Opening statement to inquiry into the Safeguard Mechanism (Crediting) Amendment Bill 2022

28 February 2023

BCA President Tim Reed and Chief Executive Jennifer Westacott AO

Senators, thank you for the opportunity to appear before you today.

The Business Council has a longstanding position supporting sensible climate policy that cuts emissions while guaranteeing affordable, secure and reliable energy.

We believe market-based mechanisms are the best way to drive investment into low emissions technology.

We are now at a pivotal moment where we have the opportunity to build on the momentum that Australian businesses have achieved over the last five years and head towards a more ambitious 2030 agenda.

But without policy certainty and policy realism, we run the risk of another five to 10 years of delay and inaction. Meanwhile our competitor countries will overtake us in the development of new products and the development of new technologies such as hydrogen.

The BCA’s landmark Achieving a net zero economy report outlined a 7-point climate policy architecture to reach net zero by 2050. At the centre of this plan was an enhanced safeguard mechanism supported by a credible offset market.

This plan was the culmination of two years of detailed work with extensive and widespread input and engagement from BCA members. Our membership covers the entire spectrum of the economy, including energy users, producers, retailers, generators and financiers. They all said our policy architecture and supporting principles were the best means of achieving a more ambitious, mid-term target and net zero by 2050.

Our message – business needs certainty to invest

Our message to this committee is simple – business needs certainty to invest and without attracting significant investment, Australia will be severely limited in its ability to meet its binding commitment to reduce emissions by 43 per cent by 2030 towards net zero by 2050.

The reformed Safeguard Mechanism provides that certainty while pushing the country closer than it has been for a decade to achieving a credible and practical pathway to net zero.

We support the reform Safeguard Mechanism’s objectives to achieve a net zero emissions economy which delivers new industries, new exports, new jobs, new opportunities and better living standards. If the economy is knocked off course, we risk our global competitiveness as our other major trading partners continue to decarbonise.

Business does not underestimate the difficulty of the emissions reduction task, but policy certainty is crucial.

No one can afford a repeat of the mistakes of the past. The perfect cannot be the enemy of the good; too much is at stake.

Our approach must be gradual, technology neutral, maintain reliability of the energy system and supply feedstock for industry.

If we attempt to push the system too hard and too fast, we risk falling short.

Our recommended design for an enhanced Safeguard Mechanism

The BCA has put forward a recommended design for a reformed Safeguard Mechanism, which was first contained in our Achieving a net zero economy report.

It recommends:

  • Emissions need to reduce predictably and gradually over time to contribute to Australia’s emissions budgets and in a way that supports international competitiveness.
  • Explicit support is required for Australian businesses in internationally exposed, hard to abate sectors where and while technology gaps remain.
  • Measures to support these businesses should not come at the expense of other sectors in the economy and should be guided by proper assessment of the threat of carbon leakage.
  • The creation and trading of safeguard credits within the scheme is essential to minimising the cost of the scheme to businesses and consumers. The first priority is to deepen and improve the Australian domestic market.
  • The future use of international credits needs to be considered. Australian Carbon Credit Units (ACCUs) and international offsets are a critical part of global efforts to reduce emissions by allowing Australian companies to participate in credible and accredited carbon offset schemes.

ACCUs are not a ‘free ride’

Most companies are investing in decarbonisation because they know their access to capital, carbon-intensive exports and products are at risk. They are not doing it to tick a box.

Companies know they need to decarbonise as soon as possible but technology gaps currently exist. This is why there is a role for credible offsets.

ACCUs for safeguard facilities are not a ‘free ride’. The cost of these offsets is not low.

Take a large steel works facility with total emissions of 6 megatons per year.

That facility only has access to technology that can reduce emissions 1 per cent until 2030 when new technology comes online. This is because new technology takes time and capital to develop and deploy at scale.

Under the safeguard mechanism that facility’s emissions baseline will decline by 4.9 per cent per year, to stay under it they will need to purchase offsets (ACCUs or SMCs) to be in compliance with the scheme.

If we assume an average cost of $50 per offset until 2030, which less that the current $75 cap on ACCUs, the cost to that facility of meeting it’s safeguard obligations will be $375 million, plus the cost of the 1 per cent emissions reductions per year.

This compliance is being borne at the same time that the facility owner is also investing substantial capital in the development and deployment of its decarbonisation technology at scale.

The cost is of ACCUs are forecast to rise over the short to medium term, while the cost of new low emissions technology is expected to fall.

This means the best hedge for a corporate against rising forward ACCU prices, is to invest in the development and deployment of low emission technologies on site.

There is no medium to long game for any business that relies solely on offsets to reduce their carbon footprint, they simply won’t be viable.

Parallel work on transparency and integrity

We also believe integrity issues in the offset scheme, both perceived and real, need to be addressed.

However, we cannot sabotage the fate of the reformed Safeguard Mechanism legislation – which will create incentives for low emissions investment – while the legitimate but complex issues of transparency, the long-term integrity of the ACCUs system and access to international offsets are explored.

These issues can and should be run in parallel.

Radical rewrites of the legislation will render it unworkable

We believe the fate of the Safeguard Mechanism has flow on consequences for the entire economy.

This why we are urging the Senate to support the government’s legislation and push back against further delays or radical attempts to rework the Bill.

If the Senate votes to bring forward the removal of gas and coal, which every credible piece of modelling stresses is essential for the clean energy transition, the nation risks compromising the reliability of the National Energy Market (NEM).

This would in turn risk increasing energy prices and creating carbon leakage, where investment moves offshore.

This is the last thing Australians and business need as they grapple with cost-of-living pressures.

It would not only erode our international competitiveness and cost jobs but importantly undermine the community’s confidence in the massive task of decarbonising the economy. To succeed in reaching net zero by 2050, Australians must remain onside.

Gas remains a vital feedstock for industry

Senators, it is clear that we cannot allow ideology that ignores economic realities to derail Australia’s carbon reduction commitments.

Blunt restrictions on coal and gas development restrict the achievement of a net zero emissions economy.

Natural gas will be needed to provide critical peaking and firming capacity when wind, solar and other energy storage is not available in the NEM.

Critically, there is no known or foreseeable industrial feedstock for manufacturing other than natural gas. If Australia is serious about rejuvenating the manufacturing sector, including the production of wind farms and other clean energy technologies, we must remain realistic about the role of gas in the economy’s diversification and transition.

Some groups are calling for changes to the government’s proposal that would make the scheme unworkable, that would simply punish workers and punish communities, especially in the regions.

We respectfully ask you to reject these changes and pass this Bill. Thank you.


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