Safeguard Mechanism Reforms: How to Futureproof Industry

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With the correct reform, the Safeguard Mechanism can help accelerate Australia’s energy transition, strengthen energy resilience and support industrial competitiveness and development.

Why the Safeguard Reforms Are a Priority for Institutional Investors, the Economy, and Australian Workers

Investor Group on Climate Change (IGCC) members manage more than A$4.6 trillion locally on behalf of more than 15.8 million Australians and millions more New Zealanders. They have financial exposure across the Australian economy. They invest for current financial performance and with a multi-decade horizon that aligns the retirement outcomes of their members and clients.

The effectiveness of the Safeguard is financially material to investors’ assets and value chains in the short and long term. Without effective reform, the Safeguard Mechanism will not prompt least-cost decarbonisation of Australian industries and it won’t happen fast enough to maintain competitiveness in the global economy. Delayed decarbonisation also increases financial impacts from climate-related damage and disruption across existing portfolios.

IGCC members identified four core objectives for the 2026-27 Safeguard Mechanism Review:

1. Deliver lowest-cost, most-efficient abatement to the Australian economy.
2. Encourage more on-site abatement, and earlier.
3. Expand carbon signals across more of Australia’s economy.
4. Ensure the Mechanism delivers its proportional share of Australia’s 2035 NDC, aligned with the Net Zero Plan.

The need for reform

Without reform, the scheme will impose costs on industry without developing any new competitive advantage.

Our research has found the present design of the Safeguard Mechanism will not drive significant on-site abatement and overreliance on offsets will worsen. Absent further reforms, the Safeguard Mechanism will not improve the competitiveness of existing industry nor support the growth of new industries other than carbon farming.

Key findings

• The scheme is not capturing significant existing opportunities for emissions reductions as the carbon signal sits below the cost of most on-site abatement, so facilities offset their emissions instead.
• The current single decline rate, applied across all industries, transfers value from manufacturing to extractive industries, which have 2.5 times the additional abatement available under $120/t than manufacturing.
  • Australia has a set of industries, including iron processors and airlines, that have an ongoing important role to play in the economy and a long term path to net zero, but they operate on low margins and their decarbonisation technologies are still being developed.
  • The scheme is not incentivising emissions reduction in the industries, primarily fossil fuel extraction, that are most able to make progress. The primary example is addressing fugitive methane emissions.
• Providing different emissions decline rates for different industries would more equitably share the compliance burden in the scheme.
• A 5 to 7% decline rate from 2031 to 2035 is consistent with the 2035 target range. Implementing a 7% decline rate would drive around 15 Mt increased average annual abatement, with around 61% of abatement delivered onsite.
• A 7% decline rate alone does not motivate significant additional on-site abatement before 2040, because ACCU prices don’t rise high enough to force a switch from offsetting. Further measures — such as increased and better-targeted financial support — are needed.
• Lowering the threshold incrementally to capture more of the economy could add another around 5 Mt/year of abatement, and improving financial support could add another around 20% (10 Mt/year) of abatement.

Investors’ proposed reforms

1. Set an average decline rate of 7% from 2031 to 2035, with differential rates calibrated to sector-specific circumstances.
2. Develop a transparent metric based on Marginal Abatement Cost Curves to inform differential decline rates.
3. Improve long-run ACCU price visibility by administering Contracts for Difference.
4. Improve emissions-intensity disclosure under facility and government reporting.
5. Replace the Cost Containment Measure with a price corridor (a floor, with prices able to rise predictably, not just a ceiling on how high prices can rise).
6. Build an enduring form of financial support to bring forward investment in on-site decarbonisation.
7. Expand coverage of the Safeguard Mechanism by progressively lowering the facility emission threshold, starting with 75,000 tonnes CO2-equivalent in 2031.

IGCC also recommends additional items for the Government’s further consideration, including the potential for capping ACCU use at the system level. We further recommend a range of complementary measures alongside the Safeguard Mechanism review, including the implementation of a border carbon adjustment (CBAM).

Download the Modelling and Recommendations