The anxiously awaited details of the “stick” component of the Federal Governments Direct Action Plan were released yesterday for public consultation, including the Rule, Regulation, Audit Determination and associated explanatory statements.
The Safeguard Mechanism, due to come into play from 1 July 2016, was established in the Carbon Farming Amendment Act 2014, with a purpose to “safeguard the value of funds spent under the Emissions Reduction Fund by requiring large businesses to keep emissions below baseline levels”. The detail around calculating baselines and determining ‘business as usual’ has had industry on the edge of their seats, and the Safeguard Mechanism has been undergoing heavy consultation to date with 89 submissions received during the previous consultation phase.
Industry are keen to have certainty around their future requirements; and while the government is hoping to finalise the legislation next month, it should be noted that the Senate will have the right to disallow the final versions prior to their release. The certainty of the Rules, therefore, are still up in the air as criticism comes in over the lack of bite:
"It's called a safeguard mechanism but it's not an environmental safeguard. Greg Hunt is not actually constraining emissions. If it's going to work it's got to have teeth but all we've got are gums," Tony Wood, Grattan Institute.
The table below provides details of some of the Rules and our insights:
The safeguard mechanism rules to note
Applicable to facilities that have direct emissions over 100,000 t CO2-e per year, (which is expected to cover 140 large businesses)
The entity with operational control of a designated large facility will be responsible for meeting safeguard requirements, including that the facility keep net emissions at or below baseline emissions levels.
This is a significantly higher threshold than the 25,000tCO2-e facility threshold under the previous carbon price. Increased thresholds reduces the number of businesses captured and provides for fewer innovative opportunities for carbon reductions.
At the CMI forum in May 2015, a Department of Environment Senior official stated that the 200+ businesses that were once covered ‘only’ made up around 50MtCO2-e p.a. This is almost 10% of Australia’s emissions profile, so should the thresholds be tightened over time there will be more incentive for carbon reductions across the economy – as it currently stands improvement will be limited.
Transport businesses have the option of defining their facilities on a national or state basis.
This is an important concession to the transport sector who are traditionally defined by which state the fuel is purchased. A national facility definition could guard against penalising carriers based on which state the fuel is purchased from year to year.
Baselines will be set using data already reported through NGERS and will be set according to the highest historical emissions point between 2009/10 and 2013/14, even if there is only one historical point.
The following exemptions apply:
Since the closure of a number of large manufacturing industries it will be unlikely that the electricity generators will exceed their sectoral wide baseline.
The delayed nature of landfill emissions from waste deposited will mean that this exemption prevents any landfill inclusion until at least 2019/20
Special treatment can be sought to allow a more generous baseline if:
These exemptions are the basis for much of the criticism to date around the Safeguard being too weak to protect BAU emissions let along achieve any actual carbon reduction. The exemption essentially cover nearly any circumstance that see the baseline exceeded.
Of particular note, the Minerals Council of Australia's concern, quoted in the consultation paper, that 'mature mining involves deeper operations'', and 'that the emissions intensity of processing operations would fluctuate depending on ore grades' so the gross emissions and emissions intensity would likely increase - has meant that mining is exempt.
New investments and significant expansions planned for post 2020, as well as facilities with inherent emission variability, will be subject to the ‘best practice approach. Best practice will be determined by the Benchmark Emissions-Intensity Index that will be developed by the Department of the Environment over time.
This will be incredibly complex to achieve and Administer via the CER as it would essentially be a ‘moving feast’ as best practice changes over time and will have to cover many sectors
Investments prior to 2020, which will have already commenced planning will be subjected to the an audited emissions forecast provided by the facility operator, with a reconciliation of the estimate against the actual performance of the facility at the end of the forecast period
As an auditor this will be incredibly difficult and risky to provide an assurance opinion against (with reference to an actual emissions number), as you will be auditing a forecast which will be subject to many external and internal factors that will impact emissions over time.
While, ideally facilities will reduce emissions to remain under their baselines. Should baselines be exceeded businesses are required to purchase Australian Carbon Credit Units (ACCUs) to offset their emissions.
Alternatively, for those that expect to exceed the baseline facilities can adopt multi-year reporting to allow an over baseline performance in one year provided the multi-year average is still below the baseline.
Non-compliance can result in fiscal penalties ($18,000/day up to $1.8M)
It is highly unlikely there will be any cases of non-compliance particularly given the number of exemptions and special cases.
Additionally, Minister Hunt has stated that:
"It has always been our commitment and we continue to budget zero revenue. It is our clear expectation that no businesses will pay penalties" Greg Hunt (AFR 2015)
A review is scheduled for 2017-18 with the door left open for international carbon abatement permits.
(Rumoured by some as an opening to form an Emissions Trading Scheme)
This (international unit purchase) is spoken about in hushed tones within Government, as the Prime Minister has on numerous occasions stated his disdain for international credits. Business however have long recognised that international credits are typically cheaper (and more plentiful) than domestic credits. That being said, we feel it is important to support the domestic abatement market for a number of factors, and if international credits are allowed, they should be limited to a point where cost-effective domestic projects are still supported. All this being said however, because the Safeguard is so ‘weak’ as it stands, it is very unlikely to generate demand for a significant volumes of ACCUs, and will not support a domestic offset market. It is likely the ERF will be the sole vehicle to drive domestic offsets projects.
The Scheme will be administered by the Clean Energy Regulator.
The Safeguard Mechanism will likely be complex and expensive to Administer. The CER will need to be adequately resourced to meet their ever expanding regulatory functions.
It is important to balance your response between understanding the potential impact of the Safeguard Mechanism as it currently stands on your business, and recognising that the actual design could be subject to some significant amendments over the coming months due to likely opposition, including the possibility that it may not pass through the Senate and be enacted by the 2016/17 financial year.
Some of the practical steps you should take now are:
- Review historic NGER reports at the site (facility) level to determine whether you are likely to trigger coverage thresholds – and if so, identify at which sites.
- Establish your baseline for these site (highest historical point between
- Identify facilities at risk of being captured if the thresholds are lowered.
- Identify exemptions which may be applicable to your facilities:
- Talk to capital expenditure committees/sales/procurement/executives on any planned acquisitions, growth forecasts or expansion that is earmarked for the future that may be impacted by the Safeguard Mechanism
- If seeking exemptions identify what other information/data you might require
- i.e. production data/emissions intensity figures
- do you have the systems and equipment in place to capture this data?
- do you have the human capital to effectively manage and monitor the impacts ?
- Quantify the impacts of any emission reduction activities currently planned. Determine if it is better to act Will we potentially be penalised if we act now or wait until a Safeguard is in place?
- If you are undertaking ERF projects – consider how any ACCUs generated will impact your performance against your baseline, and consider whether it is better to ‘hold’ some ACCUs or commit them all to an ERF contract?
Additional detail is available on the Department of Environment website:
A lot of material to get your head around - feel free to give us a call if you need a hand.
Thanks to Juliana Bedggood and Matt Drum for assisting in the compilation of this overview.