The federal government says new rules for the "safeguard mechanism" will begin in July.
But what is the safeguard mechanism?
Why does it need changing?
And what do business groups, climate experts and green groups think about the government's changes?
What is the safeguard mechanism?
This week, the federal government released a position paper on its proposed changes to the safeguard mechanism, which is a central component of its climate change policy.
The safeguard mechanism was established by the Abbott Coalition government in 2016 as part of its Emissions Reduction Fund.
But it has been ineffectual, with industrial emissions increasing during its operation.
The Albanese government wants to revamp it so it actually drives down emissions and helps Australia meet its climate targets.
As things stand, the mechanism applies to industrial facilities that emit more than 100,000 tonnes of carbon-dioxide-equivalent covered emissions a year. They are the largest polluters in the country.
About 215 industrial facilities meet that definition.
As a group, they account for almost 30 per cent of Australia's total greenhouse gas emissions.
Under the original mechanism, those big polluters were supposed to keep their net emissions below an emissions limit (a baseline), and if they produced emissions above their allowable limit they were supposed to take actions to drive their emissions down.
To help them do that, they could purchase Australian carbon credit units (ACCUs) and hand them to the government.
But critics say the emissions limits were artificially high.
And the carbon credit scheme proved controversial, with a recent review of the scheme making 16 recommendations to improve it, all of which the Albanese government has accepted "in principle".
Big changes to the safeguard mechanism
But the government wants to do more than just tinker with Australia's current carbon credit arrangements.
It wants to overhaul the safeguard mechanism framework to make it much more effective at driving down emissions.
To do that, from July this year it will begin gradually reducing the emissions limits (the baselines) that big polluting facilities are allowed to produce each year.
That's going to force the facilities to cut more of their emissions every year to stay under their baselines, helping to put them on a path to net zero emissions by 2050.
The government also wants to introduce a new kind of carbon credit to the scheme: Safeguard Mechanism Credits (SMCs).
It says a big polluter will be able to earn those new "credits" by emitting fewer emissions than their baseline allows. And businesses that earn those credits will be able to sell them to higher-emitting facilities that are struggling to cut their emissions below their own baselines, which will help those higher-emitting facilities to reduce their net emissions.
Overall, the federal government will be reducing the emissions baselines for big polluters by 4.9 per cent each year up to 2030.
The table below shows the proposed schedule for the reductions in emissions baselines, using 2022 as the base year.
By cutting the emissions limits by roughly 5 per cent a year, it means Australia's heaviest-polluting facilities will have to reduce their annual emissions by roughly 30 per cent by 2030.
What about carbon tariffs?
The government's changes to Australia's carbon rules don't stop there.
It says it will also consider introducing European-style carbon tariffs on some imported goods so Australian manufacturers can remain competitive after its new carbon rules kick in.
The EU has imposed tariffs on imported goods such as steel, cement and fertiliser to prevent European industries being undercut by competitors with weaker climate laws.
Some of Australia's industry groups have raised concerns about those types of tariffs, and the government has been listening.
"We've taken on board that feedback and said, 'Yes, this is something we should look at alongside all the other options available to government to ensure that, now that Australia has a decent climate policy, Australian industry is guided on that,'" Energy Minister Chris Bowen said this week.
"And just as Europe has gone down this road, Australia will consider its options alongside other options."
Some concerns have been raised
However, regarding the changes to the safeguard mechanism proper, experts say they're worried the government's new framework still won't be tough enough to drive Australia's absolute emissions down hard.
For one, they say the government's preferred method for calculating emissions baselines for heavy-polluting facilities is still problematic.
The federal government says it doesn't want to be too prescriptive with its baseline calculations so it won't adopt "absolute baselines" that fix hard carbon limits on Australia's big polluters.
It says it wants to retain flexible baselines to give facilities room to increase production without being penalised.
But that will have consequences for emissions, experts say.
"The government's proposal to continue with individually tailored "production-adjusted" emissions intensity baselines mean industries can expand without facing increased costs," said Rebecca Pearse from the Australian National University.
