Australia’s carbon market is changing gears. Are you ready?

Your business doesn’t need to be captured by reforms to the Safeguard Mechanism (SGM) to need a carbon credits strategy.

The SGM covers around 215 of Australia’s largest greenhouse gas-emitting industrial facilities, including oil and gas producers, mining and heavy industry. These facilities are responsible for around 28% of Australia’s emissions.

Under the previous SGM policy framework, there was little incentive for these facilities to reduce their emissions, even where costs were relatively low. However, reforms to the SGM that were introduced on 1 July 2023 will motivate covered facilities to find and implement abatement opportunities.

The SGM will now set ‘baselines’, or limits, for the direct emissions from each facility that are much closer to current levels of emissions, and will reduce this baseline each year. Australia’s most emissions-intensive facilities are now on a net zero trajectory, with a default obligation to reduce their greenhouse gas emissions by an average of 4.9% each year to 2030.

Facilities that do not meet this reduction are required to buy either Safeguard Mechanism Credits (SMCs) or Australian Carbon Credit Units (ACCUs) to cover the volume of carbon emissions that exceed their baselines.

At the same time, an independent review of ACCUs has confirmed the integrity of Australia’s carbon credit market. The review panel, chaired by Professor Ian Chubb, concluded that the ACCU scheme was “fundamentally well-designed” but made several recommendations to improve the system, all of which have been accepted in principle by the Australian Government.

The ACCU market is now poised to underpin Australia’s carbon policy framework for large industrial emitters until at least 2030, and likely much longer.

2. Low-cost opportunities are available now, but not for long

SGM facilities could have more than 40 million tonnes of annual abatement potential available at under AU$50 per tonne. Most of this can be met through efficiency programs and by addressing fugitive and vented emissions.

But by the early 2040s, we anticipate most of the lower cost abatement opportunities will be realised and options for further abatement under AU$50 per tonne will be largely exhausted.

3. Australia's carbon price is set to double, at least

Market clearing prices for ACCUs will rise under all the plausible scenarios modelled by EY. Our central estimate sees prices doubling to around AU$75 (in real dollars) before 2035.

The plausible range of prices beyond 2035 is very wide – from between AU$65 and AU$125 per ACCU – and the unknowns numerous. What we do know is that the longer SGM facilities delay abatement the more rapidly prices will rise.

The near-term strategies of SGM facilities and other market participants are uncertain and consequential. Long-term, technology developments could be significant. However, policy choices are likely to have larger potential consequences beyond 2035.

Note: Dr. Steve Hatfield-Dodds was a panel member of the Independent Review of Australian Carbon Credit Units in a personal capacity.