Submission on the Safeguard Mechanism reforms
Citizens’ Climate Lobby (CCL) welcomes the newly legislated Climate Act and Australia’s new NDC (Nationally Determined Contribution) to reduce Australia’s emissions by at least 43% below 2005 levels by 2030 and to achieve net zero emissions by 2050. These are goals that CCL supports. However we believe it is far preferable that we aim for negative emissions and that we get there before 2050. We also believe that this is possible with the right policies, of which a reformed safeguard mechanism is but one component.
CCL is an all-volunteer grassroots think tank focussed on developing and advocating rational climate policies capable of providing effective solutions to the climate crisis.
The Safeguard Mechanism
We welcome this review of the Safeguard Mechanism and the government’s intention to reform it.
CCL’s expertise lies outside many of the more technical and industry-specific issues outlined in the consultation paper. We focus on the bigger picture, the overall imperative for a predictable, rapid, economy-wide decline in greenhouse gas emissions that engages the Australian community in the necessary and desirable transition towards a zero emissions economy.
We believe this wider focus will make an important contribution to this consultation and to the overall processes of planning and implementing Australia’s net zero journey. We do this by responding to the six commendable principles set out in the following quote from the Executive Summary:-
“The Government aims to deliver its climate targets in a way that minimises costs and shares the effort across the economy. Reforms to the Safeguard Mechanism will balance the principles of being effective, equitable, efficient, and simple”
The Safeguard Mechanism is currently none of these and it is unlikely that it can be easily reformed in such a way that it can become any of these.
It’s important to acknowledge that it was designed in a period of hostility over climate and energy policy and unfortunately it bears all the hallmarks of partisan politics. It was designed as a fig leaf policy to replace a carbon price and eventually be deployed to do what a carbon price does without looking like a carbon price.
It also bears the stigma of being a policy that failed its mission to safeguard against any emissions reductions achieved by the ERF being lost. These are serious deficiencies that are difficult to overcome by reform.
We will examine the safeguard against these worthy principles in turn. We will also address a further issue, that of the timeliness. This arises from the urgency of the crisis that is unfolding and the need for effective solutions to be in place very soon.
Effective
Lowering baselines will of course enable the mechanism to start working and will be a welcome addition to Australia’s climate policy mix. However, there are serious limitations on its effectiveness
It is limited to only a small, albeit significant section of the Australian economy - 28% is too small to make a significant difference to Australia’s emissions
It will allow serious leakage of emissions from other sectors and from the many entities that come under the 100,000 tonne threshold
It will only partially address the implicit fossil fuel subsidies identified by the IMF. These will constantly undermine the safeguard’s effectiveness by continuing to encourage the production and burning of fossil fuels
It will rely significantly on offsets to ‘soak up’ emissions that are difficult to achieve or that producers find more convenient to defer or avoid - offsets that must be preserved for drawing down historical emissions and not wasted by legitimising current and future emissions
Other contradictory policies, and the policy positions inherent in government rhetoric that support and encourage fossil fuels will further weaken the safeguard
Equitable / shares the effort
The mechanism focuses mainly on one sector of the economy, and only on 215 large entities. The cumulative emissions from smaller entities are not captured so the effort is not sufficiently ‘shared’. Big sections of the economy are exempt and are not covered by other elements of Powering Australia. This burdens safeguard facilities with the heavy lifting that should be shared across the whole economy. A simple carbon tax would achieve this principle.
It is also inequitable as some of the costs imposed by the safeguard will be passed on to citizens, many of them already struggling with cost of living, low wages, rising inequality and general hardship. The safeguard has no provision to support low and middle income households during the transition to zero carbon. Again a simple carbon tax with a dividend paid to households would be far more equitable.
Efficient / minimises cost
The safeguard’s limited coverage, high degree of complexity, and lack of complementary policies will limit its efficiency. Ongoing fossil fuel subsidies will undermine the safeguard and reduce its efficiency. It is therefore difficult to see how it can minimise costs and be efficient at the same time.
