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The Greens and David Pocock seek big changes to the safeguard mechanism, and a climate trigger. In the meantime, the policy allows companies to entirely offset emissions with sham credits. By Mike Seccombe.

The polluting flaw in the safeguard mechanism

Senator Sarah Hanson-Young at the committee hearing.
The Greens’ Sarah Hanson-Young at the senate committee on environment and communications hearing on Tuesday.
Credit: Senate Committee on Environment & Communications

The committee hearing was almost over on Tuesday when the Greens’ Senator Sarah Hanson-Young finally lost her temper and shouted at the phalanx of government bureaucrats arrayed before her.

Hanson-Young’s question was about the functioning of the government’s safeguard mechanism, which requires about 200 of Australia’s biggest climate polluters to reduce their net greenhouse gas emissions by 4.9 per cent a year until 2030.

The scheme represents about a third of the government’s proposed path to net zero.

Hanson-Young wanted to know if the government had calculated how heavily those various polluters intended to rely on offsets – that is, how much was “genuine abatement” and how much was “just paying someone else, so that on paper” it looked as if the company had met its obligations.

How many facilities, for example, were projected to use 100 per cent offsets to meet their reduction targets, without bringing down their own emissions at all – a quirk of design that is allowed under Australia’s scheme and nowhere else, except Kazakhstan?

None of the 15 senior public servants from three different departments and the Clean Energy Regulator would tell her. Instead, they obfuscated.

Edwina Johnson, branch head of the safeguard taskforce in the Department of Climate Change, Energy, the Environment and Water, told Hanson-Young analysis had been done but that it was “cabinet-in-confidence”.

Hanson-Young pressed the point. “With all due respect,” she said, “if the government cannot give us that information, how on earth are we meant to be expected to vote in support of this?” There was more hedging until finally Hanson-Young’s voice rose with anger and incredulity: “I’d like to know if this is the official government position – that is, onsite abatement is considered, in this government’s view, equal or just as good as paying someone to plant some trees so that you can keep burning coal and gas. Isn’t the whole point of this whole program to incentivise and drive down actual pollution, not just to find a way to offset it on another piece of paper and say, ‘On this ledger it looks okay, even though we’re continuing to pollute’?”

Having failed to get an answer, Hanson-Young issued a warning: “Well, maybe you could tell your minister that if he wants his legislation and his regulations to pass the senate, he’s going to have to cough up some more information, because all I can see right now is that you are doing the bidding of the big coal and gas industry…”

To understand why she and others might think that way, you need to know the history of the safeguard mechanism. Created in 2016 by the Coalition, the policy was a huge exercise in greenwashing.

In theory, it imposed a cap on the amount of greenhouse gases big polluters could emit. In practice, however, it did not do that, because that cap was set so high, allowed so much “headroom”, as it was termed, they would not exceed it. Emissions went up by seven million tonnes.

The Albanese government came in promising much greater ambition on climate. Albanese committed to a 43 per cent cut in emissions by 2030 and, as part of that, to making the safeguard mechanism work like a proper cap-and-trade system.

The Labor plan also involves the use of a new type of carbon credits, safeguard mechanism credits (SMCs). Facilities that lower their emissions by more than the baseline will be credited with SMCs, which they can sell.

Other facilities that fail to meet their baseline obligations can then buy SMCs or the Coalition-era Australian carbon credit units (ACCUs), or pay a fine of $275 a tonne of excess emissions. The price of an ACCU will be capped at $75. There will also be a $600 million fund to help hard-to-abate and trade-exposed industry sectors.

The government calculates that facilities covered by the mechanism will reduce their emissions by a cumulative 205 million tonnes by 2030, or about 28 per cent of what the bureaucrats call Australia’s “emissions reduction task”.

No doubt the new scheme is an improvement on the Coalition’s, but it is very complicated compared with the approach preferred by most economists: an economy-wide carbon price.

