Emissions Reduction Fund:

Safeguard Mechanism

Consultation paper

February2018

Disclaimer

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© Copyright Commonwealth of Australia, 2018.


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Making a submission

The Government invites written submissions on the Emissions Reduction Fund Safeguard Mechanism Consultation Paper from all interested businesses and members of the community. Written responses should address the specific questions and provide supporting evidence where appropriate.

Submissions are due by 5.00pm AEST, Friday,30 March2018. Any submissions received after this date will be considered at the Government’s discretion.Submissions made in response to the Climate Change Policy Reviewdiscussion paper will continue to be considered.

Submission guidelines

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 close of business on the above due date.

All submissions must include a cover sheet, available at submission and coversheet should be provided as separate filesif sent electronically.

Submissions can be forwarded to:

Email: (preferred)

Postal:Safeguard and Industrial Policy Section

Department of the Environment and Energy

GPO Box 787
CANBERRA ACT 2601

Confidentiality

If you do not indicate that your submission should be treated as confidential, it will be treated as a public document and may be published in full on the Department of the Environment and Energy’s website. This includes the publication of any personal information of authors and/or other third parties contained in the submission.

If you indicate that your submission should be treated as confidential, it will not be published.

If only a part of your submission should be treated as confidential, please provide two versions of the submission, one with the confidential information removed for publication.

Privacy

The Department will deal with personal information contained in, or provided in relation to, submissions in accordance with this cover sheet and its Privacy Policy ( The Department’s Privacy Policy contains information about how to access or correct your personal information or make a complaint about a breach of the Australian Privacy Principles. Personal information is collected for the purposes of identifying authors of submissions and in case the Department needs to contact you for further information or clarification on your submission. It may be used and disclosed within the Department and to other persons for the purposes of updating the Safeguard Mechanism, and otherwise as required or permitted by law.

A request made under the Freedom of Information Act 1982 for access to a submission, including those treated as confidential, will be determined in accordance with that Act.

Contents

1Introduction

1.1What is the Safeguard Mechanism?

2Consultation to date

3Proposed approach for improving the Safeguard Mechanism

3.1Transitioning to calculated baselines

3.2Simplifying calculated baselines

3.3Annually updating baselines for actual production

3.3.1 Aligning reporting for businesses

3.3.2 Mechanics and timing

3.4New facilities post-2020

4Next Steps

Page | 1

1Introduction

In 2017, the Government reviewed Australia’s climate change policies—including the Emissions Reduction Fund and its Safeguard Mechanism—to ensure they remain effective in achieving Australia’s emissions reduction targets.

As an outcome of the review, the Government committed to consult with businesses on ways to bring Safeguard Mechanism baselines up-to-date with current circumstances and make it fairer and simpler.This consultation paper invites input from businesses on an approach to improve the Safeguard Mechanism design.The aim is to have any changes take effect for the 2018-19 compliance year.

1.1What is the Safeguard Mechanism?

The Safeguard Mechanismestablishesemissions baselines for Australia’s largest greenhouse gas emitters. Facilities covered by the Safeguard Mechanism must keep their emissions below baseline levels or purchase domestic carbon offsets to make up the difference. Baselines are intended to accommodate business growth and allow businesses to continue normal operations.

The Safeguard Mechanismcovers facilities with more than 100,000 tonnes of carbon dioxide equivalent emissions each year. It applies toaround 200businesses[1] in the electricity, mining, oil and gas, manufacturing, transport, and waste sectors. Together these businesses are responsible for around half of Australia’s annual emissions.

The Government has accepted the recommendation of the Energy Security Board to introduce a National Energy Guarantee to apply to electricity retailers and large electricity users registered as market customers under the National Electricity Rules. The focus of this consultation is therefore on direct emissions from the resources, manufacturing, transport and waste sectors and non-grid connected power stations.

The Safeguard Mechanism is part of the National Greenhouse and Energy Reporting Act2007. Together with the emissions reporting obligations under the Act, the Safeguard Mechanism provides a framework for Australia’s largest emitters to measure, report and manage their emissions.

The Safeguard Mechanism was established through the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015. Itwas developed through extensive consultation with affected businesses. Its operation was outlined in the Emissions Reduction Fund White Paper released in April 2014 and refined through a consultation paper released in March2015. It was legislated in November 2014, with detailed rules and regulations released in September2015. The Safeguard Mechanism commenced on 1July 2016.

2Consultation to date

The Government consulted broadly as part of the 2017 review of climate change policies. Following the release of a consultation paper in March 2017, the Department received over 350 submissions and met with over 270 stakeholders, including more than 40 businesses and industry groups directly affected by the Safeguard Mechanism.

