IGCC urges Safeguard Mechanism reforms ahead of review

The Investor Group on Climate Change (IGCC) is urging further reforms to the Safeguard Mechanism, warning without them the scheme will fail to drive industries to pursue on-site emissions reductions.

The Safeguard Mechanism is the government's policy for reducing emissions at Australia's largest industrial facilities by setting legislated limits - called baselines - on the greenhouse gas emissions of these facilities.

It was reformed in 2023 and is scheduled for a review in 2026-27 to ensure the scheme's settings continue to deliver emissions reductions in line with Australia's targets.

IGCC's report, Futureproofing Industry: Investor Priorities for a Reformed Safeguard Mechanism, argues the scheme's present design encourages facilities to offset their emissions in the carbon market rather than pursue on-site abatement, where industries spend capital to modernise facilities to reduce emissions.

"Facilities that continue to offset instead of investing do not develop that capability and risk capital being deployed elsewhere. Ultimately, strengthening Australia's energy security and resilience demands more focus on incentivising on-site abatement," the report read.

IGCC's report noted with Adjustments to Australian Carbon Credit Unit (ACCU) priced around $37 a tonne in FY26 - well below the cost of most on-site abatement - industries are incentivised to simply offset their emissions.

"By 2040, almost half of abatement delivered by the scheme is through offsets. With only 10 years left to reach net-zero emissions, this risks emissions-intensive assets being locked-in," the report read.

To encourage more earlier on-site abatement, IGCC recommends improving certainty for investors and ACCU project developers by replacing the Cost Containment Measure (CCM) with a price corridor.

"The CCM - the price cap on ACCUs - protects facilities from significant volatility. However, it curtails the long-run carbon price and diminishes the incentive to decarbonise early," the report read.

"Reforming the CCM to act as a price corridor, where prices are able rise predictably over time in response to market demand signals, but are supported by a price floor, would provide increased certainty for buyers and suppliers of ACCUs. We ask government to consider the design of this."

IGCC also recommends setting an average decline rate of 7% from 2031 to 2035, with differential decline rates calibrated to sector-specific circumstances.

"An average decline rate of 7% aligns with the top of the 2035 target range and is projected to drive 15 Mt in increased average annual abatement, with around 61% of abatement delivered on-site without non-compliance," the report read.

"Frontloading on-site abatement at facilities where there are near-term, cost-effective options means that hard-to-abate sectors have more time to find solutions."