The Australian Government’s Safeguard Mechanism is a federal policy aimed at reducing emissions from Australia’s largest industrial facilities.   

Key messages 

• The largest 215 facilities in Australia, emitting over 100 ktCO₂-e p.a., fall under the Safeguard Mechanism. 

• These sites must reduce emissions by 4.9% p.a. or surrender ACCUs or SMCs. 

• Sites that reduce emissions beyond 4.9% p.a. can register SMCs and trade them. 

• The Safeguard site represents the largest potential demand for ACCUs, and the quantity of SMCs registered has a direct impact on ACCU prices. 

Obligations Under the Safeguard Mechanism  

Facilities emitting over 100,000 tCO₂-e (Tonnes of CO₂ equivalent) must operate within specific emissions baselines and to reduce these emissions by 4.9% p.a. in line with 43% reduction (on 2005 levels by 2030) and net zero by 2050. 

In 2023-24, total emissions from the 215 safeguard facilities were approximately 136 MtCO₂-e, down from 138.7 MtCO₂-e in 2022-23.  

Managing Emissions: SMCs and ACCUs 

Facilities that emit below their declining baselines can earn Safeguard Mechanism Credits (SMCs), which can be sold to other entities or banked for future compliance needs. Whilst facilities exceeding their baselines must offset the excess emissions either by surrendering SMCs or Australian Carbon Credit Units (ACCUs). 

Trading SMCs and ACCUs: Supply and Demand 

Following the 2024 reporting period  

• Supply: over 8 million SMC units have been issued to 57 facilities.  This was much higher than anticipated. 

• Demand: the CER estimates that excess emissions from 144 facilities will require 9.2 MtCO₂-e surrendered either from SMCs or ACCUs 

The market had expected a much lower number of SMCs to be issued and hence much more of the existing 50M in ACCU holdings to be consumed in the first year of surrender under the revamped Safeguard mechanism. 

In early March, Core Markets reported that SMCs commenced trading in the brokered markets, and at a slight discount of $0.50 to $1.00 to the ACCU price ($33.25), presumably this reflects that SMCs can only be used for Safeguard sites. 

In preparation for the Safeguard Mechanism we can see that over 50% of the ACCUs in holding accounts are being retained by Safeguard sites. 

Impact on ACCU Prices 

The introduction and trading of SMCs influences the ACCU market. An increase in SMC availability can lead to a reduced demand for ACCUs, potentially stabilising or lowering their market price. Conversely, if fewer SMCs are issued than anticipated, facilities may turn to ACCUs to meet compliance, thereby driving up prices. In late 2024 the ACCU price rose substantially, likely in anticipating of the increased demand under the Safeguard.  However, with the large number of SMCs being issued for sites being under their baseline emissions, the ACCU prices retreated to prices similar to mid 2024.  

Distinguishing Between SMCs and ACCUs 

While both SMCs and ACCUs serve as instruments to offset emissions, their origins differ. SMCs are exclusive to the Safeguard Mechanism, awarded to facilities that operate below their emissions baselines. In contrast, ACCUs are generated from a broader range of projects, including land-based carbon sequestration and energy efficiency initiatives. Facilities under the Safeguard Mechanism can utilize either SMCs or ACCUs to meet their compliance obligations.  

Forecast and Registration of SMCs 

The Clean Energy Regulator (CER) had projected the issuance of SMCs based on anticipated emissions performances. However, the actual number of SMCs registered can vary due to factors such as operational changes and emissions reduction initiatives implemented by facilities. Detailed statistics on the forecasted versus actual SMC registrations for the December Quarter 2024 are available in the CER’s Quarterly Carbon Market Report.  

Cost Containment Mechanism 

To prevent excessive compliance costs, the Safeguard Mechanism incorporates a Cost Containment Measure. This mechanism ensures that ACCU prices remain within a manageable range, providing price predictability for facilities. The CER sources ACCUs for this purpose from various channels, including those delivered under Commonwealth carbon abatement contracts.  One source for the CCM is that those exiting their ERF contracts (through a mechanism known as the “buyers damages” clause) must still deliver 20% of the contracted volume to government at the auction price from their agreement. 

Implications for Facilities and ACCU Market Dynamics 

Facilities regulated under the Safeguard Mechanism must proactively manage their emissions to stay within declining baselines. This necessitates investing in emissions reduction technologies or securing sufficient credits (SMCs or ACCUs) for compliance. The interplay between SMC issuance and ACCU demand is crucial; a shortfall in SMCs can heighten ACCU demand, influencing market prices.  

