Safeguard Mechanism: International Best Practice Benchmarks

To: Department of Climate Change, Energy, the Environment
and Water (DCCEEW)
Re: Safeguard Mechanism: International Best Practice
Benchmarks
11 August 2023

Introduction

AMEC appreciates the opportunity to provide a submission to the next round of consultation the
Department of Climate Change, Energy, the Environment and Water (DCCEEW) is running, on the
Safeguard Mechanism, namely, International Best Practice Benchmarks. AMEC has engaged with the
Department and other relevant State and Commonwealth Government agencies to ensure feedback from Australia’s mineral exploration and mining industry is considered in the development and implementation of Australia’s Safeguard Mechanism reforms, to avoid unintended consequences. We welcome continued opportunities to provide meaningful feedback.

About AMEC

The Association of Mining and Exploration Companies (AMEC) is a national industry association representing over 540 member companies across Australia. Our members are mineral explorers, emerging miners, producers, and a wide range of businesses working in and for the industry.
Collectively, AMEC’s member companies account for over $100 billion of the mineral exploration and mining sector’s capital value.

Mineral exploration and mining make a critical contribution to Australia’s economy, directly employing over 274,000 people. In 2021/22 Industry generated a record high $413 billion in resources exports, invested $3.86 billion in exploration expenditure to discover the mines of the future, and collectively paid over $63 billion in royalties and taxes.

Draft Guidelines: Setting International Best Practice
Benchmarks
General Comments

AMEC has consistently provided feedback highlighting the genuine strides industry is taking to progress to net zero targets in a pragmatic and effective way. This submission should be read in addition to feedback provided in our other submissions to the reforms.

There is genuine concern across industry that the pace of reforms and transition expectations, will result in widespread unintended consequences. Whilst Government appears agnostic of skills and technological concerns required to deliver on the new requirements, with no clear way to achieving ambitious decarbonisation targets, there is concern that targets may not be met within set timeframes.
There is a wide variance in the capacity and capability of companies across Australia’s mineral exploration and mining industry, to meet targets and objectives set by the Australian Government at the Paris Agreement. It is important that companies are provided with due consideration and alternative pathways, tailored to their unique circumstances, and should the need arise, a broader position can be considered to encompass a wider group of industry members who may also be impacted.

Transition phases are key to listening to industry feedback, learning from the experience of the first- movers, and using ‘lessons learnt’ to improve the process for the next phases to progress through the transition. We welcome a tiered and phased approach, upholding best-practice principles.

New product

AMEC questions what will be considered a ‘new product’ for the purpose of this guideline, at an existing Safeguard facility where international best practice will also apply. It is understood the guideline states where a facility ‘invests in new plant and equipment resulting in the use of a new production variable’. However, clarity is sought about whether or not this includes an existing facility expanding into the next phase of processing a mineral, for instance if a different production methodology or end use product is produced, will this trigger the ‘new product’ clause? Clarity is also sought that the purchase of new plant and equipment, as regularly occurs in industry for repair and maintenance, will not be considered under the new product provisions.

Reduced decline rate

It is expected that trade-exposed facilities may need to apply for a reduced decline rate. If trade- exposed baseline adjusted (TEBA) facilities are to receive a reduced decline rate if their scheme costs are sufficiently high, AMEC questions what demonstration would be required to qualify for this adjustment, and what costs would be acceptable for consideration as ‘sufficiently high’. Guidance on these thresholds prior to commencement, is recommended.

Setting international best practice benchmarks

The drafting around this section should be tightened to reduce ambiguity and provide upfront certainty to facilities that may consider nominating to provide an industry (or commodity) benchmark.

The facility-level emissions and production data from at least two facilities over two years should clearly outline that the two years must be two consecutive years, and the same consecutive period used by all facilities contributing to the benchmark setting.

For the minerals sector, it is important that a commodity-by-commodity benchmark is calculated.
Thorough consideration must also be given to the geological, geographic and environmental variances across different commodities and different regions.

As new information and production data is gathered, timely reviews of benchmarks should also be considered. In addition to timely, scheduled reviews, the circumstances to warrant a requested review of a benchmark should be communicated.

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Process for setting benchmarks

Best Practice is effective where proposed new facilities are benchmarked against demonstrated best practice existing facilities with similar ore bodies, materials and processes using standardised metrics.
Otherwise, the risk is that some new projects will not be viable for the long term if newly built facilities are not within the same peer group. This approach to global benchmarking has been adopted successfully in the cement industry for over 20 years, where equipment type and raw materials chemistry are significant drivers of technology, energy and personnel required to manufacture saleable consistent quality product.

The key elements for feedback on the proposed guideline design are as follows:

1. General approach
2. Data collection
3. Facility selection
4. Timeline of data for selected facilities
5. Adaption for Australian context
6. Implication with annual decline rate

General approach:

The guideline states that the process development and gathering of the International Best Practice benchmarking data will be though a Consultant. Further, that “adjusting for Australian conditions” will not consider technology and skills availability and that international best practice should be based on
“on-site electricity generation at industrial facilities, not grid-connected or utility scale generators”. The concerns related to the technology and skill items are real issues that have previously been submitted to Government.

