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Changes to the safeguard mechanism are expected to finally establish a model that effectively cuts Australia’s emissions, although there is a ‘shit fight’ ahead as baselines are set for each industry. By Mike Seccombe.

The most important climate policy you’ve never heard of

The Yallourn Power Station in Victoria.
The Yallourn Power Station in Victoria.
Credit: Asanka Ratnayake / Getty Images

The Coalition government called its key climate policy by a reassuring name: the safeguard mechanism. Yet all it actually safeguarded was the capacity of big carbon polluters to go on polluting.

In the five years after it began in 2016, under then Environment minister Greg Hunt, emissions by the 215 biggest climate polluters subject to the mechanism went up by nine million tonnes, or about 7 per cent. Emissions from oil and gas extraction – mostly gas – blew out by about 20 per cent, according to analysis released this week by the Australian Conservation Foundation.

The safeguard mechanism was a peerless exercise in state-sponsored greenwashing. As the ACF says, it imposed “virtually no obligations to reduce emissions on the 215 facilities that produce 28 percent of Australia’s climate pollution”.

The foundation’s lead environmental investigator, Annica Schoo, says, “Far from cutting emissions, our analysis shows the safeguard mechanism is facilitating an increase in climate-heating emissions from Australia’s biggest polluters.”

The reason for the policy failure is not hard to divine. While limits were imposed on the emissions of the biggest polluters – those that generated more than 100,000 tonnes a year – these so-called baselines were set higher than the amount they actually did produce.

Think of it as a limbo dance where the bar was set so high that participants did not have to lower themselves to get under it. If any were concerned they might hit the bar, they could simply ask for it to be raised to give them extra headroom. (“Headroom” is a term used to describe the allowance made for facilities to increase emissions without incurring any penalty.)

This is not the way a limbo is supposed to work, of course. The bar is supposed to get progressively lowered, to make it harder to get under. This lowering is exactly what the Labor opposition promised before the election. Now it is in the process of working out the size of the increments by which it will get lower.

Of course, the ultimate goals of a limbo and the revamped safeguard mechanism are quite different. A limbo proceeds until all contestants but one fall over; with the safeguard mechanism, the objective of the government is not to have players fall over but rather to become more energy efficient, to pollute less and to allow Australia to meet its goal of cutting emissions.

“This policy will make or break Australia’s 2030 target,” says Schoo, referring to the 43 per cent reduction committed to by the Albanese government.

According to Tony Wood, energy program director at the Grattan Institute, it could also make or break the Albanese government.

Having made the previous government’s failure to take meaningful action on climate change a major policy focus at the May election, and having tied itself so tightly to its 43 per cent emissions reduction goal, Labor needs to make the safeguard mechanism work.

It will be a tricky job. While much attention has focused on moves to reduce emissions from electricity generation, reform there is relatively simple: encourage more renewable generation and provide more transmission infrastructure.

That’s not to say it will be easy but the path to decarbonising electricity is pretty straightforward and generally agreed by experts and industry leaders. Market forces are pushing power generation in the same direction as policy. Renewable energy is not just a cleaner option but also a cheaper one.

But just cleaning up electricity will not get us to 43 per cent by 2030.

“Within the next couple of years,” says Wood, “the industrial sector will be the biggest source of emissions, because electricity is coming down but nothing else is.

“It’s important for the Labor government. It’s really important for across the economy because this is the biggest source of emissions and it’s the area where much potential growth of emissions will occur if we don’t do something about it.”

Dealing with industry is a lot more complex and contentious than dealing with energy generation. “Once you get into the detail, everybody’s mind starts spinning, including the nerds. It’s a really complicated issue,” says Wood.

The simplest solution, in his view, and that of many but not all economists, would be for government to impose an economy-wide price on carbon and leave it to the market to make the consequent adjustments. But the previous Labor government tried that and lost an election.

“Labor decided that there was no way they were going to try and do that again,” says Wood. Instead, they have picked up on the safeguard mechanism, “this thing Greg Hunt came up with but was never allowed to do anything with”.

Central to the safeguard is the setting of emissions baselines for various sectors of the economy – determining what contribution they should make to meeting Australia’s emissions reduction target.

