By now, you are probably aware that the “Safeguard Mechanism” will commence on 1 July 2016. However, what probably remains less certain is whether your company is covered by the Safeguard Mechanism and, if it is, what you have to do over the coming months. This legal update aims to simplify the steps you need to undertake, and the timing of those steps, in order to ensure your company complies with the Safeguard Mechanism in 2016/17.
This legal update has been developed in conjunction with Norton Rose Fulbright’s experienced Sustainability and Climate Change team, who support their clients by providing solid advice on the choices and decisions necessary for responding to a risk, opportunity or both.
This update is not exhaustive regarding all Safeguard Mechanism requirements. Instead we have covered some of the time critical points and some key concessions businesses will need to consider to mitigate compliance costs from exceeding their baseline into the future.
What you Need to Know and do Now
Right now you need to consider whether your company is likely to be covered by the Safeguard Mechanism, which is the liable company (responsible emitter) and whether a baseline number defined by historic reported NGER data is appropriate for your facility.
Is Your Facility Covered?
The Safeguard Mechanism will apply to companies operating one or more facilities which emit more than 100,000 tonnes of carbon dioxide equivalent (CO2-e) “covered emissions” in a financial year. Covered emissions are all direct (scope 1) emissions covered by the National Greenhouse and Energy Reporting (Methodology Determination) 2008 (subject to exceptions for landfills and electricity generators).
For companies already covered by the National Greenhouse and Energy Reporting Scheme (NGERs), you should review your NGERs reports submitted since 2009/10 to determine whether any one facility has reported scope 1 emissions of 100,000 t CO2-e or more in any financial year. It is not necessary to count the scope 2 emissions (i.e. from grid electricity or steam consumption) included in your report. This review will be a good indicator of whether your facility is likely to exceed the threshold in 2016/17. Additionally, it will be necessary to consider whether your facility will be subject to any expansion or increase in production which may cause the facility to meet the threshold in the future.
If you are not already reporting under NGERs, you are unlikely to be covered by the Safeguard Mechanism, unless your facility has undergone a recent expansion, or you have a new investment or you are a non-constitutional corporation (such as a local council) which operates a large facility. In these scenarios, you should review your facility’s projected emissions to check if the threshold will be exceeded in the future.
Who is the Liable Company?
Once you have determined that your facility emits more than 100,000 t CO2-e, it is necessary to determine which company has “operational control” of the facility and will therefore be responsible for compliance under the Safeguard Mechanism. This will be the company with authority to introduce and implement any or all of the operating policies; health and safety policies and environmental policies. Where there are multiple companies operating at one facility, it is usually necessary to review the contractual arrangements in place at the facility to determine which company has operational control.
It is important to be aware that the company liable under the Safeguard Mechanism will not necessarily be the same company which is currently reporting under NGERs (as the reporting company under NGERs is usually the “highest controlling corporation”, whereas the liable company under the Safeguard Mechanism will be the one actually operating the facility).
Is a ‘Reported’ Baseline Appropriate?
The default position for companies reporting under NGERs is that your facility will be given a ‘reported’ baseline, based on NGERs data for the five year period between 2009/10 and 2013/14 (see below).
However, there are certain concessions included in the Safeguard Mechanism for facilities that expect to exceed their reported baseline, notably an ‘initial calculated baseline’ (covered further below in a practical case-study). The initial calculated baseline should be considered as your ‘cover-all free kick’ if you think you may exceed your reported baseline in 2016/17, being the ‘initial’ year of the Safeguard Mechanism.
To take advantage of a calculated baseline, right now, you need to understand what your baseline for 2016/17 will be. You can calculate this yourself based on the forecast production and emissions intensity for your facility. This will be your default emissions target. In order to manage your exposure, you should know this target well before 31 July 2016 (the first application deadline), because if you overshoot your baseline, you may need to purchase Australian Carbon Credit Units (ACCUs) for every tonne of emissions ‘overshot’.
Before 31 July 2016
Reported Baseline Calculation
The reported baseline for large facilities will be calculated by the Clean Energy Regulator (Regulator) and as mentioned will be based on your reported NGERs data for the five year period between 2009/10 and 2013/14. The Regulator will initiate the reported baseline setting process by advising responsible emitters of their proposed facility baseline number. The Regulator aims to contact all responsible emitters with their proposed reported baselines by May 2016.
If you satisfy the reported baseline criteria and believe that your projected emissions into the foreseeable future will remain below your highest reported scope 1 emissions value from 2009/10 to 2013/2014, then no further action regarding baselines is likely to be required. You should not trigger the historic baseline and will not be required to purchase ACCUs.
