The Australian government should introduce a national market-based policy to drive electricity sector decarbonisation, potentially modelled on the existing safeguard mechanism, economic research and advisory body the Productivity Commission (PC) said in a final report today.
The PC had previously recommended applying the safeguard mechanism to electricity generators at the facility level, but it may be better to consider this issue separately, it noted in a final inquiry report into "investing in cheaper, cleaner energy and the net zero transformation".
"Multiple policy options will need to be considered for the electricity sector, and even if a baseline-and-credit scheme is preferred, it may be better to keep this separate from the safeguard mechanism, at least at first, to avoid risks of uncertainty and disruption in the carbon credit markets that support that policy," the PC said.
Currently there is little relationship between the emissions intensity of Australia's remaining coal-fired power plants and their announced retirement dates, according to the commission.
Recognising the value of emissions reduction would pave the way for more emissions-intensive plants to retire earlier, it argued.
Electricity excluded from safeguard mechanism
Under the safeguard mechanism, facilities emitting more than 100,000t of CO2 equivalent (CO2e) in a compliance year across several sectors earn safeguard mechanism credits (SMCs) if they report scope 1 emissions below their baselines, and must surrender SMCs or Australian Carbon Credit Units (ACCUs) if their emissions are above the threshold.
The electricity sector, Australia's largest emitter, is effectively excluded from the mechanism because the emissions reduction policy for the segment has been focused on renewable electricity targets. The mechanism applies a single sectoral baseline of 198mn t CO2e/yr across all electricity generators connected to Australia's main electricity grids, which is way above recent data — emissions from the electricity generation sector reached a combined 138.9mn t CO2e in the 2023-24 compliance year.
A decision on whether to expand the mechanism to electricity may be considered in the upcoming safeguard mechanism review in 2026-27.
NEM review
But any new policy will need to complement reforms arising from the National Electricity Market (NEM) review, which also received a final report this week.
The decision will also need to be consistent with several policies and agreements already in place to support new investment or manage the exit of coal plants across Australia, the PC noted.
While the existing Capacity Investment Scheme (CIS) and the proposed Electricity Services Entry Mechanism (ESEM) scheme mainly target renewable output or capacity, a least-cost emissions-reduction policy would help companies deciding when to retire coal and gas plants, according to the commission.
This will be even more important if the Australian government prioritises firming auctions, which may support new gas-fired plants. Emissions policy uncertainty has been a major barrier to investment in gas-powered generation, the PC said.
"Firming auctions will be more effective if project proponents know in advance how their emissions will be treated," it noted.
Apart from a policy to drive electricity sector decarbonisation, the PC's final report urges the government to expand the safeguard mechanism, phase out fuel tax credits for on-road heavy vehicle operators, and reduce barriers to adopting low-emissions technology for heavy vehicles.
And it also calls the government to phase out the fringe benefits tax exemption for electric vehicles (EVs), a recommendation that was criticised by industry body EV Council.
