Following last year’s “climate election”, Australia’s Prime Minister Anthony Albanese moved quickly to deliver on several campaign promises, notably one to set a more ambitious 2030 emissions reduction target (43% below 2005 levels) and one to enshrine a net-zero by 2050 target into law. This week saw his Labor government deliver a key plank to meet these goals: reforming Australia’s flagship climate policy, known as the Safeguard Mechanism.

The Safeguard Mechanism regulates the emissions of Australia’s 215 biggest-polluting facilities, including sites run by companies like BHP, Anglo Coal, Woodside, Chevron and Rio Tinto. Together, these facilities account for almost 30% of Australia’s emissions, according to Australia’s Climate Council.

The mechanism was originally designed to ensure emissions from industry did not outstrip emissions reductions the government was buying in via an Emissions Reduction Fund. It did this by applying emissions intensity baselines to individual facilities. Emissions over and above these baselines had to be reduced or covered by Australian Carbon Credit Units (ACCUs) bought from domestic offset providers.

In practice, emissions under the mechanism actually rose by around 4% between its start in 2016–17 and 2020–21. During last year’s election campaign, Albanese pledged to reform the mechanism into one that reduced emissions, with annually declining baselines aligned with a longer-term net-zero climate policy goal for Australia.

This week, the government delivered that reform – after cutting a deal with the Greens to get it over the line. The final package was adopted in both the Senate and House of Representatives on 30 March, and will take effect from the new financial year on 1 July 2023.

As expected, the headline reform is that the Safeguard Mechanism will now feature annually declining baselines, targeting net emissions of 100 million tonnes of CO2-equivalent (mtCO2e) by 2029–30. (By comparison, the Safeguard Mechanism covered emissions totalling 136.9 MtCO2e in 2020–21.) This implies a 4.9% annual reduction in the baseline for most facilities, with exceptions for trade-exposed sectors.

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Other changes include an additional A$400m ($267.82m) of funding for industries that are “critical” for clean energy development (such as steel and cement); a commitment for public finance to focus on decarbonisation and not expansion of fossil fuels; a pledge to look into the feasibility of introducing a carbon border adjustment mechanism; new gas fields will have to capture and store, or offset, all their direct (scope 1) emissions, in line with international best practice; and if any facility uses ACCUs for more than 30% of its baseline emissions, it needs to explain why. The package also introduces a tradeable Safeguard Mechanism Credit for those facilities that cut emissions below their baseline.

Australia's Safeguard Mechanism after the 'climate wars'

“These reforms are crucial to our climate and our economy – supporting Australian industry and ensuring they will continue to be competitive in a decarbonising world,” said Climate Minister Chris Bowen in announcing the deal with the Greens. “[They] are the culmination of months of extensive feedback from Safeguard businesses, industry associations, climate and community groups, academics and private individuals.

“Business and climate groups have been clear that the Parliament should pass the strengthened legislation… and deliver overdue policy certainty,” he added.

Kate Chaney, one of the so-called Teal independent members of Parliament in Australia who campaigned on climate policy last year, welcomed the reforms. “They may not be perfect, but they are a start,” she told Energy Monitor. “It is vital that we put something in place to give business some certainty so facilities can invest in abatement technology as soon as possible. A number of amendments were negotiated with the government that improve the legislation, although unfortunately the reforms still leave the door open for new fossil fuel projects to be approved, making transition harder for everyone else. 

“But the legislation puts in place a framework to ensure the industrial sector pulls its weight towards our 43% emissions reduction target for 2030,” she continued. “There are review points built into the legislation so that any necessary improvements can be made over the coming years.”

“After a decade of the climate wars, these reforms are a strong and welcome market signal that will push companies to better internalise a carbon price and justify the business case for step-change decarbonisation,” says Brad Kerin, general manager at the carbon offset project developer WeAct.

“However, the government will need to clarify detail on flexibility for trade-exposed heavy emitters, technology support for hard-to-abate sectors, and models of likely demand, supply and price of new Safeguard Mechanism Credits that will be created and traded under the scheme.”

In future, the scheme could be extended to support greater ambition still, either to facilities emitting more than 25,000tCO2e per year (currently the threshold for inclusion is 100,000t) and/or to other sectors, such as electricity generation, suggests Kurt Winter of the non-profit Carbon Market Institute (CMI). Power production remains the largest source of emissions in Australia and therefore a challenge for climate policy.

“The question is whether the government’s 82% renewable energy projection [for the power sector in 2030] can be achieved with the policies in place or if they need an additional investment driver such as inclusion in the Safeguard Mechanism,” Winter says.

“The changes we have seen are very welcome and send the strongest-ever signal for decarbonisation activities that we have seen in Australia,” says Georgia Cox, policy and regulatory manager at the project developer and carbon offset provider Tasman Environmental Markets.

