Submission: Safeguard Mechanism reforms for industrial transformations
The Safeguard Mechanism (SGM) works well in delivering abatement while keeping compliance costs low, but it does little to support or incentivise on-site abatement and the transition to resilient and competitive low-carbon industries.
The review of the SGM presents an opportunity to accelerate Australia’s energy transition, strengthen energy resilience and support industrial competitiveness and development. This aligns well to investors’ goals, to manage transition risk in decarbonising their assets, and grow new industries to invest in.
Without reform the SGM will present cost to industry without developing any new competitive advantage. Our research has found the present design of the SGM will not drive significant on-site abatement and the credibility challenge associated with over-reliance on ACCUs will worsen.
Investors understand that ACCUs are meant to reduce average transition costs, allowing companies to decide how to undertake on-site abatement efficiently, when it makes sense for them. However, modelling from EY for IGCC shows that most on-site abatement that should be motivated by the current ACCU price is not materialising. Unpriced costs – learning gaps, local deployment challenges, policy uncertainty, challenging grant funding requirements – all make it simpler to offset.
Waiting beyond this review to address the current and projected overreliance on ACCUs risks locking in emissions-intensive assets with lengthy renewal cycles, meaning less time for the market to prepare and respond to changes. Small incremental price increases do not work well to incentivise expensive, lumpy capital expenditure necessary to decarbonise facilities. Jurisdictions where industrial transformations happen have much higher compliance costs, and much more subsidy than Australian facilities do. A land-sector based approach is only efficient if it supports on-site abatement, not if unfettered access delays it. ACCUs should be used to reduce average compliance costs, not set the incentive price to decarbonise.
Investors and companies want policy certainty, set early, with no surprises; not delayed decisions that condense transition timeframes in a higher-cost environment. Capital spent on land sector drawdown is capital not spent on making industrial assets more resilient and productive.
In EY x IGCC analysis, the reform that shifts the most behaviour by far is giving facilities access to low- or no-cost capital; far more impactful than a higher decline rate. IGCC is posing that this can be done in a budgetary neutral way, through a ‘Reinvestment Contribution’, a small cost on ACCU surrender with proceeds reinvested back into facility transitions. In subsequent analysis by Hatfield-Dodds & Jotzo (2026, forthcoming), a Reinvestment Contribution achieves the most on-site abatement at negative cost, compared to a base case with no reforms.
Key findings and insights from IGCC’s Futureproofing Industry report:
– By 2040, under current ACCU settings, at a 7% decline rate, about half of abatement is met through offsets. A plateau in additional on-site abatement happens between 2030 and 2035, even under 7% decline rate. This risks inefficient assets being locked in, leaving a larger land-sector drawdown task for 2050 and beyond.
– Aligning decline rates to the 2035 target is not enough to switch from offsetting ACCUs to on-site abatement. ACCUs are at $40AUD now and will only get to $100AUD in 2040 under current ACCU settings, even with a 7% decline rate (2031-2035).
– Fossil fuel facilities have ~2.5x the abatement available under $120/t than other industry. This is the low-hanging fruit, with most other abatement on-site costing substantially above this for other industry.
– Some low-hanging fruit (methane abatement) should be motivated at the current ACCU price but is not. Unpriced costs of undertaking the abatement activity, when it is simpler and easier not to, are not overcome by a low and incrementally increasing ACCU price.
– Improving the flexibility and durability of financial supports (not just grants) can add another ~20% (an additional 10Mt from 2030-2035) of on-site abatement. The only intervention in our modelling that meaningfully brought forward on-site abatement was the capital subsidy. This demonstrates undertaking on-site abatement is, for the most part, not nearly competitive at the expected ACCU price.
– Differentiated decline rates shift compliance burdens based on ability to transition in the near-term and cost of that activity, without increasing gross abatement or changing the ACCU price.
IGCC’s recommendations:
- Set a scheme-wide decline rate aligned with a 70% emissions reduction by 2035 task, with differential decline rates set to reflect near and long-term abatement opportunities of each sector.
- Implement a Reinvestment Contribution on ACCUs – generate a pool of capital to recycle back to facilities to undertake on-site abatement, with the finance structured flexibly to have a greater impact than an individual company could source itself.
- Administer Contracts for Difference on ACCUs, to improve long-run price visibility on the ACCU price and to guarantee ACCU supply at a particular floor price.
- Consolidate durable and flexible financial support from established, under-utilised grant programs into more attractive structures.
- Expand SGM coverage by progressively lowering the threshold.
In the submission you will see our upfront response, the Futureproofing Industry report and independent modelling by EYPS and ANU on different ways to reform ACCU use, which IGCC provided peer-review to, and in which our Reinvestment Contribution concept was explored.