Australia briefly had one of those, screwed out of the Gillard minority government by the Greens, and it was working. But it was seen as a factor in Labor’s 2013 election loss and the party has been too chastened by that experience to try it again.

So, instead of a relatively simple measure, we have a Rube Goldberg policy – an unnecessarily complex way of achieving what should be a simple objective.

For a start, as Richard Denniss, executive director of The Australia Institute, told the senate committee, the mechanism applies to a grab bag of industries – including some hard-to-abate sectors such as steel, aluminium and particularly cement production, as well as a large component of fossil fuel producers and other miners. Some 215 facilities are caught by the mechanism solely because they each produce more than 100,000 tonnes of emissions a year.

Said Denniss: “If we don’t want to have an economy-wide approach, we should have a sectoral approach … But facilities that happen to produce more than 100,000 tonnes are not a sector, they’re a coincidence. You could have a facility that emits 90,000 tonnes that is not covered and one that releases 101,000 tonnes and is covered.”

Further complicating the picture, the number of facilities covered by the mechanism will change as some exit and new ones enter. This is something that particularly worries the Greens and others concerned about climate: it is expected, because of the government’s enthusiasm for opening new fossil fuel projects, there will be more of them in it.

The bureaucrats told the committee that baseline emissions from existing and new coal, oil and gas facilities covered by the safeguard mechanism were projected to increase from 73 million tonnes in 2021 to 83 million tonnes in 2029-30, but with abatement they would fall to 53 million tonnes. That is, there would be more pollution from fossil fuels but it would be written off on paper.

This brings us back to the question Sarah Hanson-Young was driving: how heavily will facilities rely on offsets, rather than on-site emissions reductions, to achieve that abatement?

Analysis by the research firm RepuTex, which bureaucrats point to in lieu of government data, suggests just 26 per cent of the reduction will come from offsets. Other analyses, however, suggest it could be as much as 75 per cent.

Certainly fossil fuel companies are and will continue to be very active buyers of offsets. Last year Meg O’Neill, the chief executive of Woodside Energy, boasted that the company already had secured enough offsets to meet its 2030 emissions reduction target.

Hanson-Young asked representatives of two of Australia’s peak industry bodies if they were worried that cashed-up coal and gas companies would “hoover up” offsets, so imposing a greater burden on other sectors.

They were.

Tennant Reed, the director of climate change and energy with the Australian Industry Group (Ai Group), said that because the government has set a firm reduction target everything that follows is, in a sense, a zero-sum game.

“The allocation of baselines between different facilities – existing ones and new ones – all has to add up to that overall level of ambition. So, yes, more demand from some means that somebody is going to either miss out on allowed baseline or face greater competition for access to ACCUs, SMCs or any other units that might be allowed in the future.”

He hopes that the competition for offsets will decline as global demand for coal and gas falls over the next several decades.

Peter Grist, principal economist at the Australian Chamber of Commerce and Industry, said his organisation is also “definitely concerned” that members could face a “harsher” compliance task because of this competition, although he takes some comfort from the government’s commitment to a $75 price cap on ACCUs.

Ultimately, however, the price of ACCUs is determined by supply and demand. As Alison Reeve, deputy program director for climate change and energy at Grattan Institute, told the committee: “Having $75 as the effective carbon price assumes that there is an unlimited number of ACCUs available from the government at that price.”

Should the price go above the government’s “guaranteed” $75, taxpayers could be left to pay for the difference.

While her institute expects the price to be about $18 for the rest of this decade, the fact is it can fluctuate wildly. In early 2021, partly due to a clumsy intervention by former Energy and Emissions Reduction minister Angus Taylor, the price spiked briefly to almost $50. And, as Hanson-Young’s chief bureaucratic irritant, Edwina Johnson, told the committee: about a third of companies covered by the safeguard mechanism have their own internal carbon price estimates when making investment decisions.