“A baseline scheme by its fundamental definition is very complicated, because you’ve got to choose baselines, and wherever you pick them, you’re going to have a shit fight,” says Wood. “How do you then decide how much of the budget we should allocate to the industrial facilities – in particular, those covered by the safeguard mechanism?”

The essence of the inevitable conflict is clearer if Australia’s climate aspiration is described not as a percentage reduction but as the absolute amount of carbon emissions we must cut.

“For the first time in Australia’s history of climate wars, we have a carbon budget,” says Wood. “For the 10 years from 2021 to 2030, that’s 4391 million tonnes. That’s the budget. Which means if I want more of a share, someone else has to have less.

“And any big new facility, a big LNG plant, a new fertiliser plant in the north-west of Western Australia, they have to be accommodated inside the same budget…

“If you start saying to the existing facilities, ‘You’re going to have to reduce your entitlement to make room for a Beetaloo or Scarborough or this new fertiliser plant’, you know what sort of response you’re gonna get, right?”

On top of this, the size of the carbon budget will shrink. A consultation paper released by the Department of Climate Change, Energy, the Environment and Water (DCCEEW) last month suggested the rate by which baselines might be reduced.

“While final decline rates cannot be settled until other policy settings have been finalised, indicative decline rates are expected to be between 3.5 and 6 percent each year [to 2030],” the paper says.

“Post-2030 decline rates could be set in 5 year blocks, with the process for setting them aligned with updates to Australia’s Nationally Determined Contribution (NDC) under the Paris Agreement.”

There is a host of difficult issues to be addressed in those “other policy settings”. What share of the national emissions reduction task should be borne by the 215 or so big emitters covered by the safeguard mechanism? Should baselines be set for individual facilities or should they be based on an industry average? Should baselines be absolute, or “production adjusted”, so industries can emit more in total, so long as their emissions per unit of production, their “emissions intensity”, declines?

There are so many knotty problems. For one, decarbonising will be easier for some industries than others, so there will be special pleadings. Then there is concern about trade-exposed industries. How can the system be tailored so businesses are not disadvantaged compared with international competitors? How do we ensure Australian production doesn’t simply move offshore to places with less stringent emissions reduction requirements? How do you deal with operations that claim they can’t make cuts yet but promise to make up for it in the future by utilising some nascent new technology?

For years the fossil fuel sector has promised it would be able to capture and store its emissions. Despite the long history of failure of carbon capture and storage, the promises continue to be made, even as emissions balloon.

The standout example – the single biggest emitter identified in the ACF data, at almost 37.5 million tonnes over the five years – was Chevron’s Gorgon liquefied natural gas (LNG) development in Western Australia, which won approval on the promise that it would sequester a substantial portion of its greenhouse emissions but which has repeatedly failed to deliver.

On the basis of past experience, Jennifer Rayner, head of advocacy at the Climate Council, has no doubt we will see many such attempts by dirty industries to “move the goalposts” on compliance with the safeguard mechanism.

“They say, ‘Okay, well, we didn’t meet [our emissions reduction target] this year. But we might meet it next year, so don’t penalise us yet.’ And then they don’t meet next year but say, ‘We might meet it next year’, and just keep moving the goalposts around.”

Then there is the big question about how polluters might trade emissions between themselves via something called safeguard mechanism credits (SMCs), or buy carbon credits in the form of Australia carbon credit units (ACCUs), or offshore credits.

Don’t be daunted by the nomenclature. In essence, the system is quite simple – although the department’s explanation of how SMCs work makes it seem otherwise.

“Under the reformed Safeguard Mechanism,” says the DCCEEW discussion paper, “Safeguard Mechanism Credits (SMCs) will not be carbon ‘offsets’, because they are generated within a regulated emissions limit. The integrity of SMCs arises from the regulated emissions limit, which constrains the overall emissions of Safeguard participants. Aggregate baselines form the limit – they can be calibrated to meet the desired contribution to the 2030 target.”

Rendered into English by Danny Price, managing director of Frontier Economics, what the department is trying to say is that “it establishes a baseline, above which you can pay a penalty, below which you get a credit”.

Those facilities that succeed in cutting their emissions can sell their credits – SMCs – to those that do not. Thus, the underachievers are penalised and the overachievers rewarded, and the total quantity of emissions is reduced over time.