Optional Reported Baseline for Some Facilities
Facilities that only reported scope 1 emissions under NGERs in some of the 5 years from 2009/10-2013/14 may have a choice to opt-in to receive a reported baseline number. If you have reported scope 1 emissions under NGERs four or less times in the five years from 2009 and have only reached the threshold of more than 100,000 tonnes covered emissions in one to three of those years, you can either:
- Request a reported baseline determination, which requires you to notify the Regulator by 31 July 2016; or
- Use the calculated baseline approach under the new facility criteria, which requires you to submit an application by 31 October 2017 along with an independent audit report.
If you are in this position and don’t follow options 1 or 2 above, the Regulator will give you a default baseline number of 100,000.
For a reported baseline determination, the Regulator will provide you with feedback regarding the proposed baseline and provide opportunity for comment / consultation before the actual determination is made. Once a reported baseline determination is issued for your facility, it will no longer meet the new facility criteria for a calculated baseline.
If you expect your facility’s baseline emissions to exceed your reported baseline, then it is recommended that you consider applying for a ‘new’ baseline under the calculated baseline criteria. This is your ‘free-kick’!
For a calculated baseline that begins from 1 July 2016, applications can be submitted between 1 July 2016 and 31 October 2017. The baseline is determined by the highest expected production level of a primary production variable (and corresponding emissions) over the three-year period covered by the calculated baseline determination (2016/17 to 2018/19 for a baseline determination starting 1 July 2016). However, the years of production you can choose from to set your baseline are limited by the date from which you apply:
- to use the highest production level from all three years to determine your baseline, you need to submit your application by 30 July 2016; otherwise
- if you submit your application by 30 July 2017, you can use the highest of the last two years (2017/18; 2018/19) to determine your baseline number; alternately
- if you submit your application after 30 July 2017 and by 31 October 2017, your emissions baseline number will be established from your projected production level in 2018/19 only.
Because these application dates are not straight forward, we have provided a practical case study further below to illustrate when applications need to be submitted. You can also see Ndevr Environmental’s recent article on key dates for calculated baseline applications here. It is important to understand forecast emissions early to make an informed decision about when to submit your application, accompanied by an audit report.
The calculated baseline provides an opportunity for facilities to ‘adjust upwards’ their baseline, if it is reasonably expected that the facility’s emissions will increase. The specified criteria to be eligible for the calculated baseline include:
- increase or expected increase of baseline emissions within the first year 2016-17 of the Safeguard Mechanism (initial baseline criteria)
- new facilities that forecast expected emissions of 100 000 t CO2-e in the first year of the calculated baseline (new facility criteria)
- facilities in the natural resource sector that have variable emissions due to resource extraction or the quality of the grade ore (inherent emissions variability criteria)
- when facilities expect their baseline to be permanently increased if there is a production capacity growth greater than 20% (significant expansion criteria).
If you think your facility will satisfy one or more of the calculated baseline criteria, then you can apply to the Regulator for a calculated baseline. Generally, the calculated baseline is determined by the following calculation:
|Calculated baseline = forecast production x forecast emissions intensity|
Because the initial calculated baseline option is likely to be of interest to industry, and important dates are approaching, we have prepared an abridged case-study to demonstrate how a company might apply for an ‘initial calculated baseline’.
You have operational control of Facility ‘X’. Based on the past emissions for Facility ‘X’ in Figure 1 below, the reported baseline will be 300,000 t CO2-e.
Figure 1. Past emissions Profile
Based on your projected future emissions in Table 1 below, you think you will exceed this (reported) baseline as soon as the Safeguard Mechanism starts.
Table 1. Future Emissions and Production Profile
Forecast Units of Production (Million Units)
Forecast Emissions Intensity per Unit
1kg CO2-e per unit
1kg CO2-e per unit
1kg CO2-e per unit
What can you do?
In this scenario, if the facility was to rely on a historic ‘reported’ baseline (300,000 tCO2-e from the 2012/13 year) it would be subject to the costs demonstrated in Table 2.
Table 2. Outcome of Relying on a Reported Baseline
‘Excess Emissions’ (ACCUs for purchase)
150,000 tCO2-e (150,000 ACCUs)
Safeguard Mechanism cost to business (ACCUs @$12.25 * each)
*Weighted average price for ACCUs at ERF Auction 2, November 2015
For Facility ‘X’, assuming it can source ACCUs at $12.25 each over the next three years (equal to the weighted average price paid by the Government at ERF Auction 2), the direct cost to business over the three years is $2,450,000.
In this instance Facility ‘X’ should look to apply for an initial calculated baseline.
Under Figure 2, Facility ‘X’ should establish its baseline number using production levels in 2016/17, which will present the highest production level and therefore covered emissions during the three year calculated baseline determination period.
