Politics and the Safeguard Mechanism

As discussed in a recent JTZC post (1), the new ALP government has increased Australia’s GHG reduction target relative to a 2005 baseline from 26 – 28% to 43% by 2030. In tonnage terms this means reducing 2030 emissions by an additional 88 million tonnes against a business as usual projection based on existing policies.

The Safeguard Mechanism – baselines and carbon credits

In addition to accelerating the decarbonisation of the electricity sector, the new federal government is planning to focus on heavy industry by driving reductions from large industrial facilities with annual Greenhouse Gas (GHG) emissions of more than 100,000 tonnes. There are currently about 215 facilities with emissions above this level and these fall under a climate “Safeguard Mechanism” created by the Abbott government in 2014 after it repealed the Gillard government’s 2011 carbon pricing scheme. Under the “Safeguard Mechanism” large scale emitters are obliged to maintain emissions below a baseline set for them by the Clean Energy Regulator. In the event emissions exceed the baseline facilities are required to offset the excess emissions by purchasing and surrendering the number of Australian Carbon Credit Units (ACCUs) that corresponds to the excess emissions.

Energy commentators and advocacy groups see two major problems with the existing “Safeguard Mechanism”. Firstly the baselines are very generous and in many cases are set well above actual emissions. They do not, therefore, create a meaningful driver for decarbonisation. Secondly they see structural problems with the methodology by which ACCUs are awarded. If carbon credits are not underpinned by genuine decarbonisation activities then using them to offset real emission increases is a flawed system.

So what exactly is an ACCU? An ACCU is equivalent to 1 tonne of GHG emissions and is awarded by the Clean Energy Regulator and effectively paid for through the Emission Reduction Fund for approved and audited activities associated with either the voluntary reduction of GHG emissions or the sequestration of atmospheric GHGs. The requirement that ACCus can only go to voluntary activities is important – it means “Safeguard Mechanism” entities which are subject to a government issued baseline can not currently be awarded ACCUs for projects aimed at ensuring they remain below their baseline.

As mentioned above, some believe ACCUs do not consistently represent genuine or permanent carbon reduction activities. Examples of “suspect” ACCUs include protecting native forest that was under no threat of logging, reafforestation projects that do not guarantee ongoing forest viability and generating energy from waste stream methane that had an obvious strong business case without the value from ACCUs.

Focus on heavy Industry

Entities covered by the “Safeguard Mechanism” have been slowly trending up since the system was launched and are currently about 140 million tonnes or about 25% of the national total. The “Safeguard Mechanism” is clearly not driving emission reductions from the facilities that it covers. For Australia to increase its 2030 reduction target and ultimately get to net zero, meaningful GHG emissions reductions from large scale emitters will clearly be needed.

In spite of the scepticism surrounding the system, the new ALP government is proposing to drive emission reductions from large scale emitters by restructuring rather than replacing the current “Safeguard Mechanism”. The proposed restructuring involves firstly setting emissions at levels closer to actual emissions then ratcheting the baselines down by about 5% / year. By 2030 this will, in theory, shrink emissions from 140 million tonnes to about 100 million tonnes.

The ability of facilities who exceed their emissions baselines to offset their emissions with carbon credits will remain but in addition to ACCU credits they will be able to generate their own Safeguard Mechanism Credits (SMCs) which can be traded with other entities covered by the “Safeguard Mechanism” or banked for later use. The use of SMCs represents a change in legislation and will need to pass through the parliament.

Political Opposition

The ALP should be able to pass the required amendments to the Abbott legislation using their slim majority in the lower house but will need support from either LNP or a block of Green/Independents to get through the Senate. This is not going to be straightforward.

At the time writing the LNP has announced that it will not support the proposed legislation – despite the fact that it is based on a framework they introduced. This decision seems to have surprised the government and more than a few commentators who expected the Liberals (if not the National Party) to support this proposal. Urban voters strongly signalled support for climate action at last year’s elections and if the Liberal party hope to regain power, it seemed logical that they would need to work, perhaps grudgingly, with the government to roll out a more aggressive climate plan. Clearly that logic has not prevailed within the party room and at the moment the LNP block is a firm no.

That means the ALP, instead of negotiating off ramps and carve outs with the conservative side of politics, will be forced to deal with the Greens who will be demanding tougher targets and more restrictive conditions. Not only are the Greens putting plenty of focus on the validity of ACCUs they are also looking to use their political leverage to support their “no new coal and gas”’ mantra. A ban on new coal mines and gas extraction, appealing to most Green voters. would be politically dangerous for the ALP, particularly in pro mining states like Queensland and Western Australia. Another likely Green demand will be to prevent existing fossil fuel operations from using carbon credits – effectively forcing them to meet stricter baseline solely by facility scale emission. This is obviously the preferred route but in many instances will rely on the technical pathways that are not necessarily available. Even where they are there are likely to be complaints that there is no guarantee that the necessary major projects cant be approved, permitted and put into action by 2030.

Industries covered by the Safeguard Mechanism

It remains to be seen what concessions the Greens are able to wring out of the government to get their climate bill through the Senate. What is certain is that the new decarbonisation targets will present real challenges to some of the large operations covered by the Safeguard Mechanism – operations that for the most part play an important role in Australia’s trade balance and the provision of goods and services the country relies on, as conservative talking points will remind voters.

