Why the Safeguard Mechanism deal might not be all it’s cracked up to be

The announcement of the Albanese Government’s deal with the Australian Greens over the Safeguard Mechanism, and the subsequent passage of the bill through Parliament, triggered a wide spectrum of responses.

The Greens and News Corp media have claimed the deal will strike a hammer blow to the Australian coal and gas industries. A number of environment groups like the Climate Council feel similarly. 

But companies like Orica, BlueScope Steel and Adbri, whose facilities are covered by the Safeguard Mechanism, support the reforms. Even Tamboran Resources and Empire Energy, who are developing the Beetaloo Basin gas reserve, welcomed the deal.

And the share market reaction suggests the policy is more ‘steady as she goes’ than end of days: most notably, the share prices of most of the major companies with covered facilities increased in the days following the announcement (Figure 1).

Figure 1. Index of ASX closing price of 11 companies with covered facilities relative to opening price on day deal was announced (open 27 March = 1)

How can these two versions of reality co-exist? The answer lies in a combination of political posturing and alternative views on the future of coal and gas and the degree of flexibility that is built into the deal.

For a number of years, the Australian Government has been projecting that emissions from the sectors covered by the Safeguard Mechanism would be relatively stable in the near-term under business-as-usual (BAU) circumstances (i.e. no new policy measures), before increasing by several million tonnes (Mt) later this decade, mainly due to new gas and LNG developments.

The enhancements to the Safeguard Mechanism are forecast to change this, pushing down ‘net emissions’ (gross emissions less offsets) from covered facilities from approximately 143 MtCO₂-e to around 100 MtCO₂-e in 2030.

As Figure 2 suggests, in the absence of the Safeguard Mechanism enhancements, the Government was anticipating some new gas and coal projects but not a large increase in total covered emissions. 

Figure 2. Actual and projected business-as-usual (BAU) (no policy change) emissions from facilities covered by Safeguard Mechanism vs net covered emissions with enhanced Safeguard Mechanism, 2016-17 to 2029-30  

The Greens positioning on the Safeguard Mechanism was orientated around a feared surge in new coal and gas projects.

The hammer blow they claim to have stuck comes in the form of a negotiated ‘hard cap’ on absolute emissions, whereby 5-year rolling average gross emissions from covered facilities will need to fall over time, and a limit on net emissions from 2021-22 to 2029-30 of 1,233 MtCO₂-e.

The net emissions limit of 1,233 MtCO₂-e is consistent with the Government’s projected net emissions from covered facilities over this timeframe under the enhanced Safeguard Mechanism. The deal also includes net emission targets for 2030 (100 MtCO₂-e) and 2050 (0 MtCO₂-e) but the hard cap on absolute emissions and cumulative rolling cap on net emissions are the showpieces. 

The Greens claim these measures effectively stop the feared wave of new coal and gas projects – and, for the same reason, the News Corp media claims the deal is ruinous for the economy. 

But will these negotiated caps really make much difference, and how ‘hard’ are they really? 

For the hard cap on absolute emissions to matter, there would need to be a prospect that it will actually bind. For this to occur, in the absence of the changes the Greens negotiated, broadly, one of two things would need to have happen.  

1. The ratcheting down of the emission limits (called ‘baselines’) that apply to facilities would need to have almost no impact on the onsite emissions from the covered facilities. In this scenario, gross emissions from covered facilities remain in line with Government projections and, to meet their obligations, the facilities rely almost entirely on offsets (Australian carbon credit units (ACCUs)). For this to occur, the projected supply of ACCUs over the period to 2030 would need to roughly double and there would need to be almost no financially viable onsite abatement opportunities at the covered facilities (either that or facility operators are assumed to be economically irrational). Neither of these are plausible. 
2. In the absence of the Safeguard Mechanism enhancements, emissions would need to have been about to soar from covered facilities. In this version of reality, the Safeguard Mechanism enhancements work to pull down emissions but the reductions are not enough to bring absolute emissions below the rolling average. Figure 3 below shows a rough estimate of how rapidly gross emissions from covered facilities would need to have increased under BAU circumstances, relative to the latest Government projections, for the hard cap to have come into play over the period to 2030 (assuming 60% of abatement comes from onsite emission cuts). An increase of this magnitude was highly unlikely, as was the required increase in supply of ACCUs. 

