Seizing opportunities in the energy transition

Decarbonisation and emissions regulation

by Danielle Jones, Alexander Ninkov, Tom St John and Victoria Costa

Targeting net zero

The Australian Government has committed to various initiatives to decarbonise our national economy and support the energy transition. In 2022, Australia's greenhouse gas emission reductions targets were legislated under the Climate Change Act 2022 (Cth), including to reach emission levels of 43% below 2005 levels. To achieve these targets, the Government is developing a net zero 2050 plan, 2035 emission reduction targets and six key sectoral decarbonisation plans, including for the electricity and energy sector.

In addition to regulating and reducing emissions, governments around the world, including NZ, the UK and Singapore, are moving at pace to implement reporting regimes that require internationally aligned, climate-related financial disclosures from companies. With Australia's own mandatory climate disclosure regime set to be phased in from 2024, businesses will need to prepare for greater transparency and accountability as to their climate-related information.

Companies across all sectors are increasingly looking for green energy solutions to deliver on their own carbon-reduction commitments. Critical minerals are set to play a central role in facilitating the energy transition, and the Government's recently published Critical Minerals Strategy 2023-2030 aims to position Australia as a leading clean energy player. However, ensuring that mineral production decarbonises in an efficient and effective manner presents a significant change from business as usual—especially for Australia's resource sector.

In this section, we will look at decarbonisation and emissions regulation through three lenses:

  • climate reporting and mandatory disclosure
  • the Safeguard Mechanism scheme
  • decarbonation and green energy solutions.

What's the challenge?

Climate reporting and mandatory disclosure

Traditionally, the climate-reporting landscape has been fragmented across various voluntary frameworks and mandatory requirements. This fragmentation limits the ability of investors and other stakeholders to remain fully informed about the impacts of climate change on companies—including in relation to climate-related risks and opportunities that may reasonably be expected to affect financial performance over time.

The challenge of uplifting climate-related financial reporting to the global baseline set by the recently finalised International Sustainability Standards Board Standards should not be underestimated. In Australia alone, it is expected that the proposed regime will ultimately cover more than 20,000 organisations. Meeting these increased demands will require significant capacity and capability building within organisations and across service sectors, including as to emissions reporting and accounting, climate risk assessments and assurance.

Safeguard Mechanism

Australia has had to contend with myriad policy challenges and regulatory dilemmas on its path to net zero, and chief among them is the complexity of tapering the nation's emissions profile without jeopardising the financial viability of new and existing facilities. Policymakers are busy with major overhauls to Australia's climate policy framework (eg recent changes to the operation of the Safeguard Mechanism) that seek to address the concerns of industry stakeholders whilst also satisfying the overwhelming public desire for a rapid decarbonisation of Australia's economy.

Decarbonisation and green energy solutions

In many industries—particularly those in remote areas such as mine sites—the default power sources have been diesel and gas. The economic imperative of ensuring the continuity of operations in all circumstances (ie the ability to run operations 24/7) meant that the lowest-risk and most reliable power solutions were adopted. However, with many companies increasingly focused on decarbonisation and the need to manage their exposure to volatile energy prices (particularly for diesel and gas), renewable sources of power are increasingly being sought.

The transition from fossil fuels to renewable sources of power will be complicated, requiring multi-faceted solutions (and will, invariably, be linked to governments' ability to fund and execute network changes) that allow companies to reduce their carbon footprint while maintaining power security.

What's happening now?

Climate reporting and mandatory disclosure

In July 2023, the Government closed its second consultation on implementing Australia's proposed climate-related financial reporting regime—for a detailed analysis, see our recent Insight. Many entities, including large electricity buyers and users, are already subject to emissions reporting requirements under the National Greenhouse and Energy Reporting Act 2007 (Cth) (the NGER Act). However, the proposed regime will have a much wider reporting threshold, and will require far wider and more granular disclosures of climate-related information. This means entities such as private capital investors and other unlisted entities may be subject to reporting requirements for the first time. As such, businesses should now be considering the application of the regime to their operations.

Safeguard Mechanism

First introduced in 2016 as a pillar of Australia's climate change policy, the Safeguard Mechanism establishes site-specific emissions baselines for the country's highest-emitting facilities in the resources and industrial sectors. As of July 2023, the Safeguard Mechanism underwent significant reforms, imposing a 4.9% year-on-year reduction of each covered facility's emissions baseline, legislating a 'hard cap' on emissions from around 215 covered facilities, and introducing a new emissions credit and offset mechanism for facilities with annual emissions below their baseline (known as a Safeguard Mechanism Credit (SMC)). While the implications of the annual ratcheting down of emissions baselines remain to be seen, we expect there will be growing opportunities for businesses offering compliance-driven, carbon-abatement strategies and carbon offsets, in addition to consequences for contracting and trading in existing carbon offset markets, as a result of the introduction of SMCs.