In summary, the Safeguard Mechanism plays a critical role in steering Australia’s industrial sector towards sustainable practices. Understanding the nuances of SMCs, ACCUs, and their market implications is essential for facilities to navigate compliance effectively and contribute to national emissions reduction goals. 

Take “direct action” with Northmore Gordon 

Looking for energy efficiency or decarbonisation projects? Need expert guidance on your ACCU and SMC strategy? Whether you’re looking to secure forward contracts, explore energy-saving opportunities, or navigate compliance requirements, Northmore Gordon can help. 

Consider not only your carbon strategy, but also renewable energy and energy efficiency to maximise the value from environmental attribute certificates. 

Disclaimer: The information in this article is general only and has been prepared without considering your business’ particular circumstances and needs. You should assess or seek advice from Northmore Gordon Environmental (AFSL 533927) on whether it is appropriate for your business’s objectives. 

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The credibility of these initiatives depends heavily on the quality of the environmental certificates, as not all are created equal, and some have recently come under fire. This article explores this range of quality, tools, and financial mechanisms and discusses strategies for avoiding greenwashing accusations to make use of what is still a very important mechanism for the world to decarbonise. 

Disclaimer: Northmore Gordon (NG) has a deep understanding of certificate markets, and the requirements of all the leading decarbonisation programs & protocols and helps customers build actual emission reduction pathways.  NG has originated over 5 million certificates from a wide range of projects and has delivered for customers ‘Buy & Retire’ of certificates across 18 markets, covering 23 countries.  NG holds an Australian Financial Services License.  Information in this article is general in nature and shall not constitute advice. 

Understanding the use of RECs and Carbon Credits 

RECs and especially Carbon Credits, whilst providing an immediate solution are one mechanism to incentivise others to reduce emissions.  Businesses should always be working in parallel on their own renewable energy assets and emissions reduction projects within their business.  Internal projects, such as energy efficiency can have a negative long-term cost.  Internal projects come at high CAPEX, whilst RECs and offsets come from OPEX budgets.  

Using Renewable Energy Certificates (RECs) 

RECs represent the environmental attributes of renewable energy production. By purchasing and retiring RECs, businesses claim the green benefits of the equivalent renewable energy generation for their site and promote renewable sector growth. 

International RECs (I-RECs) are globally recognised, while in Australia, businesses can purchase Large-scale Generation Certificates (LGCs). 

Understanding Carbon Credits to Offset 

Carbon offsets are credits generated by projects that reduce, avoid, or remove greenhouse gas (GHG) emissions. Companies buy and retire these credits to offset their own emissions. The range of projects offering these offsets can include forest conservation, replanting, renewable energy, methane capture, waste and wastewater treatment, energy efficiency projects, fuel switching and many others. 

Globally, Verified Carbon Standard (VCS), Gold Standard, and United Nations’ Clean Development Mechanism (CDM) are popular choices. In Australia, the Carbon Farming Initiative (CFI) aka the Emissions Reduction Fund (ERF) is used by businesses seeking to offset emissions using Australian Carbon Credits Units (ACCUs). 

Choosing High-Quality Projects 

The quality of RECs and Carbon Credits varies. A credible REC or Offset (such as LGCs, I-RECs, some VCUs, and ACCUs) are issued under a trusted certification body (e.g. Evident for I-RECs and the CER for LGCs) and represents renewable energy that is additional (i.e., the energy wouldn’t have been generated without the incentive provided by the REC).  

Carbon Offsets have come under greater criticism that RECs; High-quality offsets are transparent, verifiable, permanent, and provide additional carbon reductions that wouldn’t have happened without the offset project. They should be certified by reputable standard-setters like VCS or Gold Standard, which ensure the environmental integrity of the project and the offset.  Today rating agencies (such as BeZero, Calyx, Sylvera, and IDEAcarbon) now exist for Carbon Credits and RECs.   

When selecting projects for carbon offsets or RECs, businesses should screen projects and choose those: 

1. With strong environmental benefits (the type of project),  

2. From registered in recent years (new vintage),  

3. From stable countries with strong compliance (in the same country as their emissions),  

4. With co-benefits, such as social impact, local employment, and additional sustainability outcomes, 

5. Certified to high standards such as a Gold Standard project, and 

6. That aligns with their overall corporate image and goals

Avoiding Greenwashing 

To avoid being accused of greenwashing (misleading or unsubstantiated claims about the environmental benefits) – businesses must ensure transparency in their decarbonisation efforts.  The press and shareholder activists are exposing businesses using low-quality projects to offset their emissions or making improper claims. Accusations of greenwashing can be reduced by using Credible Standards & Registries, performing measurement and third-party verification, providing transparency & accuracy about the originating project and following The Integrity Council for Voluntary Markets “Core Carbon Principles” 

Financial Mechanisms for RECs and Carbon Credits 

Planning a long-term decarbonisation strategy necessitates considering not just the environmental, but also the financial implications of engaging with offsets and RECs. Forward-looking financial strategies such as hedging, offtake agreements, options, and warehousing of offsets can provide companies with more control over their sustainability efforts while mitigating financial risks. 

