Are you ready for the Safeguard Mechanism reforms?

Reforms to the Safeguard Mechanism (SGM) were passed by the Australian Parliament in May 2023 and are effective from 1 July 2023. The SGM is the Australian Government’s policy for reducing emissions at Australia’s largest  industrial facilities.

It sets legislated limits—known as baselines—on the greenhouse gas emissions of these facilities. The Government has reformed the Safeguard Mechanism to gradually reduce the baselines of covered facilities using set decline rates to help Australia reach net zero emissions by 2050. 

PwC Australia is here to help you understand the new Safeguard Mechanism changes and what they mean for your business.
 

Who do the reforms affect?

Australia’s largest industrial facilities - being those facilities emitting more than 100,000 tonnes of carbon dioxide equivalent (CO2-e) emissions each year. Covered facilities (currently around 215 facilities) must keep their emissions below a legislated baseline which will change over time.

About the mechanism reforms

1. What is a baseline?

Australia’s largest industrial facilities - being those facilities emitting more than 100,000 tonnes of carbon dioxide equivalent (CO2-e) emissions each year. Covered facilities (currently around 215 facilities) must keep their emissions below a legislated baseline which will change over time.

Under the Safeguard Mechanism, facilities are given an intensity baseline which is the reference point against which net-emissions will be assessed. Net-emissions are the covered emissions from the operation of the facility plus any Australian Carbon Credit Units (ACCUs) issued in relation to abatement activities occurring at the facility, less any ACCUs or Safeguard Mechanism Credits (SMCs) surrendered for the facility, for that year.

Facilities unable to keep emissions at or below their baselines will need to either: a) surrender SMCs or ACCUs to make up the difference; or b) seek to apply the banking and borrowing or Multi-year Monitoring Period (MYMP) provisions of the reformed SGM to maintain ongoing compliance.

2. Does your company qualify for tailored treatment as a trade exposed facility?

Tailored treatment is available for emissions-intensive, trade-exposed (EITE) facilities which will be based on the principle of comparative impact.

There are two categories of EITE facilities:

• Trade Exposed facilities, which will include all facilities whose main production variable is trade exposed; and
• Trade Exposed Baseline Adjusted (TEBA) facilities, which are a subset of trade-exposed facilities facing an elevated risk of carbon leakage.

TEBA facilities will be eligible to apply to the Clean Energy Regulator (CER) for a discounted decline rate based on the relevant scheme impact metric associated with the facility’s primary production variable, in particular whether this is considered a manufacturing production variable.

• Manufacturing facilities: may be eligible for a reduced baseline decline rate of as low as 1% depending on the scheme cost to the facility as a percentage of the facility EBIT; and
• Non-manufacturing facilities: may be eligible for a reduced baseline decline rate of as low as 2% depending on the scheme cost to the facility as a percentage of the facility revenue.

3. The difference between Safeguard Mechanism Credits and offsets and ACCUs?

SMCs are a new type of unit created and used within the Safeguard Mechanism - it will represent one tonne of carbon dioxide equivalent emissions, but an SMC is not a carbon offset. SMCs are generated by facilities whose net-emissions are below their emissions baseline in any given year.

SMCs are not ACCUs and cannot be used outside the Safeguard Mechanism.