The safeguard mechanism places emissions caps on the largest emitters in the country, and functions to prevent companies from negating the greenhouse gas abatement and sequestration achieved through the Emissions Reduction Fund. However, the 2017 Government review of Australia's climate change policies revealed that while the safeguard mechanism remains crucial to national emissions reduction strategies, it direly needed renovation.

In response to the review, the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule (No. 1) 2019 (Cth) (Safeguard Amendment Rule) – amending the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Cth) (Safeguard Rules) – has now been passed and came into effect on 7 March 2019.

The Safeguard Amendment Rule introduces a broad range of updates to the safeguard mechanism and seeks to better balance commercial needs against Australia's emissions reduction goals. It addresses concerns around outdated emissions baselines (which are soon to be more than a decade old) and the barriers in the original Safeguard Rules which prevented many companies from increasing their baselines to more accurately reflect current production.

The new approaches to baseline setting under the Safeguard Amendment Rule will be implemented for the 2018-2019 compliance year.

6 Things to Note

1. All facilities will be transitioned to new calculated baselines

All facilities (even those already using calculated baselines) will be transitioned to new calculated baselines over 2018-2020. Facilities will be able to apply for new calculated baselines, using the transitional calculated baseline criteria (see section 2 below for more detail), from 1 July 2018.

To this end, all reported baselines (bar the electricity sectoral baseline) will expire on 30 June 2020.

For grid-connected electricity generators, the electricity sectoral baseline will only expire if it is exceeded, and the opportunity to transition to new calculated baselines will only arise if expiration occurs.

For landfill facilities, the approach will remain similar to the current baseline setting approach for new landfills, with the baseline transition to involve the use of a default gas capture rate. The default gas capture rate is currently still in development by the Government (in consultation with stakeholders).

2. Transition to be managed through a new "transitional calculated baseline criteria"

The transition to new calculated baselines will be managed through the introduction of a new "transitional calculated baseline criteria" which will apply from the 2018-2019 reporting year onwards.

The introduction of this criteria will allow facilities which:

a) were previously unable to apply for calculated baselines for failing to meet the new facility, significant expansion or inherent emissions variability criteria; or

b) have existing calculated baselines,

Baseline commencement Standard calculated baseline period Application deadline Calculated baseline criteria availability
1 July 2017 2017-18 to 2019-20 31 October 2018 New facility (s. 23), significant expansion (s. 24), inherent emissions variability (s. 25)
1 July 2018 2018-19 to 2020-21 31 October 2019 New facility (s. 23), inherent emissions variability (s. 25), transitional calculated baseline (s. 26A)
1 July 2019 2019-20 to 2021-22 31 October 2020 New facility (s. 23), inherent emissions variability (s. 25), transitional calculated baseline (s. 26A)

(Safeguard Amendment Act – Explanatory Statement, p. 28)

Facilities can only apply for calculated baselines using the transitional calculated baseline criteria once.
 
Facilities that have transitioned to a calculated baseline will be allowed to move to a production-adjusted baseline after the first year of using their calculated baseline, and facilities using default emissions-intensity values will be allowed to move directly and immediately to annually-adjusted baselines (see section 5 below for more detail).

3. From 2020 onwards

Existing facilities will be able to continue applying for new calculated baseline under the transitional calculated baseline criteria after 2020, provided that they have not done so previously.
 
However, the transitional calculated baseline criteria will not cover new designated large facilities after 2020.  Benchmark baselines (the current approach) will apply to new facilities post-2020

4. Inherent emissions variability criteria to remain
 
While the emissions intensity test and the significant expansion criteria for calculated baselines have now been removed (due to the introduction of the transitional calculated baseline criteria), the inherent emissions variability criteria has been retained.
 
This will ensure that facilities whose production is directly linked to particular natural resources, such as coal or natural gas, and thus have inherently variable emissions, can continue to achieve commercial sustainability while remaining within the bounds of the safeguard mechanism.

5. Prescribed production variables and default emissions-intensity values

In order to simplify the application of calculated baselines, and to reduce administrative costs for businesses, all facilities will have the option of electing to use Government-prescribed production variables and default emissions-intensity values, instead of site-specific values.  Landfill facilities will also be able to elect to use default gas capture rates.
 
However, once facilities elect to use prescribed production variables or default emissions-intensity values, they will no longer be able to return to using site-specific variables or values.
The emissions-intensity values and prescribed production variables function as follows:

 a)     prescribed production variables will identify the product or service produced by the facility, and will comprise two different types:

    i.      prescribed (fixed) production variables: production variables that apply to production-adjusted baselines that are updated once for production, and then remain fixed (the current approach); and

    ii.     prescribed (annually-adjusted) production variables: production variables that apply to production-adjusted baselines that are updated annually with production; and

b)     default emissions-intensity values will specify the emissions intensity of production.

Facilities will be able to use both the new prescribed production variables and site-specific production variables when applying for new calculated baselines, provided that the site-specific production variables do not include emissions of the kind considered in developing the default emissions-intensity values.
 
Facilities can also nominate to use default emissions-intensity values in their new calculated baseline applications.

The Government is currently developing the prescribed production variables and default emissions-intensity values, in consultation with stakeholders, and intends to release draft forms of the schedules for public comment in the coming months. It is intended that (once published as new Schedules 2 and 3 of the Safeguard Rules in mid- to late-2019) facilities will be able to use them for the 2018-2019 reporting year.

6. Annual updates to baselines in order to reflect real production

Facilities which have elected to use prescribed (annually-adjusted) production variables or default emissions-intensity values will be able to update their baselines annually, to better reflect real production.

The Government will identify and publish the eligible prescribed (annually-adjusted) production variables in the future Schedule 2 of the Safeguard Rules.

Those facilities using prescribed (annually-adjusted) production variables will be allowed to move to a production-adjusted baseline after the first, second or third year of a calculated baseline period, while facilities using default emissions-intensity values will be allowed to move directly to annually-adjusted baselines.

Facilities not using prescribed (annually-adjusted) production variables will be subject to the existing calculated baseline arrangements.  In other words, the calculated baseline will be updated once to reflect actual production at the end of the calculated baseline period, and then remain fixed from there on.

Annually-updated, production-adjusted baselines will be based on actual annual production, as reported by facilities by 31 October of each year.

Next steps

The Government will continue consulting with stakeholders and refining the Safeguard Rules over the coming months. The expert Climate Change team at Baker McKenzie is keeping abreast of all new developments and will provide ongoing updates as proposed additions to the Safeguard Rules are released and published.

The Government has also proposed the introduction of new, additional reporting requirements for select facilities, and intends to release an exposure draft of the proposed amendments to the National Greenhouse and Energy Reporting Regulations 2008 (Cth) later this year.

The Government has also committed to reviewing the Safeguard Rules every five years, in accordance with its obligations under the Paris Agreement – with the next review of the rules to occur in 2020.

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