Recent legislation passed in Australia increased its Nationally Determined Contribution commitment under the Paris Agreement from 26-28% to 43% reduction in CO2-e emissions by 2030. More recently, the Australian government announced proposed reforms to the Safeguard Mechanism. The Safeguard Mechanism was instituted by the previous Australian government in 2016 as a way to quieten climate complainers.
Under the Safeguard Mechanism, any companies in Australia that have emissions of more than 100,000 tonnes of scope 1 CO2-e emissions each year are required to reduce their prescribed baseline emissions. Unfortunately, the scheme to date has been virtually ineffective due to generous headroom provisions built into baselines.
The proposed reforms are designed to remove this headroom and require emissions from
safeguard facilities to reduce from 137 Mt CO2-e in 2020-21 to 99 Mt CO2-e in 2030 and
constrain total emissions to 1,233 Mt CO2-e until 2030. Companies that exceed their baseline are able to acquire ACCUs (Australia’s carbon offsets) but are shielded against their rising price to a cap of $75 each. It is noted, there is a lot of criticism of the ACCU option as it doesn’t promote emission reduction at a time when the effectiveness of ACCUs is under question.
It is also noted, that the proposed safeguard mechanism reforms haven’t come about from a
government intent on saving the world from climate change, but rather, from international
pressure, and to some extent, the will of the electorate.
But if new legislation is directed at the big polluters, why do SME’s need to reduce their
emissions? Back in 2015, the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, initiated the formation of the Taskforce on Climate-related Financial Disclosure (TCFD) to harness the undeniable capacity of financial-sector organizations to influence the organizations in which they invest to provide better climate-related financial disclosures.
“Currently, investors, lenders, and insurers don’t have a clear view of which companies will
endure or even flourish as the environment changes, regulations evolve, new technologies
emerge, and customer behaviour shifts — and which companies are likely to struggle.
Without reliable climate-related financial information, financial markets cannot price climate-
related risks and opportunities correctly and may potentially face a rocky transition to a low-
carbon economy, with sudden value shifts and destabilizing costs if industries must rapidly adjust to the new landscape.”Under the TCFD, companies need to assess the potential impacts of climate-related risks and opportunities. This includes disclosing CO2-e emissions and setting carbon reduction targets. Obviously, to do this, companies need to calculate their CO2-e emissions and assess how they can reduce those emissions.
In addition to Canada and the U.K., seven countries have adopted TCFD-aligned official
reporting requirements, including Brazil, the European Union (EU), Hong Kong, Japan, New
Zealand, Singapore, and Switzerland. In Australia, financial regulators have issued guidance that climate-related financial risks must be disclosed as part of existing obligations to disclose material risks, recommending TCFD as a framework for disclosure.
The next wave in climate-related financial disclosure requirements is about to happen with the anticipated release in the next few months of the International Sustainability Standard Board’s IFRS S2 Climate-related Disclosures Standard. The S1 Standard on sustainability-related financial disclosure will also be released at the same time.
The S2 Standard specifically incorporates most of the TCFD requirements, including
governance, strategy, risk management and metrics & targets provisions to ensure corporations are addressing their climate-related risk exposure and exploring related opportunities.
IFRS accounting standards are required to be applied to all Australian reporting entities,
including listed companies and financial institutions. The definition of reporting entity excludes SMEs, but there will be a trickle-down effect to SMEs, simply because of the implications of mandatory scope 3 inclusion in carbon inventories. Larger Australian companies are already starting to engage with their supply chains, exploring the
carbon policies of these suppliers.
Further, the climate-related disclosure requirements can be predicted to trickle down themselves over the not-to-distant future to SME mandatory reporting.
The conclusion from these developments is that SMEs would be wise to address CO2-e
emissions now by first calculating them, categorized into scope 1, scope 2, scope 3 upstream
suppliers and scope 3 downstream customers.
Once the carbon inventory is completed, ways to reduce scope 1 and 2 emissions can be
evaluated and the individual business case for each reduction option developed. Next, focus
should turn to tier 1 suppliers to establish how they can support the SME on its upstream scope 3 emissions reduction journey.
For more information on the Safeguard Mechanism go to: https://www.cleanenergyregulator.gov.au/NGER/The-safeguard-mechanism
If you would like to understand or calculate your carbon emmissions, or learn more about the implications of Carbon regulation for your business, please get in touch with EcoProfit. We can provide advice, run training or short courses for you or your team, and can offer consulting services to support your business.