During consultations, businesseshighlighted the importanceof policy stability and the need to build on current policies.

The last 10 or so years have demonstrated that policy uncertainty is a key risk factor for investment, acting as a significant disincentive.[2]

— Australian Industry Greenhouse Network, 2017

Rio Tinto continues to seek a stable regulatory framework in Australia which provides us with the clear signals needed to plan our investments appropriately.[3]

— Rio Tinto, 2017

Businessestold the Government the Safeguard Mechanism is working, but there are opportunities to improve it. The focus of suggested improvements was on how baselines are set. Businesses asked the Government toavoid arbitrary constraints on business growth to make the Safeguard Mechanism fairer, and make baseline setting arrangements simpler to lower administrative costs.

As highlighted in the 2017 review of climate change policies the next review of the Safeguard Mechanism will be by 2020 (to align with the long-term climate change strategy) and then as part of the five yearly review and refine cycle of climate change policies. The review by 2020 will consider the role of the Safeguard Mechanism, including consideration of any updates to rules and regulations, in the context of progress toward Australia’s 2030 Paris target, including when and how international units can be used and under what conditions, and appropriate lead times.

3Proposed approach for improving the Safeguard Mechanism

This paper outlines a proposed approach to refine the Safeguard Mechanism tomake it fairer and simpler, and bring baselines up to date. The climate change review highlighted the intention to build on the current baseline setting framework (summarised in Box 1), which was designed in close consultation with businesses and is well understood.

Box1. Current baseline setting arrangements

Baselines are initially set with reference to historical emissions—specifically, the high point of emissions between 2009-10 and 2013-14.

Historical baselines recognise past investments and are administratively simple to make, but they quickly become out of date.In recognition of this, a facility can increase its baseline if:

  • its emissions exceed its baseline in 2016-17 (initial calculated baseline),
  • it expands production capacity by more than 20percent (significant expansion),
  • there is natural variability in resource grades at mining, oil and gas facilities (baseline increase available twice before 2025), or
  • its emissions grow while its emissions-intensity is continuously improving (temporary baseline increase using the emissions-intensity test).

Under the current rules, when baselines are permanently increased, the new baseline reflects a forecast of a facility’s emissions-intensity and production over three years (or five years for very large emitters). This is called a calculated baseline.

After the forecast period, calculated baselines are replaced with a new baseline, called a production-adjusted baseline, which is updated once after the forecast period for actual production and then remains fixed.

We intend to build on this framework through updating baselines tobring them in line with current circumstances.The 2017 review of climate change policies set out a possible approach that would broaden access to calculated baselines, make applications simpler andconsider allowing baselines to be regularly updated to reflect actual production.This paper builds on the 2017 review and sets out a proposed approach with three elements:

  1. Bring baselines up-to-date by transitioning all facilities to calculated baselines over 201819 and 2019-20.
  2. Simplify applications by giving businesses the option to use Government-determined ‘production variables’ and default emissions-intensity values for calculating baselines.
  3. Updatebaselines annually for actual production, so theycontinue to reflect facility circumstances and enable growth. This would require businesses to report production.

The proposed approach is discussed in more detail below.

3.1Transitioning to calculated baselines

During the 2017 review, businessesindicated the current provisions for accessing baseline increases (set out in Box 1) provide inconsistent treatment across facilities.For example, more than onethird of non-electricity sector Safeguard Mechanism facilities have applied for a baseline increase to date, largely under the criteria of emissions exceeding the ‘initial calculated baseline’.However not all businesses were eligible under this criteria, andopportunities are more limited from 2017-18, once the criteria expire.

By limiting the relevant criteria to FY17, a facility could be effectively “locked out” from seeking permanent adjustments to its baseline.[4]

— Bureau of Steel Manufacturers of Australia, 2017

Businesses tell us other options for increasing baselines are not broad enough to adequately accommodate business growth.

AIP remains concerned that the rules relating to emissions increases flowing from business growth and incremental production increases still do not adequately address incremental production driven by changing business opportunities.[5]

— Australian Institute of Petroleum, 2017

While the current emissions-intensity test may offer relief in some years, the natural variation in emissions-intensity means that once the emissions-intensity test has been utilised in a “low” year, then the facility is likely to fail the emissions-intensity test in future (as year-on-year improvement is required).[6]

— Australian Aluminium Council, 2017

Under current arrangements, growing businesses are most likely to exceed their baseline, regardless of their efficiency or emissions performance. Someof these growing businesses are among Australia’s least emissions-intensive producers. Transitioning all facilities to calculated baselines ensures all baselines are updated and set on a consistent basis.

