Back Winners Not Losers – IGCC Submission on Safeguard Mechanism Reforms

23 September 2022

Download the Full Submission to The Initial Consultation on Safeguards Mechanism Reform

Executive Summary Of The Submission

Relevance for Institutional Investors

IGCC represents investors with total funds under management of more than $3 trillion in Australia and New Zealand and $30 trillion around the world.

Safeguard changes are relevant to investors because:

  1. Institutional investors have the capital to finance a clean energy economy. As the long-term custodians of trillions of dollars in retirement funds, investors have a fiduciary duty to deliver long-term returns for their beneficiaries. Unless climate change is addressed in an orderly and just way, the long-term retirement savings of millions of Australians are under threat.
  2. Many of IGCC’s members have significant exposure to climate risk via their listed equities and fixed income portfolios. This includes their part-ownership of companies that are covered by the Safeguard Mechanism.
  3. Australia’s economy is the most emissions intensive in the OECD exposing the economy to relatively high climate-related transition risks including that of stranded assets.
  4. Emissions from industries covered by the Safeguard Mechanism continue to grow:
    1. offsetting emissions reductions achieved in other sectors
    2. making it harder for the overall economy to achieve emissions reductions goals, and
    3. increasing climate-related investment risks across the financial system
  5. The Safeguard Mechanism covered some of the industries and sectors that will be critical to ensuring an orderly and just transition to net zero emissions and limiting climate damages above 1.5oC. Achieving these outcomes will require significant investment and support from institutional investors.

A Reformed Safeguard is Essential to Australia’s Competitive Advantage

IGCC supports the Government’s intention to use “the Safeguard Mechanism to deliver emissions reductions consistent with Australia’s Nationally Determined Contribution under the Paris Agreement and strengthen Australia’s competitiveness in a decarbonising global economy.”

The biggest climate-related transition risk to Australia stems from not positioning our economy to be prosperous in a net zero world. Policies that support the widespread dissemination of carbon price signals will incentivise investments into emission reductions across the economy and increase out competitive advantage overall.

In this context, IGCC notes the Government intends to exclude electricity emissions from the current round of Safeguard Mechanism consultations. In future, the role of the Safeguard Mechanism in the National Energy Transformation Partnership to promote an orderly and just transition to new zero emissions in electricity sector should be considered.

The role of the Safeguard in a 1.5oC world

Deciding upon the Safeguard Mechanism’s optimal share of climate targets relies on the Government having set both national emissions goals and sector-by-sector goals to align with the overall long-term emission reduction target (e.g., limiting damages above 1.5oC). Therefore:

  • In the absence, of clear and transparent sectoral goals to achieve long-term national goals, Phase I share should be aligned with a linear reduction from 2020 emissions to a 43% reduction by 2030.
  • Phase 2 and future shares should be based on advice from the Climate Change Authority on clear 2030, 2035 and 2040 policy goal posts for all sectors and be aligned with limiting climate damages from global warming above 1.5oC
  • New entrants should be captured under this sectoral share to avoid shielding them from the national task and passing on costs to the rest of the economy.

Reforms should ensure that that, by default and at a minimum, emissions baselines decline to 0 by 2050. These longer-term indicative baselines would provide visibility of future climate risks and opportunities and support early investment in low and zero emissions upgrades and projects.

Baselines, flexibility mechanisms and offsets

On other specific questions, IGCC recommends:

  • Baseline type: Build on industry production adjusted (intensity) baselines
  • Headroom: Immediate removal
  • Backing and borrowing: Facilities should be able to bank and borrow emissions within the phases of the scheme. There should be no overlap from one period to another
  • Offsets: Facilities should not be able to generate Australian ACCUs once the safeguard system is in place. Role of international units should be reviewed in future

Emissions Intensive Trade Exposed industries

Shielding unsustainable operations and sectors from the Safeguard Mechanism and overall emissions reduction targets will increase Australia’s overall cost of achieving emissions reductions and will push effort onto other sectors of the economy.

Therefore, any transitional competitiveness measures should:

  • focus on those industries that have a clear future in an Australian net zero emissions economy (e.g., renewable energy, critical minerals, and green steel, hydrogen and aluminium)
  • not be provided to industries that will decline in a net zero economy, such as coal and LNG. Support towards these sectors should be limited to the development of near-zero emissions technologies and collaboration to support a just transition for affected employees and communities.

In this context none of the proposals to address EITE’s within the Safeguard Mechanism architecture are satisfactory. Setting Paris and technology aligned pathways for hard to abate sectors and the flexibility mechanisms proposed would give entities a sufficient range of options to manage their liabilities at least cost without additional shielding that will increase the overall economic cost of the policy.

Given the compliance cost associated with the Safeguard Mechanism will be relatively small, instead of shielding industries within the policy, governments should focus on robust flexibility mechanisms, and direct support to these industries using non-Safeguard Mechanism options (e.g., technology, just transition funding).


Download the Full Submission