Figure 2. Past emissions, projected emissions and application dates for calculated baseline determination beginning 1 July 2016
Using the forecast production and emissions intensity from Table 1, the calculated baseline would be as follows:
Calculated baseline = forecast production x forecast emissions intensity
= 450M units x 1kg CO2-e per unit
= 450,000 tCO2-e
With an initial calculated baseline in place, Facility ‘X’ would have no cost to business, other than compliance costs associated with auditing and developing the initial calculated baseline demonstrated in Table 3.
Table 3. Outcome of Relying on an Initial Calculated Baseline
‘Excess Emissions’ (ACCUs for purchase)**
Safeguard Mechanism cost to business (ACCUs @$12.25 * each)
**Excess emissions compared to reported baseline. Note the facility cannot generate ACCUs by emitting less than its initial calculated baseline.
In this simplified case study, Facility ‘X’ is in a much better position by utilising an initial calculated baseline. Excluding the costs of auditing and developing the initial calculated baseline, the facility is $2,450,000 in front.
Importantly, as per Figure 2, because Facility ‘X’ wants to establish its baseline number on forecast emissions from the 2016/17 year, which will present the highest covered emissions during the three year calculated baseline determination period, it must submit its application and audit report by 30 July 2016.
If the application is submitted after 30 July 2016 and by 30 July 2017, then the baseline number for the three year period will be based on only the last two years of forecast emissions, which in this case is 350,000 tCO2-e (in 2018/19). For Facility ‘X’, because projected emissions in year 3 of the baseline determination period are higher than in year 2, the baseline number will be the same if the application is submitted after 30 July 2017 but before and by the final deadline of 31 October 2017 (and therefore based on the final year only).
Here, even after taking advantage of a three multi-year monitoring period which allows Facility ‘X’ to take the average emissions across the three years (366,666 tCO2-e), Facility ‘X’ will still need to offset 50,000 t CO2-e to avoid an excess emissions situation at the end of the monitoring period. As noted below, applications for multi-year monitoring period beginning 2016/17 are also due by 31 October 2017.
To avoid significant costs in this scenario, it is highly beneficial for Facility ‘X’s responsible emitter to submit its initial baseline application and accompanying audit by 30 July 2016.
After 1 July 2017
Following the end of the compliance year, you will be required to report as usual under NGERs, by 31 October 2017.
If it becomes apparent that your facility exceeded its baseline in 2016/17, there are various flexible mechanisms you can use to manage compliance as follows:
- apply to the Regulator for a variation of a baseline determination if your facility has had expanding production accompanied by an emissions intensity improvement, by 31 October 2017;
- apply to the Regulator for an exemption declaration because the excess emissions situation was caused by criminal activity or natural disturbance, by 31 October 2017; or
- apply to the Regulator to report as part of a multi-year period, by 31 October 2017.
Finally, if it becomes apparent that your facility has exceeded its baseline and you have not been able to take advantage of the above flexible mechanisms, you may surrender ACCUs to cover your emissions excess by 28 February 2018.
From 1 March 2018, if your facility exceeded its baseline in 2016/17 and you have not surrendered ACCUs to offset that exceedance, the Regulator may seek to impose a civil penalty on you. The maximum penalty is the lesser of 100 penalty points per day (currently $18,000 per day), with a maximum of 10,000 penalty points ($1.8 million).
While this update has focused on Safeguard Mechanism compliance in the immediate future, important differences will apply to new facilities post 2020, which will have their baseline set using emissions intensity industry benchmarks. The Department of Environment has recently issued draft guidelines on how these emissions intensity benchmarks will be established. The draft guidelines are open for public consultation with submissions due by 5.00 pm AEST on 6 May 2016.
This update sets some of the key upcoming dates and requirements to comply with the Safeguard Mechanism over the next couple of years. This update is not exhaustive; businesses have other options to manage liability under the Safeguard Mechanism and there are many complexities that we will cover in future updates.
For further queries call Ndevr Environmental Director Matt Drum:
The safeguard mechanism starts this year, and is designed to stop greenhouse gas emissions increasing above 'business as usual' for facilities with high direct emissions. If you’re wondering exactly what this means for your business, you’re not alone. That is why we’ve compiled the following safeguard mechanism “need-to-knows”. Whether you’re responsible for Greenhouse Gas and Energy Reporting, need to update your executive board on safeguard implications for your business, or just want to know more, you’ve come to the right place. This article addresses key questions businesses are asking about how the safeguard mechanism will apply to them, and provides a summary of “need-to- knows” to get you safeguard ready.
