The Australian Government has secured support from the Greens for its proposed reforms to the Safeguard Mechanism, with the parties agreeing to amendments that will see the Safeguard Mechanism (Crediting) Amendment Bill clear both houses of Parliament this week, ahead of the commencement of the new scheme from 1 July.
Following negotiations over the past two weeks, the parties agreed to several amendments including a legislated emissions cap; requirements for new LNG backfill projects to be accountable for their reservoir CO2 emissions; requirements for developments in the Beetaloo gas basin to offset their direct (and potentially indirect) emissions; and limitations on new Human Induced Regeneration (HIR) offset projects.
Agreed amendments will contribute to achieving Australia’s current emission reduction commitments, and will help to overcome potential risks of higher-than-expected emissions growth eroding the scheme’s emissions objectives, flagged in our earlier modelling. While the policy provides room for new projects to be developed, with 16 projects assumed to enter the scheme by 2030 under our modelled “government pathway”, increased emissions reduction obligations will have the effect of creating a larger “reserve” (or buffer) to manage the risk of higher-than-expected emissions. Should the buffer not be required, any overperformance may be converted into more ambitious emissions reduction commitments in the future.
Support for the Safeguard Mechanism triggered a mixed reaction from the market, with Generic ACCUs trading up, while uncertainty saw HIR units trade lower, with the Generic-HIR spread collapsing on initial action.
Looking ahead, the new Safeguard Mechanism framework will trigger a structural change in Australia’s carbon market, establishing a robust emissions limit and compliance signal for large Australian industrial facilities – for the first time since the repeal of the Carbon Price Mechanism in 2014.
We expect improved policy certainty to drive continued uplift across the market. Expectations for any immediate reversion to the high price environment of 2021-22, however, is likely to be tempered by the surplus availability of ACCUs eligible to exit the ERF program. Over the medium-term, we expect market fundamentals to now be driven by the cost of internal emissions reduction actions by industry, with the scale and timing of on-site emissions reduction investments to directly inform Safeguard Mechanism Credit (SMC) creation, demand for ACCU offsets, and market prices.
In this update, we detail the key amendments to the Safeguard Mechanism and provide our expectations for market dynamics under the new policy framework.