Around 215 facilities. That is the number of sites currently covered by Australia’s reformed Safeguard Mechanism — the largest industrial emitters in the country, each required to hold enough credits to cover any net emissions above their declining baseline. Steel, cement, aluminium, LNG, chemicals. The policy has been running in its strengthened form since July 2023, and three years in, we are finally getting a read on whether it bites or bluffs.
The honest read is: it bites, but unevenly. And the unevenness matters more than most of the commentary admits.
What the Safeguard Mechanism actually does #
Before the 2023 reforms, the mechanism was largely symbolic. Baselines were set generously enough that most covered facilities never triggered a compliance obligation. The Albanese government’s amendments changed that by requiring baselines to decline at around 4.9 per cent per year on average, converging toward net zero by 2050. Facilities that exceed their baseline must surrender Australian Carbon Credit Units (ACCUs) or Safeguard Mechanism Credits (SMCs) — a new instrument created specifically for this scheme and issued when a facility emits below its baseline.
The Clean Energy Regulator administers the scheme and publishes annual data on covered facilities, baseline settings, and credit transfers. The underlying architecture is real and the compliance obligations are legally binding. This is not a voluntary pledge dressed up as regulation.
But here is where the honest read gets complicated. The baseline decline rate sounds uniform. It is not. Trade-exposed facilities — those competing against imports from countries with weaker or no carbon pricing — receive a more gradual trajectory. The rationale is sound: you do not want Australian steel or aluminium producers shuttered while their Asian competitors face no equivalent cost. The problem is that ‘trade-exposed’ covers an enormous share of Australia’s industrial base, which means a large chunk of covered facilities are declining more slowly than the headline 4.9 per cent suggests.
The LNG exemption problem #
Follow the money and you end up at LNG. Australia’s liquefied natural gas sector is among the largest sources of covered emissions, and it is also among the most trade-exposed. Several major LNG facilities on the North West Shelf operate under baseline settings that, at least initially, gave the sector significant headroom.
I’ve been watching this play out for a couple of years now. The sector’s argument — that upstream LNG production is inherently carbon-intensive and that alternative production in Qatar or the US faces no equivalent cost — is not without merit. But the practical effect is that some of Australia’s biggest industrial emitters face a softer glide path than manufacturers and processors that are arguably more vulnerable to transition costs.
This is where I’d push back on the government’s framing. Ministers have spruiked the Safeguard Mechanism as genuinely ambitious climate policy. In aggregate, perhaps. At the facility level, the picture is messier. The mechanism was designed to be politically durable across both major parties’ constituencies, and that durability came at a cost to stringency. Fair enough as a political calculation. Less convincing as a climate one.
What it means for steel, cement, and the rest #
Not every heavy emitter got a soft deal.
Cement producers, for instance, face a structural challenge the mechanism does not solve: around 60 per cent of cement’s direct emissions come from the chemical process of calcination — limestone releasing CO₂ as it converts to lime — not from energy combustion. You cannot decarbonise that with a renewable power purchase agreement. The Safeguard Mechanism baseline decline still applies. That leaves the sector either buying ACCUs, investing in carbon capture (expensive and not yet commercially proven at scale), or looking at alternative clinker materials. Several producers have flagged the cost implications in public submissions to the AEMC and the Department of Climate Change, Energy, the Environment and Water.
Steel is a different story again. BlueScope Steel’s Port Kembla operation in Wollongong is the most emissions-intensive steelmaking site in Australia. BlueScope has been engaged publicly with the transition question — green hydrogen-based direct reduced iron is the long-term pathway most often cited — but the economics remain steep and the timeline uncertain. The Safeguard Mechanism creates a cost pressure. Whether that cost pressure is sufficient to actually accelerate capital reallocation toward low-emissions steelmaking, or simply raises input costs and gets passed through to customers, depends heavily on where the ACCU price settles.
