The Safeguard Mechanism is not delivering adequate levels of abatement
The Safeguard Mechanism is Australia’s cornerstone policy for reducing industrial emissions. An important test is whether it provides adequate incentives for industrial abatement: first, evaluated against its own baselines; and second, with performance assessed against Australia’s 2035 commitment to reduce emissions 62-70 per cent below 2005 levels.
The Safeguard Mechanism is failing both tests.
The Safeguard Mechanism does not provide strong enough incentives for facilities to invest in abatement. Since 2020-21, net emissions have fallen about 12 per cent, but gross emissions have barely declined. The lack of abatement incentive reflects the low cost of complying with baselines.
Under the Safeguard Mechanism, the cost of compliance is determined by the price of Australian Carbon Credit Units (ACCUs). In 2024-25, two thirds of facilities surrendered ACCUs for compliance, totalling 10.7 million ACCUs. In comparison, facilities surrendered only 2.6 million Safeguard Mechanism Credits (SMCs), which represent abatement below baselines. ACCU prices are below the trajectory required for efficient onsite abatement, and not sufficiently stable or certain to provide a strong signal for investments in abatement technology.
The Safeguard Mechanism is also failing to deliver abatement consistent with Australia’s 2035 target range. Emissions from Safeguard facilities will need to fall 5-7 per cent each year between 2031 and 2035 to meet Australia’s commitments, requiring a dramatic increase in abatement investments compared to recent performance.
Australia is not on track to meet its climate target
The Safeguard Mechanism is not the right tool for the job
TSI’s position is that the Safeguard Mechanism is not the right instrument for delivering the broad, deep emissions reductions Australia needs to achieve. It covers only 30 per cent of national emissions, leaving about 70 per cent uncapped. It is extremely complex, with baselines administratively determined and applied at the product and facility level. Cost and price effects are opaque, and it does not raise revenue.
An economy-wide carbon price, such as TSI’s Polluter Pays Levy (PPL), would reduce emissions more efficiently and provide a clear signal for investments in abatement. It would also raise substantial revenue - around $22 billion each year, on average - which could be used to support the transition to net zero.
Reforms to the Safeguard Mechanism need to prioritise stronger abatement incentives
In the absence of a PPL, and in the context of this review, TSI proposes a range of reforms that would materially improve the Safeguard Mechanism. These reforms strengthen incentives for emissions abatement, give Australia a better chance of meeting the emissions-reduction targets aligned with our Paris commitments, and do so at the lowest possible cost within the constraints imposed by the Safeguard Mechanism framework.
There are three priorities for strengthening industrial abatement incentives.
The first priority is to strengthen incentives for abatement in the context of low ACCU prices. The government will need to lift the price of compliance above present ACCU market prices, in a way that preserves a middle road between least-cost mitigation supported by ACCUs, and progressively stronger incentives for industrial mitigation as reliance on ACCUs rises. TSI recommends a progressive ACCU surrender surcharge. A progressive surcharge keeps the cost of using ACCUs equal to or slightly above the market price at low levels of use, but progressively increases the cost of using ACCUs for compliance as dependence increases. This progressively raises the marginal incentive for onsite abatement, while keeping the average cost of compliance well below the marginal incentive.
The second priority is to make the compliance price more predictable, so that facilities can invest in abatement with greater certainty about compliance costs into the future. TSI recommends a predictable minimum Safeguard compliance price, with a published forward pathway. SMCs need a guaranteed minimum sale value, while ACCUs need a minimum effective compliance cost.
The third priority is to tighten baselines to reflect Australia’s 2035 commitment to reduce emissions 62-70 per cent below 2005 levels, by 2035. TSI recommends decline rates of 7 per cent between 2031 and 2035.
These reforms are urgently required. Abatement investments require many years to plan and implement. Postponing these reforms will undermine incentives for industrial abatement well into the late 2030s, making Australia’s task of meeting its targets even harder.
Principles for reforming the Safeguard Mechanism
Our recommendations are guided by five principles:
- Effective mitigation: Ensure the Safeguard Mechanism delivers mitigation commensurate with Australia’s climate ambition, accounting for the risks inherent to offsets and securing high-integrity credited abatement.
- Economic efficiency: Preserve incentives to identify and undertake least-cost credible mitigation.
- Predictable price formation: Provide sufficiently stable and predictable incentives for long-term investment while limiting harmful volatility.
- Simplicity and robustness: Minimise complexity that supports gaming, discretion-related uncertainty, administrative burden, and fiscal liabilities.
- Reform compatibility: Preserve pathways to future improvements in effective mitigation, ambition, and integrity.
Recommendations
General
Australia should introduce a Polluter Pays Levy, as described in TSI’s report The Case for Pricing Pollution (January 2026). The recommendations below apply in its absence.
Strengthening mitigation incentives under the Safeguard Mechanism
Introduce a progressive ACCU surrender surcharge as a facility's reliance on ACCUs increases. Recycle revenue to support industrial decarbonisation.
Introduce vintage restrictions for ACCUs.
Introduce coordinated ACCU and SMC price floors to provide a predictable minimum incentive for industrial decarbonisation. The ACCU price floor should be implemented with a levy worth a fixed percentage of the gap between ACCU prices and the ACCU price floor. The SMC price floor should be set with guaranteed purchases at an agreed rate, and raised at an indexed, published rate.
If the cost containment mechanism regularly binds ACCU and SMC prices, it should be reviewed to reflect the revealed price of abatement.
Coverage
Lower the Safeguard threshold to 25,000 tonnes CO₂-e to align coverage with NGER reporting.
In the absence of an economy-wide Polluter Pays Levy, the government should consider adapting and expanding the Safeguard Mechanism to create efficient incentives to abate emissions in the electricity sector. The Grattan Institute has provided a model which could serve as a starting point for consultation.
Broaden the Safeguard to capture all fossil mining activity, with facility baselines designed to achieve reductions consistent with Australia's 2035 target.
Coal, methane and measurement under the Safeguard Mechanism
Align coal baselines with other sectors: industry-average emissions intensity to apply as soon as possible after 2031, with baselines reflecting the likelihood that mine methane emissions are systematically underestimated.
Introduce industry-financed, independently audited methane monitoring.
Government should examine whether reliance on GWP100 alone adequately reflects the near- and long-term warming effects of short-lived greenhouse gases, particularly methane.
The CER should publish supplementary GWP20 estimates alongside existing GWP100 Safeguard emissions data.
Decline rates under the Safeguard Mechanism
Facility baselines should be designed to achieve reductions consistent with Australia’s 2035 target, and to manage measurement and scientific risk around emissions and offsets. Baselines should decline by 7 per cent per year between 2031 and 2035. Newly-covered facilities should enter the scheme with ‘initial’ emissions reduction contributions, but converge with current participants over a five-year period.
Carbon leakage
Replace trade-exposed baseline adjustments with a border carbon adjustment.
