Under a production-adjusted framework, the baseline of each facility grows and falls with production output. When a facility’s output falls short of projections, for example, its baseline is automatically lowered accordingly. Similarly, facilities that exceed their projected output see their baseline proportionally increased.
Such a framework has two main advantages. First, by indexing baselines to production it decouples economic growth from emissions growth. Secondly, it ensures companies cannot meet their baselines by simply cutting or offshoring production. This helps prevent carbon leakage overseas.
An absolute framework, on the other hand, is where baselines do not fluctuate with production. Instead, the framework places a fixed limit on emissions that then declines , year on year. It is not adjusted based on production. This provides greater certainty around meeting the scheme’s overall emissions reductions target. However, it can lead to unintended consequences in certain economic circumstances; for example, when production decreases drastically due to a recession – such as during the COVID-19 pandemic – a facility falling below its baseline may be credited below-baseline SMCs that reflect broader economic impacts to production demand, rather than changes to production that contribute towards facility-level carbon reductions
Please note, under the historical Safeguard Mechanism, facilities have been able to apply for a range of baseline types, including: production-adjusted, calculated, benchmark, and reported. Reported and calculated baselines will no longer be available under the enhanced Safeguard Mechanism.