Safeguard Mechanism: International Best Practice Benchmarks

11 August 2023

Safeguard Mechanism Reforms
Department of Climate Change, Energy,
Environment and Water email: safeguard.mechanism@dcceew.gov.au

RE: Safeguard Mechanism: International Best Practice Benchmarks

The Australian Chamber of Commerce and Industry (ACCI) appreciates the opportunity to comment on the international best practice benchmarks for the safeguard mechanism.

ACCI is Australia’s largest and most representative business association. Our members are all state and territory chambers of commerce, which in turn have 430 local chambers as members, as well as over 70 national industry associations.
Together, we represent Australian businesses of all shapes and sizes, across all sectors of the economy, and from every corner of our country.

ACCI acknowledges that the goal of applying international best practice to the emissions intensity baselines of any new facility established under the safeguard mechanism is admirable. However, we question whether it is achievable.

The safeguard mechanism is the main policy driver to achieve Australia’s emissions reduction targets of 43 per cent below 2005 emissions by 2030, requiring covered facilities to reduce their baseline emissions by 4.9 per cent per year over the next seven years. Meeting this target requires substantial investment across all sectors covered by the safeguard mechanism to reduce their emissions intensity and meet their reducing baselines.

However, the proposed international best practice approach is more likely to stifle investment in new production facilities. Only facilities built using cutting edge technology will be able to meet the 10 per cent lowest, international best practice benchmarks that are required. These new productions facilities are likely to come at a much higher cost, both in terms of construction of the facility and production of the good, which may make the goods from these new facilities less competitive.
This may lead to existing facilities remaining in production longer than is necessary, as there will not be new production facilities, which typically adopt more advanced
technology with lower emissions intensity, being built to replace aging facilities. It is also likely that older higher emissions intensity equipment will remain in place longer, as investment in equipment upgrades are delayed or not undertaken at all.

Most problematic will be obtaining the necessary data to identifying best practice facilities operating internationally. For industry sectors such as aluminium and steel, where there are tens of thousands of smelters operating across the globe. Without a central source of information, obtaining the necessary data to determine the top 10 per cent best practice of emission intensity from all productions facilities within a sector will be extremely difficult, if not impossible. While many advanced economies may require facilities to report this data, it may not be publicly available. In less developed and developing countries, it is unlikely that this data will be collected, let alone publicly available.

Even where this is possible, another challenge is the ability for Australian producers to access and acquire best practice technology if it is under patent or owned by a corporation in another jurisdiction. Businesses that have developed highly efficient low emissions technology may not be willing to share their innovation and give away their competitive advantage in international markets.

Further, Australia is a small market, so producers of may not see Australia as attractive, instead directing their limited production of low emissions technology to larger, more lucrative markets. For example, in the transport sector, due to limited production capacity and tighter regulatory requirements (higher emissions standards) in Europe and the United States, producers of electronic vehicles have been shown to direct their more efficient, low emissions intensive vehicles to these much larger more profitable markets over sending them to Australia.

Carbon leakage is also a major risk. If we don’t get the settings right, then businesses will not make the investment in new technology to reduce their emissions intensity in Australia. If new facilities are not constructed and existing facilities forced to close, production will move offshore. Offshore production facilities in developing countries are more likely to produce these products at a higher emissions intensity relative to the Australian producer. Therefore, Australia will not only lose the benefit of domestic production, but the increased reliance on imports will contribute to a higher level of overall emissions.

This is particularly concerning for material that are essential elements in the renewable energy transition, such as nickel, cobalt, lithium hydroxide. The government is proactively trying to attract the construction of new production facilities to enable the value adding of these resources in Australia. The refining of cobalt and lithium hydroxide is at an early stage of development in Australia, with most of this material previously having been shipped overseas for processing. If the best practice thresholds for new processing facilities of these materials it set a too high, then we
will not get the investment in new production facilities and the raw resource will continue to be shipped overseas for processing at a significant loss to Australia.

In the case of iron ore projects, there are two very different processes based on the raw material, either haematite or magnetite, but all projects are assessed under the same Iron Ore Production Variable. As a result, downstream magnetite processing operations are subject to much higher emissions reduction burdens. The energy required to process magnetite ore is 17 times more intensive than haematite.
However, when magnetite is inputted into an electric arc furnace and haematite inputted into a blast furnace, the magnetite process can produce half the life cycle emissions per tonne of steel produced. The higher iron content of magnetite increases the efficiency in steel making. Without a carefully tailored safeguard mechanism, Australia will miss out on an opportunity to enlarge and diversify its economy whilst at the same time contributing to a significant reduction in global carbon emissions in the steelmaking process. To level the playing field, there should be two separate Iron Ore Variables under the Safeguard Mechanism, one for
Magnetite and another for Haematite, to reflect the different ore properties, market and volumes.

Another important consideration is that it may not be possible to introduce best practice technologies across the whole production process. Some technologies may not work together or may lead to inefficiencies in the production line, which would deter investment.

What is most important is that is that any new facilities developed in Australia lead to a significant reduction in emissions intensity. Even a marginal improvement relative to the average emissions intensity across the sector is still likely to make a substantial contribution in reducing Australia’s emissions. As the older, less efficient, higher emissions intensity equipment and production facilities are phased out and production increasingly provided by newer, more efficient, less emissions intensive production facilities, average emissions intensity will fall and the total emissions will steadily decline to support the achievement of the emissions reduction targets.

We recognise that under the current structure of the safeguard mechanism with a rigid, fixed cap on total emissions, the entry of any new production facility, of a scale and with emissions above 10,000 tonnes CO2e per year that qualify it as a safeguard mechanism covered facility, will only serve to cannibalise the baselines of existing facilities within the sector. This will force all facilities in the sector to reduce emissions at a faster rate than otherwise.

There needs to be scope to increase the emissions cap of the safeguard mechanism to allow new entrants with improved technology and lower emissions intensities. We need to get the balance right, so that we can achieve incremental improvement in emission intensity, without deterring investment in new production facilities.
Overall, ACCI consider that applying the government’s proposed benchmarks to the safeguard mechanism is too ambitious and will only serve to dissuade investment in new production facilities in Australia, with a loss of production capacity and the economic benefit it provides.

Yours sincerely

Peter Grist
Director Economics, Industry and Sustainability