Australia’s carbon market has sound fundamentals – but policy clarity, investor confidence and sharper incentives will decide how far and fast it can go.

In brief:

• Gross emissions from 220 facilities covered under Australia’s reformed Safeguard Mechanism (SGM) fell by 2% in a year, largely through low-cost measures.
• But SGM and Australian Carbon Credit Unit (ACCU) policies are not yet motivating investors to commit capital to higher-cost abatement.

A time for clarity and confidence, the 2026 edition of the EY Net Zero Centre’s Australian carbon market outlook builds on previous carbon market analysis. This report provides fresh insights into current market dynamics and the potential impact of further refinements to the Safeguard Mechanism (SGM) and Australian Carbon Credit Unit (ACCU) policy settings.

Australia has set an ambitious 62-70% emissions reduction target for 2035. Achieving it will depend on:

• Refining SGM and ACCU policies to boost investment confidence and activate deeper emissions reductions.
• Motivating broader abatement across sectors currently lacking clear incentives, particularly transport and other industry.

The 2023 reforms to the SGM and ACCU system provide a “light on the hill” for efficient, coherent economy-wide decarbonisation. Success now depends on policy momentum, investor confidence, and alignment between incentives, transparency and outcomes.

Solid foundations, uncertain signals

Australia’s Safeguard Mechanism (SGM) now covers around 220 large facilities, accounting for roughly 30% of national emissions. Early data shows measurable progress: gross emissions from covered facilities fell 2% in the first year of the reformed SGM, much achieved through low-cost measures. More than two-thirds of internal SGM abatement for the first five years can be achieved at costs under AU$25/tCO₂e.

Australia’s integration of high-integrity ACCUs into a mandatory mechanism is globally distinctive. It enables more ambitious obligations while reducing total system-wide abatement costs by over 60%.

Yet, SGM and ACCU policy settings are not yet motivating investors to commit capital to higher-cost abatement from SGM facilities or new ACCU supply. New ACCU supply is also constrained by slow progress on available methods – just one new ACCU method has been approved in the last three years.

Forthcoming SGM and ACCU reviews are expected to explore options to improve investment confidence, strengthen abatement incentives and enhance co-benefits. But the immediate impact of these reviews is to create uncertainty, which risks delaying investment until policy detail is decided and announced.

Clarity delayed, confidence deferred

Markets move with policy certainty – and for now, ACCU prices suggest investors are adopting a “wait-and-see” approach.

EY Net Zero Centre’s updated outlook reflects downgrades to new SGM activity projections and higher-than-expected cost of capital. This translates into lower projected ACCU demand growth and prices, relative to EY Net Zero Centre’s 2023 central scenario.

The updated outlook projects a flat or falling market-clearing ACCU price of around AU$30-35/tCO₂e for the next two-to-three years, followed by gradual growth to around AU$70 by 2035.

This near-term outlook is materially lower than our 2023 central projection, shaving off around AU$25/tCO₂e. After 2035, the price converges with our previous longer-term projection.

But prices to 2040 could plausibly be around AU$14 higher or lower than our central estimate. While higher prices are more likely over the medium- to long-term, sustained low ACCU prices cannot be ruled out.

Sharpening incentives, building confidence

Achieving the 2035 target will require sharper abatement incentives and greater confidence in forward ACCU prices. Aligning the SGM and ACCU reviews to report by late 2026 would support coordinated policy and timely action.

EY analysis shows:

• Lowering the SGM threshold could more than double the number of covered facilities, expanding emissions coverage by around 10% and raising prices by up to AU$5 to 2040.
• Including transport fuels in the SGM could increase ACCU demand by 7.6 Mt per year to 2040 and lift average prices by roughly AU$12.
• Public investment targeted at trade-exposed industries could unlock more than 20 Mt of abatement by 2040 without harming competitiveness.
• Aligning carbon incentives with nature repair could restore priority habitats at scale without government expenditure – avoiding an estimated AU$7.3 billion per year for 30 years – but may add upward pressure on ACCU prices.

Overall, the ACCU market provides a visible carbon price that could serve as a benchmark ‘carbon incentive value’ to guide policy development, and wider public and private investment in abatement.