“It would be easy for offset providers to be supportive of there being no cap on the amount of ACCUs Safeguard Mechanism facilities can use, and it is easy for others to criticise the use of offsets, but when you strip it back… it is critical for policy to facilitate decarbonisation across the economy as efficiently as possible.

This requires a basket of measures – and that includes investing in decarbonisation in the land sector, through high-integrity ACCUs.”

The requirement for a facility using ACCUs equivalent to 30% or more of its baseline to explain why, "sets us up for a drive for more corporate activity on decarbonisation”, says Cox. "Disclosure is an important cog in the chain.”

Emily Gerrard, director and principal lawyer at Comhar Group, also said the reforms “landed in a good place” but warns of implementation challenges. Part of this is due to the change in intent of the Safeguard Mechanism, she explains, from trying to control emissions reductions purchased by the government to trying to actively cut emissions.

The new mechanism lines up with the country’s latest national climate plan under the Paris Agreement, Gerrard says, although the ACCU scheme remains important to deliver emissions reductions in other sectors such as agriculture and land use.

Bret Harper, director of research at analysis company RepuTex, says the reform “puts [Australia] in a good position to reach more ambitious targets”, even if it alone cannot deliver on Australia's 2030 climate policy goal.

Harper also welcomes the clarity on conditions for new gas projects, which will have to account for all of their direct emissions. That will create additional demand for ACCUs if the projects proceed. “Now that they are liable and accountable for [their emissions], that [becomes] part of their business calculations,” he says.

New gas projects have to be net zero

The Australian Petroleum Production & Exploration Association (APPEA) criticised the deal, saying it will make Australia’s climate change targets harder and more expensive to meet. “Australia’s natural gas is critical to reaching net zero in Australia and the region, supporting the transition away from coal and providing reliable backup for renewables while powering Australian manufacturing,” APPEA chief executive Samantha McCulloch said in a statement.

"The requirement of net-zero reservoir CO2 from new gas fields supplying LNG projects brings forward the timelines for the development of carbon capture and storage and offset requirements for these facilities," McCulloch said in response to questions from Energy Monitor.  "While these mitigation approaches and actions were already planned, in accordance with individual company’s net-zero plans, the decisions this week increase the emissions reductions requirements and associated costs in the near-term."

“There has been a bit of a general freak out” by the gas sector and, to a lesser extent, the coal sector, says Tennant Reed of the Australian Industry Group, as they are likely facing tougher baselines than expected a week ago. However, given that the Greens' ask was for an outright ban on new projects, the net-zero requirement is a compromise. “It is not unfair to say it could have been a lot worse for the gas sector,” Reed adds.

“It is not unfair to say it could have been a lot worse for the gas sector.”

Tennant Reed, the Australian Industry group

“If governments allow new and expanded fossil fuel projects to continue then companies should be held fully responsible for the resulting emissions, and their net-zero targets scrutinised to ensure a meaningful approach to decarbonisation rather than just ongoing carbon neutrality,” says WeAct’s Kerin.

While gas cannot compete with renewable technologies for power generation, Reed notes that it is valuable for flexible generation and emergency backup, and likely will be for some time. “Getting the last 2% of emissions out of the electricity sector is a big ask,” he adds.

It is also needed for some sectors where renewable technologies are not as advanced, such as in industrial feedstock and for industrial heat. “APPEA and its members are going to have some customers for some time yet, but the market is shrinking,” Reed says.

Keeping pace with the US Inflation Reduction Act

From a governance perspective, one of the most significant elements of the reform is that if the Climate Change Authority – which will review the Safeguard Mechanism’s budgets every five years – advises the minister of the day that absolute emissions are not going down or that the net budget is not being met, the minister can introduce changes to the mechanism to address this. “This is a pretty robust mechanism to make sure the scheme remains on track,” says Reed.

“It is really binding future governments,” says CMI’s Winter.

The reforms also make Australia more attractive for foreign investors, Winter highlights. “To compete with the likes of the US, where the clean energy provisions in last year’s Inflation Reduction Act are a boon for investment, complementary measures will also be needed.”

“It is important that the Australian economy is able to attract that level of investment, so that we can remain globally competitive,” he says. “It is now a competitive space – we are seeing significant policy interventions in the US and Europe, which are driving the push and pull of investment.”

The Inflation Reduction Act “really raised the stakes”, says Harper from RepuTex, and has put pressure on Australia. “You would have had a market advantage had you been a leader in the space – now you are a follower.”

“I am excited to see the role of the Safeguard Mechanism shift from limiting emissions to actually driving decarbonisation,” says Kerin.

“However, if we are to avoid the worst of the climate impacts to come, Australia will also need a full suite of complementary climate policies that tackle energy, agriculture, transport and other hard-to-abate sectors, as well as improve fuel standards, energy efficiency and support a just transformation for vulnerable communities.”

Editor's note: This story was updated after publication to add comments from APPEA chief executive Samantha McCulloch.