Safeguard Mechanism reforms – how big and how much will it cost?

Abstract

In an effort to reduce greenhouse gas emissions, the Australian government legislated the Safeguard Mechanism (SGM) in 2016. It is generally accepted that it had minimal impact, with no material reduction in greenhouse gas emissions resulting. In a move to address this, the legislation was amended, effective July 2023. These amendments rewrote the rules – baselines will reduce over time, the method of setting them will change, new concepts such as ‘international best practice’ will be introduced and new projects (including those already sanctioned, but not yet onstream) will be subject to tougher requirements. Our analysis will review the impact on the upstream projects currently covered by the SGM, and a select group of new projects. We will give our view on how the transition from the facility-specific to industry-average baselines impacts operators, and identify some of the potential winners and losers. Whilst first reporting is not due until the end of the 2024 financial year, there is still significant uncertainty on how the amended SGM will operate, specifically with regards to ‘industry best practice’. The paper will analyse what this could mean, and potential impacts. Is the SGM the roadmap to net zero that the industry is looking for? The work will leverage Wood Mackenzie’s asset by asset emissions data, and our unique insight into the economics of upstream developments. Ultimately, we will assess the trade-off that has been made by the Australian government – emissions for commerciality – and its long-term impact on the upstream sector.