1. Spot Purchase whilst the simplest contract, has the lowest counterparty risk, but the buyer is exposed and taking whatever the price is at the time. 

2. Hedging or Forward Contracts can be put in place to forward purchase RECs and Carbon Credits for risk management to avoid potential losses by price fluctuations. Strip (forward) contracts can fix prices for multiple years into the future. 

3. Warehousing is being used by companies due to the arbitrage that exists between current and future prices.  High-quality carbon credits are expected to increase in price as low-cost abatement opportunities dry up.  

4. Options the right to buy (or sell) without the obligation, are generally harder to obtain or expensive, and not easily obtained for years into the future. 

5. Regulatory Risk means that the price of RECs and Carbon Credits are very sensitive to policy or regulatory changes. 

As CFOs, sustainability managers, and other executives navigate their decarbonisation journey, carbon offsets and RECs offer powerful tools to meet environmental goals. However, due diligence is critical in choosing the right projects and certificates to support genuine, effective climate action and avoid the pitfall of greenwashing. By aligning with robust standards, seeking third-party verification, and committing to transparency and science-based targets, businesses can not only help mitigate climate change but also build their credibility as sustainable leaders in their industry. 

Northmore Gordon has been advising businesses on their decarbonisation strategy for almost 15 years and can provide a full range of carbon, energy and certificate services for your business today.

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Whether it be recognising status or declaring ownership, certificates acknowledge value. For the broad class of products known as Environmentally Attributed Certificates, the value comes from ascribing some environmental benefit to a traded commodity.

Environmentally Attributed Certificates most commonly apply energy or carbon attributes to a generation or offsetting activity, yet they can be used to track any type of environmental value, such as distinguishing between different carbon intensities of hydrogen or managing nitrate concentration in water outflows. In essence, Environmentally Attributed Certificates serve as an accounting layer that sits atop a product or commodity to track its environmental credentials.

Certificates and their markets serve as valuable economic tools to incentivise businesses to embrace decarbonisation and environmental responsibility. Understanding how the Environmentally Attributed Certificate markets function and operate will help businesses design a procurement strategy that aligns with the national decarbonisation goals as well as their own corporate objectives.

What are the Different Energy Certificates?

In the energy space, there is a spectrum of certificates to distinguish between various decarbonisation efforts and activities:

• Green Certificates (Energy Attributed Certificates)
• White Certificates
• Carbon Offsets or Carbon Credits

Green Certificate

A Green Certificate, also known as a Renewable Energy Certificate (REC), represents 1MWh of renewable energy generation. Popular energy sources for these certificates include PV solar, wind, hydro, geothermal, and biofuels. Nuclear is not typically credited because uranium is not a renewable fuel, despite having zero carbon intensity.

To take things a step further, there are Time-based Energy Attributed Certificates being trialled that match the renewable energy generation with the electricity demand on an hourly basis throughout the day.

White Certificate

White Certificates are used to track reductions in energy use and are measured in either MWhs of energy saved or in Tonnes of CO2-e abated. Certified activities are typically those that improve energy efficiency, such as replacing traditional lighting with LEDs, installing more energy-efficient equipment, or adjusting business practises to increase energy productivity. There is an emerging market for demand response certificates that aim to drive reductions in peak energy use times at the height of summer. 

Carbon Offsets (or Carbon Credits)

Carbon Offsets represent a reduction of one metric tonne of CO2-e from either removal or avoidance activities. Emissions removal involves activities that will extract carbon from the atmosphere. This includes planting new forests, making certain changes to agricultural practices, or implementing direct air capture and sequestration technologies. On the other hand, emissions avoidance activities stop emissions that would have otherwise occurred. Energy efficiency measures, fuel switches to low-carbon sources, and forest conservation practices are examples of emissions avoidance activities.

What are the Principles of an Environmental Certificate Program?

Certificates must pass through a regulatory framework to become approved and registered for trading. This involves registering a project, monitoring the activity or performance of the project, collecting data and evidence to support the environmental claims, undergoing external verification, and being accepted by the program regulator.

