Safeguard Mechanism implementation: production variable updates and international best practice benchmarks

The Safeguard’s role in making Australia a
renewable superpower
Response to consultation on Best Practice Benchmarks
Tony Wood and Alison Reeve
The Safeguard’s role in making Australia a renewable superpower

Overview
The federal Labor Government legislated reforms to the Coalition’s Some of the proposed benchmarks are too high to be considered
Safeguard Mechanism in May 2023, to ensure the country’s ‘best practice’. In particular, the iron benchmark is well above what biggest emitters contribute their share to meeting Australia’s other countries can achieve for steel. This does not sit well with the emissions-reduction commitments. Government’s rhetoric about wanting to build Australia into a renewable
superpower off the back of green steel manufacturing.
This is a big step forward. The Government has embraced a sector-based approach, and all sectors must contribute. Carbon emissions from heavy industry will soon be the biggest source of Other benchmarks are more ambitious. The bulk freight benchmark
Australia’s emissions. Using the Safeguard to implement a limited form represents a 50 per cent improvement on current practice. But it is of carbon trading should reduce heavy industry’s emissions effectively, unlikely to make a dent in emissions from this sector any time soon, efficiently, fairly, and simply. because most road freight emissions are not covered by the Safeguard
Mechanism.
But there is more to Australia’s economic future than reducing emissions for existing facilities. To be a true ‘renewable superpower’, Ultimately though, the benchmarks are only as effective as the cost
Australia must encourage new, clean, industrial development that builds of offsetting allows them to be. A benchmark of zero requires new on our natural endowments of minerals and renewable energy. facilities to offset all emissions – they will do so if offsets are cheap.
The Safeguard Best Practice Benchmarks should be a key signal to This will reduce emissions if offsets have integrity. But it will not drive investors that Australia wants to move away from its polluting industrial industrial transformation and deliver the green superpower vision.
past. The Benchmarks are also a necessary risk management tool for government. They restrain pressure on the Safeguard Mechanism If the Government wants Australia to be a renewable superpower, emissions budget. And to the extent that they encourage new facilities it needs to give more thought to making carbon pricing policy and to be low emissions or zero emissions, they reduce the need for industry policy work together. If Safeguard settings continue to make subsidies to achieve the same goal. Finally, the Benchmarks can make it cheaper to offset than to transform, then achieving the vision will it easier or harder to meet emissions targets beyond 2030, depending require greater government spending via industry policy. This could on the extent to which they encourage or prevent lock-in of emissions. be a very expensive option.

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Table of contents

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1 Background and context . . . . . . . . . . . . . . . . . . . . . . 4

2 Interactions between the Safeguard and industry policy . . . . . 6

3 Benchmarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

4 TEBA eligibility and changes to production variables . . . . . . . 15

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The Safeguard’s role in making Australia a renewable superpower

1 Background and context

Grattan Institute is an independent think tank focused on Australian The draft Safeguard Rule released in December 2023 establishes domestic public policy. It aims to improve policy by engaging with benchmarks for some (but not all) new facilities. It also contains decision makers and the broader community. updates to some production variable definitions. And it includes the
government’s preferred position on TEBA eligibility.
The Safeguard Mechanism is a federal emissions-reduction policy applying to all facilities emitting more than 100,000 tonnes of carbon dioxide-equivalent (tCO2 -e) annually (see Box 1).

This submission responds to the exposure draft of proposed amendments to the National Greenhouse and Energy Reporting
(Safeguard Mechanism) Amendment (Production Variables Update)
Rules (No.2) 2023, as released by the Department of Climate Change,
Energy, Environment, and Water on 15 December 2023.

1.1 This round of Safeguard reforms
In May 2023, the Federal Government reformed the Safeguard, requiring facilities to reduce their direct (scope 1) emissions to remain lower than a baseline, or offset any emissions above the baseline.
Grattan Institute engaged strongly with the reform process. Our views are outlined in previous submissions, which can be found on our website.1

The May 2023 reforms left two issues unresolved:

∙ The benchmark emissions intensity that new facilities would use to
calculate their baselines; and

∙ Which industries would be eligible for trade-exposed baseline
adjustments (TEBA).

