of an approved expansion or construction of a project that falls within the safeguard mechanism. The Minister for Climate Change will then be required to undertake public consultation to determine whether the safeguard mechanism rules will require amendment as a consequence.

In other words, major projects will all have to squeeze into the same total annual emissions budget of 100 million tonnes by 2030. If a new project seems likely to blow that budget, the Government may amend the safeguard rules to preserve the cap by limiting or reducing the value of ACCU’s, adjusting the decline rates of baselines, or imposing conditions on new projects.

In effect, the Government will have to weigh approving new projects against tightening baselines for companies covered by the safeguard mechanism.

While it might limit Australia’s emissions, there is one issue – it incentivises taking industrial activity to other countries, effectively pushing emissions offshore.

Boral and Adbri, two major players in the cement industry, will both be affected by the safeguard mechanism and have expressed similar concerns. The companies say they want to see protections put in place for the sake of jobs and local manufacturers.

The worry is that companies will simply import carbon-intensive products from overseas.

Boral and Adbri have accordingly urged the Government to consider a carbon border adjustment mechanism, which is a tax on emissions-intensive goods imported from countries with lax environmental standards.

Such a mechanism would balance the cost of overseas goods with those made onshore at a higher cost, ensuring onshore manufacturers can remain competitive in the wake of the safeguard mechanism.

Vik Bansal, chief executive officer of Boral, said in a statement that a carbon border adjustment would help ensure that local manufacturers could compete with rivals from other countries, who typically do not have an equivalent measure to the Australian safeguard.

“We need to ensure local manufacturers remain competitive and there’s no carbon leakage or bleed that occurs with importation of materials from countries with lower environmental standards.”

“While we appreciate the passage of the safeguard mechanism, we’re also urging the government to move with pace on its review into a carbon border adjustment mechanism,” Bansal said.

“This will ensure a level playing field for domestic manufacturers who are committed to decarbonisation.”

Speed was important in bringing in a level playing field so that local cement manufacturers are not disadvantaged, Adbri chief executive Mark Irwin said.

Adbri has four cement plants in Australia and the group’s Birkenhead plant in Adelaide, which employs 300 people and has been in operation since 1914, is considered most at risk with this recent announcement.

“A carbon border adjustment mechanism would preserve manufacturing jobs in Australia and also minimise the risk of carbon leakage,” Irwin said.

“We hope that the government and the opposition can work together to implement a carbon border adjustment mechanism as soon as possible for sectors such as ours.”

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