‘Methodologically flawed’ (Part 4)—The ‘Safeguard’ Mechanism: Unsafe and Guarding Nothing

On Friday, the Federal Government released the latest round of emissions data. The data gives us the last quarter of the 2017/18 financial year. It’s a handy time to review the ERF’s safeguard mechanism.

Guess what? Despite the ERF, emissions are up again. Excluding Land Use, Land Use Change and Forestry—which you should if you’re examining any year more recent than half a decade ago—our emissions are at record highs. Again.

Red: Emissions in year one of the safeguard mechanism
Orange: Emissions in the second year of the safeguard mechanism
Dashed: 12-month rolling average.

In June, the Clean Energy Regulator released the first round of data on the operation of the safeguard mechanism. The safeguard mechanism’s job is to secure the emissions from our biggest emitters so that the country’s emissions don’t sky-rocket elsewhere at the same time. This data gave us all of the information we need to test the integrity of the safeguard mechanism in its first year of operation (FY 2016/17).

From that data, it’s not the least bit surprising that the national emissions are rising. They are going to continue rising, Paris Agreement be damned.

The baselines are set far too high.

While some emitters were caught by the safeguard, if emitters had pushed the envelope, and everyone had gone up to their baselines, our emissions would be 50 million tonnes higher.

To put that number in context, over the course of 13 years, the ERF’s crediting mechanism will purchase around 190 million tonnes of abatement on current contracts. Per year, the contracts will return around 14 million tonnes. Taken as a group, without attracting penalties under the safeguard mechanism, Australia’s large emitters can cancel any gains made by the ERF’s crediting mechanism more than three times over.

Another way of thinking about it is that 50 million tonnes is a 10% increase on the emissions of the highest emitting year in Australian history.

A ‘Secret ETS’?

Back when the Emissions Reduction Fund first kicked off, there was talk that the then Environment Minister, Greg Hunt, who wrote his honours thesis at Melbourne Law School on the merits of taxing pollution, was secretly trying to introduce a carbon price.

Some people, too-clever-by-half perhaps, pointed out that with strict baselines and room for shuffling credits, the ERF was looking a bit like a baseline-and-credit scheme. They were sort of right. It does have baselines and credits, but these aren’t held by the same people and that would make it a pretty unconventional trading scheme.

A normal baseline-and-credit scheme would involve baselines being set for emitters with these baselines reducing over time to a set schedule. Emitters that over-perform in reducing their own on site emissions can then sell the credit for any over-accomplishment to other parties who have not done so well over the period.

This is different to a cap-and-trade scheme. The latter scheme is preferred by most climate experts who haven’t given up on market-based solutions to the climate crisis. In cap-and-trade maximum emissions are set for the entire economy, or sectors of it, and it’s up to the emitters to sort out who gets what. For baseline-and-credit, every individual facility has a maximum.

The ERF and the safeguard mechanism were never designed to work that way. Specifically:

  • Baselines are not supposed to steadily reduce over time under the ERF’s safeguard mechanism;
  • Emitters don’t get credit for over-acheiving, so there is no incentive for positive behaviour; and
  • Credits almost exclusively come from other sectors, with no necessary connection between emitters and those who are avoiding or sequestering emissions.

Nonetheless, the ERF is still absolutely an emissions trrading scheme. It’s seriously unconventional, of course, and pretty dysfunctional but we are still trading in thin air for a climate purpose so, strictly speaking, Australia does have an ETS (Soz, LNP!).

The safeguard mechanism requires emitters responsible for more than 100,000 tonnes of carbon dioxide equivalent greenhouse gases per year to register for a baseline. Baselines are set in a number of ways and the big emitter must make sure they stay under the baseline each year. They don’t need to reduce their emissions, they just aren’t supposed to increase them.

Australia’s emissions

The total emissions for Australia are above, but let’s look at the emissions under the safeguard mechanism by sector. As above, red is the period covered by the first year of the safeguard mechanism, yellow the second, and dashed is a 12-month rolling average to make it easier to see trends among the seasonal fluctuations.

