View all Since the Safeguard Mechanism reforms took effect in 2023, Australia's largest industrial emitters have been navigating a materially different emissions and compliance environment. The Government's 2026–27 Safeguard Mechanism Review now provides an important signal of what comes next. In this article, we explore the key signals from the consultation, their implications for business, and what Safeguard entities should be doing now to prepare for the post-2030 landscape.
What is the government considering?
The consultation highlights that as the existing Safeguard scheme is broadly performing as intended, a re-design of the scheme is not envisaged. Instead, the purpose of the review is to determine how the existing framework should operate beyond 2030, after which there is currently much uncertainty. The key features under review are outlined below.
The post-2030 baseline trajectory
Respondents have been asked to identify the key factors that should be considered when determining the Safeguard Mechanism baseline decline rate for the period beyond 2030. The current Rules provide an indicative decline rate of 3.285% per year from 2030–31 to 2049–50, with the actual rate for 2030–31 to 2034–35 to be determined through the 2026–27 review and confirmed by 1 July 2027. However, the policy context has materially changed since the 3.285% rate was established. Australia has now adopted a 2035 emissions reduction target of 62–70% below 2005 levels, and the Climate Change Authority has identified increasing the Safeguard Mechanism’s decline rate as an important lever for achieving this target.
For businesses, the important point is uncertainty. The post-2030 trajectory will determine the scale and timing of future compliance obligations and, consequently, the investment required to meet them.
A potential shift in the role of carbon units
The Government intends to retain flexibility for compliance through permitting use of Australian Carbon Credit Units (ACCUs), Safeguard Mechanism Credits (SMCs), banking, and borrowing beyond 2030 but is considering whether current settings provide sufficient incentive for facilities to pursue onsite emissions reductions.
For ACCUs, three different options have been proposed to encourage decarbonisation through the introduction of: (i) a hard cap on use of ACCUs, (ii) discounting ACCUs so liable entities surrender more ACCUs for each tonne of emissions produced and/or (iii) permitting vintages under various ‘qualitative’ limits (e.g. only permitting ACCUs issued in the last five years). International offsets are also discussed, ruling out non-Paris aligned units but considering Paris Agreement Article 6.2 and 6.4 aligned offsets.
The implications could be significant. If baseline decline accelerates while access to ACCUs becomes more constrained or expensive, the value of onsite abatement increases, but so does the risk of higher compliance costs where technically viable abatement is not yet available. Also, a baseline decline simultaneously reduces SMC availability. This makes the future ACCU and SMC markets an increasingly important component of corporate risk management rather than simply a year-end compliance consideration.
Potential expansion of Safeguard coverage
The consultation highlights that the Government will consider lowering the Safeguard liability threshold, but only if benefits outweigh the costs of compliance. Analysis in the consultation has been provided to show the implications of reducing the threshold from 100kt down to 25kt in various increments, including new sectors that would be introduced to the scheme at each point. Feedback is sought on whether a new threshold should be adopted, and how these changes could be introduced to reduce compliance shocks for newly covered facilities.
Businesses currently below the threshold should therefore consider modelling their emissions trajectory through 2030–35 and the incremental cost of becoming liable, including compliance capability, ACCU/SMC acquisition costs, emissions reductions and associated capital investment.
Competitiveness, carbon leakage and trade exposure
The review is considering whether Trade-Exposed Baseline-Adjusted (TEBA) arrangements remain fit for purpose as Safeguard baselines decline. As compliance costs increase, more facilities could become eligible for TEBA, while the current facility-level cost-impact test may create unintended incentives to defer abatement. The Government is therefore seeking views on whether TEBA eligibility should instead be determined on a sectoral basis, alongside other potential changes to simplify administration and strengthen incentives for timely decarbonisation.
The review also recognises the longer-term risk of carbon leakage and considers the potential introduction of a carbon border adjustment mechanism (CBAM) for selected products. Importantly, it examines how CBAM would interact with TEBA, including whether TEBA provisions should continue where a facility becomes subject to a CBAM.
For trade-exposed businesses, the key issue is therefore the combined effect of declining Safeguard baselines, TEBA settings and emerging border carbon measures. These changes could materially influence the relative competitiveness of Australian production and should be factored into decarbonisation, investment and market strategy.
Sector-specific changes
For certain coal miners, the accounting of emissions that underpin the Safeguard scheme has recently undergone some major changes, with further changes tabled in the Safeguard Mechanism Review. The consultation specifically seeks feedback on whether compared to other sectors, coal mining operations are receiving fair treatment for their abatement potential and emissions intensity treatment.
To encourage the transport sector’s participation in the Safeguard scheme, the consultation considers mandating national transport facilities instead of permitting reporting of activities via state-based facilities. Current reporting via state-based facilities can distort results, as transport across larger distances in larger states often trips thresholds for inclusion in the Safeguard scheme, compared to similar distance transport which spans multiple states yet doesn’t meet the thresholds for inclusion within each state facility.
What does this mean for businesses?
The next phase of the Safeguard Mechanism should be treated as a strategic risk and investment issue, not simply a compliance issue.
For existing Safeguard entities, four uncertainties are particularly important:
- Baseline risk: How quickly could the facility's baseline decline after 2030?
- Compliance cost risk: What happens if ACCUs become more expensive or less available and SMC demand increases?
- Abatement delivery risk: Can the facility deliver the required onsite abatement within the available technology, project and capital investment cycles?
- Regulatory coverage risk: Could changes to thresholds or facility arrangements create new Safeguard liabilities?
From compliance forecasting to investment planning
The outcome of the Safeguard Review will not be known until 2027, but businesses do not need to wait for policy certainty to start preparing. For Safeguard entities, we see five priority areas for action:
- Model the 2030–35 compliance exposure under different baseline decline and ACCU price scenarios
- Build a marginal abatement cost curve
- Stress-test carbon market exposure and consider options for proactive ACCU acquisition
- Assess future liability for near-threshold businesses
- Connect Safeguard planning with climate transition planning
ERM supports businesses across Safeguard Mechanism strategy and compliance, decarbonisation and transition planning, carbon market risk management and climate-related financial risk. Our services include Safeguard liability and compliance modelling, ACCU and SMC market analysis, abatement and technical feasibility assessment, carbon market due diligence and financial quantification of climate-related risks and opportunities under AASB S2. Please get in touch to discuss how we can support you in developing a robust and well-positioned consultation response, or with any of your broader Safeguard Mechanism, decarbonisation, carbon market or climate-related financial risk needs.
