Labor's scheme to cut industrial emissions is worryingly flexible

Written by Rebecca Pearse, Lecturer, Australian National University

The federal government today proposed new rules to regulate greenhouse gas emissions from Australia’s polluting industrial sector. The rule changes apply to a measure known as the “safeguard mechanism”, and are supposed to stop Australia’s top 215 emitters, such as new coal, oil and gas projects, from emitting over certain thresholds, or “baselines”.

The safeguard mechanism was established by the Abbott Coalition government in 2016. It’s been widely criticised for lacking teeth – indeed, industrial emissions have actually increased since the mechanism began.

The safeguard mechanism was reviewed last year and Labor had promised a revamp. The fine detail of the changes is crucial, because it will determine how well Australia brings down its emissions on the path to net zero.

So would Labor’s proposed reforms, if implemented, be effective and equitable? Unfortunately, it appears no. They involve only very modest changes to a very flexible regime, and many issues plaguing the safeguard mechanism under the previous government continue.

What has Labor proposed?

The safeguard mechanism is the main lever the government can pull to ensure emissions from industry do not keep expanding. Industrial facilities regulated under the mechanism together account for almost 30% of Australia’s overall greenhouse gas emissions.

In its announcement today, Labor government proposed three key measures:

emission baselines will remain flexible for industrial facilities planning to grow
any tightening of baselines to industry standards will occur gently, giving facilities time to transition
“trade exposed” industries (such as exporters relying on international markets) will be compensated in the form of grants.

Overall, the government says these changes will bring emissions baselines down by 4.9% each year to 2030.

The biggest problem: flexibility

Industry lobby groups have argued against standardised rules for all facilities, saying it could damage their international trade competitiveness. Such “trade exposed” industries – such as steel producers and mining companies – have called for the safeguard mechanism to be more flexible.

But too much flexibility is generally the reason the scheme was ineffective under the previous Coalition government. Flexibility was built into the rules governing where, when, and how much industrial producers are required to reduce emissions.

The main sources of flexibility for industry under the current safeguard mechanism rules are:

loose baseline emissions, allowing facilities to expand their production
unlimited carbon credit purchases (where companies buy “credits” to represent emissions cuts made elsewhere, instead of cutting their own emissions outright).

Further flexibility will come from future proposed carbon credit trading rules that allow banking and borrowing credits for companies to use at a later time.

Ultimately, such flexibility means facilities can delay cutting their emissions to a later date. But as climate change accelerates, we have no time to waste.

Qantas is one of the companies regulated by the safeguard mechanism. AAP Image/Dave Hunt

Loose baselines

Industries aiming to grow their commodity output will be allowed to continue using flexible emissions baselines. In other words, as their production rises, so too will the amount of greenhouse gases they’re allowed to emit.

The government initially considered returning to “absolute baselines”, which fix carbon limits on existing facilities even when those facilities produce more goods.

Scientists and climate campaigners often argue for measures that make sure industry production baselines are adjusted intermittently to avoid exceeding the overall, absolute carbon target. But industry groups prefer a more flexible approach.

The government’s proposal to continue with individually tailored “production-adjusted” emissions intensity baselines mean industries can expand without facing increased costs.

For example, let’s say a new liquefied natural gas plant expands its output to meet international demand. Then, the overall emissions baseline for the plant will also increase, because the baseline is measured as emissions per tonne of gas produced. If enough producers do the same, the overall carbon budget will be broken.

New carbon credits to fill headroom

Some facilities have emitted considerably less greenhouse gases than their baseline allocations allowed, leaving a lot of headroom for these facilities to emit more greenhouse gases in future.

The Albanese government has signalled it wants to address this issue of having too much headroom by making aggregate adjustments to all baselines, plus creating a new kind of carbon credit: Safeguard Mechanism Credits (SMCs).

SMCs will be issued to facilities with baselines set above their actual emissions. These lower-emitting facilities can then sell credits to higher-emitting companies that struggle to reduce emissions. Or, these lower-emitting facilities can store the credits to use in future.

This means they’ll be able to plan to expand their emissions over reporting periods.

Industrial emissions have increased since the mechanism began. AAP Image/Julian Smith

Weak limits on ‘old’ carbon credits

Labor’s proposed safeguard mechanism will not recognise international carbon credits (where an Australian company can buy credits from an overseas company). But the government seems open to this at a later date.

When it comes to carbon credits generated in Australia, the new rules continue with a laissez faire approach. There are no limits to how many carbon credits companies can use to compensate for excess emissions over their baselines, which means companies can avoid direct emissions cuts.

Until now, the only carbon credits recognised in the safeguard mechanism have been “Australian Carbon Credit Units”. Because of their well-documented integrity issues, these units have this week been subject to an independent review.

Controversially, the review found this carbon credit system is largely sound, and made 16 recommendations to improve it. Others, however, do not share this view, and say the system doesn’t lead to genuine emissions cuts.

Flexible compensation for exporters

The planned rule changes add up to a lot of continued flexibility for industry – mostly justified as keeping costs low for the companies.

But meaningful emissions reductions in Australia will inevitably lead to reduced production (and employment) in some industries. The challenge is to make sure it happens in ways that are fair for communities and workers.

Following the practice of Labor and Coalitions before it, export-focused industries will be compensated for some losses. These industries argue they must be allowed to compete on a level footing with rivals in other countries who are not forced to bear the cost of reducing their emissions.

Industry compensation should only be applied where the cost of carbon reductions is shown to cause the industry or company in question to move offshore and lead to an increase in global emissions.

About A$600 million from Labor’s $1.9 billion “Powering the Regions Fund” will be allocated to trade-exposed businesses. Climate action campaigners have criticised this compensation, particularly if it goes to fossil fuel companies.

More tension is likely to play out in coming weeks as the government consults on the proposed changes.

At some point, however, if Labor is serious about tackling climate change, the flexibility must give way to tougher rules for polluters, and a greater government commitment to an equitable industrial transition.

Authors: Rebecca Pearse, Lecturer, Australian National University