Australia will have a carbon price for industry, and could lead to more climate action across the economy

Australia is about to take a big constructive step on climate change policy: we will have a carbon price for the industry sector, under the safeguard mechanism.

It comes nine years after the Abbott coalition government scrapped Labour’s carbon price. The protection mechanism has been dormant for many years – legislated in large parts under the coalition government, but has remained so inactive because of how it is implemented.

The mechanism will become effective as the so-called “Basic and Credit Plan”, set by A price signal About 30% of Australia’s greenhouse gas emissions. It would create a huge financial incentive to reduce emissions in the industry, although it also depends on terrestrial carbon offsets.

Under this week’s parliamentary settlement between Labor, the Greens and some members of the House of Representatives, the legislation will state that total emissions from industrial facilities covered by the scheme cannot rise over time.

Implementation of the safeguard mechanism bodes well for future climate policy in Australia. The policy does not have bipartisan support, but Dutton’s opposition is not vocal about it.

It could be the basis for extending sensible economic climate policy tools to other parts of the Australian economy and broadcasting greater climate policy ambition throughout.

How will the protection mechanism work?

The protection mechanism applies to 215 of the largest emitters of greenhouse gases in Australia. It requires them to keep their net emissions below a certain limit, known as a baseline.

Facilities under the scheme include gas extraction and processing coal mines, steel, aluminum and cement production plants, and more. Most importantly, exclude the electricity generation sector from the scheme.

The protection mechanism covers a smaller share of the economy than the Gillard government’s carbon pricing scheme, which ran from 2012 to 2014. This scheme also covered the electricity sector and some other emissions.

But the price of trading emissions credits under the protection mechanism is likely to be much higher than under the previous scheme. It will be capped at A$75 per ton, with that cap rising over time.

The higher the price, the stronger the financial incentive to reduce emissions, such as investing in low-emission processes and equipment.

Under the scheme, the baseline for the facility is determined depending on the emissions intensity of the commodities they produce and the amount of product they manufacture.

The new facilities will have lower baselines, reflecting international best practices in production. The federal government will issue credits to facilities that remain below baseline emissions. If a facility exceeds its baseline, it must cover the excess by purchasing carbon credits – either from other facilities, or from outside the scheme.

Credits are traded at the market rate. This creates a financial incentive for everyone in the scheme to cut emissions – either to save money or to make money. In this way, it works like an emissions trading scheme.

But the scheme will not be a source of revenue for the government. This was seen as a political necessity, but also a missed financial opportunity.

Great role for compensation

The emissions baselines will be under the safeguards mechanism drop by approximately 5% each year. It is estimated that net emissions from facilities under the scheme will fall from the current 143m tonnes of CO2 – the equivalent of 100m tonnes in 2030. An appropriately steep rate of reduction, considering that industry emissions are slowly rising .

But utilities will be allowed to emit above declining baselines, if they offset the increase by purchasing Australian Carbon Credit Units (ACCUs). These carbon credits are created through projects in agriculture, forestry, and land use. The idea is that emissions reductions that cannot be achieved in industry will be achieved in the land sector and paid for by industry.

There is no limit to the number of offset credits an offset credit industry can use to comply with its baselines. This is unusual for carbon trading schemes internationally. It provides maximum flexibility but also creates a security vulnerability. A large share of total targeted emissions reductions could come from offset credits.

Australia’s carbon credit system has been accused of not delivering real reductions in greenhouse gas emissions in some cases. For example, some offset projects may be awarded credits for outcomes such as local vegetation growth that might occur anyway.

The carbon credit scheme will be tightened in accordance with the recommendations of Chubb’s review. But doubts will inevitably remain about whether all the credits represent real emissions cuts.

The revised protection mechanism will create new demand from the industry for offset credits. This will encourage new offset projects, possibly at higher prices.

However, the ACCU mechanism always excludes many emission reduction options. Additional policy efforts will be needed to reduce emissions in agriculture and forestry – as well as in the transportation, construction and electricity sectors.

The future of coal and gas

The Greens sought a ban on new coal and gas projects in exchange for support for the Protection Mechanism Bill. Will politics achieve this? No, although it will make the investment case more difficult for some fossil fuel projects.

For coal and gas production projects, the mechanism only applies to emissions that arise during coal mining and gas extraction and processing. It does not apply to emissions produced when fuel is burned for energy, except when the fuel is used by another facility under the mechanism.

So the policy would create a financial incentive to disincentivize fossil fuel projects that produce a lot of emissions on site – for example, gassed coal mines and extraction of leaky gas. But it is not penalized for the fact of fossil fuel production.

So what about the amendments negotiated by the Greens – in particular, the emissions “cap”? This means that, by law, the total emissions covered by the mechanism must decrease over time, assessed over five-year periods. The Minister will need to be satisfied that the overall emissions target in the legislation will be met, and may need to change the rules in the future if necessary.

This is a kind of guarantee on the protection mechanism. But it falls short of stopping the mining of new coal and gas production. It will only tend to limit new coal mines and gasfields that have high emissions to production – and these face financial disincentives under the safeguards mechanism anyway.

In any case, expansion of coal and gas production is unlikely. Coal demand will drop sharply in Australia as coal-fired power plants are replaced by wind and solar power, international coal demand forecast back off. No expansion of Australia’s gas export industry is on the cards; The question is mostly about replacing the gas fields that have been carried out.

The question remains of how to prepare for the inevitable long-term demise of the fossil fuel industries, including whether Australia should somehow restrict fossil fuel production for export. The protection mechanism, however, is not the policy to deal with that.

I look forward

The protection mechanism will create strong incentives for large industrial emissions to reduce emissions. It lays the foundations for a cleaner and more efficient industrial sector in Australia.

It positions Australia as an international industrial competitiveness in the future. It will help to avoid Trade sanctions For imports from countries that do not have a similar carbon policy. It would give an advantage to low-emission production – the only viable species in a climate-changing world.

The protection mechanism might also pave the way for carbon pricing outside of the industrial sector – perhaps with money flowing into government, rather than as a revenue-neutral scheme. More policy efforts at the federal level across the economy will be needed to complete Australia’s transition to net zero emissions.

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