Safeguard Mechanism’s contribution towards ambitious 2035 NDC

The next milestone on Australia’s emissions reduction pathway is the 2035 target, which is expected to be ambitious to keep the nation on track with its commitments under the Paris Agreement. This paper explores three individual change scenarios to the Safeguard Mechanism, illustrating different pathways for greater emissions reductions in Australia.

We also look at the effect on Australia’s emissions reductions if these scenarios were implemented together. Noting that while the Safeguard Mechanism remains a key policy lever, achieving a 2035 target aligned with net zero will require coordinated policies that incentivise meaningful abatement across the economy – particularly in hard-to-abate sectors.

Key takeaways

• Our analysis shows that ACCU prices are highly sensitive to Safeguard Mechanism decline rates implemented post-2030, ranging between 17 per cent to 50 per cent higher than our base case ACCU price for a fair contribution towards a 65 per cent and 75 per cent target.
• As demand for carbon credits is expected to rise, the time lag in bringing high-integrity carbon supply to market becomes a risk for companies.
• Companies that see benefits will integrate their participation in the carbon market with their on-site decarbonisation strategies, not only as a compliance mechanism, but also as a hedge against uncertainty in abatement costs and availability.

Emissions projections under current policy

If the current policy setting was extended and extrapolated forward, Australia is projected to achieve a 51 per cent reduction in emissions by 2035. However, a straight-line trajectory from the 2030 target to net zero by 2050 would require at least a 57 per cent reduction by 2035.

The Climate Change Authority (CCA) has gone further, recommending a 2035 target of between 65 per cent and 75 per cent emissions reduction to align better with science-based decarbonisation pathways.

To stay on track for net zero, Australia must stretch further than current policy allows – especially in hard-to-abate sectors.

Meeting industrial decarbonisation

For facilities in hard-to-abate sectors, the impact of meeting a more ambitious 2035 target will be challenging. Industrial facilities – particularly those already covered by the Safeguard Mechanism – may be required to achieve additional abatement. It is also likely that facilities not currently covered by the Safeguard Mechanism will be drawn into its scope.

This policy evolution will need to be matched by on-site decarbonisation at each facility, complemented by engagement with the carbon market. Electrification, and fuel or energy substitution with lower-emissions alternatives, and optimisation, will take facilities part of the way, but there are emissions today that cannot be mitigated because the technologies haven’t matured sufficiently, or the impacts or economics are prohibitive.

Therefore, to achieve a net emissions impact, high-integrity offsetting of carbon is required.

As demand for carbon credits is expected to rise, the time lag in bringing new high-integrity carbon supply to market becomes a risk for companies currently waiting on the sidelines. Successful companies will integrate their carbon market participation with their on-site decarbonisation strategies, not only as a compliance mechanism but also as a hedge against uncertainty in abatement costs, risks, and timing.