Safeguard Mechanism: International Best Practice Benchmarks

Safeguard
Mechanism:
International Best
Practice Benchmarks
BlueScope Response to Consultation Paper
11 August 2023
Executive Summary
BlueScope welcomes the opportunity to respond to the August 2023 Setting International Best Practice
Benchmarks Draft Guidelines for Consultation Paper (“Consultation Paper”).
Our responses to the Consultation Paper are guided by BlueScope’s overarching purpose to strengthen our communities for the future and ensure a vibrant and enduring steel industry is retained in Australia. This means building a sustainable business that can continue to create value and contribute to Australia’s competitiveness in a decarbonising global economy. Our responses are also guided by the objectives and policy principles of effective, equitable, efficient, and simple outlined in the Department of Climate Change, Energy, the Environment and
Water’s (DCCEEW) Safeguard Mechanism Reforms Position Paper (January 2023).
The most important consideration for BlueScope is the definition of what constitutes a ‘new facility’. Our position is that any facility installed for the primary purpose of decarbonising an existing safeguard facility should not be deemed a ‘new’ facility. Moreover, such an enabling facility should be considered part of the existing facility despite the potential for it being physically located elsewhere in Australia.
If an enabling facility is deemed part of an existing facility, it should not be subject to international best practice baselines. Setting enabling facility baselines at international best practice could disincentivise and delay emissions reduction by existing safeguard facilities. This could occur where existing safeguard facilities lose access to credits for decarbonisation investments owing to the investment being deemed a new facility and therefore subject to a lower baseline, based on international performance benchmarks. Enabling facilities should instead adopt the baseline of the existing facility it is decarbonising, which will incentivise investment in the lowest cost and least emissions intensive technology regardless of location.
We also raise a number of issues for the government to consider when setting international best practice baselines including:
 avoiding adding complexity to a future carbon border adjustment mechanism
 avoiding discouraging investment in low-emission technology in Australia
 taking into account the resources, raw materials, and government support available in Australia relative to
other countries; and
 how to obtain credible emissions data for overseas facilities for all production variables.
It is also important the government takes a holistic approach to determining Safeguard Mechanism regulations. A broad review of production variables has been flagged by the government for towards the end of 2023. It is difficult for BlueScope to provide meaningful feedback on international best practice benchmarks without knowing the outcome of the production variable review. We request the government considers the joint effects of international best practice benchmarks and production variables before making final decisions on either.

1. The Safeguard Mechanism and NGERS should recognise enabling decarbonisation facilities as part of an existing facility
The potential to decarbonise Australia’s industrial facilities can be maximised by changing the definitions of “single facility” and “single undertaking” in the National Greenhouse and Energy Reporting (NGERS) legislation. Existing legislation states that a single undertaking or enterprise cannot span multiple states or territories. This definition of a single facility/undertaking is not fit for purpose when incentivising facilities to decarbonise and may delay investment in low-emission technology.
For example, the likely decarbonisation pathway for BlueScope’s Port Kembla Steelworks is to convert ironmaking from the existing coal-based blast furnace to natural gas (and eventually hydrogen) based direct reduced iron
(DRI). The optimal low-emission production process for BlueScope could involve maintaining steelmaking operations at Port Kembla while relocating ironmaking to another region in Australia. This new location could offer greater availability and lower cost access to the enablers for DRI such as natural gas, magnetite iron ore, and renewable electricity.

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Under current Safeguard regulations the re-located facility would be subject to an international best practice baseline and not generate Safeguard Mechanism Credits. This is despite it being established expressly to enable substantially lower emissions in the overall iron and steel manufacturing value chain. As a result, the business case for investing in lower emission technology is weakened and could have the perverse outcome of delaying
BlueScope’s transition to lower emissions ironmaking.
BlueScope’s view is an enabling facility that is established in Australia for the purpose of reducing emissions at an existing safeguard facility should not be deemed a new facility. Such a facility should instead be considered part of the existing facility it is decarbonising, despite being physically located elsewhere in Australia. This can be achieved by changing the facility definitions in NGERS legislation.

2. Applying the existing facility’s baseline to its enabling facility incentivises decarbonisation
Imposing new facility status alongside international best practice baselines on enabling facilities that are established for the purpose of lowering emissions from existing facilities, risks discouraging and delaying the decarbonisation of safeguard facilities.
Enabling facilities should instead adopt the baseline of the existing facility it is decarbonising by being considered part of the existing facility as outlined in section 1. This will allow the cap-and-trade nature of the Safeguard
Mechanism to work by allowing existing facilities to decarbonise against their baselines using least cost investments, and to capture the value of SMCs below their baselines to help fund the transition. This is the model that has been adopted under the EU ETS.
Our suggested approach would incentivise investment at the location that provides lowest cost decarbonisation, thereby promoting competitiveness. This in turn will lead to the decarbonisation investment occurring at the earliest point in time. It is aligned with the objectives and policy principles outlined on page 13 of the Safeguard Mechanism
Reforms Position Paper (January 2023), specifically the principle of efficiency where the policy objective is to “allow the market to find the lowest cost abatement wherever it occurs, and encourages production where it is least emissions intensive”1.