The ACCU market has been volatile. Prices ran well above $50 per tonne in 2022 before falling back as the integrity of some project types came under scrutiny — the Chubb Review in 2022 was a significant moment for confidence in the market. Prices have since recovered ground as the broader carbon market tightened, though the position has continued to move. The Clean Energy Regulator’s published ACCU market data is the place to track this; I won’t invent a current spot price when the market moves weekly.
The ACCU integrity question hasn’t gone away #
If covered facilities are surrendering ACCUs to meet Safeguard obligations, the quality of those units matters enormously. An ACCU from a well-governed Human-Induced Regeneration project in the Murray-Darling Basin is a different thing from a credit generated under methodologies that were later found to overstate sequestration. The Chubb Review recommended a series of integrity reforms, most of which the government accepted. But implementation has been gradual and the market still contains legacy credits issued under older methodologies.
The honest read here is that the ACCU market is better than it was in 2021, but not yet as reliable as the scheme’s designers need it to be. If Safeguard compliance rests significantly on ACCU purchases, and a meaningful share of those ACCUs represent questionable abatement, then the mechanism’s real-world emissions reduction is lower than the compliance data implies. That is a problem the Clean Energy Regulator is working on, but it is worth naming plainly rather than assuming the paperwork and the physics always align.
Industrial policy, not just climate policy #
One thing I think the mainstream debate underweights: the Safeguard Mechanism is as much an industrial policy instrument as a climate one. The declining baselines create a financial incentive — some would say a compulsion — for covered facilities to invest in emissions reduction technology, electrification, or process redesign. That is exactly the kind of demand signal that ARENA and the CEFC have been trying to amplify through co-investment in industrial decarbonisation projects. Whether you look at the push of carbon cost or the pull of government grants, the direction of travel is the same.
The question is speed. Heavy industry investment cycles run long. A blast furnace or cement kiln built today will operate for thirty years. Decisions being made right now by boards at BlueScope, Boral, Incitec Pivot, and the LNG operators will shape Australia’s industrial emissions profile well into the 2050s. The Safeguard Mechanism’s baseline trajectory is meant to send a clear signal that carbon costs will only rise. Whether the trade-exposed carve-outs blunt that signal enough to delay those investment decisions is the real test, and we will not know the answer for a while yet.
The broader energy transition story — the buildout of variable renewables, the firming challenge, the question of where dispatchable capacity comes from — is the backdrop against which all of this sits. I’ve written before about the Capacity Investment Scheme and whether it is quietly picking winners in that firming market. The same structural tension applies here: policy instruments that try to do too many things at once (reduce emissions, protect trade-exposed industry, maintain political support, avoid stranded assets) tend to do all of them imperfectly.
That is not an argument against the Safeguard Mechanism. It is an argument for being clear-eyed about what it can and cannot deliver on its own. The mechanism is one leg of a stool. Green hydrogen economics, electrification of industrial heat, carbon capture and storage viability — those are the other legs, and none of them is sorted yet. Projects like the potential industrial precincts in the Pilbara and Hunter Valley point toward what integrated industrial decarbonisation might look like, but the capital has not yet moved at the scale the transition requires.
Australia’s heavy industry also does not exist in isolation from the global picture. The EU’s Carbon Border Adjustment Mechanism, which started its transitional phase back in 2023, is now moving toward full implementation. That changes the calculus for Australian exporters into European markets — carbon cost is increasingly a trade issue, not just a domestic policy one. Facilities that get ahead of that curve arguably have a competitive interest in the Safeguard Mechanism working as designed, rather than being gamed through cheap ACCU purchases. A bit like a cricket team that practises on a turning pitch before the tour. Preparation has value even when it is uncomfortable.
The Clean Energy Regulator’s annual reporting under the National Greenhouse and Energy Reporting scheme — the NGER data — remains the best public window into how individual facilities are tracking against their baselines. The ACCU market data sits alongside it. Between those two datasets, anyone who wants to follow the money has what they need. The picture they tell, when you read them carefully, is of a mechanism doing real work — just not as much real work as the press releases suggest.
Whether the government tightens the trade-exposed baseline settings in the next review will be the tell. I’ll be watching.
— Marcus Wren, Editor
Photo by American Public Power Association on Unsplash