Reducing greenhouse gas emissions: The Australian Government’s Safeguard Mechanism

The newest part of the Australian Government’s policy to reduce greenhouse gas emissions came into operation from 1 July 2016.

Called the Safeguard Mechanism, it allocates ‘responsible emitters’ reported baselines or gives them the opportunity to submit a ‘calculated baseline application’ where the proposed reported emissions baseline does not reflect a facility’s future emissions.

There are several unique requirements when applying for a calculated baseline including:

  • Forecasts: calculated emissions’ baselines are determined using only forecast information, so the baseline setting year must be in the future.  This introduces various complexities including forecast ‘reasonableness’ and ‘auditability’.
  • Criteria options: several calculated baseline criteria exist for responsible emitters including assessing their ability to adhere to the set criteria for the duration of the baseline period.

Below we highlight some of the key considerations that we have been involved with over the past few months as a number of responsible emitters submitted calculated baselines during this first compliance milestone under the safeguard mechanism.

Get into the game early

When considering a calculated baseline, organisations should note that the process is complex and will involve many stakeholders.  The inputs and business knowledge needed to plan for and develop an application requires involvement from management, commercial, financial, operational, technical and sustainability functions, as there is a greater onus on responsible emitters to provide information on operational matters, production forecasts and future plans.  Ensuring the correct personnel and subject matter experts are involved is crucial given the complexity and estimation required.

Planning should begin at least six months before submitting the application. It should achieve:

Understanding & commitment from your organisation as early as possible to ensure an efficient process.  Specifically this planning step should focus on:

  • Ensuring management clearly understand the business need for applying for a calculated baseline.
  • Assigning accountability and ownership of the application process to a team or individual.
  • Identifying all personnel within the business who will be involved and required to provide information to satisfy the application requirements.

Stakeholder engagement – Liaising with the Clean Energy Regulator (CER) and engaging early with an auditor can provide the additional support needed to streamline the process for responsible emitters.

  • Engage with the CER – communicate your intention to the CER regarding the organisation’s interest in submitting a calculated baseline application and obtaining the relevant application forms you will be required to complete.
  • Engage an accredited external auditor – engage a Category 2 Registered Greenhouse and Energy Auditor (RGEA) and understand what information will be required by the auditor.

Review the disclosure of information – Once a facility is issued with a baseline determination from the CER, the details are published on the CER’s website. This includes the facility’s baseline numbers, as well as the facility and responsible emitter’s name and ABN/ACN.  If this information is considered commercially sensitive there is an option to apply to the CER to have certain information exempt from publication.

An audit trail needs strong evidence including site maintenance and turn-around activities, contractual arrangements with suppliers and customers, forecasts and assumptions regarding market conditions, as well as the reasonableness of production and operational forecasts, and other matters impacting the future of facility operations and its emissions’ intensity.

The challenging combination of complex and new

It is important to understand the legislation to select the most suitable approach for a facility.  Some of the critical and more complex matters identified during our audits included:

Forecast production information – Production forecasting within organisations is often a well-established process, although complex, and is used to inform a number of business decisions.  Understanding the process for an individual facility applying for a calculated baseline is important as there are many factors to consider that could require additional work or interpretation.   For example:

  • Timing for forecasts: when are they approved within the business and are they current and reflective for the forecast period?
  • Forecasting accuracy: how have historical forecasts compared with actual results?
  • Forecast periods: is it based on calendar year or financial year and do they reconcile with the application periods?
  • Frequency of forecast revisions or updates: how often are forecasts revisited and how might this impact the timing of a facility’s application submission?

Identifying a facility’s primary and other production variables – On face value it may be obvious what product (or products) a facility produces, however when submitting an application, facilities may be required to identify variables that are not necessarily their main output.  This is outlined in section 5 of the Safeguard Rule. For example:

  • Production variables can either be an input or an intermediate product at a facility
  • Where a facility produces more than 25,000MWh of electricity, this must be reported as a separate production variable
  • If an Emission-Intensive Trade-Exposed activity is undertaken, a facility has the option of reporting it as production variables.

Subject to satisfying the criteria in section 5 of the Safeguard Rule, a facility may have more than one option to consider when identifying production variables. Where more than one variable is identified for a facility, there is a requirement to apportion a facility’s emissions across each of these variables.  This can be particularly complex where production processes are integrated and it isn’t easy to allocate certain emissions generating activities to one or more production variable.

Clear and auditable supporting evidence is crucial

There are a number of components in the application form, and it’s not a ‘one size fits all’ approach.

Basis of preparation – The application requires that a detailed document (e.g. a Basis of Preparation) be submitted to the Clean Energy Regulator to explain the approach for arriving at the Calculated Emissions Baseline number.

It is a good idea to have clear process and data maps to support the underlying application. The specific requirements are outlined in Part D (the ‘calculated baseline information’ section) of the application form.  This document, or set of documents should:

  • Clearly address each of the CER’s requirements
  • Contain sufficient detail that articulates the basis of a facility’s approach and information underpinning the estimate
  • Be subject to an internal QA/QC processes to ensure quality and to verify the accuracy of information, data and statements
  • Ensure the source information underpinning the assumptions, forecasts and other key matters referenced in the ‘Basis of Preparation’ is available for auditing.

Assumptions underpinning estimates – Developing forecasts will invariably require some estimation as well as reliance on certain assumptions.  Together these hold a degree of uncertainty which needs to be understood and managed such that the estimates developed are reasonable.

Assumptions can include those inherent within a forecasting process or model as well as operational assumptions, e.g. timing of maintenance or shut-downs, production quality, equipment availability, utilisation and downtime, and customer demand amongst others.

Having an awareness of the sensitivity of key assumptions and testing the impact of these assumptions will support the development of forecast information.  Those assumptions which have a greater impact on the final forecast information (i.e. the most material assumptions) should be the focus when gathering supporting information to attach to a facility’s application form.

In summary

It is important to be aware of your obligations and options under the safeguard mechanism as early as possible so that you can best prepare your facilities for their ongoing emissions management needs.

If you are considering adjusting the reported baseline issued to you by the CER, the next application submission dates are 30 July 2017 and 31 October 2017.  Depending on the forecast year selected for calculating your facility’s baseline, your application (along with supporting documentation and mandatory audit report) may be submitted anytime up to these dates.

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