The safeguard mechanism, beginning 1 July 2016, will apply economy-wide to facilities with direct emissions over 100,000 t CO2-e a year. A facility with scope 1 emissions greater than 100,000 t CO2-e is termed a ‘designated large facility’ and is covered by the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (“Safeguard Rule”).
The safeguard mechanism is the third part of the Australian Government’s Emissions Reduction Fund (ERF) Policy. The ERF includes: (1) a process to credit emissions reductions (2) a fund to purchase emissions reductions and (3) a safeguard mechanism to stop increases in emissions above business-as-usual levels elsewhere in the economy. The ERF is central to the Government’s Direct Action Plan to cut emissions to five per cent below 2000 levels by 2020.
If your company has operational control of a designated large facility they are a “responsible emitter” under the safeguard mechanism. Designated large facilities are those with scope 1 emission greater than 100,000 t CO2-e. As a responsible emitter under the safeguard mechanism, you will be required to keep your facility’s emissions equal to or below baseline levels. Your baseline provides the reference point against which your future performance will be monitored under the safeguard mechanism.
What do I have to do to comply with the safeguard mechanism?
The safeguard mechanism requires you to keep net emissions, which are actual emissions less offsets sold to Government or surrendered, below baseline levels. The safeguard mechanism includes a number of features to help you meet your baseline emissions obligations. These are briefly outlined below.
Identification of an appropriate baseline emission number - The baseline emission number for your facility is determined by taking into account your facility’s circumstances. Factors which are used to identify the baseline include: business as usual emissions prior to the commencement of the safeguard mechanism, improvements in your facility’s efficiency, increases in production and operations with inherently variable emissions (i.e. resource extraction).
Offsetting – If your Designated Large Facility’s actual emissions exceed the baseline, you can use Australian Carbon Credit Units (ACCUs) to offset emissions. (Note: the potential role of international carbon credits in the safeguard mechanism will be reviewed in 2017).
Multi‑year monitoring - Multiyear monitoring allows your Facility to exceed its baseline in one year, so long as average emissions over two or three years are below baseline. Responsible emitters can apply to the Regulator for a declared multi-year period where there is a reasonable expectation that a facility’s emissions will exceed its baseline.
Exceptional circumstances - an exemption would apply to your Facility if emissions were the result of exceptional circumstances, such as a natural disaster.
What happens if I fail to meet my safeguard mechanism obligations?
Taking into account the options for compliance listed above, If your company fails to keep its facility emissions below baseline levels, the Clean Energy Regulator may apply a range of discretionary, graduated enforcement options, including civil penalties.
There are several approaches to measuring baseline, depending on your business’s circumstance. The default approach is to measure the baseline emissions number from historical National Greenhouse and Energy Reporting scheme (NGERs) data. The various approaches to measuring baselines are outlined below.
The simplest approach to identifying the baseline emissions number for designated large facilities is to use historical data reported under NGERs. Specifically, under this approach your baseline number will be taken from your highest reported scope 1 emissions between 2009-10 and 2013-14. This approach avoids new reporting obligations.
Company Delta reported the following scope 1 emissions for its Alpha Facility between 2009-10 and 2013-14. The highest reported scope 1 emissions within the time period is 210,200 t CO2-e reported for 2011-12. Therefore, 210,200 will be the default baseline emissions number for Alpha Facility.
If you have historically reported under NGERs, you do not need to apply for a Historical Baseline Number. Rather, the Regulator will provide your company with an Emissions Number Determination for each of your designated large facilities based on your NGERs reported emissions. If you would like to use a different approach to measuring your Baseline, you will need to notify the Regulator. http://www.cleanenergyregulator.gov.au/About/Contact-us
Baseline from Historic NGER Data
Reported emissions baseline determination
Planned review in 2017.
Alternative approaches to measuring your baseline are outlined below, and may require an audit report.
What if historic data is not appropriate to measure my facility's baseline?
The safeguard mechanism caters for a variety of circumstances that could affect your greenhouse gas emission numbers, including substantial facility expansion, incremental growth, the establishment of new facilities, inherent variability, external events and other circumstances where historical emissions are not representative of future expected emissions. These approaches are considered below against a number of frequently asked questions.
Generally, you will not have to offset increasing emissions due to increasing production as long as your facility’s emissions intensity improves. Your emissions intensity is the volume of greenhouse gas emissions compared to the amount of finished product, and is a measure of your facility’s efficiency.
Options for measuring baselines for incremental and significant expansion are outlined below.
If your production is increasing gradually and you can demonstrate an emissions intensity improvement, you can apply to the Regulator for a temporary variation of your baseline.
Your current emissions intensity will be compared to the emissions intensity associated with most recent baseline. Your application needs to be accompanied by an audit report.
Baseline variation for incremental increase
Variation of baseline determination for reduction in emissions intensity
Planned review in 2017.