Decarbonisation and green energy solutions

The key things happening at a federal level to support and/or encourage decarbonisation of various sectors are:

  • The Government's National Reconstruction Fund will support the energy transition, with $1 billion earmarked for 'value-add in resources', and $3 billion earmarked for 'renewables and low emission technologies' priority areas.
  • The Clean Energy Finance Corporation, Australian Renewable Energy Agency and Northern Australia Infrastructure Fund are playing leading roles in accelerating investment in decarbonisation, through project finance, debt market solutions such as green bonds, and equity instruments.
  • The Australian Securities and Investments Commission has emphasised company directors' responsibility to ensure appropriate governance structures, with reliable and useful information being disclosed, while warning against 'greenwashing'.
Guarantee of Origin scheme

The development of an internationally aligned framework to track and verify emissions from clean energy products has been in the works since 2021, in part driven by the emergence of the hydrogen market as a viable path to decarbonising Australia's electricity production. These efforts have culminated in the proposed introduction of the Guarantee of Origin scheme: a landmark proposal that will provide a mechanism to verify emissions associated with hydrogen and other low emissions commodities produced in Australia. In addition, the planned introduction of the Renewable Energy Guarantee of Origin Certificate opens the door for an ongoing renewable energy certificate framework designed to support the ongoing energy transition. This is especially relevant given the Renewable Energy Target scheme is due to sunset in 2030 and take with it the large-scale generation certificates created by eligible generators under that scheme. With policy consultation and trial workshop phases now in the rearview mirror (and $38.2 million allocated to the creation of the scheme in the 2023–24 Federal Budget), the Government is now developing the legislation and methodology, with a view to commencing the scheme's operation in 2024.

What's next?

Large electricity buyers
Climate reporting and mandatory disclosure

Many large electricity buyers and users are already subject to emissions reporting requirements under the NGER Act; however, the proposed regime will require far wider and more granular disclosures of climate-related information. The NGER Act will operate alongside the proposed regime and inform a number of its components, including scope 1 and 2 emissions accounting methodologies. Nevertheless, entities subject to the NGER Act must comply with both legislative frameworks, including any different reporting requirements (eg timelines), under the regimes.

Safeguard Mechanism

Facilities captured by the Safeguard Mechanism should be proactive in pursuing carbon abatement strategies, and ensure reporting and compliance policies are up to date, particularly as the Clean Energy Regulator's remit continues to grow.

For large electricity buyers, the short-term outlook is still relatively uncertain. Emissions in connection with electricity generation are only subject to an overall sectoral baseline, rather than a prescribed baseline for each facility. It is theoretically possible, but in our view unlikely, that the Government will expand the Safeguard Mechanism to impose a carbon cost on the electricity sector.

Decarbonation and green energy solutions

Large electricity buyers should be acting now to ensure they meet their carbon reduction targets.

Carbon-related challenges and consequences can impact project financing/refinancing, access to government grants and future plans to expand operations or change load profiles. The fundamental task is ensuring that the decarbonisation strategy and green energy solution fit into a project's broader strategic plan.

These issues are complex and time consuming, and a fertile area for delay. Ensuring all internal and external stakeholders are on board early, and are brought along on the decarbonisation journey, is vital to ensuring those targets are met.

Private capital investors
Climate reporting and mandatory disclosure

It is now clear that the proposed mandatory regime will apply widely, and capture large listed entities and financial institutions, as well as large unlisted entities, including private capital investors. Investors that are not currently voluntarily reporting climate-related information may require significant and expedited uplift to comply with the pending reporting requirements.

Safeguard Mechanism

Investors should consider available opportunities in the market for carbon abatement services, as Safeguard Mechanism facilities will be on the lookout for strategies to contend with declining emissions baselines—we are seeing an active M&A market for carbon aggregators and an increased interest in utility-scale battery storage.

Decarbonation and green energy solutions

Discussion of the emergence of pricing premiums for clean, low-carbon products (eg gold) has been building. Investors should be aware that commodities could increasingly be priced according to how they were produced, as would be the case under the proposed introduction of the Guarantee of Origin scheme.

They should also be aware that carbon border taxes are being proposed in various jurisdictions to facilitate the transition away from fossil fuels.

Climate reporting and mandatory disclosure

The proposed regime will require reporting entities to disclose information regarding climate-related risks and opportunities, including across their supply chains. Developers with complex and oftentimes geographically diverse supply chains may face significant flow-on effects from climate-related impacts on these supply chains. As such, developers should take steps to engage with suppliers to obtain accurate information in a timely manner for their own reporting purposes.

Safeguard Mechanism

Developers should be cognisant of the so-called 'pollution trigger' under the Safeguard Mechanism bringing increased scrutiny of the emissions profile of a new or expanded safeguard facility. This is because it requires the Government, in deciding whether to grant approvals, to consider and undertake public consultation on the development's estimated carbon emissions. New facilities (or existing facilities that begin producing new products) will have emissions baselines set by reference to 'international best practice levels' adapted for an Australian context. The guidelines for assessing international emissions benchmarks are presently under development and expected to be published in late 2023.

Decarbonation and green energy solutions

Access to capital to facilitate investment remains a central challenge. Financial institutions are increasingly rewarding decarbonisation with access both to equity and debt finance. Project proponents should view decarbonisation and renewable energy solutions as potential drivers of future value, and not simply as appendages to a larger product.

Australian mining companies increasingly rely heavily on a 'social licence' to operate. Proponents should be aware that emissions (and abatement) are now regarded as presenting real reputational risks. Natural resources companies need to have a clear plan to decarbonise—a failure to do so risks reputational consequences, with lasting economic consequences.