New modelling by global research and consultancy group Wood Mackenzie has identified significant potential issues for a number of local miners under the federal government’s new Safeguard Mechanism Scheme reforms.
Introduced on July 1, the reforms will see legislated limits or baselines for each mining facility which will be based on a combination of each facility’s historic emissions and an industrial average component.
According to Wood Mackenzie, exactly how the “industry average” will be defined in terms of coal mines remains “contentious”.
Their modelling of the revised Safeguard Mechanism Scheme’s adoption of a single “industry average” found it may create winners and losers in the Australian mining sector.
Underground miners may be most affected
For example, it suggests that underground mines, which tend to be much more emissions intense than open cut mines, will bear the highest cost of emissions reduction.
The scheme has been designed so that high emissions mines will be required to purchase Safeguard Mechanism Credits (SMCs) – credits which are generated by other large industrial facilities.
Wood Mackenzie’s modelling has identified that a significant portion of Australia’s mines will receive credits from the scheme – on average, open cut mines will be receiving credits from the scheme every year over 2023 to 2030.
Meanwhile, emissions-intensive mines, which are mostly all underground, will be subject to significant costs.
It has been estimated that the average cost of emissions will equal $75 per tonne of CO2 emissions.
Underground miners will need to acquire credits
“A significant portion of Australia’s open cut mines will be receiving credits from the scheme every year over 2023 to 2030,” Rory Simington, a principal analyst at Wood Mackenzie, said.
“Meanwhile, underground mines will be subject to significant costs and need to purchase SMCs. Early closure of these emission-intensive facilities could significantly impact the demand and therefore prices of SMCs, which adds another layer of uncertainty to the economic assessment of abatement solutions.”
Under the updated Safeguard Mechanism Scheme, facilities may earn SMCs by surpassing their emission reduction baselines.
However, producers do have the flexibility to purchase SMCs and Australian Carbon Credit Units (ACCUs) as offsets for their emissions.
In addition, facilities have the option to surrender up to 30% of their annual emissions reduction requirements through ACCUs.
Currently international offsets are not accepted for compliance, however that may be reviewed in upcoming government consultations.
Wood Mackenzie said its analysis also found that production-adjusted baselines play a crucial role in the Safeguard Mechanism, as they are tailored to a facility’s production levels, ensuring adjustments align with actual output.
However, reducing production will not reduce compliance costs, which therefore limits options for producers.
“Wood Mackenzie modelling shows that adopting a single ‘industry average’ will have an unequal impact on some facilities receiving benefit without any mitigation, while others will face significant financial implications,” Mr Simington said.
Emission reduction policy
The Safeguard Mechanism was initiated in 2016 as the Australian government’s policy for reducing emissions at Australia’s largest industrial facilities.
It sets legislated limits – known as baselines – on the greenhouse gas emissions of these facilities.
These baselines will decline, predictably and gradually, on a trajectory consistent with achieving Australia’s emission reduction targets of 43% below 2005 levels by 2030 and net zero by 2050.
The government moved to reform the mechanism this year to ensure that covered facilities contribute to meeting these targets, while strengthening their competitiveness as the world moves to net zero.
Under three proposed options, Safeguard covered emissions take on a proportional share of the national emissions target to 2030 and reach net zero by 2050.