1. Wood et al (2022a), Wood et al (2023a).

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Box 1: How the Safeguard Mechanism works

The Safeguard Mechanism applies to all ‘facilities’ (sites or collections coordinated to meet demand in real time. The Electricity Safeguard
of activities controlled by one corporation) that emit more than applies a collective baseline of 198 million tonnes. If this baseline is
100,000 tCO2 -e annually. These facilities must keep emissions below exceeded, individual baselines will apply to each generator.
a ‘baseline’, which reflects the emissions intensity and volume of
products they produce. Baselines decline over time: for most facilities, Figure 1.1: Spread of possible costs of complying with Safeguard
by 4.9 percentage points annually between 2024 and 2030, and at Mechanism baselines
$ per tonne of emissions
3.285 percentage points annually thereafter.
$300
Facilities whose actual emissions are below their baselines in a given Penalty price
year are awarded Safeguard Mechanism Credits (SMCs) for the $275 per tonne
$250
difference.

Facilities that exceed their baselines must purchase and surrender $200
Australian Carbon Credit Units (ACCUs) or SMCs to offset their excess
emissions. ACCUs can be purchased from private providers at market $150 Cost-containment measure
prices, or through the government’s Cost Containment Measure, which $75 per tonne in 2024, rising by
has a fixed price. 2% above CPI annually
$100
If facilities fail to purchase sufficient SMCs or ACCUs to offset ACCU price
above-baseline emissions, they must pay a penalty of $275 per tonne. (projected)
$50
Figure 1.1 shows the three possible prices paid by facilities that exceed
their baselines.
$0
The Safeguard has provisions for new-entrant benchmarks: special 2020 2030 2040 2050
baselines representing best-practice emissions intensity that should Notes: No projection available for SMC prices. SMCs could be expected to cost slightly
apply to new facilities and significant expansions and replacements. less than ACCUs, because in many cases they would have a low or zero cost of
creation; and because they cannot be used outside the Safeguard Mechanism.
Grid-connected power stations are treated differently. The sector Sources: ACCU price: Herd and Hatfield Dodds (2023). Cost-containment measure
behaves more like a single entity, because production is centrally and penalty: DCCEEW (2023a).

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2 Interactions between the Safeguard and industry policy

Unrestricted carbon emissions place a cost on all human society. The by being able to implement more tested technologies at lower cost later polluter-pays principle should apply: those causing the environmental on. Investors require a reliable, long-term carbon price to underpin harm must change their activities to avoid emitting or pay a price for the their investments. Yet a carbon price is inherently uncertain because damage they cause. it depends on the decisions of governments. For all these reasons,
investment in low-emissions industrial technologies is and will remain
The Safeguard is a polluter-pays policy: it sets an allowable amount critically inadequate.
of pollution (the carbon emissions represented by the Safeguard emissions budget and individual facility baselines), and allows And third, there is a time imperative: the net-zero deadline is now only individual facilities to determine the best way to stay within that limit. 26 years away. Market forces are not good at managing structural
Facilities can modify their operations, install new plant and equipment, transformations at high speed when the future is deeply uncertain.
or purchase offsets representing emissions reduction elsewhere in Moreover, the long-lived nature of industrial assets means that industry the economy. In this sense, it is a market-based policy, and over time is particularly poorly suited to fast changes.
should shift investment decisions towards lower-emissions options.
2.2 Closing the cost gap between conventional and green
Market-based policies are often preferred because (if well-designed) production they should lead to the lowest-cost emissions reductions, by efficiently allocating emissions abatement activity to those able to do it cheapest. The federal government has a stated goal of making Australia a
‘clean energy superpower’, using the country’s immense natural
endowments of renewable energy and mineral resources to produce
2.1 Market-based policies such as the Safeguard have three
green commodities such as critical minerals, alumina, iron, and
failings
ammonia. This will enable Australia to continue to prosper in a net-zero
Markets do not generally provide adequate incentives for research global economy.
and development of new technologies, because knowledge is often intangible, risky, and difficult to appropriate. Low-emission technologies The backbone of this vision is large amounts of cheap, green, reliable are particularly complex and uncertain. electricity. But even if this is achieved, green commodity production is
more expensive than conventional production. The size of this gap is
Second, even once early-stage research and development has been highly uncertain, as is the length of time that the gap will persist. This completed, many of the technologies that might bring about large makes it harder to use debt to finance facility upgrades or new facilities reductions in industrial emissions are expensive and high-risk. Early to produce green commodities, because future uncertainty increases movers face high costs and uncertain returns, particularly when the the cost of borrowing. As long as capital prefers the certainty of return commodity being produced via the low-emissions route is identical to from traditional production, low- and zero-carbon transformation will be the traditional route. They risk competitors free-riding on their initiative, held back. As well, facilities that face competitions from imports, or that

