Reforming the Safeguard Mechanism: Will the changes hamstring mining?

Emissions regulation will bring Australia closer to international standards. Credit: Geckoz via Shutterstock.

Reforms to Australia’s Safeguard Mechanism Scheme (SMS), which legislates on emission limits or baselines for industry, came into effect on 1 July. The SMS was first introduced by the government in 2016, but the reforms, which received cautious approval by the ‘green lobby’ in parliament, were only agreed after much haggle and debate with all the various stakeholders. They received cautious approval from environmentalist politicians, particularly from the Green Party.

But the government was forced to pay a price for this support, placing dozens of gas and coal projects  in the firing line. Green MP Adam Bandt described this triumphantly: “Coal and gas have taken a huge hit. The Greens have stopped many of the 116 new gas and coal projects in the pipeline from going ahead, pollution will actually go down, and we’ve derailed the Beetaloo and Barossa gas fields.”

So what will these reforms mean for the people who work on these fields?

Following the reforms, mine facilities will need to reduce their emissions over time, measured by comparing a 5-year rolling average. “From 1 July 2025 the rolling average of Safeguard-covered emissions over the previous 5-years are required to be lower than the 5-year rolling average from three years earlier; and from 1 July 2027, the 5-year rolling average of Safeguard covered emissions is required to be lower than the 5-year rolling average from two years earlier,” the Department stated.

Facilities can purchase and surrender domestic offsets in the form of Australian Carbon Credit Units (ACCUs) to meet their compliance obligations at a fixed price of $75 in 2023-24. An ACCU represents one tonne of emissions avoided or sequestered, so surrendering an ACCU reduces a facility’s net emissions by one tonne, in the eyes of the Safeguard mechanism. A cost containment measure is also included, limiting prices in line with the Consumer Price Index, plus 2%, each year. This measure is intended to prevent excessive prices and to provide certainty to facilities on the maximum compliance costs they would face. However, this measure will only be available for Safeguard facilities and only where they have exceeded their baseline.

There is also a civil penalty to reflect both the number of days exceeding emissions limits and the quantity of excess emissions. This year, the maximum civil penalty will be set at A$275 per tonne of excess emissions per year. All these measures will be reviewed by the government in 2026-27 to ensure they are appropriately calibrated. This next review will consider, among other things, the initial impacts of resetting and declining baselines, including the costs and availability of domestic offsets; the appropriate treatment of international units; the suitability of arrangements for emissions-intensive, trade-exposed activities and; whether the cost containment measure is sufficient.

Australia’s mining sector has understandably greeted the reforms with a measure of concern. Emission limits on each mining facility will now be based on a combination of each facility’s historic emissions and an industrial average component. But, exactly how the industry average will be defined remains contentious.

It is also clear there are going to be “winners and losers” from the change, with open-cut mines likely to be among the winners. Underground mines might see higher taxes, modelling from analysts at Wood Mackenzie suggests, since these tend to be much more emissions intense than open cut mines. Under the scheme, high-emissions mines will need to purchase Safeguard Mechanism Credits against their excess emissions. A significant portion of Australia's open cut mines are expected to receive credits from the scheme every year to 2030. Emissions-intensive underground mines, though, will be subject to significant costs.

Despite the concerns expressed by some miners, politicians are adamant that reform was needed. Climate change and energy minister Chris Bowen posted on social media that the reforms will “ensure Australian industry will continue to be competitive in a decarbonising global economy. This will help Australia reach our emissions targets […] and will achieve an additional 205 million tonnes of emissions reductions.”

Domestically, but more so among Australia’s trading partners, there is widespread recognition of the need for immediate emissions action. Fiona Hancock, Oceania climate change and sustainability services partner at consultancy EY, described this as “directly impacting the roughly 215 facilities that account for 28% of Australia’s emissions”.

An article by Matt Sprague, associate director at Swiss carbon finance consultancy South Pole, says that Australia's mining sector now “has the opportunity to be part of the solution as we transition to a net zero future.” The consequences for the country, should its mine sector fail to transition, he says, are stark. Mining is a key source of income for Australia, generating around A$455 bn of revenue from exports in the 2023 financial year. But to be consistent with a net-zero 1.5°C warming pathway, global coal production must decline each year by around 11%. This amounts to a total phase out of unabated coal power by 2040.

Because mining companies also produce key minerals and metals that can support the transition to a decarbonised economy, Australia's mining sector is well placed to be part of the solution. However, understanding that there is a delicate balance between climate impact and decarbonisation of the resource sector is the key to ensuring the future success of the mining industry. This balance is challenging because although the Australian government has set a long-term net zero target of 2050, both state and federal governments continue to support new fossil fuel projects.

Investors and stakeholders, meanwhile, also pile the pressure on fossil fuels. Thermal coal has been the first to feel the heat, but pressure will intensify with the launch of the Global Investor Commission on Mining 2030. This will introduce sustainability standards across the mining industry. According to South Pole, mandatory reporting also lies on the horizon, with the Australian government announcing its intention to align their mandatory sustainability reporting requirements with the International Sustainability Standards Board's (ISSB). In June it released its first two standards: the IFRS S1 and S2.

The ISSB is a voluntary standard, and applicability depends largely on adoption timeframes in specific jurisdictions. IFRS S1 defines the requirements for companies to communicate their sustainability-related risks and opportunities. IFRS S2 sets out specific climate-related disclosure requirements, covering greenhouse gas emissions, transition plans, the impacts of climate risks using scenario analyses, and mitigation/ adaptation plans. Canada, Hong Kong, Singapore and the UK have already announced intentions to align their mandatory sustainability reporting requirements with the ISSB. “The standards will apply to annual reporting periods starting from January 2024, with companies issuing disclosures against the standards in 2025,” says South Pole.

From 2024, the ISSB will also take over the monitoring of progress on companies reporting against the Task Force for Climate-related Financial Disclosure (TCFD). Meanwhile, IFRS S2 adopts an identical structure to that of the TCFD: strategy, risk management, and metrics and targets. But in some areas, it also goes further. IFRS S2 would require mining companies to understand their climate impacts and risks under a range of scenarios. Those already reporting under TCFD will likely see more scrutiny over the scenarios modelled, as investors increasingly look to these reports to understand the long-term risk of their investments. If mining companies do not transparently disclose their risks and impacts, then they may face greater scrutiny from both regulators and investors.

These domestic net zero targets mark an attempt to catch up with net zero goals abroad, but remain far behind the pace of emissions tariffs in international trade. As Australia's top trading partners seek to decrease their emissions, they will want to reduce their reliance on Australian businesses benefitting from Australian coal. According to the World Bank and other sources, at least 80% of Australia's thermal coal by value is currently heading to countries with net zero targets. While the country’s A$71.7bn of thermal coal exports may be at risk, South Pole argues that the benefit of transitioning to alternative products “may support the financial and environmental performance of mining companies in the long run.” Many large mining companies, including BHP, Rio Tinto and Glencore, have set net zero or carbon neutral targets although most stop short of including scope 3 emissions.

Years of under-investment and a skills shortage have already placed Australia’s mines under pressure, and the reforms will tighten the tension on underground mines in particular. Many mines survive on tight margins, and if the additional costs prove to be too onerous, then the early closure of the most emission-intensive facilities is a very real possibility. So the big question is: will the additional costs that will be incurred under the Safeguard Mechanism Scheme reforms tip underground mines over the edge?