Australia Safeguard Mechanism’s Impacts on Economy

 Executive Summary

     Australia sets a target to reduce emissions from 621 MtCO₂-e in 2005 to 354 MtCO₂-e in 2030 (DCCEEW, 2022a). However, under the current effort, it is probable that Australia will emit 390 MtCO₂-e in 2030 (DCCEEW, 2022b). As deeper cut is fundamentally required, the Albanese government has just reformed the safeguard mechanism to further pressure the carbon emitters business to adhere closely to the Australia’s goal by strictly limit their caps. To achieve the national goal, it is expected that the new emission cap will be progressively tighten at least 4.9% per year (DPMC, 2023).

     The mechanism is criticized as a ‘toothless tiger’ since emissions from fossil fuels-related industries ironically grow up (ACF, 2022). Since 2005, the sectoral emission trends in stationary energy, transport, and fugitives have increased 27.4%, 13.2%, and 14.1%, respectively due to continued growth of production and export of LNG (DCCEEW, 2022b). Therefore, the safeguard mechanism is expected to progressively reduce the emission by further prioritizing Australia Carbon Credit Units (ACCUs) for adopting fixed assets on emissions reduction technologies and providing green-jobs and skills in regions that rely on fossil-fuel income.

Purpose

     The aim of this policy review is to identify the gaps and the economic impacts of the current Australia Safeguard Mechanism. Additionally, this review provides recommendations to address the identified issues.

Critical Analysis

     Australia Safeguard Mechanism, which has been in effect in 2016, applies to facilities that emit more than 100,000tCO₂-e or around 219 facilities around the country. This regulation predominantly affects fossil fuel-based businesses such as coal, mines, gas extraction, steel production, and airlines. They are collectively responsible for 219 MtCO₂-e or 28% of total Australia’s emissions (CER, 2023c). However, as their emissions have increased since 2005, it indicates a case similar to carbon leakage: when emissions increase because of emissions reduction in different place within Australia. This is because of the facilities who exceed their baselines can easily purchase Australia Carbon Credit Units (ACCUs) for around AUD$37/ton or obtain them by participating in emissions avoidance offset (CER, 2023a). Analyzed from the interactive map, 54.72% of total issued ACCUs for vegetation projects (CER, 2023b). Afforestation merely do little to reduce carbon emission (Gifford, 2020). Facilities that exceed their emissions often justify such an action because buying credits units is way cheaper than reducing the production (Wara, 2007). Even if we grow forest twice as much as India (±700MHa), it won’t immediately lower emissions as one single tree averagely need 20 years to mature and effectively absorb carbon without any conflicts that may reduce the tree survival rate (EN-ROADS, 2022). Figure 1 illustrates the increase of emissions due to slow grow of trees and the increase of supply in fossil fuel products.

     The new progressive cap will increase the production cost and resulting to higher fossil-fuel price that will be imposed to the end-users (Parry & Pizer, 2007). The graph of the price would mountainy accelerate for a period and then decrease due to massive shifting to renewable energy. Figure 2 portrays a feedback loop where the increase of government revenue from imposing a tight cap result in the acceleration of RnD of renewable energy and its cost reduction. However, such an action would increase the adverse unemployed in fossil-fuel region particularly in Bowen Basin (Burke, 2023) and global LNG market lost to other fossil fuel exporter: Russia, US, and Saudi Arabia (IEA, 2022). Additionally, it is important to note that there is an accelerated-ongoing energy transition globally from fossil-fuel to low carbon energy technologies: wind, solar panels, and hydrogen (Burke et al., 2022; REN21, 2021; Venkataraman et al., 2022).

 

Recommendations

   This review proposes two recommendations. Firstly, it is expected that the ACCUs projects prioritize funding advanced green technologies such as carbon-capture storage. Empirical evidence from Europe shows that facilities who adopt fixed assets on expensive emissions reduction technologies generate more revenues (OECD, 2018). It is insufficient to just rely on afforestation that has longer time-lag and uncertain survival rates. Secondly, the mechanism is expected to provide green-jobs in the fossil-fuel regions. Sooner or later, the workers in energy sector must equip with the skills of green technology as the current fossil-fuel product only add 4.5% of Australia gross value, account for one-fifth of total exports and contribute 3% to the total non-grant government revenue (Burke, 2023). Furthermore, Australia has the low cost production of green technology in Pacific and East Asia (IEA, 2019). With its rich endowment in land, wind, and solar resources, Australia has the advantage to be the center of renewable energy market due to its proximity to Asia and Pacific (Garnaut, 2019). ACCUs prioritization to this would flatten the high energy price due to the progressive cap.

Figure 1 As the emitters believe they have done eligible offset project, they continue to emit more without realizing the lag time and survival rate of the forest.

Figure 2 The Safeguard Mechanism initially increases the fossil-fuel price which will accelerate the development of green energy. Prioritizing such an action will accelerate the cost and price reduction of green energy, result in cheaper and affordable green energy in short time.

References

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