Of course, there is not an unlimited supply of ACCUs. Furthermore, there is considerable doubt about the quality of tens of millions that are already contracted and the tens of millions more that will be created between now and 2030.

As previously detailed in The Saturday Paper, a number of highly credible experts, including Professor Andrew Macintosh, the former chair of the government’s Emissions Reduction Assurance Committee (ERAC), which is charged with validating the integrity of ACCUs, argue the vast majority of them do not represent real abatement of greenhouse gases.

Of particular concern are credits generated under the human-induced regeneration method (HIR), which simply involves allowing trees to grow and store carbon. You might imagine this would involve projects that planted trees on previously cleared land. It doesn’t. As Macintosh told the committee: “97 per cent of the project areas, of these projects, are located in intact native vegetation”. That is, no new trees are being planted. No extra carbon is being stored.

“On our analysis,” Macintosh said, “we suggest that between now and 2030 about 61 million high-risk or low-integrity ACCUs – I think you were saying ‘junk credits’ before – will be available for use under the safeguard mechanism out of existing human-induced regeneration projects…”

A government-commissioned review of the ACCU system last year, headed by former chief scientist of Australia Ian Chubb, dismissed claims the scheme lacked integrity, but the review made numerous recommendations for reforms, including for greater transparency in the data about how much abatement is actually being achieved.

These issues remains contentious.

The new form of credits, SMCs, are far less contested and should be used in preference to ACCUs, says Rachel Walmsley, head of policy and law reform with the Environmental Defenders Office.

“They’ve got more credibility, in that they’re linked to actual emissions reductions,” she says.

Facilities falling under the safeguard mechanism should employ a hierarchy of methods to meet their targets, she says.

First and foremost, they should have to try to abate their emissions onsite – that is, achieve the abatements themselves before looking to buy offsets. Where they can’t abate any further, they should have access to some SMCs. As a last resort, she says, they could use some residual ACCUs, maybe up to a cap of 5 per cent.

This is not how the safeguard mechanism works. The realpolitik of the situation is that the parliamentary numbers are finely balanced. The Dutton opposition will not vote for Labor’s revamped scheme. The Greens have said they will vote for it if the government puts a stop to new coal and gas developments, which the government refuses to do.

Whether this is just a negotiating position, or whether the Greens will be prepared to vote against the mechanism, is unclear. Sources say some in the party room are ready to prang the whole thing unless that demand is met, but leader Adam Bandt tells The Saturday Paper his “lines of communication are open” with Climate Change and Energy Minister Chris Bowen.

“We’re talking, the sides are talking,” Bandt says. “And if we get there or don’t get there, it’s not going to be because of a lack of communication…”

Bandt points to the fact that a number of major environment groups have suggested that the imposition of a “climate trigger” could be a way through.

It would allow new projects to be considered on the basis of their impact on climate change, which would have the effect of stopping new coal and gas while still allowing other projects to operate under the safeguard mechanism, unburdened by competition for offsets.

If the government is able to convince the Greens, it will still need another vote, likely from independent senator David Pocock. He shares most of the concerns outlined above. He worries about the integrity of ACCUs and wants the Chubb recommendations implemented in full, particularly as they relate to greater transparency of data.

Pocock tells The Saturday Paper he is worried about the price and supply of offsets. In particular, he is concerned that the mechanism “lumps together strategically important industries” and “industries of the future” with fossil fuels.

Pocock, too, has previously endorsed a climate trigger. He notes an interesting historical fact. “The year I finished high school, the man who is now our prime minister, Anthony Albanese, introduced his own bill into the house that was a climate trigger in the EPBC Act,” he says, referring to the Environment Protection and Biodiversity Conservation Act. “So this idea has been kicking around for a while.”

Given all the other problems with the safeguard mechanism, a climate trigger would not offer a perfect solution but it would be a big step forward. Perhaps its time has finally come.

This article was first published in the print edition of The Saturday Paper on March 4, 2023 as "The polluting f law in the safeguard mechanism ".

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