A high percentage of the emissions covered by the safeguard derive from fossil fuels. In effect It is a price on the carbon content of fossil fuels downstream in the economy. It would be more efficient to price the carbon at source, where they enter the economy.
Another issue is that It leaves most of Australia disengaged and on the sidelines of the emissions reduction journey we all must take together. As Minister Bowen said, “we have to be all in”. A carbon tax with revenue recycling to households would ensure all Australians are engaged in the process of decarbonising our economy. And it could go well beyond 43% by 2030 with relative ease while the safeguard and its complements will probably struggle to meet the target unless there is a collapse in consumption like the one induced by the COVID recession.
Simple
The consultation paper itself is testament to the complexity of the mechanism. The ‘baseline and credit’ system used by the safeguard is a form of emissions trading, a complex form of carbon pricing. This was a weakness in the Clean Energy Act which it replaced. The safeguard will depend on complex systems and operate in unpredictable national and global markets which will complicate things further.
There is nothing simple about having to assess performance reports of emissions reductions against baselines from 216 large facilities, make equitable decisions about how to adjust those baselines in a highly competitive market, deal with requests for deferments, exemptions and favourable adjustments of baselines, and ensure compliance with the rules in the event of emissions exceeding baselines.
The implementation of an enhanced safeguard mechanism is likely to be overly complex and involve all sorts of trade-offs to make it work.
Timely
Another major concern is the slowness of the reform process and the amount of time it will take before emissions reductions can be expected from the safeguard.
At the National Press Club in June 2022, Chris Bowen, Minister for Climate Change and Energy said:
“. . . we have 8 years - just over 90 months . . . that means we have to be all in.”
Writing in the AFR on 26 July, 2022, Minister Bowen said:
“The Powering Australia policies that the Labor Party took to the election underpin this 43 per cent reduction. It represents an ambitious but achievable goal.
“It is our hope that the commitments of our industry, states and territories will yield even greater emissions reductions in the coming decade and into the future.
“We have just 89 months to achieve these goals. We have been waiting a long time, and now we need to get on with it.”
This means that the government has just 89 months to reduce Australia’s emissions by at least 43% below 2005 levels by 2030.
However, according to DCCEEW.gov.au, “Safeguard Mechanism Reforms - Consultation Paper” (August 2022) page 7, the timetable to implement those reforms to the Safeguard Mechanism is:
· Phase 1 (2 years from 2023-24 to 2024-25): transition commencing 1 July 2023.
· Phase 2 (5 years from FY26 to FY30): changes commence in full on 1 July 2025.
That means 11 of those 89 months will occur with business-as-usual non-reductions to the 1 July 2023, followed by 24 months of ‘transitional’ improvements, leaving just 54 months to achieve these goals by employing a relatively weak mechanism that covers less than one third of Australia’s emissions, backed by ACCU’s that are the subject of the Chubb inquiry, which arose because of Professor Andrew Macintosh’s claims that the system is a fraud.
The timelines appear to be as follows
Nine months of business as usual (zero emissions reductions) between now and 1 July 2023 when "interim" reforms will be imposed.
Two years of interim reforms to 1 July 2025 before the full suite of (as yet undefined) reforms will come into effect
Just 5 years to achieve the newly legislated NDC of 43% reductions below 2005 levels by 2030.
It will be pretty close to 2030 before it is known whether the safeguard (with its complementary policies) is working well enough to enable Australia to reach its targets. This will be much too late as the crisis escalates and 1.5 C° gets ever closer. It should be noted that at the end of the March 2022 quarter, total emissions have increased by 1.5% on the previous year.
Climate dividends, a powerful but simple complement to the safeguard
Climate Dividends is an elegant solution to Australia’s climate challenge. It can complement and enhance the safeguard by addressing the deficits and filling the gaps we have identified. By progressively pricing the greenhouse gas content of fossil fuels at their source the climate dividend takes much of the emissions reduction burden off the safeguard and will enable it to focus on some of the non-fuel related emissions that constitute 23% of Australia’s emissions (excluding LULUCF).
