A fresh outbreak of Australia’s climate wars is threatening to sabotage the Albanese government’s policy to revise the Safeguard Mechanism to meet its legislated 2030 carbon emissions reduction target.

It’s a depressing development. Here’s how we got here.

The Safeguard Mechanism was introduced in 2016 by the Coalition government. Having axed the Gillard government’s carbon price, it introduced the Emissions Reduction Fund as its central climate change policy tool – the government would directly fund projects to reduce greenhouse gas emissions. It would do this by buying Australian Climate Change Units created by such projects.

The Coalition government saw a risk that these reductions could be eroded by increasing emissions elsewhere. Therefore, it introduced the Safeguard Mechanism to contain emissions growth from large industrial activities such as coalmining and heavy manufacturing that produced annual emissions of more than 100,000 tonnes. Baseline levels of emissions were set for individual facilities with the idea that they would need to stay below those baselines or buy ACCUs themselves to offset any gap. At the time, Greg Hunt as environment minister, rejected criticisms that the policy was environmentally weak. He emphasised the emissions budget could be progressively tightened throughout the 2020s and through to 2050.

In the world of political reality, the Coalition’s actual design allowed emissions to rise and never lowered baselines. It therefore never realised its objective, although a small number of businesses met their above-baseline obligation by buying and acquitting ACCUs.

The Labor government now plans to revise the Safeguard to realise that original ambition and align the lowering of baselines with its legislated carbon budget to 2030. Its core design has been widely supported by business groups as the best option to create investment certainty and lower emissions at low cost. The government needs to legislate the change and that means securing the support of the opposition or the Greens plus two other senators.

Any expectations of a new era of climate policy peace have been firmly dashed. The opposition refuses to support the proposal – even though it is based on its own policy. The Coalition’s claim that Labor has turned its incentive-based carrot into a tax-based carbon stick ignores the facts of the original design and Labor’s reforms. And concerns about direct impacts on household expenses are likely to be vastly overstated. The effective carbon price is well below $20 a tonne across the next seven years.

Enter the Greens, from stage left. As with other stakeholders, the Greens have several concerns with the design of the revised Safeguard. Their latest position is to support legislation for the proposed design, but only if the government bans any new coal or gas development. Their objection seems to be based on the notion that such developments will add to emissions, blowing Australia’s carbon budget. This sounds superficially like a good idea, but it’s not.

Labor’s proposal sets a carbon budget to 2030 for the sector covered by the Safeguard. The emissions from any new project would have to be contained within that budget. The argument therefore is not about increasing emissions but about who would get how much of the limited budget. Rather than seeking a ban, the Greens should push the government to fix the budget in law and seek concessions elsewhere in the Safeguard design.

Independent senator David Pocock and some environmental groups have taken a different approach, arguing that emitting businesses should not be able to buy their way out of their Safeguard obligation by purchasing ACCUs. Instead, the businesses should be required to reduce their own emissions, at least to some minimum level.

Pocock is right to say that emissions reductions are preferable to offsetting to limit the risk of making climate change worse. But limiting the use of offsets increases costs and could have perverse consequences, including pushing up global emissions, and failing to reduce emissions within the Safeguard. A better approach would be financial support to close the cost gap on new, lower-emission technologies, to encourage their adoption rather than use offsets.

Here’s the bottom line. The government’s proposal is, overall, a reasonable starting point and the core positions should not be softened or delayed. However, the detailed design carries significant risks that the carbon budget will be exceeded, or the cost of the Safeguard will escalate significantly. The emissions decline rate may not be enough to account for emissions growth, and the allocated funds to support emissions reduction activities may be nowhere enough.

In defiance of the 2022 election result and the pleas of the business lobby, the opposition may stick to opposing as a pathway back to government. Labor may stick to its design and dare the Greens to stand in the way. The Greens may once again deny the good in search of the perfect.

Business wants certainty and Australians are climate war-weary. The revised Safeguard Mechanism is not first-best policy. But the weaknesses can and should be addressed so it can do the job that was always intended.

Good politics is the art of compromise. Failure would be a pox on all their houses.

Tony Wood

Energy and Climate Change Program Director
Tony has been Director of the Energy Program since 2011 after 14 years working at Origin Energy in senior executive roles. From 2009 to 2014 he was also Program Director of Clean Energy Projects at the Clinton Foundation, advising governments in the Asia-Pacific region on effective deployment of large-scale, low-emission energy technologies.

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