But there are issues with the granting of SMCs. It’s entirely possible, even likely, that some facilities will be credited with SMCs for making investments in technology to cut emissions, which they would have done regardless of the safeguard mechanism, says Price.

“If these businesses will invest in these technologies, in any case, then the scheme is actually just giving the money to nothing. Technological change is happening anyway. You shouldn’t be rewarding that,” he says.

“You should be constantly adjusting the baselines to reflect the fact that this technological change is going on.”

The bigger issue, however, relates to the use of ACCUs and other similar offsets. Like SMCs they serve to allow highly polluting facilities to keep operating by buying access to the carbon savings made by others. ACCUs are awarded by the government for projects that either avoid emissions or sequester carbon dioxide – usually in trees, soil and geological formations. Each tonne of carbon dioxide or carbon dioxide equivalent avoided or stored is equal to one ACCU.

Theoretically, a big polluter could buy ACCUs and similar international carbon credits to offset its emissions and thereby remain within its baseline.

But there is a problem. The integrity of ACCUs – and some international offsets – is highly dubious.

Indeed, the whole ACCU scheme – another invention of the previous government – was branded a “sham” earlier this year by Professor Andrew Macintosh, who previously chaired the body charged with advising on the “integrity standards” applicable to these projects.

“People are … getting credits for growing trees that are already there,” he told The Saturday Paper in March. “They are getting credits for growing forests in places that will never sustain permanent forests. And they are getting credits for operating electricity generators at large landfills that would have operated anyway.”

Since then, three Coalition government appointees to the integrity board on which Macintosh used to sit have left. All had close ties to high-emitting industries. The government has also ordered an investigation of the whole ACCU scheme, headed by former chief scientist Ian Chubb. It is due to report in December.

But Macintosh remains concerned that low-quality ACCUs could undermine the effectiveness of the new safeguard mechanism.

“At the moment about 16.5 million ACCUs that were generated a year, probably three to three-and-a-half million of them are legit,” he says.

“So, if the Chubb review comes along and says, ‘We’re going to fix these integrity problems’, credit supply is going to plummet and, as a consequence, prices go through the roof.”

He argues the government should put a price cap on ACCUs. But his greater worry is that “bad offsets”, whether bought in Australia or bought offshore, will go into the safeguard mechanism.

“Because if that happens,” he says, “for every bad unit that goes in, you’re increasing emissions within the safeguard.”

Macintosh is not the only one with concerns. The Climate Council’s Jennifer Rayner points to a speech given by Chris Bowen shortly after he became minister for Climate Change and Energy.

“He said something along the lines of the fact that he was pretty much happy for people to do 100 per cent offsetting to meet their baseline,” she says.

“The extent to which the government seeks to constrain offsetting through the policy design … will be the key test of whether it’s actually going to work at all.”

The irony, says Polly Hemming, senior researcher in The Australia Institute’s climate and energy program, “is that Labor actually needs carbon credits more than the Coalition did – they’ve expressed greater climate ambition but still committed to gas and coal developments”.

She notes there are 114 new gas and coal projects currently proposed or in development, including the massive and massively polluting Scarborough and Beetaloo Basin gas projects.

“So, carbon credits are the things that are going to bridge that gap,” Hemming says. “And you don’t want to just have industry having unfettered access to carbon credits.”

For the scheme to be credible, she says, there should be a limited supply of carbon credits, “but there is no cap”.

Of course, we can’t be sure yet how that issue, or the many other complications involved in turning the former government’s greenwashing scheme into a safeguard mechanism that actually safeguards the climate, will be addressed. The period for submissions to the discussion paper has only just closed, and there is vigorous disagreement between various expert submissions on what the final shape of the mechanism should be. We won’t see legislation for several months.

Perhaps it’s a triumph of hope over experience but there is genuine belief the new government will finally come up with a plan that actually cuts emissions.

“The changes in the safeguard mechanism, the shift to an emissions intensity scheme, is, despite all the warts on the carbon credit, incredibly exciting,” Macintosh says. “It’s a really sensible way about going about doing carbon pricing.

“It won’t be perfect, you know, certainly won’t be perfect in the early years. But there is a chance of putting in something that actually does, finally, drive some transformational change.”

This article was first published in the print edition of The Saturday Paper on September 24, 2022 as "The most important policy you’ve never heard of".

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