What if we have significantly expanded our facility or have a new facility?
If your facility undergoes a significant, permanent expansion, you can apply to have your facility baseline permanently increased following the rules for establishing baselines for new investments (calculated emissions baseline approach). The significant expansion criteria includes an increase in maximum production capacity of more than 20 percent, and that the facility has exceeded its baseline or is reasonably expected to exceed its baseline in at least one year of the three-year period covered by the calculated-emissions baseline determination (i.e. the three years following expansion of your facility).
The approach for measuring baselines for new investments and significant expansions of existing facilities differs depending on whether the facility comes online before or after 2020. The different approaches are outlined below.
Before 1 July 2020, the new facility baseline number will be calculated based on estimates of production and emissions intensity at the facility. You will be required to provide an audited emissions forecast to the Regulator, after which the Regulator will issue you with a baseline determination. This baseline determination is temporary, and will expire when actual production data becomes available. At this time, the facility may be eligible to apply for a production adjusted baseline determination if actual production differs from forecast production.
From 1 July 2020, Baselines for new investments whose direct (scope 1) emissions exceed 100,000 tCO2-e will be set using benchmark emissions intensities. Best practice will be determined by comparing the relative performance of industry peers. Where available, existing industry data will be used to developing benchmark emissions intensities that are representative of best practice. Where data is limited or not adequately representative, international data or independent technical advice will help to define best practice. For significant expansions of existing facilities, this approach will only apply to the emissions associated with the expanded capacity such that the facility’s baseline would be the sum of its existing baseline and the benchmark baseline for the increased production resulting from the significant expansion.
Baseline for significant expansion or new facility
Calculated-emissions Baseline Determination
Best practice benchmark baseline to apply for new facilities post 2020
If your facility has experienced exceptional circumstances, such as a natural disaster or criminal activity which has caused increased emissions, you may be eligible for an exemption. If approved, the facility will be exempt from its safeguard obligation for a defined period of time. In assessing your application for exemption, the Regulator will consider whether reasonable steps were taken to mitigate the risk of excess emissions occurring from the exceptional event.
However, exemptions do not apply to circumstances reflecting normal market dynamics which may affect emissions variations, such as price, production inputs and outputs or maintenance. In such circumstances, other options, such as adjusted baseline for incremental increase in production (less than 20 percent), may be available.
My company’s operations in natural resources and reserves have inherently variable emissions, how will this affect my baseline emissions number?
The safeguard mechanism allows baselines to be adjusted for emissions variability associated with extracting natural resources or reserves. Operations in mining and oil and gas sectors can have highly variable emissions intensity, particularly fugitive emissions associated with resource extraction. In some circumstances, emissions may rise while production remains constant, for example as a mine moves from high to low grade extraction over the mine life. For this reason, in the period until 2025, facility operators can apply to vary baselines where:
- The operation of a facility is associated with the extraction of a natural resource or reserve;
- The properties of the resource or reserve have a direct effect on the emissions performance of a facility;
- The facility has a limited ability to control for such emissions;
- The facility has a calculated-emissions baseline or a reported-emissions baseline; and
- Facility emissions have exceeded or are expected to exceed their baseline and the natural resource properties are the primary reason for this.
Baselines are adjusted using the calculated emissions baseline under the Safeguard Rule, where the Regulator may revise the facility baseline on an audited emission forecast provided by the facility operator.
It is worth noting that this approach to varying baselines will not be available after 2025, because new facilities covered by the safeguard mechanism after 1 July 2020 are expected to operate at best practice emissions intensity.
Varied baseline for natural resource operations
Calculated emissions baseline determination
Not available for new facilities post 2020
Baselines can be adjusted if facilities expect to exceed their baseline in the safeguard mechanism’s first year. The baseline will be increased to reflect forecast emissions, using the calculated emissions baseline approach, similarly to the approach for new investments or significant expansion of a facility covered by the safeguard mechanism before 2020.
A sectoral-baseline, equal to 198 million tonnes CO2-e, applies to all grid-connected electricity generators. This baseline is the total scope 1 emissions from grid-connected generators in 2009-10. Individual baselines will also apply if the sectoral baseline is exceeded.
If the sectoral baseline is exceeded in a given year, the Regulator will publish a statement on its website. Individual grid connected generators will not be covered up to and including the year that the Regulator states sectoral baseline emissions have been exceeded.
Individual baselines will be set at each facility’s highest annual covered emissions between 2009-10 and 2013-14. Generators will have access to the same emissions management options as facilities in other sectors, as well as similar baseline adjustments to accommodate economic growth.
