Key takeaways:
Safeguard Mechanism Australia rules have become an important consideration for many of the country's largest industrial energy users. The scheme sets emissions limits, known as baselines, for major facilities and requires businesses to manage emissions that exceed those limits.
The Australian Government introduced the Safeguard Mechanism in 2016 and substantially reformed it from 1 July 2023. The reforms introduced progressively declining baselines, creating stronger incentives for covered facilities to reduce emissions over time. The standard decline rate is 4.9 per cent annually through to 2030, subject to specific adjustments and exceptions.
Consequently, the mechanism can affect operational decisions, capital investment, energy procurement and carbon purchasing strategies.
This guide explains which facilities Safeguard Mechanism Australia captures, how compliance works and what the resulting costs can mean for Australian businesses.
The Safeguard Mechanism forms part of Australia's National Greenhouse and Energy Reporting framework. Its central purpose is to limit and progressively reduce emissions from Australia's largest industrial facilities.
Generally, the mechanism applies when a facility produces more than 100,000 tonnes of carbon dioxide equivalent, or tCO2-e, of covered emissions during a year or other applicable monitoring period.
Each covered facility receives an emissions baseline. At the end of the relevant period, its net emissions are compared with that baseline.
If emissions are above the baseline, the responsible emitter needs to manage the excess. Options can include reducing emissions, surrendering eligible Australian Carbon Credit Units, surrendering Safeguard Mechanism Credit Units or accessing an approved flexibility arrangement.
Meanwhile, facilities that perform better than their baseline may qualify to receive SMCs. These units can subsequently be sold or used for compliance.
| Feature | How it works |
| Coverage threshold | More than 100,000 tCO2-e of covered emissions annually |
| Main compliance measure | Facility emissions baseline |
| Standard baseline decline | 4.9 per cent annually to 2030 |
| Above baseline | Manage excess emissions through eligible compliance options |
| Below baseline | Eligible facilities may generate SMCs |
| Main tradable units | ACCUs and SMCs |
| Administrator | Clean Energy Regulator |
The mechanism targets facilities rather than businesses simply because they are large companies. Therefore, a corporation may own several facilities while only some meet the Safeguard threshold.
The scheme captures major industrial facilities across sectors such as mining, oil and gas, manufacturing, transport, waste management and other emissions-intensive activities.
In 2024–25, 208 facilities were covered by the mechanism. Together, they reported 132.8 million tonnes of covered emissions, down 2.3 per cent from 136.0 million tonnes in 2023–24.
The number of covered facilities can also change from year to year. For example, the Clean Energy Regulator reported 219 covered facilities in 2023–24 compared with 208 in 2024–25. Facilities moving above or below the 100,000-tonne threshold can contribute to these changes.
Grid-connected electricity generation operates differently.
Rather than automatically imposing individual baselines on each grid-connected generator, the rules currently apply a collective sectoral baseline of 198 million tCO2-e per year. Individual arrangements would become relevant if total emissions from grid-connected generators exceeded that sectoral baseline.
In 2024–25, reported scope 1 emissions from grid-connected generators were approximately 133.7 million tCO2-e, which remained below the sectoral baseline.
Therefore, businesses should not assume the standard facility rules apply identically across every emissions-intensive sector.
Understanding baselines is essential because crossing the 100,000-tonne coverage threshold does not automatically mean a facility must purchase credits for every tonne it emits.
Instead, compliance depends on the relationship between the facility's applicable baseline and its net emissions.
For many facilities, standard baselines incorporate production levels and emissions-intensity values. As a result, production remains relevant when determining the emissions limit.
However, those baselines decline over time.
The standard annual decline rate is 4.9 per cent through to 2030. Consequently, a facility that makes no improvement to its emissions intensity may face increasing compliance pressure as its baseline tightens.
That creates an important commercial consideration. Maintaining current emissions performance may not be sufficient when the permitted emissions intensity continues to decline.
There is no single fixed Safeguard Mechanism cost for every covered company.
The financial effect depends on factors including:
Recent compliance data demonstrates the potential scale of these obligations.
For 2024–25, total covered emissions reached 132.8 million tCO2-e while aggregate baselines were 126.2 million tCO2-e. Furthermore, 141 facilities had net emissions above their baselines before final compliance actions, with total excess emissions of approximately 13.7 million tCO2-e.
To manage their obligations, responsible entities ultimately surrendered 10.8 million ACCUs and 2.6 million SMCs.
Consider a hypothetical facility with an excess of 50,000 tCO2-e.
If it chose to cover the entire amount using carbon units purchased at $40 each, the simplified calculation would be:
50,000 x $40 = $2 million.
An excess of 100,000 tonnes at the same unit price would imply a $4 million purchasing requirement.
These figures are illustrations rather than forecasts. Actual costs depend on the units used, purchase timing, contracting arrangements, existing holdings and available abatement opportunities.
However, current carbon market pricing shows why the issue matters. The Clean Energy Regulator reported that generic ACCUs reached a volume-weighted average spot price of $39.03 on 14 August 2026, while SMCs reached $39.25 on the same date.
Australian Carbon Credit Units and Safeguard Mechanism Credit Units play different roles.
ACCUs represent verified emissions avoidance or carbon storage generated through eligible Australian projects. Covered facilities can acquire and surrender ACCUs to manage emissions above their baselines.
SMCs, meanwhile, are created within the Safeguard Mechanism. Eligible facilities that operate below their baseline can receive SMCs, which can then be traded or retained.
This creates a market-based incentive.