The guideline mentions that a Consultant will be engaged to complete this work on behalf of the
Government. Clarity on the terms of reference to undertake this task will be critical, along with details of how industry will be engaged through the process.

Data collection:

The process to understand the benchmarking approach has highlighted some key concerns related to data collection and the granularity of data provided. The primary concern related to guideline content relates to how and from what source the data used will be collected. Current industry sources of international benchmark data are via subscription services. The data provided by these services are calculated differently to how emissions intensity values are calculated under Safeguard.

The Safeguard approach to calculating emissions intensity values for a facility (sourced from submitted NGERS data), has added complication via splitting out emissions derived from production
(tonnes) and energy (MWhs). Therefore, based on the proposed guideline, will potentially create a set of variables that prevent a reasonable comparison of performance to the benchmarked facilities.
Therefore, a significant level of assumptions and interpretation will be required.

Facility selection:

The Department should consider expanding facility selection that considers the lower 25th percentile value of facilities. The “cherry picking” of up to 2 facilities in a pool of 200 (as per iron ore example) poses a risk of selecting facilities that could be considered outliers in a data sample set with very unique characteristics that cannot be adopted for the Australian context or consider ore body

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complexity. Otherwise, the risk is that the conclusions are likened to comparing “apples with oranges” rendering it challenging to make a judgement based on science.

a. Iron Ore example: Analysis of the near 2Bt global iron ore industry of emissions intensity
data across 265 facilities shows that 5 of the Top 10 facilities exist in Brazil where the
primary energy source is hydroelectricity and that contribute to 210Mtpa production. For
magnetite producers, this becomes even more problematical, given that magnetite
globally makes up 13% of iron ore volumes. These magnetite producers will get
consumed by a weight of numbers given that under Safeguard, they are treated equally.

Each type of equipment to support the facility will have its own energy needs. The only remaining driver for emissions intensity reduction to achieve best practice levels, would be the facility’s access to low or zero carbon energy sources or to stop production altogether.

Timeline of facility data:

The approach of using the basic weighted average of data of the selected international best practice facilities that make up 10% of the safeguard annual production capacity using the previous 2 years, is not adequate. Unless longer term data from the selected facility is sought, then understanding whether the plant is ramping up, in decline (through a variety of factors) or stable will not be possible.
A “trend” in data, or understanding the underlying variation in operations, cannot be derived from 2 data points. Ensure at least 5 years of data to establish the value which is aligned to previous department analysis on safeguard baseline calculations and setting of the initial industry average values in 2018.

Adaption for Australian context:

Selection of energy source appropriate for a facility cannot follow a “cookie cutter” approach.
Certainly, learnings on alternative lower emissions technologies can be shared across facilities – but practical application in the field, requires significantly more assessment. Any adjustment criteria based on new information needs to be agreed and have input by industry. Criteria such as understanding end use, load profile, site and geographical suitability are critical items required to be assessed against such that generation assets (which require longer than mine life payback periods) are not left stranded.

Implication with annual decline rate:

For new facilities that have the international best practice emissions intensity values applied, coupled with the current Safeguard Mechanism annual decline rate assumptions, this will mean that depending on timing for when a new facility commences operations, the new value will be lower again. This new value is driven not by virtue of best practice performance and technology maturity, but via a calculation.

o For example: The decline rate for emissions intensity values for stationary power
generation, significantly changes footprint required at a facility that may not yet have been
constructed. This is a key concern where land availability is continually being challenged
by other factors. Updates to emissions intensity values based on a calculated decline
rate, is not how invention and innovation works.

Conclusion:

Unless there is an appropriate understanding of the source, context and validity of the international best practice data taken over a sufficient length of time from representative sample size of facilities,

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there is a real risk that incorrect value setting for the new production variables will jeopardise business decisions for new facilities to be built in the future.

Appropriately considered benchmarks help provide input into the design process to enable sustainable reduction of emissions intensity and continue to keep Australia at the forefront of the effort. Any benchmarking approach needs to be underpinned by key principles to assist in guiding new facility design. These principles ensure that appropriate technology selection is considered to manage ore body characteristics, complexity and facility location to ensure financially viable (through the energy and emissions lens) options can be assessed.

Recommendations:

➢ Addition of a dedicated production variable for critical raw materials required to support the
transition effort, noting that many of these emerging industries in Australia have either
insufficient data available and / or the volumes of these materials is low;
➢ Ensure % cut off for IBP value increased to a minimum of lower 25th percentile of the sample;
➢ Ensure at least 5 years of data to establish the value;
➢ Emissions intensity metrics aligned to internationally recognised calculation methods;
➢ Consider the use of “peer groups” to allow for appropriate comparisons for new facilities
relative to the technology, ore body, product, location and energy source;
➢ IBP values are readily available as a guide for new facility entrants in informing baseline
creation;
➢ IBP values are periodically reviewed (suggest FY27- aligned to Safeguard Mechanism review
period) when there are known changes in the technology availability and adoption;
➢ IBP values are not changed via the decline rates as published under Safeguard;
➢ Establish the relevant criteria and process for “adjustment” for Australian context; and
➢ Ongoing consultation and involvement with industry participants.

