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 ERF is a $2 billion Abbott-era government fund that purchases carbon abatement twice a year by conducting reverse auctions. At each auction, projects can be awarded ACCU off-take contracts that are either fixed – where the project must deliver the ACCUs over the contract term; or optional – where the project can sell their ACCUs to the ERF or choose to sell at a higher price on the spot market. 

The average price paid by the Australian Government for ACCUs in the latest auction was $16.94, spread across 24 optional delivery contracts, for a total of 6.8 million tonnes of CO₂-e abatement. This is the first time that no fixed delivery contacts have been awarded, against the backdrop of climbing ACCU prices in spot market. This suggests that the ERF is moving to a role of providing a floor price to project developers while still allowing them to participate in the growing spot market. 

As shown below, this year has seen significant growth in the ACCU market with spot prices diverging from the historic trend of following the auction results. In the past 12 months, there has been a 108% growth price to $33.50, $10.40 (65% of the 12-month growth) being in the past 6 weeks alone. 

In compassion to international markets, ACCUs (AU$33.50) are still trading at discount, per tonne of CO₂-e, compared to European Allowances – €57.93  (AU$90.36); and UK Allowances – £58.00 (AU$106.95); But above the Californian Emission Trading Scheme – US$23.30 (AU$31.21); and China’s newly launched ETS – ¥41.62 (AU$8.73). 

Also this month, the Minister for Energy and Emissions Reduction announced the program development priorities for 2022, which add methods for electric vehicle and hydrogen refuelling infrastructure, use of hydrogen, stacking of different activities on farms, and expansion of the existing carbon capture and savanna fire management methods. This announcement builds on the existing priorities for soil carbon, biomethane, plantation forestry, and blue carbon. 

While there have been criticisms of some land-based methods in the past months, ACCUs are recognised as a high-integrity carbon units with a diversity of methods to credit carbon savings. The growing value of ACCUs is increasing interest in projects for industry, particularly in energy efficiency, fuel switching, transport, and alternative waste treatment across a range of sectors. The methods for industry are based on rigorous internationally recognised standards, such as the International Performance Measurement and Verification Protocol. While the ERF is dominated by land-based projects, industrial projects now make up 22% of the active projects, with further growth expected as higher ACCU price reduces payback periods for capital intensive projects in the industrial sector. 

If you haven’t factored ACCU pricing into your next project, now is the time to reconsider how the carbon value of your projects can be realised to boost the energy productivity of your business as the world transitions to net-zero. 

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The Clean Energy Regulator’s latest Quarterly Carbon Market Report predicts that the schemes will provide 57.1 million tonnes of emissions savings in 2021. That figure would represent an increase of more than 7% on the result delivered in 2020, when the schemes produced 53.1 million tonnes of emissions savings. The “conservative” estimate is based on the average emissions intensity of generation from all fuel sources.

However, the report notes that this emission intensity from all fuel sources is falling as the country continues to move towards more renewables. The March Quarter 2021 report also shows the continuing success of the Emissions Reduction Fund (ERF).

Key Takeaways from the quarterly report are:

• Auction 12, held on 12 and 13 April 2021, contracted 6.8 million tonnes of forward carbon abatement from 10 contracts at an average price of $15.99 per tonne, for a total commitment of $108 million.
• The Regulator expects the ERF to deliver Australian Carbon Credit Units representing 17 million tonnes this year, an increase of more than 6% on the record 16 million tonnes of 2020
• The Large-scale Renewable Energy Target (LRET) is on track to drive down emissions by 24.3 million tonnes – also an increase of 6%
• The third key pillar of the government programs – the Small-scale Renewable Energy Scheme (SRES) – is expected to provide the largest growth in emission reductions, with its 15.8 million tonnes of savings representing a 12% increase from 2020
• Rooftop solar was the strongest growth area under the SRES umbrella, with 792 megawatts (MW) worth installed in the first three months of 2021 – up 28% on the same period last year
• A total of between 3.5 and 4 gigawatts (GW) of rooftop solar capacity is now expected to be added across the country this year

The report also showed the Large-scale Renewable Energy Target of 33,000 gigawatt hours (GWh) was met by the end of January and that Australia has added a record 7.0 GW of renewable energy capacity in 2020. This is expected to result in an increasing oversupply in Large Scale Generation Certificates (LGCs) and may result in a softening of the LGC wholesale price over time.

No major large-scale renewable energy projects reached final close in the first quarter of the calendar year, but the Regulator expects between 2 and 3 GW of capacity will come online by the end of 2021 amid strong indications of healthy investment.

Voluntary private and state and territory demand for Australian Carbon Credit Units (ACCUs) and large-scale generation certificates (LGCs) reached record highs, rising 39% compared to the same quarter last year to 532,000 units and certificates.

Part of this was attributed to significant corporate commitments, with Coles Group becoming the latest major supermarket to commit to a target of net-zero emissions by 2050, joining Woolworths Group and ALDI.

The three major supermarket chains were responsible for a combined 1% of Australia’s reported emissions in 2019-20.

The Clean Energy Regulator is now assessing expressions of interest for the development of an Australian carbon exchange, with predictions that the implementation of such a program could slash business costs by as much as $100 million by 2030.

The exchange would make trading of Australian carbon credit units simpler and reduce transaction costs to support the rapidly increasing voluntary demand from the corporate sector. 

More information on the Clean Energy Regulator’s March Quarter 2021 Quarterly Carbon Market Report can be found in the highlights video below or here.

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