Carbon Markets

ARTICLE: Safeguard Mechanism reform: A closer look at an ‘industry-average’ baseline scheme

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RepuTex has today released its submission to the Department of Climate Change, Energy, the Environment and Water (DCCEEW) on proposed amendments to the Safeguard Mechanism.

The decision to implement an “industry average” or “site-specific” baseline framework represents a major crossroads for Safeguard policy design, and will have notable consequences for market development, beyond simply determining ‘how the emissions reduction obligation will be distributed’ between high emitting facilities.

In particuar, we believe that the implementation of an industry-average framework could risk the efficient development of Australia’s carbon market given below-baseline Safeguard Mechanism Credits (SMCs) would not initially represent 1 tonne of emissions (like a carbon permit), or 1 tone reduced (like a carbon offset). Instead, free SMCs issued to below-average facilities would be designed to convey a financial benefit (like a green certificate), but would not have any CO2 attributes. In addition, the calculation of industry average baselines would rely on the use of outdated default variables, establihsing baselines well above current industry average performance levels, which could risk creating an oversupply of SMCs within the new Safeguard market.

While some of these risks may be mitigated by complementary settings, such as an accelerated decline in baselines, recommended steps to strengthen the integrity of crediting under an industry average scheme would take time to “flush out” grey carbon units from the market, which may be of practical concern to the interim effectiveness of the scheme’s contribution to Australia’s 2030 target.

In this article, we consider the key policy settings required to develop a credible, scalable emissions market under the Safeguard Mechanism, and the potential risks for policymakers in adopting an industry-average framework.

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