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The Safeguard’s role in making Australia a renewable superpower compete with other exporting countries in global markets, will find the review, it should consider the role a CBAM could play in developing cost gap reduces their competitiveness if consumers aren’t willing to viable green commodity production.
pay extra for green production.

There are three, complementary, ways to close the gap: make Recommendation 1 conventional production more expensive by pushing up the carbon As part of the Carbon Leakage Review, consider the role a carbon price (in Australia’s case: the cost of offsetting); use border adjustments border adjustment mechanism could play in developing viable to make conventional imports more expensive and green exports green commodity production.
cheaper; and use industry policy to underwrite production of green commodities.

2.3 The design of TEBA isn’t helping close the cost gap 2.4 Industry policy complements carbon pricing

Current Safeguard policy grants concessions to trade-exposed Once the fundamentals of reliable, green, low-cost electricity, stronger industries for impacts on earnings or revenue arising from Safeguard carbon pricing, and border adjustments are in place, the role of compliance. Concessions take the form of a gentler baseline reduction industry policy is to bring down the production costs of low-carbon trajectory. This blunts the effect of the cost of offsetting in making commodities sooner, by closing the cost gap between green and conventional production more expensive, meaning the cost gap is wider traditional production.
than it otherwise would be. Industry policy can include many different policy instruments, but
A carbon border adjustment mechanism (CBAM) ensures imported fundamentally, it involves sharing the risk of industrial transformation goods are subject to a carbon price equal to that faced by domestic between governments, consumers, and firms.
producers of the same goods. Where Australia is a net commodity Current policies that could bring down low-carbon commodity importer, such as for ammonia and steel (but not alumina), this would production costs in Safeguard facilities include the Powering the replace the need for trade exposure concessions, and mean domestic Regions Fund, the National Reconstruction Fund, and Hydrogen production would face the full impact of carbon pricing, which would Headstart.
help close the cost gap for green production. CBAMs can also include concessions for exporters so that they face the full cost of carbon but Grattan Institute has repeated called for better-structured and receive compensation on exports where overseas consumers are not better-targeted industry policy available over multiple decades, willing to bear the extra cost. including through early-stage subsidies such as grants and loans,
contracts-for-difference for green commodity production, and embodied
The government is considering policy options through its Carbon carbon standards to encourage consumer demand.3
Leakage Review, due to report by 30 September 2024.2 As part of this
3. SeeTowards net zero: Wood et al (2021), The next industrial revolution: Wood et
2. DCCEEW (2023b). al (2022b) and Hydrogen: hype, hope, or hard work?: Wood et al (2023b).

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2.5 Governments must strike a balance between carbon pricing,
border adjustments, and industry policy
Figure 2.1: Carbon prices for Safeguard facilities fall well short of what is
High carbon prices, a CBAM, and comprehensive industry policy could needed to limit climate change together deliver the renewable energy superpower vision. A high cost $ per tonne of emissions of offsetting provides an incentive for new facilities to be built to have $700 low- or zero-emissions.
Global 1.50C pathway
But high offsetting costs also have an impact on incumbent facilities. (projected)
The government has chosen Safeguard settings that deliver a gentle $600 transition for existing facilities, through a low offsetting cost (Figure 2.1), and TEBA concessions. This will protect jobs and competitiveness, but it won’t be sufficient to deliver on the vision of being a renewable $500 superpower.

