Carbon Markets

BRIEFING: Regulatory options to address on-site action under the Safeguard Mechanism

Negotiations on the Safeguard Mechanism (Crediting) Amendment Bill are set to intensify this week as the government seeks to secure support for its policy in the upper house. Two areas of the policy remain under scrutiny, focused on addressing emissions from coal and gas facilities: 1) the unlimited use of offsets, with some groups advocating for a quantitative limit on offset use; and 2) rules to account for emissions from new coal and gas projects.

While proposals to limit offset use are intended to incentivise direct emission reductions by industry, a quantitative limit on offsets will not be feasible under the proposed Safeguard Mechanism framework – unless supported by a penalty price – given facilities would have no recourse to meet their annual liabilities where they are unable to reduce their on-site emissions. This is because Safeguard Mechanism Credits (SMCs) are not forecast to be widely available on commencement of the scheme.

While offsets can be limited under cap-and-trade schemes, where “allowances” fulfull a similar role, ACCUs will therefore be required to underpin the Safeguard Mechanism “baseline and credit” scheme, particuarly in the early years of the new framework.

As an alternative to a hard limit on the use of offsets, a number of options remain on the table to address emissions from coal and gas facilities. These include a legislated cap on emissions, regular progress reporting and consideration of new entrants, and a potential soft cap on the use of ACCUs as a disincentive for heavy offset use.

In this briefing note, we discuss our expectations for the passage of the Safeguard Mechanism policy framework, and possible legislative amendments. We also outline our expectations for the proposed cost containment measure to be triggered in the latter part of the decade, and the implications for policymakers and market participants.

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