Figure 3. Estimate of required increase in emissions from facilities covered by Safeguard Mechanism for the hard cap on absolute emissions to bind (Greens BAU)

Given neither scenario is plausible, the hard cap on absolute emissions appears to be of no practical relevance. 

The net emissions cap of 1,233 MtCO₂-e is different. While the Government already announced it intended to keep net emissions from covered facilities to 1,233 MtCO₂-e over the decade, and to hold back a portion of the emissions budget to ensure net emissions stayed within this cumulative cap, there was a risk a future government could refuse to tighten the baselines in the event it appeared the budget would be exceeded.

In principle, legislating the net cap means that, if the budget is at risk of being exceeded, the Government will need to tighten the baselines. 

This looks like a material win but its effectiveness depends on how it was legislated. Contrary to how they have been publicly portrayed, the negotiated legislative changes do not guarantee the caps will be adhered to. They consist of two process requirements.

1. Under the Climate Change Act 2022 (Cth), the Climate Change Authority is required to provide advice to the Minister in relation to the preparation of an annual climate change statement. This must now include advice about: (i) whether absolute and net emissions from covered facilities are declining in accordance with both the absolute and net emissions caps, and (ii) if they aren’t, whether the baselines need to be tightened. If the Authority advises that absolute or net emissions aren’t declining in accordance with the caps, and that the baselines need to be tightened, then the Minister must undertake public consultation in relation to whether the baselines need to be tightened. At the completion of the consultation, if the Minister is satisfied the baselines need to be tightened, only then is the Minister legally obliged to amend the baselines. 
2. Under the Climate Change Act 2022 (Cth), if the Environment Minister approves a new development and they are satisfied it is likely to increase the emissions from an existing or likely new covered facility, and the Environment Minister has received an estimate of the scope 1 emissions from the facility, then the Environment Minister must provide the estimate to the Climate Change Minister, Secretary of the Climate Department and the Climate Change Authority. If the Secretary is then satisfied that the baselines need to be tightened in order to keep the emissions of covered facilities within the absolute and net emissions caps, they must tell the Climate Change Minister. If the Climate Change Minister receives this advice from the Secretary, the Minister must undertake public consultation in relation to whether the baselines need to be tightened. After the consultation, if the Minister is satisfied the baselines need to be tightened, again, only then is the Minister legally obliged to amend the baselines.

As is plain from these descriptions, the process requirements are convoluted and caveated and they have been carefully drafted to make it difficult for a third party to drag the Minister to the Courts in the event the caps aren’t adhered to.

Notably, the Minister is also now not allowed to make safeguard rules unless they are satisfied the rules are consistent with the caps. This should prevent backsliding but it doesn’t compel the Minister to tighten the baselines if the caps will be exceeded and, as a legislative instrument, the baseline rules only need to be made once a decade.

Of course, laws do not have to be litigated to be effective. The negotiated legislative processes could constrain future governments simply by making it harder, from a political perspective, not to act if the caps look like they will be exceeded. 

But they are far from a legal guarantee and, most importantly, the deal left untouched the other main tool governments can use to undercut the effectiveness of the Safeguard Mechanism: offsets.

In future years, the extent to which the net emission caps reduce actual emissions will largely turn on the quantity and quality of offsets that are available for use by covered facilities. 

Most of the ACCUs in the system currently don’t represent real and additional abatement, and lurking in the background is the prospect the government could allow covered facilities to use international units. 

Professor Andrew Macintosh is Director of Research, at the ANU Law School, at the Australian National University