Investor group urges 7% Safeguard Mechanism decline rate to 2035
IGCC modelling by EY finds Australia’s Safeguard Mechanism falls about 10 Mt short of the 2035 target and recommends a 7% annual decline rate from 2031.
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Australia’s Safeguard Mechanism will fall around 10 million tonnes of carbon dioxide equivalent short of the country’s 2035 emissions target if its scheduled settings are left in place, according to modelling published by the Investor Group on Climate Change on 17 August 2026. The report, “Futureproofing Industry: Investor Priorities For a Reformed Safeguard Mechanism”, recommends raising the Safeguard Mechanism decline rate to an average of 7 per cent a year from 2031 to 2035, with steeper reductions applied to coal, oil and gas facilities and gentler ones elsewhere.
The modelling was carried out by EY-Parthenon Strategy using the EY Net Zero Centre’s CARBON VIEW model, in a technical report dated 12 August 2026. The IGCC paper was written by Francesca Muskovic and Bethany Richards, incorporating modelling by EY Net Zero Centre head of research Steve Hatfield-Dodds. It lands as the federal government prepares its statutory review of the scheme in 2026-27, with consultation submissions due on 18 September 2026 and decline rates for 2031 to 2035 required to be set by 1 July 2027.
Why the Safeguard Mechanism decline rate matters
The Safeguard Mechanism applies to facilities emitting more than 100,000 tonnes of carbon dioxide equivalent in covered scope 1 emissions a year. Each facility receives a baseline that falls annually. Under the Clean Energy Regulator’s published schedule, the rate is 4.9 per cent each financial year from 2023-24 to 30 June 2030, after which an indicative 3.285 per cent applies, with the department setting rates in five-year blocks.
That reversion is the pivot in the EY analysis. Modelling the return to 3.285 per cent, EY found it would deliver about a 57 per cent reduction on 2005 levels by 2035 and leave the scheme short of the national target range by roughly 10 Mt CO2e, with carbon prices settling around A$50 to A$60 a tonne to 2040. Australia’s 2035 target, announced by the government on 18 September 2025, is a 62 to 70 per cent cut on 2005 emissions. The 10 Mt figure is the shortfall against that range, not a measure of national emissions in isolation.
EY found that decline rates of 5 to 7 per cent a year from 2031 to 2035 “would be consistent with meeting the national 62-70% emissions reduction target for 2035”. IGCC selected the top of that range, stating that its members “consider that the top of this range should be used to calibrate the Safeguard Mechanism’s average decline rate”. At 7 per cent, EY projects around 15 Mt of increased average annual abatement across 2031 to 2040 against the 3.285 per cent base case, with about 61 per cent delivered on site, and Australian Carbon Credit Unit prices near A$100 a tonne from 2035.
| Decline rate scenario, 2031-35 | Average net emissions a year, 2031-50 | Indicative ACCU price from 2035 |
|---|---|---|
| 3.285% (current indicative setting) | 48 Mt | About A$55/t |
| 5% | 44 Mt | About A$100/t |
| 7% (IGCC recommendation) | 38 Mt | About A$100/t |
| 7% then 5% | 34 Mt | About A$100/t |
Source: EY-Parthenon Strategy, “Analysis of Safeguard Mechanism policy options: Technical Report”, 12 August 2026, prepared for the Investor Group on Climate Change.
Different rates for different sectors
The report’s second theme is that a single rate applied to every covered facility misallocates the task. IGCC recommends decline rates 2 percentage points higher for coal, oil and gas extraction from 2031 to 2035, with other facilities eased so that the aggregate Safeguard baseline is unchanged. EY found that differential rates have “little or no effect on system-wide abatement incentives, market function and efficiency, or total compliance costs”, meaning the change redistributes the burden rather than raising total abatement.
The justification is the shape of the abatement supply curve. EY’s sector analysis puts the share of the abatement task available on site below A$120 a tonne at 29 per cent for fossil fuel extraction, against 11 per cent for manufacturing and other industry and 4 per cent for transport.
Francesca Muskovic, IGCC executive director for policy, stated that “a single, one-size-fits-all decline rate risks penalising industries that don’t yet have a viable path to on-site abatement”, according to coverage of the report published by RenewEconomy on 18 August. She added that tailoring the scheme to sector circumstances “is the lowest cost way to get over the coming decade”, naming iron processing and aviation as industries needing time.
Seven recommendations, including a lower threshold
The report makes seven recommendations in total:
- Set an average decline rate of 7 per cent from 2031 to 2035, with differential rates by sector.
