The Safeguard Mechanism in Australia
For the more than 200 industrial facilities it directly covers, the Safeguard Mechanism is one of the most consequential pieces of climate policy currently in operation in Australia. It is also currently under a formal government review for 2026-27.
This article explains what the Safeguard Mechanism is, how it works, who it covers, and what it means in practice for both for the companies subject to it and for the broader market.
What the Safeguard Mechanism Is
The Safeguard Mechanism is the Australian Government’s policy for reducing greenhouse gas emissions at Australia’s largest industrial facilities. It was established in 2016 and substantially reformed in May 2023, with the reformed settings taking effect from 1 July 2023.
The mechanism operates by setting a legislated emissions limit (known as a baseline) for each covered facility. Baselines are calculated using a production-adjusted emissions intensity framework, meaning they are linked to what a facility produces rather than set as a fixed absolute number. This design is intended to accommodate legitimate growth in output while still requiring emissions efficiency improvements over time.
Facilities that exceed their baseline in a given financial year must surrender compliance units to cover the excess. These can be either Safeguard Mechanism Credits (SMCs) — credits generated by facilities that come in below their baseline — or Australian Carbon Credit Units (ACCUs), which are offsets generated through registered emissions reduction projects across land use, waste, agriculture and other activities.
Who It Covers
The Safeguard Mechanism applies to industrial facilities emitting more than 100,000 tonnes of carbon dioxide equivalent (CO₂e) of covered emissions per financial year. It currently covers over 200 facilities nationally, spanning the mining, oil and gas, manufacturing, waste and electricity generation sectors.
In the electricity sector, the mechanism operates differently i.e. applying a single sectoral baseline across all generators connected to Australia’s main electricity grids, rather than facility-level baselines.
For context, the facilities covered by the Safeguard Mechanism collectively account for a substantial share of Australia’s total national emissions. They include some of Australia’s largest and most recognised companies, many of which are now also subject to mandatory climate-related financial disclosures under Australian Accounting Standards Board Standard S2 (AASB S2). The overlap between the two frameworks is meaningful, the AASB S2 reporting will increasingly make Safeguard Mechanism compliance data visible to investors in a way it has not been previously.
How Baselines Are Declining
Under the 2023 reforms, facility baselines decline at a rate of 4.9% per year through to 2030. For facilities in emissions-intensive, trade-exposed industries (sectors where competitiveness concerns are greatest) a lower decline rate of 3.2% per year applies initially, transitioning to 4.9% over time.
The trajectory is designed to contribute to Australia’s legislated emissions reduction targets: 43% below 2005 levels by 2030 and net zero by 2050.
Decline rates beyond 2030 have been explicitly deferred to the 2026-27 review, which means the post-2030 trajectory remains uncertain. For companies making long-term capital investment decisions such as in industrial processes, energy infrastructure, or production capacity, that uncertainty is material.
The current default prescribed unit price for compliance units is $36.82 per tonne, based on data from 1 July 2025 to 31 March 2026, published by the Department of Climate Change, Energy, the Environment and Water (DCCEEW).
The 2026-27 Review
The government review of the Safeguard Mechanism, now underway, will assess the initial impacts of the 2023 reforms and consider whether policy settings are appropriately calibrated. Key issues under consideration include the post-2030 baseline decline rates, the costs and availability of domestic offsets, the appropriate treatment of international units, arrangements for emissions-intensive trade-exposed activities, and whether a border carbon adjustment should be introduced for select commodities at risk of carbon leakage from imports.
The review coincides with decisions on Australia’s post-2030 emissions trajectory and its 2035 national climate target, placing additional pressure on policymakers to align industrial settings with longer-term ambition. Independent analysis has noted that while the mechanism is delivering declining emissions in aggregate, the pace of change appears to be lagging the scheme’s own baseline trajectory.
What This Means in Practice
For covered facilities, compliance with the Safeguard Mechanism requires ongoing measurement and reporting of emissions under the National Greenhouse and Energy Reporting (NGER) scheme, active management of baseline trajectories and projected surplus or deficit positions, and decisions about whether to invest in operational abatement or purchase compliance units.
There is a spectrum of approaches observable in company disclosures. Some covered facilities are integrating Safeguard compliance into broader decarbonisation planning, with capital expenditure decisions shaped by the declining baseline trajectory. Others are managing it primarily as a cost such as purchasing ACCUs or SMCs to cover excess emissions. The transparency that AASB S2 reporting now requires will make that distinction increasingly visible to investors, as Scope 1 emissions from covered facilities become directly comparable across the market for the first time.
For companies not directly covered including those in supply chains, the finance sector, and smaller industrial operators, the Safeguard Mechanism is relevant as a signal of the direction and pace of industrial decarbonisation in Australia, and as a factor in assessing the transition risk exposure of counterparties, investees and clients.
Our View
The Safeguard Mechanism is structurally one of the more credible elements of Australia’s climate policy architecture as it provides declining baselines, a tradeable credit system, and a clear 2030 trajectory that gives industry an structure to plan around.
What the 2026-27 review should examine is the distinction between genuine operational abatement and offset purchasing as a compliance pathway. A mechanism that primarily drives credit transactions rather than changes to industrial processes will not deliver the emissions reductions Australia’s targets require. The availability and integrity of domestic offsets (particularly ACCUs) has been a subject of ongoing scrutiny, and that scrutiny is appropriate.
The post-2030 trajectory is the most significant open question for covered facilities right now. With decline rates beyond 2030 still to be determined, companies face real uncertainty in long-term capital planning. The next three years will likely bring growing pressure on domestic offset supply as more facilities approach or exceed their baselines, upward pressure on credit prices, and increasing investor scrutiny, particularly as AASB S2 disclosures make Scope 1 emissions from covered facilities directly visible and comparable in a way they have not been before.
For companies outside the direct scope of the mechanism, the Safeguard Mechanism review is still worth watching. Its outcomes will shape the pace of industrial decarbonisation across Australia’s largest emitting sectors, which has flow-on implications for supply chains, financing conditions, and transition risk assessments more broadly.
Sources
- Department of Climate Change, Energy, the Environment and Water (DCCEEW), Safeguard Mechanism, updated April 2026, dcceew.gov.au
- Clean Energy Regulator (CER), Safeguard Mechanism administration and prescribed unit price data, 2026, cleanenergyregulator.gov.au
- Australian Parliament, Safeguard Mechanism (Crediting) Amendment Act 2023, May 2023
- International Carbon Action Partnership (ICAP), Australian Safeguard Mechanism ETS Description, updated 2026, icapcarbonaction.com
- PwC Australia, Safeguard Mechanism, 2026, pwc.com.au
- Grattan Institute / Energy Insights, Safeguard Mechanism 2026: Australia’s Credibility Test, February 2026, energy-insights.com.au
- Net Zero Compare, Australia Safeguard Mechanism, 2026, netzerocompare.com
- Boston Consulting Group (BCG), Australia’s Safeguard Mechanism Is Heating Up, January 2026, bcg.com
- Australian Parliamentary Library, Reforming Australia’s Safeguard Mechanism: An Update, November 2024, apo.org.au
Anabranch ESG Advisory provides independent advice on ESG strategy, climate disclosure, and sustainability reporting. The information in this article is general in nature and does not constitute legal or financial advice.