As Figure 2.1 shows, the Safeguard offsetting cost falls well short of the $400 prices needed globally to transform all economies to be consistent with limiting global temperature rise to 1.5 degrees and preventing the worst effects of climate change.4 $300
Penalty price
As long as the cost of offsetting remains low and TEBA is in place, the government will find itself having to invest more in industry policy to realise its clean energy superpower vision. This comes at a cost $200 to current taxpayers, who get fewer services, and future taxpayers,
Cost-containment who will have to repay the borrowed money. If offsetting costs were measure higher and CBAM was in place, there would be more incentive for $100
ACCU price existing facilities to transform or close sooner, and for new facilities to (projected) be emissions-free.
$0
2020 2030 2040 2050

4. The projected trajectory of global carbon prices in Figure 2.1 represents the
Sources: ACCU price: Herd and Hatfield Dodds (2023). Cost-containment measure
average cost that polluters in all sectors would need to face in a given year to bring
and penalty price: DCCEEW (2023a). Global carbon price: Network for Greening the
about changes to technology, practices, and behaviours that limit global emissions
Financial System (2023).
in that year to the level consistent with keeping atmospheric greenhouse gas
concentrations below levels that would cause average global temperatures to rise
more than 1.5 degrees above pre-industrial levels by the end of the century.

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In Chapter 3, we discuss in more detail how little difference the best- Recommendation 2: practice benchmarks make in bringing forward low- and zero-emissions
In the 2026-27 review of the Safeguard Mechanism: technology for some key commodities, given the low cost of offsetting.
∙ Review the cost containment mechanism cap price, and
consider the role it plays in transforming Australian industry.
2.6 The Safeguard should reinforce the goal of Australia being a
clean energy superpower ∙ Review the role of the Benchmarks in encouraging the
The industrial sector will soon be the highest-emitting sector of the development of low- and zero-emissions industrial facilities.
Australian economy (and the present highest-emitting sector, electricity, continues to decarbonise). The industrial sector is also one of the most capital-intensive sectors, requiring billions of dollars to transform to net zero. And its assets have long lives.

As the premier policy constraining emissions in the industrial sector, the Safeguard should provide investors with a strong signal as to what kind of future industries Australia wants to build. It should encourage investment into transforming existing facilities to low- or zero-carbon operations. And it should encourage new facilities to be built with low or zero carbon emissions.

Under current policy settings, it does not do so. Safeguard facilities only make small savings by avoiding liability for carbon, compared with the cost of shifting to green production. The avoided liability is even smaller if a facility is eligible for TEBA. Setting benchmarks for new facilities based on current best practices does not reflect that current best practices emit much more carbon than can be acceptable in a net-zero economy.

Understandably, the government’s focus right now is on completing the reforms it started in 2022. The 2026-27 review of the Safeguard
Mechanism would be the appropriate forum to consider the issues raised above. But in the current consultation process the government should resist pressure to make the best-practice benchmarks less stringent than proposed and to expand TEBA eligibility.

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3 Benchmarks
The government has proposed 21 international best practice below industry average emissions intensity. Meanwhile a new facility benchmarks, to enable new facilities to calculate baselines. In this using technology that produces emissions, which is able to keep these submission we comment only on hydrogen, iron and steel, coal and emissions below the Benchmark, could receive SMCs, which provide it
LNG, and bulk freight. with additional revenue.

3.1 The ‘best practice’ approach has flaws
Best practice may not be best for long This is particularly a problem for hydrogen. A steam methane reforming
The government’s methodology to set Benchmarks avoids using (SMR) hydrogen plant with partial carbon capture and storage (CCS) data from international plants that received subsidies. This maintains attached could receive SMCs; a green hydrogen plant running on integrity of the Safeguard, in that it allows the value of SMCs to drive renewable electricity would not. The Safeguard therefore advantages decisions about which technology to use. SMR production over electrolytic production, even though the hydrogen
is ‘dirtier’. A similar situation could arise for any new industrial facility
But industrial sectors all over the world are undergoing rapid change, that is all-electric.
as countries strive to reach climate targets. This growth is being driven by subsidies, and an increasing proportion of industrial production will be much cleaner than current production. Best-practice unsubsidised
Recommendation 3: facilities will soon be obsolete.
In the 2026-27 review of the Safeguard:
This calls into question what ‘best practice’ will become. Continuing to define ‘best practice’ based on obsolete technology isn’t logical. ∙ Review best practice benchmarks against international trends.
It also signals to investors that Australia is happy to accept obsolete ∙ Revisit and revise the methodology for determining technology while the rest of the world moves on. This is at odds with a benchmarks to reflect the extent to which subsidies overseas
‘renewable superpower’ vision, and risks locking in long-term emissions are driving change and avoid locking in emissions.
patterns which will be difficult to change.
∙ Revise the Benchmark methodology to ensure new zero- and
Zero-emissions producers are inadvertantly disadvantaged low-emissions facilities are not disadvantaged.

