Parliament releases first annual climate change statement

As part of the economy-wide approach to achieving commitments under the Paris Agreement, the Federal Government has announced further changes intended to support industry emissions reductions, while maintaining competitiveness as the global economy decarbonises.  

Yesterday, the Federal Government tabled its first annual climate change statement (Statement) under the new Climate Change Act 2022 (Cth) (Climate Act). In the Minister for Climate Change and Energy’s (Minister) speech to Parliament, the government has committed to a number of key reforms.

Key features

Key features of the proposed reforms are:

1. Introducing fuel efficiency standards - The Federal Government seeks to introduce national fuel efficiency standards. This is in response to concerns that Australia is lagging behind in the transition to electric vehicles, and criticism that the current policy settings have failed to secure supply of affordable electric vehicles.

International implementation of fuel efficiency standards has involved setting an average emissions target for vehicle manufacturers or local distributors, based on carbon emissions per kilometre. 

Design of these standards for Australia, considered under the National Electric Vehicle Strategy, will emphasise efficacy, equity, transparency, credibility and ensuring access to the best emissions and safety technology. It is anticipated a national standard could contribute to reduction of transport emissions and fuel cost, and increased supply and uptake of electric and low-emissions vehicles in Australia.

2. Reforms to the safeguard mechanism (Safeguard Mechanism) – The Federal Government has committed to:

• a redesign of the Safeguard Mechanism. Whilst the Federal Government is not ‘pre-empting the design of the reforms’, it has committed to releasing draft reforms to the Safeguard Mechanism by way of regulation in the near future. The draft design follows consultation on the Safeguard Mechanisms Reforms: Consultation Paper which was discussed in our previous insight in August 2022
• introducing a Safeguard Mechanism Credit (SMCs) trading scheme to incentivise facilities covered by the Safeguard Mechanism to reduce emissions

SMCs Trading Scheme

On 30 November 2022, the Minister introduced the Safeguard Mechanism (Crediting) Amendment Bill 2022 (Cth) (SM Crediting Bill) which seeks to reduce Safeguard Mechanism baselines and enable Safeguard facilities to stay below their baselines to generate tradeable credits, called SMCs. The purpose of the SM Crediting Bill is to enable the crediting element of the reforms. Crediting would mean that facilities with emissions below baseline levels have an incentive to further reduce their emissions if they have cost-effective emissions reduction opportunities.

The SM Crediting Bill builds on the Climate Act and incentivises facilities covered by the Safeguard Mechanism to reduce emissions and contribute to Australia’s international commitments. The reforms to the Safeguard Mechanism will support emissions reductions in the industrial sector, helping to ensure Australian businesses can remain competitive as the world decarbonises.

What is being proposed?

The SM Crediting Bill:

• Amends the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) and Australian National Registry of Emissions Units Act 2011 (Cth) (ANREU Act) to establish the framework for creating SMCs, covering how credits are issued, purchased, and included in Australia's National Registry of Emissions Units. Each SMC corresponds to a tonne of carbon dioxide equivalent of emissions and can be traded and used by other facilities to reduce their net emissions
• Amends the NGER Act to require the Minister to be satisfied that the safeguard rules on the detailed elements of the framework for issuing SMCs are consistent with the objects of the Act
• Includes a number of provisions for the Minister to make legislative rules prescribing certain matters. Consultation will be undertaken in developing or amending any such legislative rules
• Contains amendments to enable eligible offset projects at Safeguard-covered facilities under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act) to be phased out because they will now be eligible to receive SMCs
• Amends the Income Tax Assessment Act 1997 (Cth) so that SMCs receive the same tax treatment as other specified units, like Australian Carbon Credit Units (ACCUs)

What does this mean for ‘tomorrow’?

Around 70 percent of the safeguard facilities are owned by companies that have made net zero commitments. These voluntary commitments contribute to over three quarters of emissions reported under the Safeguard Mechanism.

If the SM Crediting Bill is passed, the reforms will level the playing field between the majority, who are on a path to net zero, and a minority who have yet to begin this journey.

The businesses that have low-cost abatement opportunities can reduce their emissions faster than required by the Safeguard Mechanism. The SM Crediting Bill incentivises further emissions reduction by allowing these overachieving businesses to be issued tradable SMCs that can be sold to other businesses with more limited abatement options to help meet their required emissions reductions.

What’s next?

The SM Crediting Bill will be referred immediately to the Environment and Communications Legislation Committee for inquiry and report by 2 March 2023. 

What else is happening?

The annual climate change statement comes in the context of the government:

• recently launching the State of the Climate Report 2022 which ‘underlines why the Australian Government is acting with urgency to tackle climate change’^[1]
• considers the Environment Protection and Biodiversity Conservation Amendment (Climate Trigger) Bill 2022 (Cth) (Climate Trigger Bill) which seeks to amend the Environment Protection and Biodiversity Conservation Act 1999 (Cth) to introduce a climate trigger. The Climate Trigger Bill was tabled by Senator Sarah Hanson-Young (Australian Greens) on 5 September 2022 – whilst the Minster addressed a number of initiatives to reduce greenhouse gas emissions in his speech to Parliament, the Minister did not address a commitment to a climate trigger
• awaiting the results of the independent review into the integrity of ACCUs, due by 31 December 2022. Any changes resulting from that review, and its impacts on the carbon credits market, may influence the relationship between ACCUs and the Safeguard Mechanism

More changes are certain to come.