A facility above its baseline potentially faces a cost. In contrast, an eligible facility that reduces its emissions sufficiently below its baseline may create a tradable asset.
In 2024–25, the Clean Energy Regulator issued 6.7 million SMCs to 54 responsible emitters.
The annual decline in baselines means businesses need to consider future obligations rather than looking only at current emissions.
Suppose a facility remains at broadly the same emissions intensity while its applicable baseline continues declining. The gap between emissions and the baseline can grow, potentially increasing the number of carbon units required.
Therefore, businesses have several broad strategic options.
They can invest in technology and operational changes that directly reduce emissions. They can purchase ACCUs or SMCs to manage residual emissions. Alternatively, they can combine physical emissions reduction with a longer-term carbon procurement strategy.
The right balance depends on marginal abatement costs, available technologies, carbon prices, investment horizons and operational requirements.
A reactive strategy can expose businesses to unnecessary uncertainty. Instead, covered companies can integrate Safeguard obligations with energy procurement, operational planning and capital investment.
Businesses should calculate the cost per tonne of reducing emissions internally and compare it with the expected cost of purchasing eligible units.
For example, an efficiency project that permanently removes emissions at an attractive cost per tonne may deliver greater long-term value than repeatedly buying carbon units.
However, not every emission source has an immediately economical technical solution. Carbon units can therefore remain an important tool for residual emissions.
Because standard baselines can reflect production and emissions intensity, businesses need credible production forecasts.
Modelling several scenarios can reveal how changing output, declining baselines and carbon prices could affect future liabilities.
For some industrial businesses, electricity and energy procurement can form part of the broader emissions strategy.
Energy efficiency, electrification and renewable electricity arrangements may support emissions reduction where they address relevant emissions sources. Power Purchase Agreements can also provide longer-term renewable energy and pricing outcomes, although their treatment should be considered alongside the specific emissions covered by the Safeguard Mechanism.
Energy Action's existing approach to corporate renewable PPAs similarly emphasises the importance of assessing pricing, contract duration, supplier risk and regulatory requirements rather than treating renewable procurement as a simple electricity purchase.
A project that appears economical without a carbon assumption may produce a different result once future compliance costs are incorporated.
Consequently, companies can include carbon-price scenarios in capital expenditure assessments, procurement strategies and long-term financial models.
The Safeguard Mechanism also includes a government cost containment measure.
Eligible Safeguard facilities with excess emissions can purchase ACCUs held by the Australian Government at a predetermined price. The measure began at $75 per ACCU in 2023–24, with the price increasing by the Consumer Price Index plus 2 per cent each year.
For 2026–27, the fixed cost containment price is $87.72 per ACCU.
This mechanism effectively provides an additional source of units for eligible facilities when compliance-market conditions become particularly expensive. However, it should not be confused with the ordinary ACCU market price.
Businesses approaching the 100,000 tCO2-e threshold should monitor their emissions carefully, while already-covered organisations need to look beyond annual compliance.
Start with accurate emissions and production forecasts. Then model declining baselines, potential carbon prices and alternative abatement investments.
Businesses should also coordinate energy procurement and emissions management. Energy contracts, renewable energy projects, operational efficiency and carbon procurement can interact financially, even though they may have different treatment under emissions accounting and Safeguard rules.
Finally, organisations should continue monitoring regulatory developments. The Australian Government commenced the 2026–27 Safeguard Mechanism Review in 2026, meaning businesses should follow any future changes to scheme settings rather than assuming today's framework will remain unchanged indefinitely.
Safeguard Mechanism Australia has moved emissions management firmly into the financial and operational planning of the country's largest industrial facilities.
Facilities producing more than 100,000 tCO2-e of covered emissions can enter the scheme, while progressively declining baselines create an ongoing requirement to reduce emissions or manage excess emissions through eligible units and flexibility measures.
The financial consequences can be substantial. However, businesses that forecast their obligations, understand carbon-market exposure and integrate emissions management with their broader energy strategy can make more informed decisions.
Energy Action helps Australian businesses understand energy costs, procurement opportunities and renewable energy strategies. By bringing energy-market expertise into long-term planning, businesses can better assess their energy and emissions options as the Safeguard Mechanism evolves. Visit Energy Action to explore solutions for managing business energy procurement, costs and sustainability objectives.
Safeguard Mechanism Australia is a federal framework designed to limit and progressively reduce greenhouse gas emissions from Australia's largest industrial facilities. It establishes emissions baselines and requires responsible emitters to manage emissions that exceed those limits. Following the 2023 reforms, standard baselines generally decline by 4.9 per cent annually through to 2030.
Generally, a facility becomes covered when its annual covered emissions exceed 100,000 tCO2-e. The mechanism applies at the facility level, so the size of a company alone does not determine coverage. In 2024–25, 208 facilities were covered across Australia.
There is no universal compliance cost because each facility has a different baseline, emissions profile and strategy. A business may invest directly in emissions reduction, surrender ACCUs or SMCs, or use approved flexibility measures where eligible. Carbon-market prices therefore matter significantly when a facility relies on purchased units.
The responsible emitter must manage the facility's excess emissions in accordance with the Safeguard rules. This can involve surrendering ACCUs or SMCs or accessing eligible flexibility arrangements. Conversely, facilities performing below their baselines may qualify to generate SMCs.
Currently, international offsets cannot be used for Safeguard Mechanism compliance. The existing framework relies on eligible Australian units, including ACCUs and SMCs. The Australian Government has identified international units as an issue for consideration through the 2026–27 review of the mechanism's policy settings.
