Is the Safeguard Review asking the right question?

Australia does not need to choose between industrial decarbonisation and a functioning carbon market. It needs both. 

One question being considered as part of the Australian Government’s ongoing 2026–27 Safeguard Mechanism Review (‘the Safeguard Review’) is whether the scheme is “appropriately incentivising onsite abatement” and whether changes to how Safeguard facilities can use Australian Carbon Credit Units (ACCUs) could strengthen that incentive. The National Greenhouse and Energy Reporting Act 2007 (NGER Act) requires each Safeguard facility to face “a material incentive to invest in reducing covered emissions from the operation of the facility”.  However, the existence of an incentive does not necessarily imply that policy should require climate change mitigation to exclusively occur within the boundaries of designated facilities. 

The Safeguard Mechanism is designed to place an increasing emissions constraint on designated facilities and currently allows those facilities flexibility in how they respond. Organisations with exposure to the Safeguard Mechanism can a) invest onsite, b) acquire Safeguard Mechanism Credits (SMCs), or c) use ACCUs. This flexibility allows businesses to tailor their responses in light of differences in technology readiness, costs and investment cycles. 

The Safeguard Review is canvassing opinions on limitations on ACCU use, discounting and vintage restrictions that could increase incentives for mitigation activities occurring within designated facilities.

This raises an important question for policy makers - will increasingly prescriptive settings unlock emissions reductions that would not otherwise occur, or will they increase the economy-wide cost of achieving Australia’s climate goals?

The real issue: how much flexibility the scheme should preserve  

Appropriately incentivising reductions in covered emissions is a central objective of the Safeguard Mechanism. But that objective does not, by itself, determine the appropriate balance between abatement at Safeguard facilities and abatement elsewhere in the economy, including through ACCU projects. A more relevant test is whether the Safeguard Mechanism is driving investment in climate change mitigation activities in a way which is cost-effective, enables trade-exposed businesses to compete in global markets, and improves confidence in Australia’s industrial policy settings. 

The Safeguard Mechanism should be used to encourage decoupling of industrial growth from emissions through predictable declining baselines, meaningful facility-level investment signals and access to high-integrity, market-based compliance options. Reform should target demonstrated barriers—not constrain flexibility simply because some abatement occurs beyond a facility boundary. 

Striking a balance between emissions reduction incentives and flexibility

Section 3(2) of the NGER Act offers a series of objectives (called “safeguard outcomes”), including: 

• declining aggregate emissions from designated facilities,
• reducing net emissions consistent with national targets,
• creating material incentives for facilities to reduce covered emissions, and
• support for the competitiveness of trade-exposed industries. 

Flexible compliance enables competitiveness of Australian businesses to be balanced with ambition. At present, Safeguard facilities can meet part or all of their compliance shortfall using ACCUs or SMCs to effectively finance climate change mitigation projects where these can be achieved most cost-effectively as opposed to only within their own facility boundaries. Greater reliance on mitigation outside facility boundaries can raise legitimate questions about the integrity, permanence and distribution of that mitigation. Those risks are better addressed through robust integrity settings than by assuming that mitigation within a Safeguard facility is inherently preferable. 

We should be mindful that climate change is an inherently global problem and facility boundaries are an accounting construct created to help us measure where emissions are occurring. As such, the relevant policy question is not whether enough emissions reductions occur within designated facilities, but rather whether proposed reforms help to achieve the safeguard outcomes.  Any case for restricting flexibility should turn on whether doing so improves performance of the scheme—not simply on whether it causes more abatement to occur inside a facility boundary.

Different reform options imply different views about the role of flexibility 

The Safeguard Review canvasses a range of adjustments which could be combined in different ways. Whilst individual settings are not mutually exclusive, they broadly sit along a spectrum between preserving flexibility and placing greater emphasis on where mitigation activities occur. 

At one end of the spectrum, the Safeguard Mechanism could continue to use a combination of declining baselines and flexible, market-based compliance options. Facilities would face a growing incentive to reduce covered emissions, but retain the flexibility to determine whether onsite investment or acquiring carbon units represents the most cost-effective response at a particular point in time. Predictable post-2030 baseline decline rates, continued ability to use ACCUs and SMCs, and targeted support for emerging industrial technologies would enable such an approach. 

At the other end, the settings could place greater emphasis on emissions reductions within designated facilities. Restrictions on the extent of ACCU use, discounting of ACCUs used for compliance, or other mechanisms could be used to increase the relative value of onsite abatement and create more incentive to bring forward facility-level investments. 

The Safeguard Mechanism should continue to pursue ambitious net emissions reductions whilst preserving the flexibility inherent in its market-based design. Market based compliance enables the safeguard outcomes to be reconciled by encouraging the lowest cost climate change mitigation activities to occur. 

After more than 10 years of operation, the Safeguard Mechanism is an established part of Australian climate policy, making predictability in how its settings evolve important for investor confidence. If the scheme is to move toward more prescriptive settings, those adjustments should be made only where there is strong evidence that they encourage achievement of the safeguard outcomes in a superior way. Absent such evidence, policy settings should focus on strengthening the constraints on covered emissions, rather than prescribing what mitigation activities are appropriate and where they must occur.

The broader goal: decoupling economic growth from net emissions growth 

Australia does not need to choose between a strong industrial economy and lower emissions. Resources and industrial production remain major sources of exports, employment, regional investment and government revenue, but these sectors also need to decarbonise substantially to meet the country’s Nationally Determined Contribution.   

The policy challenge is therefore not to choose between growth and decarbonisation; it is to create conditions in which they can be separated; or indeed where decarbonisation drives growth. Market-based compliance can support this by directing capital towards the lowest-cost climate change mitigation opportunities. A successful scheme should help Australia reduce net emissions while supporting investment, productivity and a competitive industrial base. This reflects the broader goal of sustainable development: decoupling economic growth from environmental pollution and natural resource use so that present needs can be met without compromising the ability of future generations to meet their own needs.

Climate ambition without policy stability risks making Australia’s industrial base less competitive  

Many Safeguard facilities compete in global commodity markets where both demand and prices are determined by international forces, not Australian climate policy. Safeguard facilities therefore cannot simply pass higher carbon costs on to their customers.   

If Safeguard settings increase costs too far or too quickly, they could discourage investment in Australian projects or shift production to countries with weaker emissions policies, without reducing global emissions.  

At the same time, both industrial decarbonisation and land-based carbon sequestration projects require significant upfront investment and long-term certainty. The Safeguard Mechanism therefore needs to balance ambition with competitiveness and predictable policy settings. Greater certainty will give Safeguard-exposed entities and carbon market participants the confidence to invest in Australian industry.

What Safeguard entities and carbon investors should consider 

Safeguard-exposed entities and carbon market participants can use the Safeguard Mechanism Review to test how different settings could affect their future compliance costs, investment decisions and carbon market strategies. Key actions to consider include: 

• Testing different compliance scenarios: Businesses should model how their Safeguard obligations and costs could change under different post-2030 decline rates and other potential policy changes.
• Revisiting onsite emissions reduction projects: Businesses should look again at their planned decarbonisation projects, as higher carbon prices or tighter compliance settings could make projects that were previously too expensive more attractive.
• Reviewing carbon purchasing and investment strategies: Safeguard facilities should consider how and when they secure ACCUs and SMCs, while carbon investors and financiers should test how different Safeguard settings could affect future demand for ACCUs and the value of their investments.