The treatment of the electricity sector under the safeguard mechanism will be reviewed in 2017. While some have suggested an emissions intensity baseline should be set for the electricity sector, it is unclear whether this will be considered under the 2017 review.
If you are already reporting your annual emissions under the NGER Act you do not need to register again under the safeguard mechanism.
If you are a responsible emitter with operational control of a safeguard facility, and are not already registered under the NGER Act, you need to register in line with section 15B of the NGER Act.
Companies already submitting reports under sections 19, 22G and 22X of the NGER Act will generally have their reporting requirements covered by the NGER Regulations, and will not have additional reporting requirements (See Safeguard Rule, Part 5). Some responsible emitters who are not controlling corporations under NGERs, such as trusts or non-constitutional corporations, will have new reporting obligations under section 22XB of the NGER Act.
Responsible Emitters should also report a change in principle activity for a facility, because the emissions may need to be attributed to a different industry sector. (See section 7 Safeguard Rule, regulation 4.31 NGER Regs).
It is advisable to review your reporting requirements to ensure ongoing compliance under the safeguard mechanism. As always, it is important that records are kept to monitor compliance, and kept in a way that is easily and quickly accessible for inspection and audit.
If your company is satisfied that the historical baseline determined by NGER data is suitable, you will not be required to submit an application or an audit. However, to receive an alternatively measured baseline, you will need to submit an application and accompanying audit.
The summary table found at the end of this article draws on information from the Safeguard Rule Explanatory Statement to outline the different approaches to measuring baseline numbers, including whether an audit and application for a baseline determination is required.
Can I generate Australian Carbon Credit Units (ACCUs) at my facility if it is covered by the Safeguard Mechanism?
Yes, facilities covered by the safeguard mechanism can still participate in the ERF to generate ACCUs and enter a contract for purchase of ACCUs with the Government. However, to avoid double counting, ACCUs issued for abatement at the facility will be added on to the facility’s net emissions. For example if a facility emits 180,000 tCO2-e and creates 20,000 ACCUs that year, the net emissions number will be 200,000. For ACCUs generated at the Facility to be subtracted from the facility’s net emissions, they need to be returned directly to the Government, either by selling the ACCUs to the Government through the ERF auction and contract process, or by directly relinquished ACCUs to the Government. If the ACCUs generated from the facility are sold on the secondary market, the offsets transfers to a third party, and the emissions remain part of the facility net emissions number.
In some cases it will be beneficial for a company implementing an energy and emissions saving activity to generate ACCUs under the ERF, rather than immediately realising the resulting emissions reductions against their baseline. Generating ACCUs will give an organisation flexibility as ACCUs can be ‘banked’ and used when needed, or monetized to generate revenue for your organization. Importantly, you may be able to generate your own ACCUs at a lower cost than they could be purchased on the secondary market at a later point in time. The table below summarises options for facilities that generate ACCUs under the ERF, including how the approach affects the facility’s net emissions number.
Options for facilities that create ACCUs under the ERF
‘Annual Safeguard Emissions Number’ equals:
Scope 1 actual emissions from the facility less ACCUs generated and sold to Government (note ACCUs must leave ANREU Account to be subtracted from net emissions number)
Avoid penalties and/or cost of purchasing offsets for exceeding the baseline and receive payment for the ACCUs from CER. Provides some flexibility as the seller sets the delivery schedule – annual or spot.
One buyer only (Government), may not receive best price for ACCUs, lose some flexibility as locked into delivery volume and timing defined in ERF contract. Generating ACCUs includes a cost to business (administrative/in-kind/specialist advisory/audits).
Net scope 1 emissions from the facility excluding ACCUs generated and returned to government (net out ACCUs surrendered to Government)
Avoid penalties and/or cost of purchasing offsets for exceeding the baseline.
This option does not result in any payment for the ACCUs.
Generating ACCUs includes a cost to business.
Scope 1 actual emissions from the facility plus ACCUs generated and sold on secondary market (accrue ACCUs generated and ACCUs sold)
Receive revenue for ACCUs sold on secondary market. More buyers, potentially better price. More flexibility on timing and volume assuming liquidity.
Does not reduce operating emissions against baseline
Scope 1 actual emissions from the facility plus tonnes CO2-e represented by ACCUs held in account (accrue ACCUs held)
Increased flexibility. Use at a future date when the price for secondary market ACCUs is high and or annual safeguard emissions number is high and baseline cannot be adjusted.
Generating ACCUs includes a cost to business. No revenue flow from ACCUs.
Scope 1 actual emissions from the facility
No cost to business for generating ACCUs. Immediate improvement of performance against annual safeguard emissions number is realised.
No flexibility to bank offsets for future periods when secondary prices and/ or annual safeguard emissions numbers are high.
