Against the backdrop of a decarbonising global economy, Australia has seen significant developments across its carbon policies and plans in the last twelve months, particularly following COP28. Australia’s desire to dramatically reduce its carbon emissions by the end of this decade will, however, require more significant and broadscale efforts to achieve the target of net-zero by 2050.

Safeguard Mechanism

Historically, the primary drivers for pursuing carbon projects have been either:

  • to satisfy the altruistic objective of addressing climate change impacts by reducing greenhouse gases emissions in the environment; or
  • for the financial benefits derived from the Australian Carbon Credit Units (ACCU) generated from these projects.

However, the Federal Government’s overhaul of the Safeguard Mechanism regime, which took effect from 1 July 2023, is now driving a rapid increase in demand for ACCUs.

The recent changes to the Safeguard Mechanism regime, have introduced stricter baselines and penalties for Australia’s largest emitters, being those that emit the equivalent of 100,000 tonnes of carbon dioxide annually. These baselines will continue to rachet down until 2030, as existing facilities transition to industry average emission intensity values over this period. As it currently stands, a responsible emitter who exceeds the baseline for their facility is required to procure and subsequently surrender either Safeguard Mechanism Credits or ACCUs to satisfy the excess emissions, hence the reason for the recent increase in demand for these credits. As the complex Safeguard Mechanism rules are fully grasped by industry, there is expected to be heightened scrutiny by the Clean Energy Regulator with respect to compliance to ensure Australia’s decarbonisation targets are achieved.

The cost of compliance with the Safeguard Mechanism can be significant for some responsible emitters, depending on the specific emissions from a facility. This is consequently driving many responsible emitters to carefully review their facilities to identify opportunities to implement operational improvements to reduce emissions, which is the primary intent of these reforms. However, the cost implications arising from the Safeguard Mechanism reforms are also steering responsible emitters to review their contractual arrangements and operational control allocations in an attempt to shift the liability for surrendering credits to offset excess emissions.

Since 2022, there has been greater scrutiny of Australia’s carbon credit scheme, particularly around the integrity of issued ACCUs. In the coming year, and in response to these concerns, we expect to see the establishment and maintenance of a tradeable platform within the Australian Securities Exchange, through the Australian Carbon Exchange. The launch of a regulated platform towards the end of 2024 only adds to the incentive for the development of carbon projects as we expect to see heightened regulation on the integrity issue and surrender of ACCUs in light of the changes to the Safeguard Mechanism regime.

Nature Positive Plan

Reforms in the carbon space are also being met with a wide array of associated environmental reforms which will directly impact large-scale resource projects that require Federal environmental approval. Most notable is the Federal Government’s announcement of the Nature Positive Plan, which principally seeks to overhaul the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act). This follows the outcomes from the comprehensive independent review of the EPBC Act which concluded that the Act is ineffective, inefficient, and its compliance and enforcement is weak.

The Nature Positive Plan sets out the blueprint for:

  • establishing a national Environmental Protection Agency (EPA) that will be responsible for compliance, enforcement and decision-making actions relevant to approvals for large-scale resource projects as well as expanding the role of the Climate Change Authority;
  • introducing National Environmental Standards aimed at improving environmental protection and guiding decision making, including a Standard specifically focused on restoration actions and restoration contributions (i.e. offsets); and
  • the establishment of a voluntary nature repair market to enable businesses and individuals to invest in nature, through a framework for measuring, monitoring, reporting, verifying and tracking biodiversity improvement projects, which will operate alongside the formal carbon market.

It is expected that biodiversity certificates generated through the proposed nature repair market and ACCUs could be created in respect of the same land, which will encourage proponents to deliver projects that can achieve dual benefits with both carbon reduction and biodiversity protection outcomes.

Where to next?

The Federal Government is continuing the push for decarbonisation following COP28 through a raft of policy reforms.

These reforms are also stretching to the import and export realm. With the Federal Government’s review into carbon leakage, which occurs where industries (such as Safeguard Facilities) shift operations to countries with less stringent climate policies. This review will consider the feasibility of an Australian carbon border adjustment mechanism, which would effectively impose a tariff based on the difference in the carbon price between the producing and importing countries.

Whilst the Government is committed to achieving net zero emissions by 2050, significantly greater investment and more concerted action will be required to meet this target. The 2023-24 Budget provides relatively nominal funds for the establishment of a new authority and development of a new plan (outlined below), which will only get Australia so far:

  • Establish a National Net Zero Authority to help guide Australia’s net zero transformation ($83.2 million funding over 4 years).
  • Identify and prioritise nationally significant climate risks to Australia and develop a National Adaptation Plan ($28 million funding over 2 years).

Over the next decade, we therefore expect to see ongoing reforms resulting in more industries and facilities being covered by the Safeguard Mechanism, increased scrutiny of ACCU integrity and policies targeted at improved biodiversity protection to achieve an overall reduction in greenhouse gas emissions.

This is an article from our 2024 Edition of Emerging Issues for the Australian Energy and Resources Industry. To read more from this publication, click here.