Reformed Australia safeguard scheme faces uncertainties

Australia's reformed safeguard mechanism triggered more decarbonisation efforts in its first year, but key uncertainties need to be clarified to unlock bigger investments, delegates heard at a Carbon Market Institute (CMI) symposium in Canberra on 1 July.

Settings are clear until 2030 but uncertainties over a few major factors beyond that year have been causing hesitation and blocking investments, market experts said.

The mechanism became a 'declining baseline-and-credit' emissions trading scheme (ETS) from 1 July 2023 after a reform by the Labor government, which set a emission reduction target of 43pc by 2030 from 2005 levels after taking office in mid-2022.

Figures from the first year under the reformed scheme, between 1 July 2023-30 June 2024, will only be known after facilities surrender their units ahead of the 1 April 2025 compliance deadline.

The Australian government still needs to define the design of the cost containment reserve, under which safeguard facilities may access Australian Carbon Credit Units (ACCUs) held by the Clean Energy Regulator (CER) at a fixed price that started at A$75 ($50) in the 2023-24 fiscal year to 30 June and will be increased with inflation plus 2pc/yr.

"On a fundamental basis, [the reserve] shouldn't be required to be triggered before 2027-28, but we do need price signals to unlock a new wave of investments and capitalise a whole new suite of projects that are not already banked," climate solutions and brokerage firm Core Markets' chief executive Chris Halliwell told delegates on 1 July.

Uncertainty over baseline decline rate

Under the reformed mechanism, facilities that emit more than 100,000t of CO2 equivalent (CO2e) in a fiscal year face declining baselines and need to surrender ACCUs or upcoming safeguard mechanism credits if their onsite abatement activities were not enough to keep their emissions below thresholds.

The rate of decline was set at 4.9pc/yr from 2021-22 to 2029-30 and will be set in five-year blocks from 2030-31 onwards, in line with future updates to Australia's Nationally Determined Contribution (NDC) under the Paris Agreement, with later rates to be defined by 1 July 2027.

The government disclosed an indicative decline rate of 3.285pc/yr in the safeguard rules from 2030-31 to 2049-50, said Australian carbon advisory company RepuTex's head of research Bret Harper. But that would mean "a less ambitious" rate than the existing one, even as Australia might set a much more ambitious emissions reduction target by 2035, Harper added.

Uncertainty for trade-exposed facilities

There is significant uncertainty and risk for so-called trade-exposed baseline adjusted facilities, which are typically smaller industrial participants that face a high risk of carbon leakage.

Such facilities can apply for a discounted decline rate as low as 1pc/yr, but several of them do not know whether they will qualify, climate risk and energy transition consultancy Energetics' head of emissions quant David Kazmirowicz told delegates.

He mentioned the example of one client, Victoria-based glass manufacturer Oceania Glass, which is the sole producer of float glass products in Australia.

"All their competition comes from overseas and they are, putting it mildly, up in arms that there was a domestic policy mechanism triggered without an equivalent for overseas imports," he said. "This facility is looking at existential impacts where, I think, big players in the resource industry are potentially not."

Australia has been looking at the possibility of introducing a carbon border adjustment mechanism (CBAM), with a second consultation paper to be published in the "near future", said Australian National University professor Frank Jotzo, who has been leading the carbon leakage review. The first round of consultation showed strong "support for the principle of a CBAM", he added.

By Juan Weik