3. Other considerations for international best practice benchmarks
Applying international best practice benchmarks to new facilities raises a number of potential issues. The government should consider the following:
 avoid adding complexity to a future carbon border adjustment mechanism
 avoid discouraging investment in low-emission technology in Australia
 taking into account the resources, raw materials, and government support available in Australia relative to
other countries; and
 how to obtain credible emissions data for overseas facilities for all production variables.
The government should also take a holistic approach to determining Safeguard Mechanism regulations. A broad review of production variables has been flagged by the government for towards the end of 2023. It is difficult for
BlueScope to provide meaningful feedback on international best practice benchmarks without knowing the outcome of the production variable review. We request the government jointly considers the effects of international best practice benchmarks and production variables before making final decisions on either.

1
https://storage.googleapis.com/files-au-climate/climate- au/p/prj23cd662ff4387d8c254ae/public_assets/Safeguard%20Mechanism%20Reforms%20Position%20Paper.pdf

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3.1 Implications for future carbon border adjustment mechanism must be considered
The Australian government has committed to undertake a review of additional policy options to address carbon leakage, including considering an Australian carbon border adjustment mechanism (CBAM). The review will give particular consideration to an Australian CBAM for the steel and cement industries2.
Different baselines for existing and new facilities could create enormous complexity for sectors subject to a future
CBAM. The complexity arises from the emission baseline that imports would be assessed against – that is, differing baselines will complicate the scheme with respect to the volume of CBAM certificates that importers would need to purchase as this would then need to account for both the industry average baseline and the international best practice baseline for a sector.

3.2 International best practice benchmarks should not disincentivise investment in Australia
Increasing quantities of affordable steel are required for Australia to achieve its decarbonisation targets. For example, steel is a critical input used in renewable electricity, transmission, and hydrogen production facilities.
Government policy should incentivise the steel required for Australia’s energy transition to be produced domestically. Setting new entrant baselines at current world’s best practice with a decline rate of 4.9%pa could impose significant carbon costs on low-emission steelmaking to the point where Australia does not attract new investment. This could have the unintended consequence of increasing Australia’s reliance on imported steel and promoting carbon leakage.
Disincentivising low-emissions ironmaking in Australia also risks slowing decarbonisation of the global steel industry. Australia is one of the world’s most prospective regions for hydrogen-based ironmaking. Developing this industry in Australia will help decarbonise steel sectors in Asia and other parts of the world that do not have access to high quality renewable resources. In addition, it will generate local employment, economic activity, and sovereign capability, especially in regional Australia.

3.3 International best practice must take account of the resources and support available in
Australia
The Consultation Paper mentions lack of technology in Australia will not prevent that technology being considered international best practice. BlueScope’s view is the government also needs to consider whether the enablers of that technology are available in Australia.
As an example, lower-emission natural gas direct reduced ironmaking (DRI) plants currently operate in North
America, Middle East, North Africa, and Russia. Natural gas is very cheap in these locations and there is an affordable source of high-grade magnetite iron ore pellets. In Australia, natural gas prices are comparatively high and the ACCC is projecting Australia’s east coast gas market to suffer up to a 300PJ/annum shortfall by 2034.3
There is also no production of high-grade magnetite pellets for DRI in Australia and DRI grade magnetite pellets account for less than 3% of global seaborne iron ore trade4.
Several ironmakers in the EU are in the process of transitioning a proportion of their blast furnace capacity to natural gas DRI, driven by supportive government policy including substantial government grants (around 50% of the capital investment, equivalent to approximately A$1.5bn for each steel plant), free carbon credits, and a carbon border adjustment mechanism. This is significantly incentivising the transition of steelmaking in the EU and could be considered international best practice; however these incentives and enablers are largely unavailable in
Australia.

2
https://www.dcceew.gov.au/sites/default/files/documents/safeguard-mechanism-reforms-factsheet-2023.pdf
3
Australian Competition and Consumer Commission, Gas Enquiry 2017-2030 Interim Report (January 2023), page 18.
https://www.accc.gov.au/system/files/Gas%20Inquiry%20-%20January%202023%20interim%20report%20-%20FINAL_0.pdf
4
International Iron Metallics Association estimate 38.2Mt of DR grade seaborne ore supply in 2020
(https://www.metallics.org/assets/files/Public-Area/Presentations/AIST_210301.pdf). Total seaborne ore supply exceeds 1.5 billion tonnes per year.

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Producing DRI from Australian hematite/goethite (blast furnace quality) ores remains prospective but the technology is currently at a low level of technology readiness with pilot plants yet to be established. Section 2.1 of the Consultation Paper rules out using non-commercial facilities when setting international best practice baselines.
Advancing DRI technology so that it can utilise Australian hematite/goethite ores is crucial to enabling wide-spread adoption of DRI by the steel industry, thus preserving Australia’s iron ore export revenues. The government should ensure international best practice benchmarks do not disincentivise research and development into using
Australian hematite/goethite iron ores in DRI.

3.4 Emission data availability
Obtaining credible emissions data to determine international best practice will be difficult. For integrated steelmaking production variables, the department needs emissions data for coke ovens, lime kilns, sinter plants, pellet plants, iron and steelmaking, and hot rolling for at least the two most CO2 efficient plants globally.
There is no methodology for reporting emissions data that is consistent with NGERS, applied by steelmakers globally, and publicly accessible. We are interested and willing to engage further with the Department on the sourcing of data, to understand how the data will be collected, where it will be drawn from, and how any comparability issues will be dealt with.

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