Using SMCs as the sole driver of change disadvantages potential ∙ Establish a timetable for regular review of all best practice new zero-emissions industrial facilities. Because these facilities never benchmarks, to reflect the pace of change in the global produce scope 1 emissions, they never participate in the Safeguard, industrial sector.
and they therefore never receive SMCs, despite producing at well

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3.2 Hydrogen SMR process without any carbon capture) around 2031. Imposing the
best-practice benchmark potentially brings this date forward to 2029.6
The proposed Benchmark may not represent best practice
However, for hydrogen producers choosing to use grid electricity,
The government’s proposed emissions intensity benchmark for
the best-practice benchmark does not make green hydrogen hydrogen is 7.13tCO2 -e per tonne of hydrogen. This is below the range
cost-competitive before 2040. Even setting the benchmark at zero does of emissions intensity for hydrogen made via steam methane reforming
not change this. It continues to be more economic to install SMR and
(SMR) (between 9.9 and 10.9 depending on whose reference you use).
buy offsets.
It is a higher intensity than has been achieved by hydrogen production
What this points to is that the potential cost of carbon (whether plants internationally using carbon capture and storage (between
this comes from the the cost-containment mechanism cap price, or
5.2tCO2 -e per tonne of hydrogen and 4.6tCO2 -e per tonne of hydrogen,
the ACCU price) is a more important driver of switching to green in Canada and the US respectively), and obviously higher than
technology than is the benchmark.
zero-emissions hydrogen made using electrolysis. It is also higher than the standards likely to be imposed by other countries for hydrogen As we noted in our recent report, Hydrogen: hype, hope, or hard work?, imports: the US, Canada, and South Korea have adopted an emissions achieving the government’s ambition of building a hydrogen industry intensity of 4tCO2 -e per tonne of hydrogen, Japan 3.4tCO2 -e per tonne requires both industry policy and carbon policy.7 A higher carbon price of hydrogen, the EU 3.38tCO2 -e per tonne of hydrogen, and the UK would result in the green premium gap closing sooner, and reduce the
2.4tCO2 -e per tonne of hydrogen.5 likely fiscal costs of industry policy.
All the above implies that Australia may end up lagging best practice.
3.3 Iron and steel

Recommendation 4: The proposed Benchmark may not represent best practice
Lower the proposed hydrogen Benchmark to match international The government’s proposed emissions intensity benchmark for iron
import standards. is 1.75tCO2 -e per tonne of metallic iron products. The explanatory
document notes that this benchmark is based on the top 10 per cent
of Australian industry performance, because suitable, high-quality data
could not be found globally for primary iron.
Impacts of the Benchmark on hydrogen industry development
Our analysis (add chart here?) shows that green hydrogen production This value is high. Assessments of the current state of iron production using behind-the-meter renewable electricity could become in the EU put the emissions intensity of blast furnaces at 1.6tCO2 -e cost-competitive in Australia with grey hydrogen (produced using the

