Flat carbon prices to 2028 risk Australia’s 2035 climate target, EY analysis warns

Australia risks falling short of its 2035 emissions reduction target unless clearer and more confident policy signals unlock business investment in deeper decarbonisation, according to the EY Net Zero Centre’s Australian Carbon Market Outlook 2026.

The analysis shows Australian Carbon Credit Unit (ACCU) prices are projected to remain flat at AUD $30–35 per tonne of carbon dioxide equivalent until at least 2028, a level unlikely to drive the medium and higher cost abatement needed for meaningful emissions reduction. Prices are projected to rise gradually to around AUD $70 per tonne by 2035, but the report, A time for clarity and confidence: Australian Carbon Market Outlook 2026, warns that without stronger, better sequenced policy mechanisms, investment may lag the pace required to achieve Australia’s 2035 target of a 62–70 per cent reduction from 2005 levels.

The pressure is particularly acute for Australia’s industrial sector, which is responsible for more than a quarter of national emissions and over 80 per cent of Safeguard Mechanism obligations. Under the Safeguard Mechanism, each facility has an emissions baseline, the limit it must stay under, and these baselines decline by 4.9 per cent each year to 2030. The report finds that without clearer policy signals before 2028, businesses may delay investment in long lead abatement technologies such as electrification, process heat transformation and land-based carbon removals, increasing their exposure to rising compliance costs and risking greater market volatility.

“Australian organisations have matured in their baselining, risk assessment and scenario planning, but stable prices alone won’t unlock the scale of investment required for long term emissions abatement,” says Emma Herd, EY Australia Climate Change and Sustainability Services Partner and EY Net Zero Centre Co-Lead.

“We need clearer, more confident policy settings to give businesses the certainty to act at scale and invest in practical, funded, operational emissions reductions.”

The report highlights several policy levers that could strengthen abatement incentives and provide businesses with the clarity they need to plan with confidence:

• Bring forward the Safeguard Mechanism review to report by the end of 2026, enabling earlier policy announcements to remove the current handbrake on investment.
• Extend coverage of the Safeguard Mechanism, bringing more facilities into scope, lifting demand for Australian Carbon Credit Units, and providing over $900 million in national benefits by 2035 (according to the Productivity Commission Clean Energy and Net Zero report).
• Establish a carbon price corridor, or alternative policy action to reduce the risk of very low credit prices, improving investor confidence and motivating orderly abatement.
• Strengthen targeted transport sector incentives, including options such as winding back access to fuel tax credits or introducing an ACCU-linked carbon fuel charge as part of wider road user charging reforms.
• Align carbon and biodiversity markets through “nature positive Australian Carbon Credit Units” that reward land sector abatement and priority nature repair through measurable on-ground action.

The modelling indicates that declining Safeguard Mechanism baselines are placing growing pressure on high emitting sectors, making early action critical to manage compliance costs and volatility.

“Extending incentives to more sectors and strengthening the signals that support the Australian Carbon Credit Unit market will be essential to achieving orderly, efficient decarbonisation,” says Dr Steve Hatfield Dodds, EY Parthenon and EY Regional Chief Climate Economics and Policy Officer, for Oceania.

“Australia has strong foundations in place, but the next decade requires acceleration, moving from frameworks to funded, operational change. A failure to provide investment-grade certainty before 2028 risks higher long-term compliance costs for industry and a slower, more volatile pathway to meeting the 2035 target.”

The report provides updated modelling of ACCU price trajectories, Safeguard Mechanism obligations and emerging abatement opportunities across industry, transport and land‑based activities such as reforestation, soil carbon projects and habitat restoration.

The full report, A time for clarity and confidence: Australian Carbon Market Outlook 2026, is available at this link.

-ENDS-

Media Contact:

Adam Ross, Strategic Communications Leader
adam.ross@au.ey.com
0405 721 313

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