Commencement of the safeguard mechanism: is your business ready?

09 June 2016

The ‘safeguard mechanism’ is due to commence on 1 July 2016. It is the final plank of the Federal Government’s Emissions Reduction Fund (ERF) and is aimed at limiting emissions growth across the Australian economy. The safeguard mechanism is intended to cover businesses that directly emit more than 100,000 tonnes of CO2-e per year, which will capture facilities such as power plants, mines, large manufacturers and some landfills. Facilities covered by the mechanism must keep emissions below a set baseline or face potential penalties for exceeding the safeguard limit.

Overview of the Emissions Reduction Fund

The ERF forms part of the Federal Government’s direct action plan to reduce greenhouse gas emissions to 5% below 2000 levels by 2020. It is a fund allocated to the purchase of emissions reductions with $2.55b in expenditure over the first four years’ of its operation. Businesses or organisations wishing to participate in the ERF must register their projects with the Clean Energy Regulator (Regulator). Projects may include emissions avoidance and carbon sequestration projects. To be eligible for registration, the projects must use an approved method to estimate the likely emissions reductions from their projects and meet certain additionality requirements. They must also satisfy the auction pre-qualification requirements and participate in a reverse price auction, the first of which was held in April 2015. For more information on recent auction results, click here.

Successful bidders enter into contracts in which the Federal Government agrees to purchase emissions reductions from the projects. Contracts include provisions to ‘make good’ unless under delivery is not reasonably within the control of the proponent. Once a project is implemented, a proponent must report their emissions to the Regulator, which will verify reports and issue credits to the proponent. Proponents will ultimately receive payment from the Regulator for Australian Carbon Credit Units (ACCUs) at the contract price.

Commencement of the safeguard mechanism

Around 140 businesses have facilities with direct emissions (scope 1) of more than 100,000 tonnes of CO2-e per year. From 1 July 2016, these businesses must adhere to baselines set by the Regulator for existing facilities. The baselines will be set using data already reported under the National Greenhouse and Energy Report scheme (NGERs) to reflect the highest emissions level for a facility over the five year period between 2009-10 to 2013-14. If these ‘high points’ are likely to be higher than in previous years, then businesses may be eligible to have their baselines set at that higher level, known as a ‘calculated baseline’. Businesses that are likely to seek calculated baselines may include, for example, mines that have begun production since 2013-14.

A company is required to disclose information to the Regulator that may warrant the company’s baseline being set lower than the reported baseline. This may occur, for example, if emissions intensive activities no longer take place at the facility or activities previously reported as part of one facility are now reported as part of another. Failure to disclose this information may result in the Regulator retrospectively imposing a tighter baseline on the facility.

The company with operational control of a facility will be responsible for meeting the safeguard requirements by keeping emissions at or below the reported baseline. A company will have ‘operational control’ if it has the authority to introduce and implement any or all of the operating policies, health and safety policies and environmental policies.

Grid connected electricity generators will be treated differently. A baseline will apply across the electricity sector that will be set at the high point of sectoral emissions over the period 2009-10 to 2013-14. Individual generators will not have to keep emissions below their own individual baselines unless the sector exceeds its sectoral baseline.

A range of options are available to assist businesses meet their safeguard obligations. These include purchasing ACCUs to offset emissions above the baseline, generating their own ACCUs by carrying out a project under the ERF and multi-year monitoring which will allow a facility to exceed its baseline in one year provided average emissions over two or three years are below the baseline. Facilities may be eligible for an exemption from compliance where emissions are the direct result of exceptional circumstances, such as a natural disaster or criminal activity.

If your facility exceeds its baseline in 2016/17 and has not surrendered ACCUs to offset the exceedance, the Regulator has a number of graduated enforcement options available to it, including the imposition of a civil penalty. The maximum penalty for breaching a safeguard limit is $1.8 million, but fines are likely to be used by the Regulator as a last resort.

Implications for business
  • If your business is likely to exceed its reported baseline, then you should consider applying for a new ‘calculated baseline’. Applications can be submitted to the Regulator between 1 July 2016 and 31 October 2017 for a calculated baseline that begins from 1 July 2016. Importantly, the years you can use to set your calculated baseline are limited by the date from which you apply;
  • Businesses caught by the safeguard mechanism should consider the ramifications for their operations if tighter baselines are applied in the future. The Federal Government’s direct action plan aims to cut emissions to 26-28% below 2005 levels by 2030; and
  • The safeguard mechanism may create opportunities for a secondary carbon market. The Federal Government will review the safeguard mechanism in 2017-18 and decide whether businesses can use international carbon units, in addition to ACCUs, to offset emissions that exceed baseline levels.

This article was written by Charmian Barton, Partner.

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