6. Assumes no TEBA concession awarded.
5. Parkes (2023). 7. Wood et al (2023b).

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The Safeguard’s role in making Australia a renewable superpower per tonne of steel.8 Other benchmarking studies show Italy and the US Ultimately, the government needs to consider how its carbon pricing producing steel at an intensity of less than 1tCO2 -e per tonne of steel.9 policy and industry policy work together. If the carbon price remains
low, governments will need more industry policy. If governments only
It is unsurprising that a value based on data from Australian facilities
have limited fiscal capacity to deliver industry policy, then they need would compare poorly with overseas facilities. Both Australian steel
to have the courage to increase the carbon price, such that industries facilities use blast furnaces, which are more emission-intense than
such as steel have more incentive to change.
direct reduction (DRI). In addition, they are small by world standards, and old. Using their performance as a benchmark means Australia will continue to lag the world. Recommendation 5:
Set the Benchmark for iron and steel lower, to reflect DRI rather
The Benchmarks will not encourage an Australian green steel industry than blasts furnace production, and encourage and support
development of a green iron and steel industry.
A green iron and steel industry in Australia would use DRI technology, fuelled by hydrogen. Under current policy settings, and assuming a best-practice benchmark of zero, Australian green premiums for iron production are significant through to 2040. Grattan analysis shows that 3.4 Coal and LNG in a best-case scenario, where hydrogen costs fall consistently through
The proposed Benchmarks will have little impact on coal and gas prices to 2040, the green premium for iron reduces to about $116 per tonne of iron. This is still a significant premium on the world price of iron, which The government’s proposed benchmark for coal mining is is currently about $721 per tonne.10 0.00592tCO2 -e per tonne of coal. For LNG, the proposed benchmarks
are between 0.000492tCO2 -e per gigajoule (GJ) of LNG and
The pathway to green iron and steel lies via using gas-fuelled DRI. 0.00001192tCO2 -e per GJ of LNG.12
These have approximately the same capital and non-fuel operating costs as a hydrogen-fuelled plant. But they cost 40 per cent more to These Benchmarks will add a premium to the cost of producing coal of build than a blast furnace.11 between 2 per cent and 3 per cent immediately, rising to between 3 per
cent and 6 per cent in the longer term.13
The proposed high Benchmark, in combination with the low projected cost of offsetting (Figure 1), is unlikely to nudge proponents of new plants towards the DRI route. If the government wants to encourage development of a green steel industry, it should set the Benchmark 12. The lower value represents the combined benchmarks for extraction and lower. liquefaction of unprocessed gas (lower) and liquefaction of processed gas from
a facility that has integrated extraction and procseesing (higher). In the absence of
8. Pardo and Moya (2013). information in the materials released by government, we assume this includes the
9. Hasanbeigi (2022). requirement for offsetting or sequestration of all reservoir CO2 .
10. Wood et al (2023b). 13. Grattan calculation. Assumes world coal prices return to long-term average by
11. Australian Industry Energy Transitions Initiative (2023). 2030.

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For LNG, the premium would be between 1 per cent and 2 per cent on the fleet-wide average of 0.093kg CO2 -e per tonne-kilometre and is immediately, rising to between 2 per cent and 4 per cent in the longer more efficient than even the most efficient large trucks currently in the term.14 fleet (Figure 3.1).

Neither of these are likely to discourage new investment. And the small Most of the road-freight fleet is not affected by the Safeguard. In 2021, premiums stand in sharp contrast to recent super-profits from high total emissions from trucks were 19.9 million tonnes. But emissions international prices caused by the war in Ukraine. There is no reason from road freight transport subject to the Safeguard in that year were to consider making either the coal or LNG benchmark less stringent. only 548,645 tonnes, coming from two companies.
This leaves aside the question of whether opening new coal and gas Lowering the Safeguard threshold, which will have to happen at facilities is consistent with Australian and international commitments some point, is likely to bring many more road freight companies into to phase out fossil fuels. For example, as a member of the Pacific the Safeguard. But because most of these have been subject to
Islands Forum, Australia committed to transition away from fossil reporting requirements under the National Greenhouse and Energy fuels.15 And as a signatory to the Global Stocktake Agreement at CoP Reporting Act (NGER), they will not be considered new facilities and
28, Australia has committed to ‘transitioning away from fossil fuels in the Benchmark will not apply.
energy systems, in a just, orderly, and equitable manner, accelerating action in this critical decade’. The only situation where the Benchmark would apply is a road freight
company that is new to the Australian market and was large enough at
If the Safeguard were to be used as a policy tool to give effect to these the point of market entry to emit more than 100,000 tonnes annually.
commitments, the best way to do so would be to raise the price cap in This seems unlikely.
the cost containment measure.
To put the freight fleet on the path to net zero will require other policies.
Recommendation 6: Grattan Institute’s 2022 report, The Grattan Truck Plan, sets out
Do not make the Benchmarks for coal or LNG less stringent. recommendations that would reduce total emissions from the road
freight sector by 8 per cent in 2030, and 18 per cent by 2040.16 These
included binding zero-emissions sales targets for sellers of new trucks,
progressively tighter carbon-emissions requirements on the engines
3.5 Bulk freight and tyres of new diesel trucks, and removing regulatory barriers to
the adoption of cleaner trucks. The sectoral pathway for the transport
The proposed Benchmark is stringent, but is unlikely to lower emissions
sector would be the appropriate forum to develop and adopt these
The government’s proposed new-entrant benchmark is 0.0395kg CO2 -e policies.
per tonne-kilometre . This is a substantial (50 per cent) improvement
14. Grattan calculation. Assumes Asian LNG prices return to long-term average by
2030.
15. Pacific Islands Forum Leaders (2023). 16. Terrill et al (2022).