Once projects and their associated certificates are approved, the certificate programs have underlying principles that promote the existence and maintenance of certificate markets. These fundamental principles include additionality, persistence, and traceability.

Additionality asserts that having an existing certificate market promotes the development of activities that would otherwise not have developed under business-as-usual scenarios. For instance, without the existence of REC markets, there would not be an economic incentive for developers to build renewable energy plants. Therefore, the certificates stimulate additional activity to drive climate, energy, and other environmental improvements. As such, owners of environmental certificates can take ownership of driving this progress.

Persistence refers to the certified activity having a lasting impact. In some situations, this persistence may mark that savings are intact for an allotted period of time. For other certificate activities, it assures permanence, where the carbon offset or sequestration activity represents emissions reductions that are permanently maintained and not re-released into the atmosphere.

Traceability enables certificates to be traced back to their source and for them to be tracked in a registry. This promotes transparency of activity and also inhibits certificates from being used by multiple parties.

These programs can be administered by government regulators or by third-party administrators. Certificate programs give shape to market-based funding programs, voluntary markets, and direct obligation schemes.

What are the Types of Certificate Markets?

There are two types of markets for certificates: compliance and voluntary. While demand is generated differently between these distinct market types, they both share the same underlying objective of accelerating environmental goals through an additional source of funding. This funding makes it feasible to develop renewable energy plants, implement energy savings strategies, and build carbon-reduction projects.

In regulatory compliance markets, there is an obligation on liable entities to surrender a certain number of certificates each year. Government bodies are the typical regulator for this market type, placing requirements on certain entities – such as electricity providers or large energy users – to surrender back to the government a certain number of certificates each year. Often there is a penalty price in compliance markets if an obligated entity fails to surrender the required number of certificates. Regulatory markets are the primary market for most certificates, yet there are certificates that are gaining popularity within voluntary markets.

In contrast to the compliance market, voluntary markets generate demand through businesses and consumers who want to buy certificates for their environmental credentials. These credentials bring businesses closer to achieving goals focused on net-zero pathways, decarbonisation, resource conservation, community development, and environmental stewardship. Although participation in voluntary markets is optional, third-party recognition can stimulate demand for specific certificates within the market. For example, Climate Active, the Australian government’s carbon-neutral standard, only recognises certain certification types as eligible carbon offsets, which makes them more coveted than other certificates in the market.

There is a greater diversity of certificates within voluntary markets than in compliance markets. This causes voluntary markets to exhibit certificate price differential that is unseen in compliance markets where all certificates are treated as equal. Price disparity can be caused by the type of certificate, such as whether it represents carbon avoidance or carbon removal. In addition, some certificates in the voluntary market may cost a premium due to their associated co-benefits that align with the United Nations Sustainable Development Goals.

Not all certificate types have both compliance and voluntary markets – some certificate products are entirely voluntary, and some certificates with a compliance market have no voluntary demand from buyers. Where both a compliance market and a voluntary market exist for the same certificate, the prices are linked as demand in the voluntary market reduces the supply for the compliance market and vice versa.

How Does an Environmental Certificate Provide Value?

Holding an environmental certificate enables the owner to take claim to the environmental benefit it offers. For instance, when clean electricity from a PV solar farm enters the grid, it becomes indistinguishable from the rest of the grid electricity that is generated from other power sources. This makes it difficult to determine who the end-user of that clean electricity is. Therefore, a facility must purchase a REC to make the claim that they are indeed using the clean electricity generated from that solar farm. Without the certificate, the facility is unable to make the claim and is therefore unable to take advantage of the other significant business benefits that stem from transitioning to a clean energy profile.

Making the clean energy transition is becoming increasingly important, as people, governments, corporations, and investors want stability now and security for the future. Climate change is no longer an abstract scientific conversation. It is wrapped into all pressing matters of the day, from fuel price hikes and supply chain bottlenecks to rising concerns around sweeping fires, intense storms, and dying coral reefs. Our climate and environment must be prioritised, and businesses that adapt to and embrace a nature-positive model are positioning themselves for long-term success.

Although there are immeasurable societal and environmental benefits in transitioning away from fossil fuels and protecting the environment, there also must be sound economic motives to really incentivise businesses to embrace decarbonisation. This is where certificate markets, and Northmore Gordon, come into play.

Northmore Gordon specializes in the nuances, policies, and procedures of the energy certificate marketplace. We help businesses find and source energy solutions that promote the well-being of their own business as well as that of the community and environment. To incorporate a more nature-positive strategy and stay ahead of the changing energy landscape, reach out to us and see just how empowering our partnership can be.

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