Under theproposed approach, all facilities remaining on a reported (historical) baseline must apply for a calculated baselinein 201819 or 201920, by then reported baselines could be more than a decade out of date.Facilities that already have a calculated baseline could not reapply—their baseline is already set using upto-date data.

Existing provisions to accommodate natural resource variability in the mining, oil and gas sectors would remain. Eligible facilities would retain two opportunities to apply for a calculated baseline before 2025.

For landfill facilities, the Safeguard Mechanism will continue to recognise the distinction between emissions from legacy and non-legacy waste[7]. Noting landfill facilities have no discernible output, and in recognition that there is a delay between when waste is deposited and emissions occur, views are sought on the approach for transitioning landfill facilitiesaway from historical baselines. One option is to use gas capture rates similar to the current baseline setting approach for new landfills.

Views are invited on:

  • The proposed approach to transition all facilities to calculated baselines over 2018-19 and 2019-20.
  • Whether there are reasons to allow facilitiesthat applied for a calculated baseline in 201617 to reapply.
  • The most appropriate way of transitioning landfill facilities under the proposed approach.

3.2Simplifying calculated baselines

Transitioning facilities to calculated baselinesincreases the number of applications. Simplifying the application processwillhelp lower administrative costs.Businesses have told us that auditing forecasts is the most costly element.

Calculated baseline applications currently require facilities to identify one or more production variables,then forecast their production and emission-intensity over three years (or five years for large facilities). Box 2 explains the terms underpinning an emissions-intensity value.

Box 2. Emissions-intensity value terms

The production variable identifies the product or service being delivered, for example, tonnes of alumina or passenger kilometres.

The emissions-intensity valuespecifies the emissions-intensity of production, for example, emissions per tonne of alumina or emissions per passenger kilometre.

To reduce the need to forecast emissions-intensity, the proposed approach would introduce an option to use default production variables and emissions-intensity values. Default values would be calculated and published by the Government. They could reflect average or median performance of a sector, or be set at some other level. The variation in emissions-intensity among facilities in a sector would need to be taken into account when deciding how default values are set.

This would be similar to the availability of lower order methods for emissions reporting under the National Greenhouse and Energy Reporting Scheme, which allows businesses to choose between different methods to measure and report their emissions. These methods are summarised in Box 3.

Box 3: National Greenhouse and Energy Reporting Scheme measurement methods

Under the National Greenhouse and Energy Reporting Scheme,businesses can choose between four tiers of measurement method. Procedures for applying these methods to different emissions sources are specified in the National Greenhouse and Energy Reporting (Measurement) Determination2008. These methods are consistent with international guidelines and Australia’s National Greenhouse Accounts.

Method 1: The National Greenhouse Accounts default method

Method 1 allows facilities to estimate their emissions using default emissions factors determined by the Department. These emissions factors represent the national average emissions for a range of activities, such as the combustion of liquid fuels. Method 1 provides a low cost emissions estimation option.

Method 2: Facility specific method using Australian or international standards

Method 2 gives businesses the option to undertake additional measurements to gain more accurate emissions estimates. For example, businesses can measure their fuel inputs rather than relying on national average values.

Method 3: Facility specific sampling and analysis in line with Australian and international standards

Method 3 builds on method 2, allowing businesses to do additional sampling-—for example, of fuels or raw inputs-—to improve the accuracy of emissions estimates.

Method 4: Direct monitoring of emissions systems

Method 4 focuses on measuring emissions directly, rather than modelling emissions based on input use. It can be cost effective when direct measurement is routinely undertaken for other reasons. For example, direct monitoring occurs in underground coal mines for health and safety reasons.

The opportunity to use simpler (lower order) methods and default values allows businesses to meet their reporting obligations at a lower cost. They can choose to use higher order methodsto get a more accurate result, where it is cost effective for them to do so, for example, if emissions monitoring is a routine part of their operations. Having a choice of methods helps businesses to manage the costs of emissions measurement and reporting, and recognises that their capacity to undertakethis work differs by facility type and size.

This principle can beextended to the Safeguard Mechanism. Introducing the option to use default values (similar to the National Greenhouse and Energy Reporting Scheme method 1) would simplify calculated baseline applications and lower administrative costs for facilities that elect to use them. In particular, it would reduce auditing costs by avoiding the need to audit site-specific emissions-intensity forecasts.If combined with regular updates for actual production (discussed in section 3.3), it could eliminate forecasts altogether.

The published default values would be updated when measurement methods change. This would ensure baselines and emissions are measured and reported in a consistent way and would prevent baselines becoming out of date when there are mandatory changes in the methods for measuring emissions under the National Greenhouse and Energy Reporting Act2007.

A facility with a calculated baseline could choose to move to default emissions-intensity values at any time,butonce it has chosen to use the default value it could not move back to a site-specific value.