A range of methods for generating carbon credits under the ERF are now available for industry, and new methods are under development. A list of finalised methods by sector is available at the Department of Environment website.
Yes, currently most transport facilities reported under NGERs are defined on a state basis. Under the safeguard mechanism, you will have the choice to define your transport facility on a national basis or retain state-based reporting. Whether it makes sense for you to aggregate your facility emissions will depend on your individual circumstances. To ensure the national definition takes effect for your transport facility, when the safeguard mechanism commences on 1 July 2016, you will need to make a nomination prior to scheme commencement.
Yes, similarly to the Carbon Pricing Mechanism, there is a policy to limit coverage of the safeguard mechanism to waste that is deposited at a landfill after 1 July 2016. This policy will be integrated in the National Greenhouse and Energy Reporting (Measurement) Determination 2008 which will ensure methods are available to measure legacy and non-legacy waste separately.
The Safeguard Rule will be reviewed in 2017, and some changes may occur through this process. For example, Environment Minister Greg Hunt has recently stated that the 2017 review will include the establishment of processes to purchase international carbon credits, and that responsible emitters under the safeguard mechanism would have access to them.
The following elements are expected to be reviewed, with a report to be released in late 2017:
- the operation of the safeguard mechanism in concert with the crediting and purchasing elements of the Emission Reduction Fund
- the effectiveness of the baseline setting approach for new investments already underway
- the transition to the best practice framework for new investments
- any conditions and criteria for existing facilities to adjust baselines
- the role of the crediting, purchasing and safeguard mechanism elements of the Emission Reduction Fund in conjunction with the broader suite of emission reduction policies to meet the 2030 target
- An examination of how different sectors, including the electricity sector, are to be treated.
Summary of baseline measurement and requirements
The summary table below draws on information from the Safeguard Rule Explanatory Statement to summarise the different approaches to measuring baseline numbers, including key criteria, and whether an audit and application for a baseline determination is required.
This article provides general information only, and may exclude important information. Stakeholders should seek their own advice on how the rules apply to their individual circumstances. If you would like more information specific to your company’s circumstances, our dedicated and experienced team can assist you.
Our contact details are at:
If you would like further general information, or to review the Safeguard legislation and explanatory statement, you can visit the Australian Government Department of Environment website: https://www.environment.gov.au/climate-change/emissions-reduction-fund/about/safeguard-mechanism.
The Department of Environment has just released a series of fact sheets for certain ERF methods. If you run an industrial facility and have some energy and carbon savings projects in mind, have a look at the following fact sheet as a first port of call. As of June 30 there are already two ERF projects registered under the recently released Industrial Fuel Energy Efficiency Method, and we're seeing more and more interest and opportunities on the ground as businesses look to monetise carbon and energy savings under the ERF.
The Government's $2.5B Emissions Reduction Fund (ERF) is likely to pass the Upper House after Clive Palmer and his Senators agreed to support the ERF legislation. The ERF allows for the continuation of existing Carbon Farming Initiative (CFI) projects and will be expanded to cover activities such as Industrial Energy Efficiency, transport emissions reductions and more.
Under the ERF businesses will now be able to 'monetise' many energy efficiency projects that also lead to carbon reductions. Depending on the scale of reductions (and the price per tonne of carbon available via a reverse-auction), pay-back periods and business cases for projects may be significantly improved.
The Department of Environment currently has numerous ERF Methodologies out for public consultation. Projects need an approved Methodology to be able to monetise their carbon reductions, and an Industrial Energy Efficiency Methodology is due to be released soon.
We will keep you posted as the policy develops, in the meantime if you have any questions feel free to contact us directly.
With the abolition of the Carbon Price, the stage is set for the introduction of the Federal Government’s Emissions Reduction Fund (ERF), a key component of their Direct Action Plan (DAP).
The ERF presents an excellent opportunity for additional funding for business projects that reduce the emissions intensity of a production process beyond the Business As Usual (BAU) scenario.
To help you find out more about the ERF and how to participate, our friends at the Carbon Market Institute (CMI) are hosting a series of Information Sessions in the following capital and regional cities:
- Melbourne – Monday, 21 July, 3.30 pm to 5.45 pm, followed by drinks/canapés.
- Sydney – Tuesday, 22 July: 10.30 am to 12.45 pm, followed by lunch.
- Perth – Monday, 28 July: 3.30 pm to 5.45 pm, followed by drinks/canapés.
- Adelaide – Tuesday, 29 July: 2.00 pm to 4.15 pm.
- Brisbane – Monday, 4 August: 10.30 am to 12.45 pm, followed by lunch.
- Townsville – Tuesday, 5 August: 10.30 am to 12.45 pm, followed by lunch.
