Emissions Intensity Benchmark Guidelines

Emissions Reduction Fund:

Safeguard mechanism

Emissions Intensity Benchmark Guidelines

April 2016

DRAFT

Disclaimer

While reasonable efforts have been made to ensure that the contents of this publication are factually correct, the Commonwealth does not accept responsibility for the accuracy or completeness of the contents, and shall not be liable for any loss or damage that may be occasioned directly or indirectly through the use of, or reliance on, the contents of this publication.

© Copyright Commonwealth of Australia, 2016.

The Emissions Reduction Fund Safeguard Mechanism Emissions Intensity Benchmark Guidelinesis licensed by the Commonwealth of Australia for use under a Creative Commons By Attribution 3.0 Australia licence with the exception of the Coat of Arms of the Commonwealth of Australia, the logo of the agency responsible for publishing the report, content supplied by third parties, and any images depicting people. For licence conditions see:

This report should be attributed as ‘Emissions Reduction Fund Safeguard Mechanism Emissions Intensity Benchmark Guidelines, Commonwealth of Australia 2016’.

The Commonwealth of Australia has made all reasonable efforts to identify content supplied by third parties using the following format ‘© Copyright, [name of third party] ’.

Making a submission

The Government invites written submissions on the draft Emissions Reduction Fund Safeguard Mechanism Emissions Intensity Benchmark Guidelines(the draft benchmark guidelines) from all interested businesses and members of the community.

Submissions are due by 5pm AEST, Friday, 6 May 2016. Any submissions received after this date will be considered at the Government’s discretion.

Submission instructions

Where possible, submissions should be sent electronically, preferably in Microsoft Word or other text-based formats, to the email address listed below. Alternatively, submissions may be sent to the postal address below to arrive by 5pm AEST on 6 May 2016.

All submissions must include a cover sheet, available at

Submissions can be forwarded to:

Email: (preferred)

Postal:Emissions Reduction Fund submissions

Policy Frameworks Branch

Department of the Environment

GPO Box 787

CANBERRA ACT 2601

For further information, or to request a hard copy of the draft benchmark guidelines, please call 1800852974.

Confidentiality statement

All submissions will be treated as public documents, unless the author of the submission clearly indicates the contrary by marking all or part of the submission as ‘confidential.’

Public submissions, including any personal information of the author(s) and/or other third parties contained in the submission, may be published in full on the Department’s website.

If a submission contains the personal information of any third party individuals, please indicate in the submission whether they have provided consent to the publication of their information.

Any request made under the Freedom of Information Act 1982 for access to a submission marked confidential will be determined in accordance with that Act.

1

Contents

1Introduction

1.1How to read these guidelines

2Policy context

2.1Definition of leading practice

2.2Application of emissions intensity benchmarks

2.3Landfills

2.4Electricity

3Objective

4Principles

5Administrative process to be followed

5.1Overview of developing a benchmark

5.2Governance, roles and responsibilities

6Determining production variables and benchmarks

6.1Selecting production variables

6.2Selecting data for emissions intensity benchmark calculations

6.3Calculating the emissions intensity benchmark

7Updating benchmarks

7.1Changes to a benchmark value

7.2Changes to a production variable

7.3Changes to global warming potential values

8Publication of information

8.1Public disclosure of dataset details

8.2Minimum information to be published in the safeguard rule

9Definitions

1

1Introduction

The Australian Government’s Emissions Reduction Fund implements a long-term framework for stable and sustainable climate change policy. It has three elements: crediting, purchasing and safeguarding emissions reductions (Figure 1). Implementation of the crediting and purchasing components is underway, with the first two auctions to purchase abatement completed in April and November 2015.

The safeguard mechanism ensures emissions reductions purchased by the Government are not offset by significant increases in emissions above business-as-usual levels elsewhere in the economy.

Figure 1 Emissions Reduction Fund components

The safeguard mechanism is established through the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (the safeguard rule). It applies to facilities whose annual covered emissions(see section 9– definitions) are more than 100,000 tonnes carbon dioxide equivalence (t CO2-e), and assigns each facility an emissions baseline that the facility must not exceed in net terms.

Further details on the safeguard mechanism can be found on the Department of the Environment’s website ( and in the safeguard rule.

Under the safeguard mechanism, facilities that commence operation or significantly[1] increase productive capacityafter 1 July 2020 areable to apply for a new or updated emissions baselinethat reflects leading practice in emissions intensity of production in their sector. Leading practice is reflected in the form of emissions intensity benchmarks (see section 9 – definitions).

Draft emissions intensity benchmarks will be developed by the Department of the Environment, informed by industry and community views. The Minister for the Environment will make final emissions intensity benchmarks by amending the safeguard rule to include the benchmarks.

The purpose of these guidelines is to set out the processes and considerations that will apply when a benchmark is made, and how and when it will be reviewed.

1.1How to read these guidelines

The benchmark guidelines have formatting features to assist with understanding its content:

• Specific meanings are highlighted with bold italicised text the first time they appear and defined in section9.
• Shaded italicised textdenotes guidance for determining benchmarks.
• Boxed text containsbackground information and examples.

