Safeguard Mechanism reforms - another significant step in Australia’s climate law renaissance

By Frances Medlock, Commonwealth & Government Liaison Solicitor

With the passing of the Safeguard Mechanism (Crediting) Amendment Bill 2023 (the Bill) through the Federal Parliament on 30 March 2023, Australia has a new emissions reduction regime for large industrial emitters. For the first time, this includes a limit on gross emissions, and a requirement that ministerial decision making be in line with a carbon budget. While the final version of the bill is not as ambitious as the science requires, it does improve the Safeguard Mechanism significantly. And, importantly, should result in a real reduction in emissions from the approximately 215 facilities covered by the mechanism.

Before that, Australia passed a Climate Change Act that established greenhouse gas emissions reduction targets in national law. Next, we will need to ensure that rules and regulations made by the minister are effective at securing real emissions reductions, and that amendments to our environmental assessment and approval laws adequately address climate impacts. With the momentum for climate law reform continuing to build, every policy that is strengthened, and every increase in ambition, is a critical step towards a safe climate future.

EDO has long advocated for emissions reductions laws at the federal level commensurate to the climate crisis. Among other things, this means we need clear mechanisms to facilitate the phasing out of fossil fuel energy sources and fossil fuel production according to a legislated timeframe. As noted in our Roadmap for Climate Reform, strengthening the Safeguard Mechanism in the first instance is a starting point. But much more needs to be done to reduce all our emissions – scope 1, as well as indirect emissions – down to real zero. It’s in this context that this legal update analyses four key changes to the Safeguard Mechanism, including the new opportunities to ensure a robust climate policy that will result in real and rapid emissions reductions.

Emissions caps and budgets

Under the Government’s changes, facilities covered by the Safeguard Mechanism which emit more than 100,000 tonnes of CO2e will have to reduce their emissions intensity by 4.9% per year (called a ‘baseline’). These include oil, gas, waste, and transport companies. Some trade-exposed companies will be subject to lower baselines, with discounts applied for hard to abate industries like manufacturing. Importantly, the reforms specify that all emissions produced by covered facilities will be subject to several new emissions caps. These caps represent a crucial change to the Safeguard scheme, and should ensure that emissions are reduced in real terms year on year. Given the policy has historically failed at achieving emissions reductions,¹ EDO is pleased to see an intention in these reforms to ensure the revamped mechanism will do just that.

The three different emissions caps are set out in the objects of the bill. First, the net emissions cap, drawn from the proportionate coverage of the Safeguard Mechanism of about 28% of Australian emissions, sets a carbon budget of 1,233 million tonnes of CO2e between 2020 and 2030. Second, point-in-time caps mean net emissions from all Safeguard-covered facilities must be no more than 100 million tonnes in 2030, and net zero in 2050, reflecting our legislated emissions targets. Finally, the objects set a limit on gross emissions, so that from 2024, 5-year rolling average emissions must go down. This final cap is particularly important, as it represents a gross limit on emissions that can be produced under the Safeguard Mechanism. This means it doesn’t count the credits which have been purchased to offset a facilities’ underachievement of its baseline, only the real emissions cuts which have been made by covered companies.

With much of the substance of the Safeguard Mechanism to be fleshed out in the regulations and subordinate legislation, these emissions caps and budgets play an important role in constraining how the mechanism will operate. This is because the Climate Change Minister, when making the Safeguard rules, must be satisfied that those rules are consistent with achieving the reductions set out in the objects. While this is a subjective test, that requires the Minister to be personally satisfied that the rules are consistent and emissions budgets on track, EDO considers the requirement for analysis against the gross emissions cap a significant improvement to the original legislation. This is further bolstered by a requirement that the Minister must publish a public statement of reasons outlining why the Safeguard Mechanism’s operation will bring down emissions in line with the objects.

Carbon offsets in the Safeguard Mechanism

To meet their baselines each year, covered facilities can choose to undertake onsite abatement, for example through energy efficiency measures, or they can purchase Australian Carbon Credit Units (ACCUs) to offset the emissions they produce. The bill also allows for a third option through the creation of a new type of carbon credit, called Safeguard Mechanism Credits (SMCs). SMCs are created by covered facilities overachieving on their emissions reduction requirements. Those facilities can then trade their overachievement, effectively establishing a carbon credit trading scheme internal to facilities covered by the mechanism.

Facilities can choose which of these three options they take to meet their baselines. However, each of these options may not result in the same, real-world emissions reductions. For example, as evidenced by the Independent Review of Australian Carbon Credit Units (Chubb Review), as well as others,² there are significant concerns about the permanence and verifiability of ACCUs. EDO was vocal in raising concerns about the integrity of these credits throughout the consultation process on the draft bill, as there is no requirement that facilities must undertake onsite abatement actions first, or use the higher integrity SMCs, before offsetting using lower integrity ACCUs (in line with the mitigation hierarchy). This is particularly concerning as companies will have unlimited use of ACCUs to meet their baselines.