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Recommendation 7:
In developing the sectoral pathway to net zero for the transport Figure 3.1: The proposed Benchmark for bulk freight is much lower than
sector, develop and adopt policies to reduce heavy vehicle the fleet average
emissions. kgCO2 -e per tonne-kilometre

Rigid trucks

< 8t
3.6 Future benchmarks
The government has signalled it anticipates setting a further tranche of 8−20t international best practice benchmarks by mid-2024.
20−30t
We recommend that ammonia be a priority for a benchmark.
Articulated trucks ammonia has potential uses in a future net-zero economy in power generation and as a shipping fuel, because it is cheaper to transport < 30t than hydrogen, and doesn’t contain carbon.It can replace fossil fuels in power plants, and replace carbon-intensive shipping fuel. The 30−40t
International Energy Agency forecasts that power generation and shipping will become much more significant drivers of future demand > 40t growth for ammonia than its current use as fertiliser.17
All vehicles
Australia is well-placed to capitalise on this demand: we already export ammonia, and we have abundant renewable energy available Rigid trucks to make ‘green’ ammonia. There are currently at least 24 projects in development nationally. Articulated trucks

All vehicles
Recommendation 8:
In the next round of Benchmarks, prioritise a benchmark for 0.0 0.2 0.4 0.6
ammonia, given its potential as a green commodity export, its role CO2 emissions (kg) per tonne−km
in developing a hydrogen industry, and the large number of Notes: Point size indicates the size of the freight task; totals are weighted by tonne-
projects currently in planning stage. kilometres.
Source: ABS (2020).

17. IEA (2021, p. 72).

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4 TEBA eligibility and changes to production variables

4.1 Eligibility for trade-exposed baseline adjustments 4.1.3 Hydrogen
4.1.1 Iron and steel The government’s proposed best-practice Benchmark for new hydrogen
facilities (7.13tCO2 -e per tonne of hydrogen) is much higher than the
Grattan’s research shows that Australia has a potential competitive
standards likely to be imposed by other countries for hydrogen imports advantage in producing green iron, and that hot-briquetted iron could
(4tCO2 -e per tonne of hydrogen or lower).
be a future export commodity. But green iron will have a considerable premium on it compared to traditional production pathways, and This implies that Australia is lagging international best practice, and producers are likely to face difficulty passing costs on to international also that international consumers are willing to bear the cost of lower buyers. emissions intensity. If international consumers are willing to pay for
lower emissions intensity than the Safeguard requires, there is no need
Therefore, iron-making should be made an eligible TEBA activity. for hydrogen production to be designated a TEBA activity, because
This would also align the TEBA activity list with the changes to the TEBA is meant to reflect limited capacity to pass through costs in global production variable definitions discussed in section 4.2. markets.

Recommendation 9:
Add iron to the list of TEBA-eligible production variables.
4.1.2 Coal and LNG
We note that coal and LNG are considered non-manufacturing TEBA Clarify section 39(3)(a)(ii) of the Safeguard Rule to explicitly activities, and that eligibility for an adjusted baseline is assessed on the include international price trends.
basis of their revenue and emissions. Reconsider hydrogen’s eligibility for TEBA.

Both coal and gas exporters are currently enjoying historically high world prices, due to the wars in Ukraine and Gaza. But prices should
4.2 Changes to production variable definitions eventually return to the long-term average. This will reduce revenue, but may also cause facilities to reduce production. We support the changes to the steel production variables to make sure
facilities are not disadvantaged by switching from steel-making to iron-
Neither would be a result of the Safeguard, but to avoid doubt, section making. This aligns with iron potentially being an economic opportunity
39(3)(a)(ii) of the Safeguard Rule (assumptions made in working out for Australia.
revenue) should be clarified to explicitly include international price trends.

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