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.
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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.