The table below provides a snapshot into the industries covered by the “Safeguard Mechanism” and their associated share of the 140 million tonnes of GHG emissions

Table1 – Industries covered under the Safeguard Mechanism

The table above shows that about half the emissions come from fossil fuel companies – this is the group the Greens will target for tougher rules. If one adds in Iron Ore, Aluminium, Non Ferrous metals and Gold then it is pretty clear that the “Safeguard Mechanism” is strongly skewed to the mining industry.

It should be noted that GHG emissions from this group do not include emissions from downstream (or offshore) consumption or processing. In the lexicon of decarbonisation and climate advocacy the baseline will be based on Scope 1 emissions which are those arising solely from the operation of the facility in question. Scope 2 emissions are those associated with inputs (a typical example being emissions related to electricity purchases) and Scope 3 emissions which are from downstream consumption outputs from the facility (the classic example being the massive Scope 3 emissions from Australia’s coal and gas exports).

Figure 1 Schematic showing the difference between Scope 1,2 and 3 emissions.

To comply with the new decarbonisation policy, mining and metals companies, as well as the others listed in the table above, will need to be looking at ways to reduce Scope 1 emissions produced at within the confines of the facilities they own and operate

How might an annual 5%reduction in GHG emissions be achieved?

One hopes that the ALP government has commissioned detailed modelling that shows a realistic pathway for Australia’s large scale industrial facilities to reduce GHG emissions by 25% over the next 6-7 years. Collectively these operations are too important to the national economy for them to be given unachievable targets that threaten their existence. Following this logic the government should have a sense that the targets, while challenging, should be doable.

On the other hand, of course, there will be Green modelling showing scope for much more aggressive cuts while the LNP will argue that the government is setting unrealistic targets that will cause businesses to shut or move overseas with workers losing jobs and the economy being damaged.

So let’s look at how the facilities described in the table above will be looking to cut emissions and perhaps get a sense for whether some facilities might exceed their baselines by enough to generate SMC offsets to be traded with those who fall short? This assumes, of course, that the use of carbon offset is not restricted or banned.

Not surprisingly, the decarbonisation options for large scale industrial operations are pretty much the same as those available for the nation as a whole. The most well developed pathway lies with electrical generation – replacing fossil fuel generation with renewables and then electrifying as many functions as possible.

Remote mining operations, which are well represented among “Safeguard Mechanism” entities, with on site electricity generation will have the most straightforward pathway. Entities that own and operate diesel or natural gas based generation can progressively add renewables and batteries to their mix – the cost of this will be partially offset by the fact that they will now be able to generate SMCs which can be sold to those looking to offset emissions. As an added benefit, remote industrial operations often supply power to nearby communities. One imagines there will be claims for additional “outside for the fence” credits.

Operations connected to the grid or with a third party electricity supply will have a less obvious pathway, especially if downstream integration of power supply and investment in low emission generation is not possible. If decarbonisation of their electricity supply is not an option then they will be looking at transport related emissions. Mining typically relies very heavily on diesel powered mobile equipment and at least in theory, reductions are possible by converting to electric vehicles or even LNG. Unfortunately, neither option is readily available for large scale and/or specialised vehicles so depending on the makeup of the vehicle fleet there may be limited scope for short term emission reductions. Decarbonising transport related emissions might there offer some scope for reduced emissions by 2030 but for most facilities this is a more of a post 2030 opportunity.

Another route to reduced transport emissions is via investment in fixed plant such as conveyor belts or in pit separation. For a mining operation, these sorts of opportunities will be aimed at reducing the amount of material transported on site by truck or reducing haul distances. These opportunities are effectively a subset of “decarbonisation through electrification” and from a national GHG perspective increasingly make sense as the electrical supply is decarbonised. Again, if these sorts of projects do not play a role in meeting 2030 targets they could still play a role in meeting post 2030 decarbonisation goals.

Additionally, there are always old fashioned efficiency gains – getting more output per unit of energy used or distance travelled. These sorts of gains will lower emission intensities and help meet decarbonisation targets but given they would also be obvious routes to reducing operating costs a lot of this will have already been done. There will always be efficiency related investment ideas that can’t be justified on operating costs alone – the extra benefit from avoiding the need to purchase offset could push some projects across the line.

In conclusion it seems plausible that the “Safeguard Mechanism” entities will collectively have decarbonisation options capable of meeting or getting close to the proposed 2030 targets and those with a major portion of their emissions associated with on site power generation may be able to make quite significant gains. Everyone will, however, argue very strongly to be able to use carbon offsets. Even those with plausible pathways will highlight the complexity and delays (including permitting delays) associated with carrying out major projects especially in remote locations requiring indigenous consultation.

There will be, however, industries that can justifiably claim to have very little scope to significantly reduce generation or transport emissions – glass, aluminium and steel are obvious examples. These industries are characterised by processes that require either high temperatures or high levels of energy input. In these instances electrification isn’t the answer. For some “Safeguard Mechanism” industries, green hydrogen or carbon capture and storage are the ultimate decarbonisation solution. Neither of these technologies is anywhere near commercially available and some sceptics question whether either ever will be.

This all makes the use of carbon credits vital to the ALP’s proposed new 43% reduction target. Restricting the issuing and use of offsets will make conservative fears of industry closing and moving offshore both more likely and more potent. If the ALP is to stare down the Greens they will need to convince the public that carbon offsets are not a rort that allows industry to keep destroying the environment but a robust and audited system that reflects real and permanent carbon mitigation. Seems like we should have a closer look at ACCUs and how they are issued and verified in our next discussion