There are a lot of upward trends there. To put these into context, here are Australia’s annual emissions, excluding land-use, land-use change and forestry, from 1990 to 2017. Blue here indicates that the data is taken from our UNFCCC communiques (which is the only easy place to find data back to 1990), and orange indicates the most recent full year, where the data has not yet been made available through the UNFCCC’s data portal.

This chart is by calendar year, rather than quarter, so it won’t perfectly match the charts above, but is enough to give you the bigger picture. 

Blue: Data from Australian UNFCCC comminques
Orange: Data from Department of Environment and Energy quarterly updates

Up and up and up and up. That’s the story of just about everything if you limit yourself to the post-carbon price period. 

Ignoring LULUCF, our emissions were the highest ever in 2016 and higher again in 2017. Given the dearth of effective climate policy in this country, it would be a very brave person who expected that they would not be the highest recorded in 2018. Certainly the first half of the 2018 calendar year doesn’t look good.

Electricity is the one big exception. There, emissions are dropping as a result of renewable supply increasing and basic economics, with fossils being no longer being the cheapest form of new generation capacity. 

If it was properly designed, the purpose of the safeguard mechanism would be to arrest this growth.

The first year of the safeguard mechanism

In 2016/17, the first year of operation of the safeguard mechanism, the 128 companies caught by it (i.e. those with facilities emitting more than 100,000 tonnes of carbon dioxide-equivalent greenhouse gases per year) emitted 131.3 million tonnes of greenhouse gas. Australia’s total annual emissions of Australia’s 530.4 million tonnes. This means that the safeguard mechanism is covering around a quarter of all Australian emissions. For the other three quarters, there are no limits.

Thirteen emitters were responsible for more than half of the greenhouse gases covered by the safeguard mechanism. They were:

Responsible emitterEmissions
(tCO2-eq)
Baseline
(tCO2-eq)
Increase
potential
Woodside10,160,82626,045,398156.3%
Chevron Australia7,721,7718,338,4298.0%
BlueScope Steel6,291,56911,149,73777.2%
Anglo Coal4,915,2775,275,7877.3%
Santos4,830,1745,461,59213.1%
Alcoa4,577,8474,909,5397.2%
Qantas Airways4,362,4354,698,5107.7%
South323,785,1643,866,0682.1%
ConocoPhillips3,625,7884,351,03320.0%
BHP Billiton3,313,0044,871,76247.0%
Queensland Alumina3,284,2643,386,3043.1%
BM Alliance Coal Operations3,136,5284,473,58742.6%
Bulga Coal Management3,119,2823,988,56127.9%

Between them, these emitters had 49 separate facilities covered. In the year where Australia’s emissions were (temporarily) the highest ever recorded, on average these facilities could have increased their emissions more than one third (34.5%) before they met their baseline. Does this look like a mechanism that is effectively preventing emissions increases?

Again, this was the year with the highest emissions in Australia’s history.

And under the safeguard mechanism, those responsible for emitting one quarter of our emissions could have emitted even more. A lot more. Enough to increase the entire national emissions in the highest ever year by another 10% with no-one receiving a penalty. And there is nothing to prevent anyone else increasing their emissions. And there is no incentive for these large emitters to reduce their emissions.

The fact that anyone exceeded baselines this generous is incredible. They did. Sixteen of the 203 facilities covered by the safeguard mechanism exceeded their baseline in the first year of the safeguard. In total, they had to surrender ACCUs to an estimated approximate value of $4 million (probably less). Each of these facilities is a multi-billion dollar operation. These punishments are the sort of money that could be lost down the back of the couch.

Quite the safeguard…

 

Data sources

Australian emissions data

Department of Environment and Energy, Quarterly Update of Australia’s National Greenhouse Gas Inventory for June 2018.

UNFCCC data interface, Time series, Annex I.

Safeguard mechanism data

(Original source: Clean Energy Regulator, 2016-17 Safeguard facility reported emissions.)

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