- Develop a metric to inform differential decline rates, based on the marginal abatement cost curves in the EY model.
- Improve long-run carbon price visibility through Contracts for Difference.
- Improve emissions-intensity disclosure in facility and government reporting.
- Replace the Cost Containment Measure, the price cap on ACCUs, with a price corridor.
- Build enduring financial support for on-site decarbonisation investment.
- Expand coverage by lowering the facility threshold, starting at 75,000 tonnes CO2e in 2031.
On the threshold, EY modelled a reduction in three steps, to 75,000 tonnes from 2031, 50,000 from 2034 and 25,000 from 2037, and projected around 5 Mt a year of additional abatement across the economy by 2040, with only a modest effect on ACCU prices. On financial support, an illustrative 50 per cent capital subsidy was modelled as lifting on-site abatement by about 20 per cent, up to 10 Mt a year to 2035. That figure is separate from the 10 Mt target shortfall.
The report also flags that the decline rate alone does not solve the offsets question, noting that “by 2040, almost half of abatement delivered by the scheme is through offsets”. EY tested a facility-level cap of 50 per cent on ACCU surrender and found it raised on-site abatement but roughly tripled compliance costs, prompting IGCC to suggest assessing a system-level cap instead. Readers unfamiliar with the instrument can review how voluntary carbon markets work and how scope 1, 2 and 3 emissions are defined, the boundary that determines what the Safeguard covers.
How the scheme has performed so far
Clean Energy Regulator data for 2024-25, published on 15 April 2026, shows 208 facilities covered, down from 219 the year before, accounting for 29.9 per cent of national emissions. Covered emissions were 132.8 Mt CO2e, down 2.3 per cent, and net emissions 120.3 Mt, down 5.5 per cent. Total baselines fell 7.3 per cent to 126.2 Mt. But 141 facilities exceeded their baselines, with total excess emissions of 13.7 Mt against 9.2 Mt the previous year, and 13.4 million units were surrendered, made up of 10.8 million ACCUs and 2.6 million Safeguard Mechanism Credits.
The IGCC report follows research from the Climate Council published on 12 August 2026, “Free Ride: How our biggest polluters are dodging their fair share”, which found that the 197 facilities continuously covered by the scheme had cut pollution by 0.40 per cent over two years, against the 4.9 per cent annual cut the baselines require, and that emissions from continuously covered fossil fuel facilities rose 0.2 per cent. The Climate Council recommends an overall decline rate of 6.8 per cent, close to IGCC’s 7 per cent but reached from a different starting point. The two facility counts are not the same measure: the Climate Council counts facilities continuously covered across the period, while the Clean Energy Regulator’s 208 is the total covered in 2024-25.
The scheme’s own objects cap net emissions from all Safeguard facilities at 100 Mt CO2e in 2029-30, falling to zero from 2049-50, with a cumulative limit of 1,233 Mt over the decade to 30 June 2030. Australia’s other targets are a 43 per cent cut on 2005 levels by 2030 and net zero by 2050. Industrial emissions policy sits alongside the electricity build-out covered in earlier Winss reporting on Australia adding a record 9.1 GW of renewables in FY26 and on Australia’s Cheaper Home Batteries Program passing 500,000 installations.
About the Investor Group on Climate Change
The Investor Group on Climate Change was established in 2005 as a not-for-profit company limited by guarantee, registered with the Australian Charities and Not-for-profits Commission. It describes itself as the leading network for Australian and New Zealand investors seeking to understand and respond to the risks and opportunities of climate change, and it was a founding partner of the global Climate Action 100+ initiative. Its chief executive is Rebecca Mikula-Wright. The report states that IGCC members manage A$4.6 trillion locally on behalf of more than 15.8 million Australians and millions more New Zealanders, and the organisation lists 101 members. Its 2026 State of Net Zero survey found 56 per cent of respondents naming policy and regulatory uncertainty as a barrier to deploying capital, up from 40 per cent in 2023-24, which is the concern this report attempts to address ahead of the government’s 2026-27 review.
Sources: Investor Group on Climate Change; Investor Group on Climate Change and EY; Clean Energy Regulator; Clean Energy Regulator; Clean Energy Regulator; Prime Minister of Australia; Climate Council; RenewEconomy
Featured image: photo by 振中 潘 on Pexels (free Pexels license).
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I specialize in sustainability education, curriculum co-creation, and early-stage project strategy. At WINSS, I craft articles on sustainability, transformative AI, and related topics. When I’m not writing, you’ll find me chasing the perfect sushi roll, exploring cities around the globe, or unwinding with my dog Puffy — the world’s most loyal sidekick.