2Policy context

The legislative framework for the safeguard mechanism has been established, as summarised in Table 1.The legislative framework reflects the Government’s policy decision with respect to benchmarks.

The benchmark guidelines are not a part of the legislative framework. This is a non-legislative document that supports the safeguard rule by setting a consistent approach for determining emissions intensity benchmarks.

Table 1 Summary of legislative context

Primary legislation / The National Greenhouse and Energy Reporting Act 2007(NGER Act)establishes the safeguard mechanism, commencing 1 July 2016
Safeguard rule / The National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 establishes the operational elements of the safeguard mechanism, such as the kind of facilities that have an obligation and how their baseline determination is made.
Other subordinate instruments:
NGER Regulations
NGER (Audit) Determination / TheNational Greenhouse and Energy Reporting Regulations 2008and theNational Greenhouse and Energy Reporting (Audit) Determination 2009support the safeguard mechanism.

The Clean Energy Regulator (the Regulator)is responsible for administering the safeguard mechanism.The Clean Energy Regulator does not have a role in selectinga production variable or determining the benchmark value.

2.1Definition of leading practice

Benchmarks will represent leading practice with respect to emissions intensity in each sector. Consistent with the Emissions Reduction Fund White Paper released in April 2014, leading practice will be defined as the weighted average emissions intensity of the best-performing (that is, least emissions-intensive) 10percent of Australian industry production[2].

It should be noted that the benchmarks only consider emissions intensity. While many Australian businesses strive to implement leading practices in all aspects of their operations, these practices do not always relate to emissions intensity. The Government has designed the safeguard mechanism to be neutral to individual business’ practices, recognising that businesses are best placed to make decisions about their individual operations.

2.2Application of emissions intensity benchmarks

Under the safeguard rule, existing large facilities are subject to baselines from 1 July 2016. A baseline is an absolute amount of emissions that a facility may not exceed in net terms, expressed in tonnes of carbon dioxide equivalence. A baseline is set out in a baseline determination made by the Regulator. Where no determination is made, a default baseline of 100,000 t CO2-e applies. Pre-2020 baselinesare generally calculated using the facilities’ historical emissions, not benchmarks.

For new or significantly expanded facilities that exceeds (or expects to exceed) the safeguard coverage threshold of 100,000tCO2-eafter 1July2020, the Regulator will apply an emissions intensity benchmark to make the facility’s baseline determination.

The first baseline made for a facility using the emissions intensity benchmarkis calculated on the basis of forecasted production and is set out in a benchmark-emissions baseline determination. It expires three years after it comes into effect for new facilities, and five years after it comes into effect for large new facilities[3](see section 39 of the safeguard rule).

After a benchmark-emissions baseline determination expires, if an application is made, the Regulator may make a production-adjusted baseline determination (see Subdivision 5 of Division2 of Part 3 of the safeguard rule). The production-adjusted baseline is made using actual production data in place of the forecasted data used for the benchmark-emissions baseline.If the benchmark has been updated in the time since the benchmark-emissions baseline was made, then the updated benchmark is used. Once made, a production-adjusted baseline does not change, regardless of whether there are subsequent updates to the benchmark.

If an existing facility undertakes a significant expansion after 1 July 2020, the baseline for the expansion will be calculated using a benchmark.Examples of a significant expansion are expanding the productive capacity of a facility by more than 20 per cent or beginning to make a new product.

Subdivision 4 of Division 2 of Part 3 of the safeguard rule sets out the facilities eligible for a new baseline determination based on benchmarks.

Box 1 describes how a benchmark-emissions baseline determination is made under the safeguard rule.

2.3Landfills

Landfills do not produce an output in the way other facilities do.Even if the amount of waste deposited does not change from year to year, the amount of emissions produced by a landfill can increase over time. The Government has determined the benchmark for landfills will beset using the landfill gas capture rate. They are covered by a landfill-benchmark baseline determination as outlined under Subdivision 7 of Division 2 of Part3 of the safeguard rule. Because the metric for the benchmark is already decided, the benchmark calculation is not subject to all aspects of the development process established in these guidelines.

2.4Electricity

A sector-wide baseline of 198 million tCO2-e will apply to the electricity generators connected to any of the five grids listed in the safeguard rule. If this baseline is exceeded, individual baselines will come into effect for each electricity generator with emissions above 100,000tCO2-e. Most electricity generators will have sufficient historical data for a reported-emissions baseline determination (the safeguard rule sets out how this type of baseline is made).The Regulator makes these kinds of individual baseline determinations without requiring an application from the facility.

These guidelines will be used to develop an emissions intensity benchmark applicable only tonew electricity generators whofirst exceed the 100,000 t CO2-e after 1 July 2020, or an existing generator who has a significant expansion and is eligible for a baseline adjustment after 1July 2020.Individual baselines for these facilities will not come into effect while the sector-wide baseline is in place (that is, while the annual covered emissions of the electricity generators connected to any of the five grids listed in the safeguard rule remains below 198million t CO2-e).

