While the Australian Carbon Credit Unit (ACCU) market has been relatively stable over the past six months, Australia’s climate policy landscape is again about to change gears.
By the end of February, Australia will submit its updated Nationally Determined Contribution (NDC) under the Paris Agreement, including a 2035 emissions target.
For Australia’s carbon market, this will guide the shape of the Safeguard Mechanism compliance scheme after 2030 – including the re-setting of emissions baseline decline rates – the key lever to drive industrial decarbonisation, and demand for ACCU offsets.
While final baseline decline rates will not be set until 2026-27, we expect Australia’s new 2035 target to immediately impact the ACCU market as policy ambition shifts sentiment, and underlying forecast market fundamentals.
This is likely to re-shape both spot and forward traded ACCU markets – just prior to the first compliance deadline under the reformed Safeguard Mechanism (31 March).
Market participants must therefore begin to understand the impact of Australia’s updated NDC on the ACCU market, including how baseline decline rates under the Safeguard Mechanism are likely to be aligned to Australia’s new 2035 target.
In this article, we take a closer look at recent modelling within our Briefing paper: “Australia’s 2035 emissions target: Safeguard Mechanism baseline scenarios and ACCU market impacts”, and discuss the key implications for market participants.
The Climate Change Authority’s initial advice recommends that Australia adopt a 2035 target within the 65-75% range
Under the Paris Agreement, countries must update their NDCs every 5 years. Australia’s updated NDC is due by the end of February and will include a 2035 emissions target.
Under the Climate Change Act 2022 the Government must receive advice from the Climate Change Authority (CCA) before submitting its next emissions target. Final advice will be received in October 2024, considering Australia’s fair share of global emissions reductions, economic impacts, and sectoral decarbonisation pathways.
In April 2024, the CCA’s initial issues paper (PDF) recommended that, based on current evidence, a 2035 target in the range of 65% to 75% below 2005 levels would be ambitious, achievable and sustainable.
For Australia’s carbon market, this range provides stakeholders with an upper and lower bound to inform the design of the Safeguard Mechanism framework after 2030, including possible emissions baseline impacts.
How are Safeguard Mechanism baselines currently aligned with Australia’s emissions targets?
In January 2023, the Australian Government (DCCEEW) adopted a “proportional share” methodology to align the Safeguard Mechanism with Australia’s 2030 target.
This was consistent with modelling RepuTex undertook for the Australian Government (which set Australia’s 43% reduction target by 2030), that the alignment of Safeguard Mechanism emissions baselines with Australia’s 2050 net zero target could deliver an estimated 205 Mt of abatement between 2024 and 2030.
The Safeguard Mechanism’s proportional share was calculated as 28.14% of national emissions in FY21 (the most recent year reported emissions data was available).
Applying this to the national budget created a “Safeguard Mechanism emissions budget” of 1,233 Mt CO2e between 2021 and 2030.
From its starting point in 2023-24, a 4.9% annual baseline trajectory (including an emissions reserve) was calculated to satisfy both the Safeguard Mechanism emissions budget and a 100 Mt cap on 2030 emissions, with net emissions estimated to fall to approximately 95 Mt in 2030.
After 2030, a default minimum decline rate of 3.285% per annum, for all years after 2029-30, was legislated to maintain a trajectory towards net-zero emissions in 2050.
We expect emissions baselines to increase if Australia’s national target is greater than 67% on 2005 levels by 2035
In our latest briefing paper, our modelling considered four scenarios for the interaction between Australia’s national 2035 emissions target and post-2030 emissions baseline decline rates under the Safeguard Mechanism:
- Continuation of current 4.9% baseline decline rate after 2030;
- Baseline decline to meet a 65% national emissions target on 2005 levels by 2035;
- Baseline decline to meet a 70% national emissions target on 2005 levels by 2035;
- Baseline decline to meet a 75% national emissions target on 2005 levels by 2035.
Each scenario assumed a 30% proportional share of forecast total reported national emissions in 2025-26, not accounting for any future emissions reserve (e.g., any withholding of the emissions budget to offset uncertainty about future production).
Findings indicated that, under current policy, the continuation of the current 4.9% baseline decline rate would correspond to a 67% national target on 2005 levels by 2035.
Safeguard Mechanism baseline decline rates are therefore likely to increase if Australia’s 2035 target is greater than 67%, with outcomes indicating potential for a much more material increase in annual baseline decline rates at the middle to upper end of the CCA’s recommended target range.
Scenarios would see industrial emissions covered by the Safeguard Mechanism reach net-zero by the early to mid 2040’s (varying by scenario), brought forward from 2050. This would make the scheme’s pathway for industrial decarbonisation more consistent with the United Nations Secretary General’s Climate Acceleration Agenda, which called for developed countries to bring forward net-zero deadlines to 2040.
