As most people reading this will know, Labor’s re-jigged Safeguard Mechanism is currently being scrutinised by the Senate, requiring both the Greens and at least two cross-benchers to pass it.
A lot has been said about it, ranging from it being a transformational change to a state-sponsored greenwashing scheme. Being a little confused about on which end of the spectrum it lands, I decided to investigate for myself. Is this a case of Labor daubing some bright green lipstick on a Coalition pig?
Spoiler: it all hinges on how well the scheme can be amended before it passes into law.
At its heart, the Safeguard Mechanism is a form of “Baseline and Credit” scheme where each industrial facility is assigned an emissions baseline representing their actual emissions.
Emit less than the baseline then you earn credits which can be sold to entities that have gone over. Penalties can also apply if you don’t meet the baseline. At least that’s how it works in theory.
The problem is that not only have the Coalition generally allowed too much headroom between a site’s actual emission levels and their baseline, there’s been no penalties. A classic do-nothing policy.
Labor opted to stick with the existing mechanism but promised to adjust the rules to give it real teeth.
Did they though?
First the good bits. To be fair, there is some pretty neat stuff in there. The wafty, non-effectual Coalition baselines will be given a significant haircut so they initially represent actual historical emissions for a given site. This means that each year as the baselines rachet downward by around 5%, increasing pressure will be applied to continuously improve.
In reality, the baselines will shift in a more complicated way, converging over time to industry average levels. A company that has invested time and resources to reduce emissions as far as possible will likely be under the baseline, whilst a competing company in the same industry that hasn’t will likely be over.
If, for example, your site is under the baseline by a thousand tonnes worth of CO2-equivalent, you will automatically generate a thousand Safeguard Mechanism Credits (SMCs) you can sell to other companies in the scheme.
Cha-ching! One tweak that’s been proposed is to start the scheme with industry average levels, rewarding companies that have already invested in low-emissions technology.
There are, however, some features that don’t seem particularly great about the design of the mechanism if you care about structurally reducing emissions across the economy.
A $75 price cap on offset credits (so-called Australian Carbon Credit Units, or ACCUs) might seem a bit low to send the right investment signals. Only covering the top couple of hundred polluters (that emit 100k+ tons per year or more of CO2-equivalent) may have a similar diluted effect.
But these are not the truly ugly parts.
Once you console yourself with the fact that Scope 3 emissions are out of scope and that the overall ambition is still too weak, the elephant in the room is that businesses do not have to actually reduce their emissions, but can rely entirely on SMCs and ACCUs. In comparison, the vast majority of other jurisdictions limit offsets to less than 10%.
This would probably be okay if offsets represented real carbon abatement, but the overwhelming evidence seems to indicate that a lot of them, perhaps even the majority, are on somewhat shaky ground.
We’re just not there yet in terms of providing trusted offset supply chains with traceable provenance, solid scientific evidence and transparency on methods, provable additionality and guarantees on permanence.
Somewhat disturbing is the possibility that existing offsets that are known to be suboptimal (as highlighted in the recent Chubb review) might not be taken out of circulation, instead mixed in with the rest in what is eerily reminiscent of how banks packaged together subprime mortgages with other assets, sparking the global financial crisis. What could possibly go wrong?
With no limits on banking credits for future use and no firewalling of coal, oil and gas from the rest of the industry, there’s nothing to stop deep-pocketed fossil fuel companies buying up low-price ACCUs now that will cover them until 2030, unfairly driving up the price for everyone else.
As Ketan Joshi also points out, there are some fundamental issues where fossil fuel projects that are currently in the pipeline could easily blow the carbon budget if not dealt with correctly.
However, after seeing some very sensible changes under active consideration (especially the ones limiting access to ACCUs), I feel somewhat more hopeful of what the scheme can bring, particularly if combined with much greater transparency around reporting.
With some critical amendments I think the Safeguard Mechanism could be a good tool to help reduce emissions, but as it stands now it’s in danger of being a distracting fig leaf while emissions actually rise.
If I were the government though, I would start designing a complementary scheme to have in the back-pocket: an economy-wide carbon price, just on the off-chance our ambition as a country needs to dramatically accelerate in the coming decade. Just in case.
Steve O’Connor is a Canberra-based Climate Reality Leader