It is simple - it only requires the setting of a single fee, with defined annual increments, to be levied on the greenhouse gas content of fossil fuels at their source. It will rely on existing volumetric measuring and reporting processes for the collection (perhaps by ATO) of the fee from a handful of producers and importers. The net revenue can be readily distributed as a monthly dividend to households, perhaps by ATO or Centrelink, or a new purpose-built authority.
The only complex element will be putting carbon border adjustments in place to protect against unfair competition from countries without a comparable carbon price. As the EU will soon introduce a Carbon Border Adjustment Mechanism (CBAM) Australia will need to respond anyway. With our own carbon price in place the CBAM would have no negative impact on Australia. Pending the introduction of CBAMs in larger economies, Canada has introduced an interim solution to complement its climate dividend scheme, now 4 years old and steadily rising in value.
It is timely. Climate dividends could be applied quickly. The only time constraint would be whatever consultations and political preparations may be needed to build awareness and acceptance in the community and with industry.
It is effective. A tax on the greenhouse gas content of fossil fuels is the one single policy that can quickly end the fossil fuel subsidies that will work directly against the safeguard. The recent IMF report is clear that
“Raising fuel prices to their fully efficient levels reduces projected global fossil fuel CO2 emissions 36 percent below baseline levels in 2025—or 32 percent below 2018 emissions.
Whilst this figure (36%) assumes a global carbon price, it is likely that Australia’s rate of reduction could be even more impressive, given our abundant resources. It suggests that Australia could choose a fairly slow rate of annual increments in the carbon price, if it is complemented by other initiatives, such as the safeguard and whatever agricultural, forestry and land use policies are implemented.
It is equitable. Carbon dividends would be more equitable than the safeguard in two important ways:-
It would ensure that fossil fuel emissions are progressively taxed out of the economy at a pre-set rate of reduction so that the safeguard and other policies do not have to address fossil fuel emissions as well as other sources of greenhouse gases.
And importantly, it would be much more equitable in how it spreads the burden amongst the people of Australia, and to a lesser extent, people of the world. The dividend ensures that low-to -middle income households are able to manage the costs of the transition and to actively participate in the decarbonisation of our economy.
It is efficient. By covering 77% of emissions (excluding LULUCF) and not allowing any leakage, exemptions, profit-taking or gaming, climate dividends is the comprehensive policy necessary to reduce emissions quickly. It gives the government the ability to set the ideal rate of annual increments; i.e. fast enough to be effective and meet our targets, slow enough to enable society, industry and the economy to adapt with minimal disruption.
It also minimises cost, partly due to its efficiency, but also because it redirects over $50 billion of inefficient subsidies that are working against all the efforts of 3 tiers of government, industry and community to reduce emissions, protect the environment and support the health of citizens.
The G20 and COP26 both called for a phasing-out of ‘inefficient’ fossil-fuel subsidies. The IEA and the UN are both calling for an end to all new fossil fuel developments. Climate dividends can phase-out subsidies in a matter of years, thus saving Australia much unnecessary effort and expenditure.
The removal of contradictory policies that undermine or cancel each other out is critical if we are to address climate change. They are enormously wasteful of money, time and resources. And ultimately, they become pointless.
Another efficiency derives from the CBAM that would protect Australia from unfair trading and would in turn encourage other countries to similarly price carbon. As outlined by the IMF, a global carbon price would drive emissions down rapidly and enable the world to meet its Paris Agreement targets easily.
And finally, the greatest efficiency possible is the early return to a safe climate that is only possible with a comprehensive policy that reduces emissions quickly with minimal disruption and brings the rest of the world onboard.
Conclusion
Safeguard reform is long overdue and very welcome, as a complement to a more comprehensive policy. Coupled with a carbon dividend scheme the safeguard would enable Australia to phase-down approaching 100% of our emissions. Even when combined with other policies in the government’s Powering Australia plan, the safeguard will not be enough to meet our need for rapid and effective emission reductions, especially if fossil-fuel emissions remain in place.
CCL recommends the adoption of carbon dividends as an essential component of Powering Australia, alongside the Safeguard Mechanism.
Rod Mitchell – National Chair, CCL Australia
