Safeguard mechanism has multibillion-dollar price tag for industry

Australia’s biggest polluters face a combined carbon offset bill of between $2 billion and $9 billion by 2030 under the government’s new climate policy, but major manufacturers say their lower emissions reduction target under the safeguard mechanism will spare consumers from significant flow-on costs.

The mechanism, which for the first time will impose carbon emissions limits on the 215 industrial polluters that generate more than 100,000 tonnes of greenhouse gas a year, was approved by the federal parliament on Thursday, passing the Senate with the support of the Greens.

The safeguard mechanism will impose carbon emissions limits on industrial polluters that generate more than 100,000 tonnes of greenhouse gas a year.


It returned to the lower house for approval of the final bill and passed by 89 to 50 votes with Labor, the Greens and most independents supporting it. The Coalition and Bob Katter voted against it, but in a sign of Liberal dissent, Tasmanian Liberal MP Bridget Archer abstained.

Under the mechanism, most polluting industries including fossil fuel producers must cut their emissions by about 5 per cent a year until the end of the decade, but manufacturers do not have to do as much heavy lifting and are only required to cut theirs by 1 per cent a year.

Manufacturing Australia chief executive Ben Eade said forcing manufacturers to cut 4.9 per cent a year amid competition with imports from countries that have less onerous emission regulations would have put local manufacturing plants at risk of closure in coming years.

He said the scheme’s design created a level playing field that would prevent manufacturers from having to pass on significant cost increases to consumers for goods such as steel, cement, aluminium and bricks, which at present require fossil fuels to produce.

Carbon market analyst Reputex released an analysis of the safeguard mechanism in February focusing on how many carbon credits companies would probably need to buy to comply with the scheme, which will force big polluters to reduce their carbon footprint by a cumulative 28.5 per cent, or 205 million tonnes by the end of the decade.

They can either reduce real-world emissions by adopting new, cleaner technology run on renewable energy to replace polluting systems that run on fossil fuels, or they can buy carbon credits, generated by carbon farming companies, to offset their emissions.

Reputex’s analysis found that with optimum policy settings in place, 75 per cent of the required cuts could be achieved with direct emissions reductions.

“Companies will always favour internal actions as a permanent hedge against ongoing offset costs, particularly where higher offset prices are forecast,” Reputex head of research Bret Harper said in February.

Reputex’s forecast indicates that, under best practice settings, companies would offset 25 per cent of their emissions, which is equal to 50 million tonnes of carbon credits. That would cost $1.75 billion at the current price of credits – about $35 a tonne.

However, Reputex, ANZ and other market analysts have forecast the price of carbon credits could rise to $90 by 2030. Under this price, the total cost of the 50 million carbon credits would be $4.5 billion.

But with many analysts warning current policy settings are far from optimal, and many companies could rely on more offsets for 50 per cent or more of their carbon cuts, the cumulative carbon credit bill could be up to $9 billion or more.

The cost of this higher-priced offset scenario equates, roughly, to only $6 million per polluter each year, on average.

The safeguard mechanism legislation includes a rule that forces companies that rely on offsets for more than 30 per cent of their carbon cuts to report to the minister annually with an explanation for why they aren’t cleaning up their operations.

The Australian Industry Group, representing more than 60,000 businesses employing more than 1 million staff, said the lower reduction target for manufacturing sectors in the safeguard mechanism’s design would offer “breathing space” to consider more effective and efficient long-term measures.

Manufacturing Australia – led by the CEOs of ASX-listed manufacturing giants such as Incitec Pivot, BlueScope Steel and Brickworks – said the federal government had recognised the need for “tailored treatment” for businesses whose important industrial processes still rely on fossil fuels but are unable to readily switch to electrification yet.

Talks between manufacturing leaders and the Albanese government have centred on how to encourage manufacturers to reduce their carbon footprints while also recognising that technological breakthroughs to drive down manufacturing emissions – such as carbon capture and storage, or using zero-emissions hydrogen for industrial heat or chemical reactions – are more likely to become viable in the 2030s or 2040s.

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