- Geelong – Monday, 11 August: 10.30 am to 12.45 pm, followed by lunch.
- Newcastle – Tuesday, 12 August: 1.30 pm to 3.45 pm.
The event is free and open to the public, but spaces are limited to register now to find out more.
Our Director, Matt Drum will be sitting on the Expert Panel for the information sessions as will our Sydney Principal, Phil Link in Sydney and Newcastle. On behalf of the CMI, we invite you to join us in your respective cities to learn more about the ERF and benefits of participation.
Ndevr Environmental is a member of the Carbon Market Institute, an independent, not-for-profit company established to assist Australian business in meeting the challenges and opportunities associated with the developing national and international carbon markets and thereby build capacity to grow in a low-carbon world.
On 1 July 2014 the Clean Energy Regulator will allow project proponents to register a ‘Notice of Intention’ to participate in the $2.55B ERF. Despite the lack of legislation at this stage, and the events of the past week, projects that will achieve carbon reductions and meet the eligibility criteria can initiate the process to achieve ERF funding.
This process is particularly important for ‘new’ projects that are not transitioning from the Carbon Farming Initiative (CFI), which will be expanded under the ERF. Carbon saving projects and methodologies are already well underway for new activities such as:
- Industrial Energy Efficiency (i.e. fuel switching, boiler upgrades etc.)
- Transport efficiency improvements
- Commercial building upgrades
What’s the Rush?
The additionality tests for the ERF (which governs if a project is eligible or not) have softened significantly via proposed amendments to the CFI, opening the door for many new activities. One of the key eligibility criteria is that the project cannot have already ‘begun’ if it is to be considered eligible. If a project has been identified to the Regulator (via Notice of Intention) before it begins and meets the other criteria, it will be eligible for support under the ERF.
So, if you have any carbon saving projects under consideration, they should be included in the Notice of Intention as soon as possible. This will keep the door open for ERF funding if and when the legislation passes. If the project begins before the Regulator is notified, it will immediately be ruled out!
The ‘notice of intention’ is not a binding agreement, and we have been told the form will be (likely) available on 1 July or very soon thereafter. It will be a straightforward process with only preliminary company and project details required. If you are interested in pursuing ERF funding, contact us directly and we will forward the link to the form as soon as it’s available. Further if would like some more information on the types of projects likely to be eligible and feasible we're happy to discuss.
Taken from CARBON FARMING INITIATIVE AMENDMENT BILL 2014 EXPLANATORY MEMORANDUM:
“The Bill expands the current land-based scope of the CFI Act to enable any type of emissions reduction project to be an eligible offsets project. This is to enable the Emissions Reduction Fund to unlock emissions reduction opportunities across the economy.
A key requirement under both the Emissions Reduction Fund and the Carbon Farming Initiative is that credits are issued for emissions reductions that are ‘additional’ – that is, they are not likely to have occurred under normal business conditions, in the absence of the Emissions Reduction Fund.”
As mentioned, one of the key requirements to prove additionality is that the project has not begun, this is called the ‘newness’ test. An extract from Section 388B(2) describes the concept:
In determining whether the project has begun to be implemented, disregard any of the following activities that have been, or are being, undertaken in relation to the project:
- planning or designing the project;
- obtaining regulatory approvals for the project;
- obtaining consents relating to the project;
- obtaining advice relating to the project;
- conducting negotiations relating to the project;
- sampling to establish a baseline for the project;
- an activity specified in the legislative rules;
- an activity that is ancillary or incidental to any of the above activities.
The following are examples of when a project has begun to be implemented:
- making a final investment decision in relation to the project;
- acquiring or leasing a tangible asset (other than land) that is for use wholly or mainly for the purposes of the project (disregard an asset that is a minor asset);
- commencing construction work for the purposes of the project;
- in the case of a sequestration offsets project—preparing soil for seeding or planting that is for the purposes of the project;
- in the case of a sequestration offsets project—seeding, planting or fertilising plants that are for the purposes of the project;
- in the case of a sequestration offsets project—installing an irrigation or drainage system for the purposes of the project.
‘Final investment decision’ has the meaning generally accepted within the corporate finance community.
As you can see the criteria is quite broad, with some ambiguity, however the basic principle is that the Government is genuinely trying to remove as many barriers to entry as possible and encourage participation.
Projects will also need to be undertaken in accordance with a methodology to obtain registration from the Regulator. Once registered, a project will generate Australian Carbon Credit Units (ACCUs) and it is these units that the Regulator will contract to buy at a price the successful bidder (proponent) nominates, generally via a reverse auction process. The contract period will likely be 5 years or less depending on the nature of the project.
The exposure draft of the contract is currently open for consultation and can be found here.