Assessment of Safeguard Mechanism options to motivate on-site abatement and support the transition to a competitive and sustainable low-carbon Australian economy

Australia’s Safeguard Mechanism, which requires the country's large industrial and resource facilities to reduce their greenhouse gas emissions over time, is under review. Current policy settings drive net abatement while keeping compliance costs low through allowing the use of ACCU credits, but do little to support investment in industry and resource sector decarbonisation and the transition to a resilient and competitive low-carbon economy. The Safeguard Mechanism Review has the opportunity to consider options that continue to use ACCUs to reduce average abatement costs, while providing greater incentives for on-site abatement and moving to a future where the incremental ACCU supply cost does not set the system-wide marginal abatement incentive, given that the supply price of ACCUs is likely to be lower than the efficient incentive required to drive the SGM and economy-wide abatement required for Australia’s net zero transition. This paper outlines and assesses several options to sharpen the incentive for on-site abatement and smooth the transition to a competitive and prosperous low emissions economy. We find there are a range of options that could meet the goals, among them price-based (or royalty) approaches that increase the cost to facilities of acquiring or using ACCUs through a fee on ACCU surrender or an in-kind percentage of ACCU generation; a volume-based ACCU discount (or exchange rate) that requires surrender of more than one ACCUs per tonne of SGM abatement shortfall; and a system level ACCU cap, implemented with full flexibility across facilities. We assess the effects of different options quantitatively, and find they have different impacts on system incentives, average abatement costs, emissions reductions in industry and in the ACCU credit generating activities, and public benefits outcomes.