"For example, let's say a new liquefied natural gas plant expands its output to meet international demand. Then, the overall emissions baseline for the plant will also increase because the baseline is measured as emissions per tonne of gas produced. If enough producers do the same, the overall carbon budget will be broken."
And that's just one area of contention.
Another area of concern involves the safeguard mechanism's use of carbon credits and offsets to buttress the system.
The United Nations has been calling on policymakers to prioritise making cuts in absolute emissions by 2030, saying offsets should be used sparingly because they're too easily used by corporates and governments to greenwash their net-zero achievements.
Andrew Macintosh and Don Butler from the Australian National University, who raised concerns last year about Australia's existing carbon credit scheme, said they couldn't fathom how the recent review of the scheme found the arrangements were "essentially sound".
But nevertheless, they said they welcomed the recommendations to improve the current scheme because all carbon credit systems needed integrity to work properly.
"Measures should be taken to prevent low-integrity credits being issued to existing projects," they advised this week.
"And polluting facilities should not be allowed to use low-integrity credits to meet their emission reduction obligations."
Responses from green groups?
Green groups say the proposed changes to the safeguard mechanism will improve the system.
But they've still raised concerns about the government's use of carbon credits and offsets, warning companies might be able to exploit the flexibility in the new system to keep polluting at dangerous levels.
Australian Conservation Foundation:
Gavan McFadzean, the ACF's climate change program manager, said unlimited carbon credits and offsets could undermine the entire project.
"This redesign significantly improves on the Coalition's safeguard mechanism in several respects, but we can’t offset our way to net zero," he said.
"Unlimited offsets allow big, publicly listed companies like Woodside, Glencore and Santos — which have done more than enough climate damage already — to pay to keep polluting."
Greenpeace:
Glenn Walker, Greenpeace's head of advocacy and strategy, said emissions baselines for new facilities entering the scheme ought to be set to zero if we're to be serious about reducing emissions.
"Massive new entrant gas projects like Woodside's Burrup Hub could blow Australia's emissions baseline out of the water under the current policy proposal," he warned.
"This places an unfair burden on other Australian businesses and sectors, which would need to do more heavy lifting to reduce emissions."
Climate Council:
Jennifer Rayner, the head of advocacy at the Climate Council, said cutting down the artificially high emissions caps that existed under the original safeguard mechanism was a welcome step.
"However, allowing facilities in the safeguard mechanism to use cheap and easy offsets to write off all of their emissions will send completely the wrong signal," Dr Rayner said.
"This will simply incentivise Australia's heavy industry to engage in tricky carbon accounting to cover up pollution as usual instead of investing in genuine transformation."
Responses from industry?
Business groups have broadly welcomed the government's changes to the system, saying they will finally provide certainty for businesses.
Australian Industry Group:
Innes Willox, the chief executive of Ai Group, said the changes looked manageable and should keep Australian businesses competitive.
"What these proposals do is give industry the framework to work with now and perhaps much greater sense of certainty around direction of policy," he said.
"We didn't want to have a system in place that would lead to closure, to offshoring very quickly. We think industry can work with this."
Business Council of Australia:
The BCA said the changes were a measured step and would provide certainty for businesses.
"[But] the final design of the safeguard reforms will require ongoing consultation, recognising that for some businesses the transition will be more difficult because the necessary technology is still to be developed," it said.
Australian Chamber of Commerce and Industry:
David Alexander, ACCI's chief of policy and advocacy, said the government's move towards production-adjusted baselines set on a facility-by-facility basis was a good one.
"This recognises that the emissions-reduction effort for some facilities is more difficult than others due to location, the nature of production and the current technologies installed at each site," he said.
"The safeguard mechanism needs to be structured so that facilities are encouraged to lower their emissions intensity, not simply cut production in order to meet targets."
Minerals Council:
Tania Constable, chief executive of the Minerals Council of Australia, said she still had some concerns about the overall cost of compliance under the scheme.
She also wasn't sure if the new system would allow Australian businesses to remain competitive with overseas rivals.
"[But] our industry is taking a very constructive approach to the proposed changes," she said.
The federal government is now seeking feedback on its proposed changes to the safeguard mechanism, with the feedback period ending on February 24.
Its new rules will begin in July.