3Objective

Australia will meet its climate change targets through policies that reduce emissions, increase productivity and improve the health of the environment. At the core of these policies are the Emissions Reduction Fund and Safeguard Mechanism (including the emissions intensity benchmarks).

The objective of the emissions intensity benchmarks is to support improvement of the net emissions intensity of Australian industry.

4Principles

A set of principles will guide decisions made during the process of establishing benchmarks, including selecting production variables and data to calculate benchmarks. A summary of the principles is shown in Figure 2.

Figure 2 Summary of benchmark principles

Principle 1: Create incentives for investment in low-emissions production

To help achieve the objective and play their part in helping Australia meet its emissions reduction targets,benchmarks will need to send a clear signal to businesses to consider emissions intensity when making commercial decisions. This helps avoid the risk thatfacilities or new equipment with relatively high emissions intensity are locked in for the long term.

A business considering competing production options should be able to easily compare each option’s emissions intensity in order to factor it into the investment decision. This means production variable definitions should be readily understood and benchmarks should not discount or exclude factors that contribute to emissions.

To implement this principle, benchmark emissions intensities will represent leading practice and production variable definitions will aim to align with either market or commonly used industry definitions.

Principle 2: Focus on outcomes

Rather than mandate the use of particular technologies,production practices or inputs, the Government’s policy is to set a benchmark for emissions efficiency of sectors, and leave businesses to make their own decisions about how best to meet it. The Government’s policy is that benchmarks will represent the average of the best-performing 10per cent of Australian production.

Allowing special cases or exclusions will compromise the ability of a benchmark to incentivise emissions efficient investment.

The design of the safeguard mechanism recognises businesses may make choices that do not meet the benchmark so long as offsets are obtained to ensure a facility’s net emissions do not exceed its baseline. More information about obtaining and surrendering eligible offsets can be found in section 22XK and 22XN of the NGERAct.

To implement this principle, benchmarks will be developed to be neutral to technology, location, geography, productionpracticesand inputs. Precedents or exclusions that make it more difficult to meet the principles for future benchmarks will be avoided.

Principle 3: Use a consistent approach to develop benchmarks and select production variables

While the Government wishes to makebenchmarks that apply equally to industry peers, not altering the benchmark for individual facility circumstances (Principles 1 and 2), it is important to note many facilities covered by benchmarks will be complex operations. Some facilities will produce a single product, others will have multiple products. Something that is an intermediate product at one facility may be an output at another facility. A single facility may produce different grades of output that attract different prices, but have the same covered emissions intensity. Some facilities generate their own electricity; others buy it from the grid.

A consistent approach will be used soa production variable can apply to as many facilities in a sector as possible. Benchmarks will also apply to significant expansions of existing facilities, which over time will help level the playing field between market incumbents and new entrants.

To implement this principle, production variables will generally be based on outputs. Production variables may be defined using inputs or intermediate products where it is not possible to benchmark multiple outputs or if this enables a benchmark to apply to more facilities within an industrial sector. Production variables will cater for how businesses naturally structure their operations. Aspects of production that do not produce direct (scope 1) emissions will not be included. Production variable definitions will be equally applicable to new facilities and expansions of existing facilities.

Principle 4: Avoid perverse incentives and minimisered tape

The Government remains committed to reducing the burden of red tape for business. The objective will not be achieved if the production variable definitions and benchmarks incentivisebusinesses to restructure themselves to avoid liability. In addition, such restructuring is likely to be economically inefficient, meaning the benchmark would act as a drag on economic growth. This can be avoided by making sure production variables aredefined to adequately account for the scope of a facility’s operations. At the same time, the number of benchmarks should be minimised because allocating emissions to numerous products within the one facility will make compliance burdensome.

To implement this principle, benchmarksare able to cover multiple industries if these industries use largely similar production processes. A single benchmark may cover multiple products if they are produced by a single process. Production variable definitions will not overlap. Separate benchmarks will not be created to reflect different internal company or business structures.

Principle 5: Base on the best possible data

To ensure the benchmarks reflect achievable and realistic emissions intensity of production, they will be developed using data from facilities operating in Australia. Production data and emissions data will both be required. Similarly, it is important to ensure that data from operating facilities is representative of typical operating conditions. The best source of production and emissions data is collected under the National Greenhouse and Energy Reporting Scheme (NGERS). Due to commercial confidentiality, some data from NGERS cannot be publicly released. There are also some sectors where production data is not reported under NGERS. For these, a different source of production data will be required.

To implement this principle, benchmarks will be calculated using datasets that meet criteria (see section6.2). Benchmarks may be calculated using data supplied by industry or other third parties where this data meets the criteria in section 6.2.1. Facility-level data used to calculate benchmarks will not be published. Information will be published about the process used to gather and filter data, the sources, and the approach taken to calculation (see section8).

Principle 6: Focus on continuous improvement

Technology continues to improve, and many industries are likely to continue the historical trend of becoming more efficient and less emissions-intensive over time. To achieve the Government’s intent that the benchmark represents the best-performing 10 per cent of Australian production, it will be necessary to adjust the benchmark from time to time. It is important that this is done in a way that promotes certainty for business.