Questions that have arisen across industry to ensure suitable benchmarks for all commodities and industries are introduced, are outlined below.

▪ How will the consultant(s) identify best practice facilities?
▪ Will industry input be considered into the recommendation of whether or not an adjustment for
Australian conditions is required and justified?
▪ In calculating the domestic top 10 percent best practice emissions intensities, will they be spread
across multiple industries, or could they all potentially be from the same industry?
o If they are all from the same industry, would be data be skewed due to a potentially
limited sample size?
o If a limited sample size is used, applications for facility-by-facility adjustment applications
will be expected.
▪ The process of releasing the exposure draft and explanatory document with the changes outlined
in Schedule 1 of the Safeguard Rule after the benchmarking comparison activity has been
completed by the consultant appears to be a fate accompli, is this the case or will there be room
for consideration of feedback?
▪ When is this consultation expected to occur, as we are already in late 2023? This should not be a
rushed process, or released over the Christmas break.

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▪ What are the ‘priority production variables’ that will likely need to be legislated by the end of 2023?

Emissions apportioning

As has consistently been communicated to Government, the technology and calculation methodologies required for accurate and effective tracking and disclosures of Scope 3 emissions does not yet exist, nor do the legal requirements to do so.

The proposed requirement via example 4 (page 8 of the guideline) where emissions for the selected facility’s calculation of production variables should exclude Scope 2 and 3 emissions and electricity, and multi-product facilities should apportion emissions between products in a way consistent with the
Safeguard Mechanism, will be practically challenging.

The maturity and reliability of disclosures at the expected level does not yet exist. To then be able to differentiate between the sources of emissions to the degree of accuracy expected for setting a best- practice benchmark, is a significant burden. AMEC recommends reconsideration, particularly of the cost, practicality, accuracy, and constraints this proposal could result in.

Adjustments

It is an important acknowledgement that adjustments for Australian facilities given Australian geological and climate conditions, may be considered. AMEC welcomes clarity on the envisaged scope of these adjustments.

Australia’s geological resources are voluminous, yet complex in terms of depth, grade, extraction, processing, and all logistics involved with developing and producing a mineral resource into a saleable product. Yet, we have a renowned expertise in this field.

With new developments our companies are able to consider different and new ways of extracting minerals, and making mines economically viable to run. This can unlock value that was previously overlooked due to uneconomic circumstances. The development of mineral facilities and resources is a national priority. It should not unintentionally be made harder to operate as a result of the changes under this framework and the broader climate and environmental reform agendas of State, Territory and the Commonwealth Government.

The unique attributes of the Australian climate include its ecological habitats and environment. They cannot be replicated within the same jurisdiction, let alone other interstate jurisdictions, or internationally. These conditions undeniably have a material impact on a facility’s emissions profile, and should be a strong factor for consideration for adjustment qualification. For example, a facility in
Western Australia’s Pilbara region will have been designed to operate in completely different conditions to a facility producing the same mineral, on the east coast. The variance in the amount of energy and inputs required to operate in these different conditions, will lead to substantially different baselines.

The process to apply for adjustments should be fair, transparent, and straightforward. It should not inadvertently favour larger operators, at the expense of less mature operators. Government engagement with industry will influence the success of this regime.

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Capacity building

Whilst it is acknowledged that with demand, technology and skills could be procured or developed, it is remiss not to acknowledge the cost and time associated with these undertakings. Whilst larger companies may have the capital and risk appetite to enable early adoption of new and untested at commercial-scale technologies, smaller companies typically do not have the financial capacity or risk appetite, and are at risk of falling further behind.

Skills is another point of contention. We continue to experience a skills shortage across the nation. If it was so easily addressed, without navigating complex visa and migration systems and caps, at substantial cost with no guarantee of success, would Government not have addressed its own shortages, ahead of industry? A constant concern raised during various engagement sessions with all industries, is that there are not yet enough skilled experts in Australia to meet industry demand, let alone regulatory demand, as climate and environmental reforms progress rapidly.

We will eventually develop a skilled Australian workforce that will drive our addressing of the challenges posed by climate change, and progress innovative Australian solutions. Until that point, it is inefficient Government positioning not to consider a lack of skilled workers a substantive barrier.

Final Comment

AMEC appreciates the ongoing consultation DCCEEW has run to ensure there is robust feedback to the Safeguard Mechanism reform process. Given the enormity of the changes which will not only encapsulate the nation’s largest emitters, but will have flow-on effects to all companies operating in
Australia, it is imperative that a tiered, scalable and phased approach is adopted, to limit the impost of additional cost and administrative burden.

For further information please contact:

Director, WA, NT, Director – SA & Industry Policy, AMEC

Commonwealth Policy, AMEC

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