Posted: 07 Aug. 2020 03 min. read

Managing climate risk

How the Safeguard legislation can help

In 2015, Australia was one of 196 parties that came together under the Paris Agreement to take action aimed at limiting global warming to well below 2 degrees Celsius above pre-industrial levels. Central to the achievement of this Agreement’s long-term goals are Nationally Determined Contributions (NDC), which disclose commitments by each country to reduce national emissions and adapt to the impacts of climate change. Under its NDC, the Australian Government has committed to reducing emissions by 26–28 per cent on 2005 levels by 2030[1] which it intends to achieve through its Direct Action approach. 

A key lever in achieving this commitment was the introduction of the Safeguard Mechanism in 2016, designed to ensure emissions reduction activity under the Emissions Reduction Fund is not offset by substantially increased emissions elsewhere in the economy.

Having worked with several clients to assess the impact of the Safeguard legislation’s introduction it was clear that as long as an organisation was aware of the implications, little action was required, and minimal financial risk existed. However, this all changed with the 7 March 2019 amendments to the legislation which, amongst other things, set an expiration date for the conservative ‘Reported Baselines’ given to all facilities. Accordingly, organisations are being forced to take meaningful action across all of their high emissions assets or literally pay the price.

Further amendments on 12 May 2020, due to the disruption of the COVID-19 pandemic to businesses, extended the application deadlines and expiration of the Reported Baselines by 12 months.

Key dates now in effect are:

  • 30 June 2021: The expiration date for all Reported Baselines
  • 31 October 2021: The last application deadline for a Transitional Calculated Baseline, although an interim deadline of 30 July 2021 could be applicable
  • 1 July 2020: The latest date a Transitional Calculated Baseline can take effect from regardless of when the application is submitted. This means it will replace the Reported Baseline in its first year, rather than commencing afterwards.

Moving forward, to minimise exposure to purchasing Australian Carbon Credit Units (ACCU) to offset baseline exceedances under the Safeguard Mechanism, one of the key options available to companies is to apply for a Transitional Calculated Baseline as per the key dates outlined above. To prepare this application effectively, organisations will need to undertake detailed forecasting of their emissions profiles (as well as production) over the upcoming 2-3 year time horizon for each facility under their operational control. This means that, for many of Australia’s largest emitters, they will be creating a detailed blueprint of their overall emissions profile moving forward on an asset by asset basis for the first time.

With the broader societal and stakeholder pressures around climate action, these organisations are already looking at climate risk as part of their broader governance and strategy frameworks, albeit at different stages of maturity. This tends to be in the form of disclosing position statements on climate change, assessing climate risk impacts and opportunities associated with their operations, and developing metrics and targets, including an increasing move towards decarbonisation aspirations. These climate disclosures are generally being developed through the Task Force for Climate-Related Financial Disclosures (TCFD) framework and are often linked to Australia’s Paris Agreement commitments.

This presents a real opportunity for organisations to connect the detailed forecasting of emissions being undertaken as a result of legislative change to how they are addressing climate risk and reporting it publicly. As they develop a more comprehensive understanding of their actual expected emissions profile over the short to medium term, they will be able to more accurately build out their climate disclosure and emissions reduction strategies from the bottom-up. Not only will this facilitate more comprehensive disclosures to stakeholders, but it will also enable better operational planning and initiatives to reduce emissions tied directly into publicly disclosed reduction targets, whilst having the added benefit of minimising the potential cost of ACCUs.

As we anticipate government policy will likely tighten baselines further under the Safeguard Mechanism in the future, we expect upward pressure on the price of ACCUs as companies find it harder to remain beneath their legislated baselines. Accordingly, the time is now for corporates to act to ensure their baselines are optimally positioned from 1 July 2020 onwards. Some key considerations include:

  1. What approach should be utilised to accurately forecast emissions across assets?
  2. Assessing whether a Transitional Calculated Baseline is appropriate and, if so, preparing an application for each facility for the relevant upcoming application deadline, being 30 July or 31 October 2021; although applications can be submitted any time before these dates. We would recommend timing the application submission to be straight after a cyclical production forecast.
  3. Moving beyond the application, considering how each facility is positioned to remain below its emissions baseline, and what emissions reduction initiatives are available.
  4. If a facility is likely to exceed its baseline in the future, what options should an organisation consider to minimise financial risk?


Meet our author

Phil Williams

Phil Williams

Specialist Leader, Risk Advisory

Phil is a Registered Greenhouse and Energy Auditor and Director in Deloitte’s Sustainability and Climate Change team. He has 13 years of experience working in sustainability and has led Deloitte’s Safeguard Rule assurance and advisory services since the inception of the legislation. Phil has a wealth of experience in providing carbon and energy and broader sustainability reporting services, having worked with many of Australia’s largest and most complex organisations, predominantly in the Energy and Resources sector. Phil has a process improvement background and is also a Certified Internal Auditor. By coupling his strong understanding of process risks and controls, with his knowledge of carbon and energy, Safeguard and sustainability reporting processes, Phil is able to provide efficient services and relevant improvement recommendations to help organisations draw value out of compliance activities to complement their broader sustainability strategy. Phil is known for his ability to manage and deliver high quality engagements which, when coupled with his pragmatic approach, have been key to assisting many entities not only comply with relevant legislation, but also enhance their sustainability disclosures and strategy.