Despite this, EDO was pleased to see greater transparency measures included in the final version of the bill, with requirements that facilities that use carbon credits equivalent to more than 30% of their emissions baseline required to explain why they have not made more onsite cuts. While no limit has been placed on facilities’ use of credits to meet their baselines, this adds a ‘name and shame’ component. In addition, the strengthened objects now also refer to creating material incentives for emissions reductions.

It was also good to see the Federal Government begin to implement the Chubb Review recommendations as part of the Safeguard Mechanism changes, particularly as they relate to better integrity, governance and quality of ACCUs. EDO will continue to advocate for real emissions reductions to be the priority for any company or government in reaching emissions targets, and will continue to call out the use of low-integrity offsets, including through our corporate greenwashing work.

A carbon emissions ‘trigger’

The bill as passed by the parliament also now includes a ‘trigger’ which will require the Climate Change Minister to assess new or expanded projects against the objects. This will be relevant both for new projects, and for existing but expanding projects, where the 100,000 tonne Safeguard Mechanism entry threshold has been met.

Under these provisions, the Climate Change Authority (CCA) and the Department Secretary will respectively be responsible for informing the Minister when it looks like the carbon caps are going to be exceeded. For the CCA, this information will be gathered and shared through the annual climate change statement required under the Climate Change Act 2022, and can include information about approved or future projects. The Departmental Secretary may also receive information through government organisations, including State and Territory Environment Protection Authorities, or the offshore petroleum regulator, NOPSEMA.

Based on this information, where it looks like the Safeguard Mechanism is not going to achieve the reductions set out in the Act’s objects, the Secretary or CCA must inform the Minister, and advise if the Safeguard rules should be amended to get the scheme back on track. If so, the Minister is subsequently required to undertake public consultation, and undertake amendments of the rules if the Minister is satisfied this is required. For example, if a new proposal or expansion of an existing project is going to exceed the carbon budget or result in higher gross average emissions, this ‘trigger’ makes it transparent, and ensures consultation with the wider community. It’s then up to the Minister to make sure the rules are consistent with the legislated emissions caps. Amendments to the rules could ensure this by, for example, limiting ACCUs accessible to the new entrant, adjusting the decline rates of baselines, or imposing specific conditions. The Minister can also take other policy actions (outside the Safeguard rules) to achieve the objects.

This is a subjective test, that requires the Minister to be satisfied that changes are needed, even where provided with advice to that effect from the CCA or the Secretary. However, with new transparency provisions which require public consultation, publication of ministerial statements of reasons, and public reporting of overall emissions from covered entities – alongside the new hard emissions cap – there are clearer legal pathways for holding future governments to account if it looks like the necessary emissions reductions are not being achieved.

Assessing new entrants

As part of reforms to the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act) the Federal Government has committed to a new requirement for project proponents to report scope 1 and 2 emissions to the Environment Minister as part of the EPBC Act approvals process. Through provision of information to the CCA, approvals by the Environment Minister under the EPBC Act of high-emitting projects will cause an assessment by the Climate Change Minister of that project’s reported emissions against emissions caps. This is not a ‘climate trigger’ in the strict sense (as approvals by the Environment Minister will happen first), but it does mean new projects covered by the mechanism must be assessed against the gross emissions cap in the objects of the bill.

It’s important to note that this link between environmental approvals and the Safeguard Mechanism legislation does not comprehensively exist in law yet, noting that amendments to the EPBC Act to require proponents to disclose potential emissions have not yet been introduced to parliament. However, this is a commitment by the government as set out in the Nature Positive Plan, and EDO looks forward to engaging further on how the links between our environmental laws and climate policy can be strengthened.

Finally, new entrants will also be subject to ‘international best practice’ baselines. While the guidelines for what international best practice looks like are still being developed, it’s clear that this means zero net carbon emissions for new gas fields for LNG export, including those supplying existing gas facilities. This has implications for projects like the Barossa Gas Project, as well as new gas projects in the Beetaloo Basin – both of which will need to be net zero from commencement.

The need for further reform

EDO has engaged deeply over several months in this policy process as the bill has progressed, including through numerous submissions to departmental consultations, appearing at a Senate Committee Inquiry, and engaging with stakeholders and decision makers. As a result of these processes, it’s been heartening to see links between our national environmental laws and emissions reduction schemes progress, and strong provisions relating to transparency and reporting added into the bill.

However, EDO remains concerned about some significant missing components of the Safeguard Mechanism reforms. As noted above, this includes allowing the unlimited use of ACCUs to meet baselines, as well as the fact that our legislated emissions reduction targets are not in line with what the science tells us about the need to urgently reduce emissions. The Safeguard Mechanism more generally does not address indirect emissions (scope 2 or 3) or extend beyond about 215 industrial facilities. It’s clear that the Safeguard Mechanism is only one piece of the climate action puzzle, as it only covers a portion of Australia’s emissions, and does not represent the rapid, economy-wide emissions reductions science tells us are necessary to avoid the worst impacts of climate change.

There is much more that needs to be done, and EDO will continue to advocate for policy solutions which represent best practice, have legal frameworks with integrity, and which are backed by science.

You can read EDO’s submissions relevant to the Safeguard Mechanism consultation process here: