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EXPLANATORY DOCUMENT

Exposure draft amendments to the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015

Background

This document explains the exposure draft amendments to the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015. It is intended to be read in conjunction with the “Safeguard Mechanism Consultation Outcomes” document which sets out the proposed approach to updating the Safeguard Mechanism and the high level policy rationale, following feedback from the consultation process conducted in February and March 2018.

The Safeguard Mechanism commenced on 1 July 2016. It applies to facilities with more than 100,000 tonnes of carbon dioxide equivalent emissions each year. Covered facilities must keep their emissions below a baseline set by the Clean Energy Regulator or purchase domestic carbon offsets to make up the difference. Baselines are intended to accommodate business growth and allow businesses to continue normal operations.

Most baselines were set at the high point of emissions over five years from 2009-10 to 2013-14. This means baselines can be based on data that is up to eight years old and out of step with current operations. To support economic growth, some facilities can access a baseline adjustment (generally known as a calculated baseline), however this is not available to all facilities.

As an outcome of the 2017 review of climate change policies, the Government committed to consult with businesses on ways to bring Safeguard Mechanism baselines up-to-date with current circumstances and make it fairer and simpler. The Government released a consultation paper on 21 February 2018 outlining an approach to improve the Safeguard Mechanism in line with this commitment.

Consultation closed on 30 March 2018. The Government received 57 submissions from individuals, businesses, local councils and peak bodies. Views expressed in submissions and during stakeholder discussions were broadly supportive of the approach proposed in the consultation paper. Submissions are available on the Department’s website at https://www.environment.gov.au/climate-change/government/emissions-reduction-fund/consultation/safeguard-mechanism

The Department has released draft legislative amendments for public comment for a six week period, until 7 September 2018.

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https://www.environment.gov.au/climate-change/government/emissions-reduction-fund/consultation/safeguard-mechanism

https://www.environment.gov.au/climate-change/government/emissions-reduction-fund/consultation/safeguard-mechanism

The proposed amendments to the Safeguard Mechanism would give effect to three main policy changes:

1. Bring baselines up-to-date by transitioning all facilities to calculated baselines over in 2018-19 and 2019-20, by:

a. giving all facilities access to calculated baselines in 2018-19 and 2019-20 (new section 26A); and

b. expiring reported baselines on 30 June 2020, except for those facilities covered by the electricity sectoral baseline (amendments to section 18).

2. Simplify calculated baseline applications by giving businesses the option to use Government-determined production variables and default emissions intensity values for calculating baselines (amendments to sections 4, 5, 6 and 27 and new schedules 2 and 3).

3. Update baselines annually for actual production where facilities use eligible production variables, so they continue to reflect facility circumstances (amendments to section 44).

Further explanation of the main amendments is set out below. Legislative references and terms that are defined in the Safeguard Rule are in italics.

Summary of amendments

Part 1 – Preliminary

Section 4 Definitions

To simplify calculated baseline applications and reduce auditing costs, facilities would have the option to use Government-determined (or prescribed) production variables and default emissions intensity values, or continue to use site-specific estimates as per the current approach:

Prescribed production variables and default emissions intensity values will be made by the Government, in consultation with businesses and supported by independent technical advice, and published in the Safeguard Rule.

Site-specific production variables and emissions-intensity values are determined by businesses to reflect individual facility circumstances, based on audited forecasts of production and emissions intensity (the current approach).

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Section 4 would be amended to define prescribed production variables and default emissions intensity values, which will be set out in new schedules 2 and 3. There are two types of prescribed production variables and both types can be used to simplify calculated baseline applications:

1. prescribed (annually-adjusted) production variable (set out in schedule 2) would apply to production-adjusted baselines that update annually with production.

2. prescribed (fixed) production variables (set out in schedule 3) would apply to production-adjusted baselines that are updated once for production, and then remain fixed.

Prescribed production variables and default emissions intensity values will be added to schedules 2 and 3 from 2019. The framework for developing them is at Appendix A.

A site specific production variable that is the same as a production variable set out in schedule 2 would be considered to be a prescribed (annually-adjusted) production variable for the purposes of calculating a production adjusted baseline.

Section 4 example

Facility A has a calculated baseline covering the three year period 2016-17 to 2018-19. It used a site-specific production variable and an estimated emissions-intensity value to establish its calculated baseline. At the end of the calculated baseline period, Facility A applies for a production-adjusted baseline to commence on 1 July 2019. Facility A’s production variable is the same as one listed in schedule 2. The production variable is treated as a prescribed (annually-adjusted) production variable. Facility A’s production-adjusted baseline is therefore adjusted annually with production, using the emissions intensity set for the calculated baseline commencing on 1 July 2016.

Other minor amendments to section 4 would provide clarity to existing definitions, including clarifying that a by-product means a product that contributes less than 10 per cent to a facility’s revenue.

Section 5 Identification of production variables

Under the proposed approach, facilities would be able to use a combination of prescribed and site-specific production variables when applying for a calculated baseline, subject to the new requirements in sections 5 and 6.

New subsection 5(1A) would specify that a site-specific production variable can only be used in combination with a prescribed production variable if the emissions associated with it exceed five per cent of a facility’s total emissions.

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In conjunction with new subsection 6(8A), new subsection 5(1A) would prevent overlap between the emissions allocated to each production variable.

New subsection 5(1B) would ensure that a site-specific production variable cannot be materially the same as a prescribed production variable, unless it is approved by the Clean Energy Regulator.

Section 6 Emissions-Intensity calculation criteria

New subsection 6(8A) is intended to avoid double counting of emissions when specifying emissions-intensity values for production variables, where a mix of default and site-specific emissions-intensity values are used. It would ensure the emissions included in a site specific emissions-intensity value are not also included in a default emissions intensity value.

Part 3 – Baselines

Division 2 – Baseline determinations

Subdivision 2 – Reported-emissions baseline determination

Section 18 Duration of reported-emissions baseline determination

New subsection 18(3)(c) would expire reported baselines on 30 June 2020, for facilities that are not grid-connected electricity generators. This ensures all baselines are able to be set on a consistent basis, using more up-to-date data. For grid-connected electricity generators, reported baselines will only expire if the sectoral electricity baseline is exceeded. If this happens, electricity generators would have the opportunity to apply for a calculated baseline. Table 2 (under the explanation for amendments to ‘Part 4 – Compliance’) summarises compliance dates, including the expiration of reported baselines.

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Section 18 example

Facility A currently has a reported baseline and its emissions are below its baseline. Its reported baseline will expire on 30 June 2020, but it can apply for a calculated baseline in 2018-19 or 2019-20 using site-specific emissions-intensity values (under new section 26A). If Facility A does not apply for a calculated baseline, it will receive a default baseline of 100,000 for 2020-21.

Facility A chooses to apply for a calculated baseline to commence on 1 July 2019, using a site-specific production variable (determined using section 5 of the Rule) and an estimated emissions-intensity value reflecting the site-specific characteristics of the facility. Facility A has until 31 October 2020 to submit a calculated baseline application using a site specific emissions-intensity value.

Subdivision 3 – Calculated-emissions baseline determination

Section 24 Significant expansion criteria

Amendments to subsection 24(10) would limit the availability of the significant expansion criteria for calculated baselines to 2017-18. The criteria would no longer be needed in 2018-19 and 2019-20, as all facilities would have the opportunity to apply for a calculated baseline under new section 26A.

Section 24 example

Facility A plans to undertake a significant expansion in 2019-20. It will increase its total productive capacity by more than 20 per cent, bringing its emissions above its baseline. The facility is no longer able to use the significant expansion criteria, but can apply for a calculated baseline under the transitional calculated baseline criteria in new section 26A (it must apply by 31 October 2020). Facility A’s calculated baseline can be set as per the current arrangements – namely based on an audited estimate of the quantity of production in the year with the highest expected production level during the calculated baseline period and the expected emissions-intensity of production in that year.

Section 25 Inherent emissions variability criteria

The operation of the inherent emissions variability criteria would remain unchanged, with minor amendments to subsection 25(5) to clarify how a facility can demonstrate that the properties of the natural resource are the primary reason for exceeding its baseline.

This would be achieved by introducing the concept of a baseline comparison year. For the purposes of demonstrating eligibility, the first financial year to be covered by the

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calculated baseline should be compared against the most recent baseline comparison year. The baseline comparison year depends on which baseline determination is the most recent for the facility. If the most recent baseline determination is:

a reported-emissions baseline, the baseline comparison year is the financial year with the highest emissions in the period 2009-10 to 2013-14.

a calculated-emissions baseline, the baseline comparison year is the first financial year of that determination.

a production-adjusted baseline, the baseline comparison year is the financial year used to determine the baseline emissions number for that baseline.

This is similar to the approach used for emissions-intensity test.

Section 26A Transitional calculated baseline criteria

New section 26A would set out the criteria for a transitional calculated baseline, which would give all facilities at least one opportunity to apply for a calculated baseline. See Table 1 for an overview of calculated baseline criteria availability.

Table 1: Calculated baseline criteria availability

Baseline commencement

Calculated baseline period

Application deadline

Calculated baseline criteria availability

1 July 2017 2017-18 to 2019-20 31 October 2018New facility (s. 23), significant expansion (s. 24), inherent emissions variability (s. 25)

1 July 2018 2018-19 to 2020-21 31 October 2019New facility (s. 23), inherent emissions variability (s. 25), transitional calculated baseline (s. 26A)

1 July 2019 2019-20 to 2021-22 31 October 2020New facility (s. 23), inherent emissions variability (s. 25), transitional calculated baseline (s. 26A)

It is intended to provide covered facilities with an opportunity to apply for a calculated baseline for 2018-19 or 2019-20, noting that reported baselines expire on 30 June 2020. Applications made for baselines commencing on either 1 July 2018 or 1 July 2019 could use site-specific production variables and emissions-intensity values, as per the current arrangements, or nominate prescribed production variables and default emissions intensity values from new schedules 2 or 3.

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The opportunity to apply for a transitional calculated baseline will remain beyond 2020, but each facility can only apply using the transitional calculated baseline criteria once (subsection 26A(2)); and it does not apply to new facilities covered by the Safeguard Mechanism after 2020 (subsection 26A(6)). Grid-connected electricity generators could apply for a transitional calculated baseline after 2020 in the event that the sectoral electricity baseline is exceeded (subsection 26A(8)).

Facilities must use prescribed production variables and emissions-intensity values for transitional calculated baselines that commence from 1 July 2020 (subsection 32(2)(e) and subsection 26A(5)).

Table 2 (under the explanation for amendments to ‘Part 4 – Compliance’) provides an overview of compliance dates.

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Section 26A examples

Facility A currently has a calculated baseline covering the three year period 2016-17 to 2018-19. Facility A chooses to retain its existing calculated baseline for the full three year period – it does not have to apply for a transitional calculated baseline. In 2019-20 Facility A transitions to a production-adjusted baseline, using the emissions intensity value used in its application for the calculated baseline that commenced in 2016-17.

Facility B is a transport facility with emissions over 100,000 tonnes per year. It plans to expand its fleet, causing the facility to exceed its reported baseline in 2019-20. Facility B does not meet the significant expansion criteria (if it were continued), new facility, or inherent emissions variability criteria. Facility B applies for a transitional calculated baseline (under new section 26A) by 31 October 2020 for the calculated baseline to commence on 1 July 2019.

Facility C is a manufacturing facility with a calculated baseline covering the three year period 2016-17 to 2018-19. It expects both its production and emissions to peak in 2020-21. Following the calculated-emissions baseline period, instead of applying for a production-adjusted baseline, the facility applies for a transitional calculated baseline (under new section 26A) covering the three year period 2019-20 to 2021-22. At the end of the calculated baseline period, Facility C transitions to a production-adjusted baseline.

Facility D currently has no obligations under the Safeguard Mechanism as it does not emit over 100,000 tonnes a year. In 2022-23, this facility emits 110,000 tonnes of scope 1 emissions. Under the current arrangements, this facility would receive a default baseline of 100,000 tonnes as it does not meet the new facility criteria set out in section 33. Under the new section 26A, Facility D can apply for a transitional calculated baseline using prescribed production variables and default emissions intensity values (set out in schedules 2 and 3).

Section 27 Information required in applications; Section 28 Audit reports

The proposed amendments would streamline the information required in calculated baseline applications. Applications must nominate the emissions-intensity to be used for each production variable in the application – namely either an estimated site-specific emissions-intensity or the default emissions intensity for a prescribed production variable (paragraph 27(1)(d)). Supporting evidence for emissions-intensity values would no longer be required if default values are used, making applications simpler and less costly (subparagraphs 27(1)(f), (g), and (i)).

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New paragraph 27(1)(j) would require a statement that the methods used to estimate a site-specific emissions-intensity value are based on the methods used to report emissions under the National Greenhouse and Energy Reporting Scheme for the facility. This recognises the need for consistency and that if a ‘method 1’ approach from the National Greenhouse and Energy Reporting (Measurement) Determination 2008 is used to report a facility’s emissions under the National Greenhouse and Energy Reporting Scheme, the method used to estimate the facility’s baseline emissions number should be based on the same approach.

If a prescribed production variable is used, new paragraph 27(3)(b) would require facilities to use the measurement requirements in place for that production variable.

Amendments to section 28 would ensure the auditing framework covers applications using the transitional calculated baseline criteria. An audit for applications under new section 26A would need to make sure the applying facility meets the eligibility requirements in new section 26A and that the application includes information specified in section 27. Audits would not need to provide assurances for emissions-intensity estimates where default emissions intensity values are used. This would reduce the scope and therefore the associated costs of these audits, while retaining the integrity of the process.

Section 30 Making of calculated-emissions baseline determination

Amendments to paragraph 30(2)(e) (in conjunction with amended paragraph 27(1)(d) and new subsection 26A(5)) would require calculated baseline determinations commencing after 1 July 2020 to use prescribed production variables and default emissions intensity values. This recognises that 2018-19 and 2019-20 is a transition period.

This does not apply to calculated baseline determinations made on the basis of the inherent emissions variability criteria (section 25). These applications would be able to continue to use site specific emissions-intensity values after 2020, as per the current arrangements.

Section 31 Duration of calculated-emissions baseline determination

Amendments to subsection 31(4) would allow a new calculated baseline determination to replace an existing calculated baseline determination.

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Section 31 example

Facility A has an initial calculated baseline covering the period 2016-17 to 2018-19. Facility A applies for a transitional calculated baseline under section 26A to commence in 2018-19. Facility A’s initial calculated baseline is in effect for a two year period: 2016-17 and 2017-18. The transitional calculated baseline replaces the initial calculated baseline—it commences on 1 July 2018 for the three year period 2018-19 to 2020-21.

Subdivision 4 – Benchmark-emissions baseline determination

Section 34 Significant expansion criteria; Section 38 Making of a benchmark-emissions baseline determination

Under the proposed approach, baselines would be updated annually for actual production where facilities use eligible, prescribed production variables (see amended section 44).

Amendments to sections 34 and 38 (along with amendments to paragraph 44(3)(b)) would allow annually adjusted baselines to operate in conjunction with a benchmark baseline.

Amendments to section 34 would limit the availability of the significant expansion criteria for benchmark-emissions baselines to components of baselines that are fixed (that is, those production variables that are not included in schedule 2). This criteria is not needed where baselines adjust annually with production, as the baseline will automatically accommodate any increase to production.

Amendments to section 38 would allow benchmark-emissions baselines to be calculated each year. This means if a facility applies to increase its baseline using the significant expansion criteria after 2020, its baseline can include:

an annually adjusted component (see subparagraph 38(3)(b)(ii))—based on a previously determined production-adjusted baseline using a prescribed (annually adjusted) production variables (from schedule 2); and

a fixed component (see subparagraph 38(3)(b)(i))—based on a significant expansion allocation, which is fixed and based on a production variable and benchmark emissions-intensity (from schedule 1). In line with amendments to section 34, the significant expansion criteria only apply to components of baselines that are fixed.

Baselines using the new facility criteria would be fixed for the benchmark baseline period (as per paragraph 38(3)(a)).

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Subdivision 5 – Production-adjusted baseline determination

Section 40 Application; Section 41 Information required in applications

Amendments to section 40 would allow facilities to move to a production-adjusted baseline earlier than the current framework. This means they don’t have to wait until the end of their calculated baseline period to apply for a production-adjusted baseline.

New paragraph 40(1)(aa) would allow production-adjusted baselines to commence before the end of a calculated baseline period. This would allow a facility to move to a production-adjusted baseline after one or two years of a calculated baseline period.

New paragraph 40(1)(ab) would allow a facility to move directly to an annually adjusted production-adjusted baseline, without first completing a calculated baseline application. This is only for facilities using prescribed (annually adjusted) production variables and default emissions intensity values.

Unless paragraph 40(1)(ab) applies, the responsible emitter for a facility cannot apply for a production-adjusted baseline without first applying for a calculated baseline (or benchmark-emissions baseline). The calculated baseline process is necessary to establish an emissions-intensity value based on site specific characteristics.

Amendments to section 41 would describe the information required in applications using prescribed production variables and default emissions intensities.

Section 40 and 41 examples

Facility A choses to apply for a transitional calculated baseline (under new section 26A) to commence in 2018-19. In its application, Facility A chooses a prescribed (annually-adjusted) production variable with a site specific emissions-intensity value. The calculated baseline application establishes the emissions-intensity for the prescribed production variable (that is, the estimated emissions intensity in the year with the highest forecast production).

Facility A choses to apply for a production-adjusted baseline to commence in 2019-20 under new paragraph 40(1)(aa). The application uses the site specific emissions-intensity value established through the calculated baseline application. From 2019-20, Facility A’s baseline will be annually adjusted to reflect actual production.

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Facility B has two production variables: both are prescribed (annually-adjusted) production variables listed in schedule 2. It nominates to use the default emissions intensity values listed in schedule 2 for both production variables. Facility B choses to apply for a production-adjusted baseline to commence in 2019-20 under the new paragraph 40(1)(ab). There is no requirement for Facility B to apply for a transitional calculated baseline. Facility B will need to report production from 2019-20.

Facility B must include in its production-adjusted baseline application the details of its prescribed (annually adjusted) production variables (see paragraph 41(1)(e)). The application must also specify that the baseline is using the default emissions intensity values (see paragraph 41(1)(d)). The audit report accompanying the application only needs to assess that the required information is provided and presented fairly (see paragraph 42(2)(b)).

In this example, Facility B could move directly from a reported baseline to a production-adjusted baseline and did not have to prepare and submit a calculated baseline application. As a result, Facility B has avoided any requirement to provide audited forecasts of production and emissions-intensity values (refer sections 27 and 28).

Section 44 Making of production-adjusted baseline determination

Amendments to section 44 would allow baselines to be updated annually for changes in production where facilities use eligible production variables—that is, prescribed (annually-adjusted) production variables specified in Schedule 2.

Amended paragraph 44(3)(a) sets out the formula for making a baseline where not all production variables are eligible to be annually adjusted. A baseline emissions number is the sum of:

a fixed component: for all production variables that are not prescribed (annually adjusted) production variables this component is calculated by summing the contribution of each production variable. The contribution for each production variable is calculated once by multiplying the amount of production in the relevant historical year by the nominated emissions-intensity value; and

an annually-adjusted component: for all production variables that are prescribed (annually adjusted) production variables this component is calculated by summing the contribution of each production variable. The contribution for each production variable is calculated every year by multiplying production in the current year by the nominated emissions-intensity value.

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New subsection 44(3)(aa) sets out the formula for calculating a baseline where all production variables are eligible to be annually adjusted. The baseline is calculated each year as the sum of production in the current year multiplied by the default emissions intensity value specified in schedule 2

Section 44 examples

Facility A applied for an initial calculated baseline covering a three-year period 2016-17 to 2018-19. It subsequently applies for a production-adjusted baseline starting 1 July 2019 using in its application the same site-specific production variable and estimated emissions-intensity value used in the initial calculated baseline application (see subsection 41(1)). Its baseline is set in accordance with paragraph 44(3)(a). Facility A’s production variable is not the same as any listed in schedule 2. Facility A’s baseline remains fixed for the duration of the production-adjusted baseline. This is the same as the current arrangements.

Facility B produces a production variable, which is specified in schedule 2 (that is, a prescribed (annually-adjusted) production variable). Facility B uses a site specific emissions-intensity value in its calculated baseline application.

Following the calculated baseline period, Facility B applies for a production-adjusted baseline. The production-adjusted baseline emissions number for Facility B is:

the quantity of the production variable produced in a financial year multiplied by the site specific emissions-intensity value established through the calculated baseline application (refer subparagraph 44(3)(a)(ii)).

Facility B’s baseline emissions number is calculated on this basis every year so that its baseline reflects the annual changes in the quantity of the production variable produced.

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Section 44 examples (continued)

Facility C produces staticum and varyum. Facility C has a transitional calculated baseline (under section 26A) for the three year period 2019-20 to 2021-22. In its audited calculated baseline application, Facility C had two production variables, with the following details:

for staticum—a prescribed (fixed) production variable with a site specific emissions-intensity value of 0.5 tonnes CO2-e per tonne of staticum.

for varyum—a prescribed (annually adjusted) production variable with a site specific emissions-intensity value of 1.0 tonnes CO2-e per tonne of varyum.

Production of staticum was constant over the calculated baseline period – Facility C produced 210,000 tonnes in each of the three years.

Facility C transitions to a production-adjusted baseline from 2022-23. In 2022-23, Facility C produces 150,000 tonnes of staticum and 180,000 tonnes of varyum.

In 2022-23, Facility C’s baseline emissions number for its production-adjusted baseline is based on two components (as per paragraph 44(3)(a)):

A fixed component for staticum, which is based on the emissions-intensity of staticum in Facility C’s calculated baseline application (0.5 tonnes CO2-e per tonne staticum) multiplied by the high-point of historical production for staticum over the three year calculated baseline period (210,000 tonnes staticum). This component is fixed for the duration of the production-adjusted baseline; and

An annually-adjusted component for varyum, which is based on the emissions-intensity of varyum in Facility C’s calculated baseline application (1.0 tonnes CO2-e per tonne varyum) multiplied by the actual production of varyum for the financial year (180,000 tonnes varyum).

The production-adjusted baseline in 2022-23 is:(210,000 × 0.5) + (180,000 x 1.0) = 285,000 tonnes CO2-e.

New subsection 44(3A) would require production amounts for each prescribed (annually adjusted) production variable to be reported each year in accordance with any requirements set out in the schedules.

New subsection 44(3B) would require any updates to default or benchmark emissions-intensity values to be reflected in the baseline emissions number for the following financial year. This ensures that baselines and emissions are set on a consistent basis if, for example, there are changes to the way emissions are measured under the National Greenhouse and Energy Reporting Scheme.

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New subsection 44(3C) would clarify that the emissions-intensity of the production variable is the site-specific emissions-intensity determined through an audited calculated baseline application process, unless a facility elects to use a default emissions intensity value.

New subsection 44(3D) would allow a facility to switch to a default emissions intensity value for any financial year, so long as the nomination is made before the end of that financial year. This applies to both fixed and annually adjusted production variables.

New subsection 44(3E) would ensure a facility that nominates to use a default emissions intensity value cannot switch back to a site specific emissions-intensity value for that production variable.

Subdivision 6 – Variation of baseline determination for reduction in emissions intensity

Section 46 Application

Amendments to subsection 46(1) would limit any applications for the emissions-intensity test to 2017-18. The emissions-intensity test is no longer needed with the introduction of annually-adjusted baselines.

Subdivision 7 – Landfill-benchmark baseline determination

Section 52 Application to Section 55 Duration of landfill-benchmark baseline determination

Amendments to subdivision 7 rename the type of benchmark determination as ‘landfill baseline determination’. Amendments to paragraph 52(2)(b) would allow an application for a landfill baseline determination to be made for any financial year.

Subdivision 8 – General variation and remaking of baseline determinations

Section 57A Variation of certain calculated-emissions baseline determinations and production-adjusted baseline determinations because of changes in activities

New section 57A would allow the Clean Energy Regulator to vary a baseline determination for a facility due to changes in activities at a facility. This is similar to the existing section 19.

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Section 57B Making of replacement baseline determinations if facilities restructured

New section 57B would allow the Clean Energy Regulator to revoke existing baseline determinations and make replacement baseline determinations for facilities that are restructured.

Part 4 – Compliance

Division 2 – Declared multi-year periods

Section 65 Application; Section 67 Making of a multi-year period declaration on request

Amendments to sections 65 and 67 would simplify and improve access to multi-year monitoring periods, so long as the Clean Energy Regulator does not consider there to be significant risks that the facility will fail to comply with its obligations under the Act (see new paragraphs 67(2)(b) and 67(2)(c)). These amendments would also extend the deadline for applications until 1 February after the end of the first year of the proposed multi-year monitoring period (see subsection 65(4)). See Table 2 (next page) for an overview of compliance dates.

To assist the Clean Energy Regulator’s assessment, applications would need to provide information regarding the potential risk of future non-compliance (see new paragraphs 65(3)(e) and 65(3)(f)).

New paragraph 65(3)(d) would require applications to provide an estimate of the number of Australian Carbon Credit Units likely to be used to comply with the Act for the multi-year monitoring period. This would provide the Clean Energy Regulator with more information on the quantities of offsets likely to be used for meeting obligations.

Section 65 and 67 examples

Facility A exceeds its baseline in 2022-23. This facility can apply to the Clean Energy Regulator by 1 February 2024 for a multi-year monitoring period commencing on 1 July 2022.

Facility B exceeds its baseline in 2022-23 and anticipates it will need to use Australian Carbon Credits Units to assist with reducing its net emissions. Facility B can apply to the Clean Energy Regulator by 1 February 2024 for a multi-year monitoring period. The application must include an estimate of the number of Australian Carbon Credit Units likely to be used to ensure its emissions over the entire multi-year monitoring period do not exceed the baseline over the same period.

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Table 2: Compliance dates

Complete by Activity Legislative reference

31 October 2019 Deadline for 2018-19 calculated baseline applications

Current – s. 22(3)

1 February 2020 Deadline for applications for a multi-year monitoring period commencing on 1 July 2018

New – s. 65(4)

1 March 2020 A facility’s 2018-19 emissions must not exceed its baseline from this date

NGER Act s. 22XF

30 June 2020 Existing reported baselines expire New – s. 18(3)(c)

31 October 2020 Deadline for 2019-20 calculated baseline application

Current – s. 22(3)

Division 3 – Notification and publication requirements

Section 71 Advisory notices; Section 72 Publication

Amendments to sections 71 and 72 update notification and publication requirements. Amendments to subparagraph 71(3)(c)(iii) would allow the Clean Energy Regulator to notify responsible emitters where a baseline emissions number has been automatically updated as a result of annually reported production data. This will help ensure responsible emitters and the Clean Energy Regulator have a common understanding of the baseline emission number in a given year.

Amendments to section 72 would require the Clean Energy Regulator to publish information about the future demand for Australian Carbon Credit Units. This includes publishing an aggregated total of the Australian Carbon Credit Units likely to be surrendered by all facilities with a multi-year monitoring period (see new paragraph 72(1)(d)). This information is aggregated across all facilities and will not disclose any commercially sensitive information. Publishing this information would provide buyers and sellers of Australian Carbon Credit Units with additional insights into the potential short-term demand for Australian Carbon Credit Units. Amendments to section 72 are also included to clarify a number of existing requirements.

Schedule 2 Prescribed (Annually Adjusted) Production Variables; Schedule 3 Prescribed (Fixed) Production Variables

New schedule 2 will set out the prescribed (annually adjusted) production variables. New schedule 3 will set out the prescribed (fixed) production variables. Production variables and emissions-intensity values will be published by the Government from 2019.

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Under the National Greenhouse and Energy Report Act 2007, facilities will report the quantity of each prescribed (annually adjusted) production variable used in an application in the same way they currently report greenhouse gas emissions and energy information. The National Greenhouse and Energy Reporting Regulations 2008 will be updated to support this requirement.

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Appendix A – Defaults Framework

Emissions Reduction Fund Safeguard Mechanism Framework for developing default production variables and emissions-intensity values

As set out in the 2017 review of climate change polices and the Safeguard Mechanism consultation paper, the government will develop default production variables and emission intensity values to simplify and streamline baseline applications and lower administrative costs for businesses.

This document sets out a framework to guide the selection of default production variables and emissions-intensity values for the Emissions Reduction Fund Safeguard Mechanism, and identify which production variables will be eligible for annually adjusted production-adjusted baselines. The framework includes:

Background on production variables

Principles for selecting default production variables

The default calculation method for determining default emissions intensities.

Process and timing

The Government will develop default values and identify which production variables can be used for annually-adjusted baselines, in consultation with businesses and supported by independent technical advice. Final default values will be included in the Safeguard Rule in two schedules:

production variables that apply to production-adjusted baselines that are updated once for production, and then remain fixed (the current approach), and

production variables that apply to production-adjusted baselines that update annually with production.

The Government will aim to publish as many as possible in the first half of 2019, for use in 2018-19—noting that calculated baseline applications for this year are due by 31 October 2019.

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BACKGROUND ON PRODUCTION VARIABLES

What are production variables?

Production variables and emissions-intensity values are used to set facility baselines using a ‘calculated baseline’ approach (subsection 30(3) of the Safeguard Rule). They have been part of the Safeguard Mechanism since its inception in 2016. A calculated baseline is the sum of ‘production’ multiplied by the ‘emissions-intensity of production’ for each relevant production variable nominated by the facility, where the:

Production variable identifies the product or service being delivered, for example, tonnes of alumina or passenger kilometres.

Emissions-intensity value specifies the emissions-intensity of production, for example, emissions per tonne of alumina or emissions per passenger kilometre.

A facility can nominate its own production variables (consistent with section 5 of the Safeguard Rule) and estimate a site-specific emissions-intensity value using audited forecasts of its production and emissions over three years (or five years for new large facilities). Baselines are ‘trued-up’ for actual production after the forecast period, and then remain fixed.

How will default production variables be defined?

Default production variables would ideally be an output of a facility (e.g. tonnes of aluminium). However, in some cases, it may be impractical to define the production variable as an output, and an alternative—such as an input or intermediate product—may be sought. For instance, a production variable for an intermediate product may be required if the intermediate product can be sold or traded between facilities. An intermediate product or input may also be practical if a facility produces a large number of outputs and it is difficult to apportion emissions among them.

There may be instances where it is not practical to develop a production variable. In these cases, a more generic fall-back—such as energy consumed—may be the only option, though this would be a last resort and used as an interim measure.

Why can’t all production variables be adjusted annually for production?

Aligning a production variable closely with an output will best allow a baseline to reflect the emissions of production. The further removed the production variable is from the output, the more difficult it is for the baseline to reflect emissions.

In general, output-based production variables will be suitable for annual production adjustments, whereas input-based production variables will not. Intermediate production variables may be suitable under certain circumstances, for example, if they only cover the emissions associated with making the intermediate product. They may not be suitable if they are a proxy for an output (and cover emissions that occur downstream of the intermediate product).

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What are emissions-intensity values?

Emissions-intensity values are expressed as emissions per unit of production variable and are used under the Safeguard Mechanism to develop baselines, consistent with the legislative framework used since the scheme’s inception.

The Government set out in its 2017 review of climate change policies that it would develop ready-made default emissions intensity values that businesses could use if they so choose as an alternative to developing their own site-specific emissions intensity values. This option would simplify baseline applications for businesses and lower administrative costs. A facility can continue to estimate its own site-specific emissions-intensity value rather than use the default.

It is proposed default emissions intensity values for the Safeguard Mechanism will be set at a level that is representative of a sectoral average.

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PRINCIPLES FOR SELECTING DEFAULT PRODUCTION VARIABLES

The following principles will guide the selection of prescribed production variables and calculation of default emissions intensity values, and a decision on which production variables will be used for annually adjusted production-adjusted baselines. In practice, the process will involve a balance of these principles.

Principle 1: Effective

Provide a suitable basis for setting baselines that reflect emissions per unit of production.

Principle 2: Consistent

Treat facilities and industries consistently. Provide a suitable reference point that is representative of a sectoral average.

Principle 3: Practical

Be as simple and low cost as possible, avoiding excessive measurement and reporting requirements and building on existing schemes, where possible.

Principle 4: Robust

Be based on high quality data and robust methodology that protects the confidentiality of sensitive industry data.

Guidance on implementing these principles is provided below.

Principle 1: Effective

Provide a suitable basis for setting baselines that reflect emissions per unit of production.

Production variables should:

represent products or activities that are similar or interchangeable

- they should not be adjusted, corrected or discounted for different technologies, geographies, inputs, or practices, among other things as this would undermine the administrative benefits of the government developing broadly applicable production variables. Highly tailored production variables adjusted for such factors are available through site specific production variables nominated by businesses.

include all activities that contribute to direct (scope 1) emissions, with no overlap between production variables, and

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ideally be based on outputs, noting that there may be instances where intermediate products or inputs are appropriate and practical alternatives, depending on:

- data availability and quality, including the ability to apportion emissions between activities, processes and products.

They should not:

affect investment decisions that are not related to greenhouse gas emissions or encourage businesses to restructure themselves to avoid compliance obligations

encourage a facility to shift emissions causing processes outside the facility, for example by purchasing an intermediate product instead of producing it on-site.

Where practical, production variables should allow for the calculation of an emissions-intensity value—for example, a site-specific or industry average emissions-intensity—that can be used to update baselines annually to reflect actual production. To be suitable for annual production adjustments, a production variable should:

represent the final output, to best reflect emissions of the entire production process

reflect discrete steps/processes in the supply chain, where multiple production variables are required, and

include the majority of emissions-causing processes (in conjunction with other sector production variables).

To be suitable for annual production adjustments, a production variable should not:

be an input, as this does not best reflect emissions per unit of production

be (or include) a waste product or by-product, to avoid encouraging the use of inefficient processes and poor quality inputs, or

encourage facilities to buy intermediate products instead of making them on-site to externalise emissions.

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Principle 2: Consistent

Treat facilities and industries consistently. Provide a suitable reference point that is representative of a sectoral average.

Production variables should be defined in a way that is equitable and consistent across facilities and sectors. This means:

facilities undertaking the same processes and activities should be able to use the same production variables

- a production variable may be applicable to multiple sectors where an activity is common (for example, on-site electricity generation)

multiple production variables may be required where there are multiple discrete steps along a supply chain

- this will enable production variables to apply consistently across industries where individual facilities could undertake one, more or all of the activities (for example, mining and mineral processing).

Production variable selection should consider the distribution of emissions-intensity within an industry.

Principle 3: Practical

Be as simple and low cost as possible, avoiding excessive measurement and reporting requirements and building on existing frameworks, where possible.

The selection of production variables should support the calculation of baselines and emissions-intensity values that are as practical and simple as possible.

To achieve this, production variable selection should:

align with standard industry definitions and existing reporting frameworks

build on other Government programmes, in particular, adopting existing production variables, where practical, for emissions-intensive, trade-exposed activities from Schedule 6 of the Renewable Energy (Electricity) Regulations 2001

avoid unreasonable measurement and reporting requirements

include a fall-back option, such as the use of input, fuel, heat or value-added metric, where other options are not practical due to lack of data or excessive cost (particularly for smaller emissions sources).

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Principle 4: Robust

Be based on high quality data and robust methodology that protects the confidentiality of sensitive industry data.