Refer to the briefing paper for our full scenario analysis of emissions baseline decline rates to meet a 65-75% national emissions target on 2005 levels by 2035, along with our modelling of the potential size of the Safeguard Mechanism total liability (demand for carbon credits after direct on-site decarbonisation actions) to 2035.
Subject to the ambition of the 2035 target, ACCU market impacts may be immediate
Australia’s updated NDC, including a target for 2035, is due to be announced in the next six months, by the end of February 2025.
Decline rates for the 2030-31 to 2034-35 period will then be the subject of DCCEEW consultation in 2026-27, with final baselines decline rates to be set by 1 July 2027.
This process will be wound into the 5 yearly baseline review in 2026-27 (which we touch on in the section below).
While final baseline decline rates will not be set until 2026-27, we expect Australia’s new 2035 target to more immediately impact the ACCU market from February as policy ambition shifts sentiment, and underlying forecast market balance.
In particular, as liquidity builds, we expect the new target to materially impact the shape and level of prices in forward traded markets including both our tracked OTC forward contracting market, and the ASX’s new futures exchange.
Refer to our full briefing paper for more detailed discussion.
Australia’s changing policy environment will continue to actively re-shape the ACCU market
While the ACCU market has been relatively stable over the last six months, we regularly remind our subscribers that Australia’s carbon market is a policy construct.
Australia’s changing policy environment will continue to actively re-shape the market.
It is therefore critical that participants understand how upcoming events are likely to influence prices and market dynamics.
This extends much more widely than Australia’s updated NDC.
One of the more forgotten aspects of the Safeguard Mechanism reform is that the government’s 5 yearly baseline review in 2026-27 will also monitor progress within the current 2030 target period.
This will include the need to adjust baseline decline rates for FY29 and FY30 to meet the 2030 target, for example where new entrants or production growth has been higher than expected, beyond the allocated emissions reserve. This remains highly possible.
In 2026-27 the Australian Government will also review other Safeguard Mechanism policy settings to ensure that (after the first 2 years of operation) the scheme’s settings are still fit for purpose (both before and after 2030). This includes:
- the cost and availability of ACCU offsets;
- the potential inclusion of high-quality international units (offsets or compliance units);
- the suitability of arrangements for EITE activities;
- the treatment of flexibility mechanisms (e.g. banking, borrowing, multi-year monitoring periods);
- the eligibility of SMCs for banking and use after 2030; and
- whether the cost containment measure (CCM) is sufficient.
Following input from Greens MPs in March 2023, the policy review was also expanded to consider the extent to which on-site abatement is being driven by the Safeguard reforms, and whether any additional incentives are required.
This will include the consideration of a “discount” on the abatement value of ACCUs when offsets are used for more than a certain percentage of emissions, or any circumstances where limits on the use of ACCUs may be appropriate[1].
Australia’s methane emissions curveball
Another key policy watch is change to the reporting of methane emissions for open-cut coal mines covered by the Safeguard Mechanism, an area that has received considerable scrutiny from environmental groups and the International Energy Agency.
From 1 July open cut coal miners will begin to transition from the use of ‘Method 1’ production-derived estimates for fugitive methane emissions to ‘Method 2’, involving coal seam specific sampling and characterisation. A further tightening of the Method 2 methodology was recommended by the CCA (among 25 recommendations for enhanced methane reporting) – to which the government will soon formally respond.
Enhancing the accuracy of reported fugitive methane emissions has the potential to significantly re-shape the Safeguard Mechanism’s emissions budget (and Australia’s emissions budget), with implications for the re-setting of emissions baselines in both the current target period, and under Australia’s 2035 new target.
We will look at changes to methane emissions reporting in a forthcoming briefing paper.
As a result, while the ACCU market has been relatively stable over the last six months, a truly stable market must expect the unexpected.
Australia’s changing policy environment continues to loom as the biggest influence on prices and market dynamics. This will begin in February, just prior to the first compliance deadline under the reformed Safeguard Mechanism scheme.
Access the full report
This report was published under our Australian carbon intelligence service. To request access to the full paper, “Australia’s 2035 emissions target: Safeguard Mechanism baseline scenarios and ACCU market impacts”, contact our Client Services team.
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[1] We have previously referred to this as the “four-fifths” rule, which we flagged in our March 2023 policy analysis, whereby if the number of ACCUs surrendered by a liable entity exceeds 50% of a facility’s liability in a monitoring period, each additional ACCU surrendered would only reduce the facility’s liability by “four-fifths” of a tonne (e.g. the benefit of each additional ACCU would only represent 0.8 tonnes of CO2e), creating a stronger incentive for direct emissions reduction investments.
