Navigating Carbon Credit Requirements under the Safeguard Mechanism

With challenges such as inherently high emissions, production increases, and older infrastructure, it may feel inevitable that some mines would struggle to meet the Safeguard Mechanism requirements.

However, there are ways for high-emitting facilities to meet baseline requirements, or successfully manage the situation when they don’t.

Reporting on annual emissions

Each year mines, manufacturers and other large-scale greenhouse gas (GHG) emitters have to meet their obligations under the Safeguard Mechanism.

These facilities must measure and report on their emissions annually to ensure they don’t exceed their legislated emissions baseline.

If emissions do exceed the baseline, corrective actions must be taken, such as buying carbon credits.

And with this year’s spot price steady at around $38 for each Australian Carbon Credit Unit (ACCU), the costs can quickly add up.

It’s always better to stay under the baseline to minimise the expense of purchasing carbon credits.

That’s easier said than done, but fortunately Xenith’s Environmental, Social and Governance (ESG) experts are on hand to help you make sense of it all.

Understanding the Safeguard Mechanism

The Safeguard Mechanism, established under the National Greenhouse and Energy Reporting (NGER) Act, is a key component of Australia’s strategy to achieve its emission reduction targets.

The Safeguard Mechanism sets legislated emissions baselines for facilities emitting more than 100,000 tonnes of carbon dioxide equivalent (CO₂e) annually. This is designed to cover sectors such as mining, manufacturing, and large-scale energy production.

This careful monitoring is needed because Australia has a commitment to reduce emissions by 43% – compared to 2005 levels before 2030 – and then achieve net zero by 2050.

If mines and other industries covered by the Safeguard Mechanism exceed their baselines, it could undermine efforts to achieve Australia’s emission reduction targets.

The carrot and the stick

Those staying below, or “beating”, their mandated baselines may be rewarded with some tasty carrots – Safeguard Mechanism Credits (SMC) – which can be kept for use against future emissions, surrendered to help stay below the baseline, or sold to other Safeguard facilities.

Those who go above their mandated baselines, however, may face the stick, which means being compelled to take corrective action and to surrender their carrots, or even to buy Australian Carbon Credit Units (ACCUs).

In a sense, the carrot becomes the stick for those exceeding their baselines.

The challenge of an ever-decreasing baseline

Managing emissions baselines is a primary challenge for coal mines, which typically have high initial baselines due to their significant emission profiles.

These baselines are designed to decrease annually, compelling mines to adopt more efficient operational methods or cleaner technologies.

This creates a requirement for continuous improvement in emissions intensity.

Mines may need to invest in emissions reduction technologies or purchase credit units to offset excess emissions, impacting operational budgets and potentially increasing the cost of coal production.

To mitigate non-compliance risks, coal mines might need to improve operational efficiency, invest in new technologies, or seek alternative energy sources.

These changes can involve significant capital expenditure as well as operational disruptions, requiring careful management.

How we can help

At Xenith, our expert team of ESG consultants assist clients in navigating the complexities of the Safeguard Mechanism by providing comprehensive services, including:

• Forecasting Scope 1 GHG emissions in accordance with the Safeguard Mechanism methodology.

• Projecting facilities’ Safeguard baselines and identifying potential exceedances.

• Forecasting future carbon liability using various price scenarios.

• Conducting worst-case scenario analyses to assess the potential impacts of adverse regulatory changes on the baseline.

• Developing decarbonisation strategies that provide a framework for systematically reducing GHG emissions, achieving regulatory compliance and enhancing operational sustainability.

• Collaboration with internal and external stakeholders to understand appropriate decarbonisation initiatives.

• Recommendations of specific projects to reduce GHG emissions and improve energy efficiency.

For help in understanding, measuring, and managing your obligations under the Safeguard Mechanism, contact our ESG team today for an initial consultation.

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Get in touch with Xenith. Our team of experts will guide you through your unique path towards quality, meaningful and compliant climate-related financial disclosures.