Safeguard mechanism changes need to maintain export industry competitiveness

Additional price risk management measures must be included in any changes to the safeguard mechanism to prevent excessive costs, damaging volatility or predatory price speculation and other forms of behaviour that would cost jobs and exports in Australia’s mining industry.

This is a key recommendation made in the MCA’s submission to the Department of Climate Change, Energy, the Environment, and Water Securing Safeguard Mechanism Reforms Consultation Paper.

The absence of a stronger measure threatens the industries Australia relies on for economic recovery and growth by undermining international competitiveness.

The MCA and its members have a strong commitment to climate action, supporting the Paris Agreement and an industry ambition of net zero by 2050.

But this vital task will be undermined is a risk mechanism is not in place to ensure that any price generated by the scheme is sufficient to support emissions reductions but not if so high that it impacts jobs and economic growth.

The government must include an additional pathway, similar to the Renewable Energy Target (RET) shortfall charge or price cap in other international schemes, for facilities to satisfy compliance obligations and manage upside price risk by paying per tonne of CO2-e. This is in addition to including the proposed safeguard mechanism credits, and the existing carbon credit systems (Australian Carbon Credit Units), and international credits.

A form of price risk management occurs in comparable international schemes and would be in addition to the mechanisms proposed in the consultation. While the proposed changes have various design features to help facilities operate within their baselines, facilities will still be exposed to high compliance cost risk as the proposed changes to the safeguard mechanism will leave the carbon market attractive to speculators.

In particular, unlike comparable carbon schemes in other jurisdictions and sectors, the proposed changes will leave safeguard mechanism facilities who are unable to reduce their emissions below their baseline allowance exposed to upside price risk. The MCA also made several other recommendations including:

• The scheme design minimises the risk of carbon leakage in the form of both production and investment leakage
• Existing SGM facilities should not be competitively disadvantaged against new entrants due to the baseline approach taken
• The government should allow flexibility for facilities to choose between using facility specific production-adjusted baselines, facility specific fixed baselines, or industry average production adjusted baselines
• The government should provide certainty that baselines will not be declined ahead of any supporting legislation needed to enact cost management measures contained in the consultation paper such as safeguard mechanism credits, and
• The need for reform of federal, state and territory emissions approaches to ensure a least cost approach to achieving the 2030 target. Safeguard mechanism-covered facilities should be exempted from additional state based emissions reduction obligations.