Emissions-intensity values should be calculated using high quality data, with a preference for:

recent data, where it is available and of a sufficient quality

data that has been subjected to audits, and

data points derived using higher order methods, where there is evidence that lower order methods are less accurate at the facility level.

The emissions-intensity value should:

represent a sectoral average, based on data from facilities operating in Australia

- calculations should be production-weighted to account for different industry profiles, which may include different mixes of large and small facilities

take account of natural business cycles

- use multiple years of data to avoid setting a value on an unrepresentative year (for example, a year which includes a maintenance shutdown)

avoid outliers

- use the average of the median (or middle) data points, rather than the average of all data points, to automatically remove outliers (for example where a facility is under construction or in a ramp-up phase)

: this may not be necessary in sectors with a small number of facilities and/or no outliers;

protect data confidentiality

- average multiple data points, rather than using a single data point.

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DEFAULT EMISSIONS INTENSITY CALCULATION METHOD

Where possible, the following methods will be used to calculate default emissions-intensity values for each prescribed production variable.

This approach aims to develop emissions intensity values that are representative of a sectoral average and protect facility specific information.

In cases where this is not practical, alternative methods will be considered in consultation with relevant businesses.

Production-weighted median using five individual years of data

For each production variable:

- Calculate the emissions intensity of production for each relevant facility for the five years from 2012-13 to 2016-17 (that is, five data points per facility), in so far as this is feasible and data is of a sufficient quality.

Fewer years may be used if data is not of a sufficient quality. Some facilities or years may be omitted if the data is of a relatively poor quality.

Some facilities may be omitted from the calculation if emissions cannot be apportioned among multiple production variables.

Where practical, emissions could be apportioned in the same ratio used for calculating the Jobs and Competitiveness Program emissions-intensity values.

- Rank the data by emissions-intensity (including up to five data points for each facility).

- Determine the production-weighted, average emissions-intensity of around half the emissions intensity values closest to the median production unit.

Where practical, a minimum of 5 values, from at least 2 facilities should be used. If data is only available for a single facility, it should not be used without that facility’s agreement.

The data that is used for averaging should represent the median of the sector, but should not reveal protected information about any particular facilities.

In some cases the above approach may not be practical, for example where apportioning data between activities at a facility is not possible or where there are confidentiality issues. In these cases, it may be necessary to draw more heavily from previously apportioned data, such as that used for calculating Renewable Energy Target exemptions.

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Relevant facilities include Safeguard Mechanism facilities, and may include other relevant National Greenhouse and Energy Reporting Scheme (NGERS) facilities where data is of a sufficient quality.

Emissions data will be drawn from NGERS reports.

Production data may be drawn from NGERS reports, Renewable Energy Target data or other sources, including public reports and industry databases (for example, AME).

An illustrative example is provided below.

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Emissions-intensity calculation method: illustrative example

Record # (n)

Facility Year EI (t CO2e/ t prod.)

Production (tonnes)

Total production (%)

Cumulative Production (%)

1 A 2014-15 0.53 228,365 1.49% 1.49%2 A 2013-14 0.54 301,988 1.97% 3.46%3 A 2016-17 0.56 227,888 1.49% 4.95%4 A 2015-16 0.58 221,896 1.45% 6.39%5 B 2013-14 0.59 561,204 3.66% 10.05%6 B 2014-15 0.59 976,703 6.37% 16.43%7 B 2016-17 0.6 698,315 4.56% 20.98%8 B 2015-16 0.62 668,874 4.36% 25.34%9 C 2015-16 0.62 815,223 5.32% 30.66%10 A 2012-13 0.63 214,315 1.40% 32.06%11 C 2014-15 0.64 794,611 5.18% 37.24%12 B 2012-13 0.68 658,444 4.30% 41.54%13 C 2016-17 0.68 766,114 5.00% 46.54%14 D 2016-17 0.73 555,669 3.62% 50.16%15 D 2015-16 0.75 546,778 3.57% 53.73%16 C 2012-13 0.76 764,154 4.98% 58.71%17 D 2014-15 0.78 504,914 3.29% 62.01%18 E 2013-14 0.79 582,407 3.80% 65.81%19 C 2013-14 0.8 919,315 6.00% 71.80%20 D 2012-13 0.81 550,551 3.59% 75.39%21 D 2013-14 0.83 964,866 6.29% 81.69%22 E 2016-17 0.93 564,223 3.68% 85.37%23 E 2012-13 0.94 632,351 4.13% 89.49%24 E 2014-15 0.94 844,964 5.51% 95.01%25 E 2015-16 0.95 765,445 4.99% 100.00%

In this example, the records highlighted in yellow are the 10 records centred on the median production unit, five records above, and five records below (including the median production unit record). These records will be used to calculate the default value.

The default value is:

Default EI = ∑n=10

19

(EI x Production)

∑n=10

19

Production

= 0.729 t CO2-e / t production

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Continued

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Emiss

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Default CalculationProduction weighted median 10 facilities

Average production EI

Average facility EI

The graph shows emissions-intensity plotted by cumulative production for the example dataset. The proportion of production for the sector that contributes to the default value is indicated by the red dashed line. The emissions intensity default value is represented by the black line (0.729 tonnes CO2-e/ t production).

explanatory document: exposure draft amendments … · web viewin this example, facility b could...

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