UPDATE: ERF Safeguards – Toothless Tiger or Hidden Dragon?

Prior to the announcement of Australia’s new post-2020 emissions reduction target – and the release of updated rules for the government’s ERF Safeguard Mechanism – in this Update we analyse the ability of the government’s proposed safeguard policy to curb Australian emissions growth, and explore scenarios for the potential size of the associated compliance market.

After accounting for the coverage threshold at the facility level, we anticipate that the Safeguard Mechanism will cover approximately 80 companies, controlling 261 facilities with emissions over 100,000 t/CO2e.

80 per cent of covered facilities are expected to be from Queensland, Western Australia and New South Wales.

While 261 facilities are expected to be covered by the scheme, just 85 facilities, operated by 30 companies, are expected to face any compliance obligation, largely derived from existing metals, coal mining, oil and gas, and transport facilities. For these firms, Australian Carbon Credit Units (ACCUs) are expected to be the marginal source of emissions reductions into the market.

Notably, out of Australia’s top 20 emitting facilities, none are expected to incur any liability, despite almost all being forecast to grow their emissions over the next ten years. This means the largest generators such as Loy Yang A and B, Hazelwood, Bayswater, and Yallourn are expected to avoid exceeding their sectoral baseline under the scheme, while LNG export facilities Wheatstone, Gorgon, Itchys and Pluto are also expected to avoid facing any liability as a result of re-baselining.

Given the ineffectiveness of the scheme, changes to the policy are a significant risk, with potential for more onerous baselines – or an alternate policy mechanism – to manage Business As Usual (BAU) emissions growth, while contributing towards Australia’s forthcoming post-2020 emissions target.

As outlined within the report, should adjustments be made, we anticipate the safeguard compliance market may grow to cover a significant portion of Australian emissions, suggesting that while the scheme is currently a ‘toothless tiger’, it may readily be characterised a ‘hidden dragon’ given the potential scope for a more meaningful compliance market to emerge, even if principles such as historic highpoint baselines be maintained.

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