Carbon Markets

ARTICLE: The reformed Safeguard Mechanism and income tax implications for Safeguard Mechanism Credits (SMCs)

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Australia’s carbon market will soon have a new asset category: the Safeguard Mechanism Credit unit (SMC). Under the reformed Safeguard Mechanism which took effect on 1 July 2023, these new units will come onto the market from January 2025.

To what extent the Safeguard Mechanism is effective and cost efficient in achieving the emissions reduction targets will be influenced, at least to some degree, by the income tax consequences of the emissions unit transactions in relation to both SMCs and ACCUs. Given the different tax treatment of ACCUs and SMCs, as well as different carrying costs, Safeguard Mechanism facilities will need to weigh up the varying tax consequences of unit surrender on market pricing, and surrender strategies.

In this article[1], Associate Professor at the University of Sydney Law School, Celeste Black, provides a summary of the income tax rules under the Safeguard Mechanism and the varying tax consequences of unit surrender.

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