Carbon pricing has been one of the most contested ideas in Australian climate policy. Yet the basic economic principle is relatively simple: greenhouse gas emissions carry costs, and putting a value on those emissions can encourage businesses to find lower-cost ways to reduce them.
Australia no longer has the economy-wide carbon pricing system introduced in 2012. Carbon pricing, however, has not disappeared from Australian climate policy. Today it operates through a more targeted combination of emissions baselines, tradable credits and Australian Carbon Credit Units, particularly for large industrial facilities.
- Australia does not currently have an economy-wide carbon tax.
- The Safeguard Mechanism places declining emissions constraints on Australia's largest industrial facilities.
- Most covered facility baselines decline by 4.9% each year to 2030.
- Australian Carbon Credit Units and Safeguard Mechanism Credits can play a role in compliance.
- Australia's national target is a 43% reduction below 2005 emissions by 2030 and 62–70% by 2035, with net zero targeted for 2050.
What is carbon pricing?
Greenhouse gas emissions impose costs that are not automatically reflected in the market price of electricity, fuels, transport, industrial production and other economic activity. Carbon pricing attempts to bring at least part of that cost into economic decision-making.
Once emitting greenhouse gases carries a financial cost, businesses have an incentive to compare the cost of continuing to emit with the cost of reducing those emissions.
There are several ways of creating that incentive, and the differences between them matter.
Government establishes a price for emissions. Businesses then decide how much emissions reduction is worthwhile at that price.
Government establishes an emissions constraint while trading allows market participants to determine the effective price of compliance.
Eligible projects that reduce or remove emissions can generate units that may be used in qualifying compliance or voluntary markets.
The Garnaut Review and emissions trading
The original Garnaut Climate Change Review examined market-based climate policy when Australia was considering how a broad emissions trading system could operate across the economy.
Chapter 14 of the 2008 Review examined the design of an Australian emissions trading scheme. One of its central economic questions remains relevant: how can Australia reduce emissions while giving businesses flexibility to find efficient ways of achieving those reductions?
The original chapter remains available in our historical archive. Read Chapter 14 of the 2008 Garnaut Climate Change Review →
The policy landscape has changed considerably since 2008. Australia's current framework is not the economy-wide emissions trading system contemplated during that period. Nevertheless, several underlying concepts — emissions constraints, tradable units and financial incentives for abatement — remain part of contemporary policy.
How carbon pricing works in Australia today
The principal federal policy applying declining emissions constraints to Australia's largest industrial facilities is the Safeguard Mechanism.
The mechanism began in 2016 and was substantially reformed in 2023. It applies to facilities that exceed the relevant emissions threshold and establishes emissions baselines against which their performance is assessed.
The Safeguard Mechanism in four steps
- Emissions are measured. Covered facilities report their emissions through Australia's national greenhouse reporting framework.
- A baseline applies. The facility has an emissions limit calculated under the mechanism's rules.
- Baselines decline. For most covered facilities, the emissions intensity represented by those baselines falls over time.
- Facilities manage compliance. Businesses can reduce their own emissions and, where permitted, use eligible carbon units.
Which facilities are covered?
The Safeguard Mechanism generally applies to industrial facilities emitting more than 100,000 tonnes of carbon dioxide equivalent per year.
Covered sectors include mining, oil and gas production, manufacturing, transport and waste. Electricity generation is treated differently, with grid-connected generators generally operating under a sectoral approach.
For most covered facilities, baselines are designed to decline by 4.9% each year to 2030, although different arrangements can apply in particular circumstances, including for some trade-exposed facilities.
ACCUs and Safeguard Mechanism Credits
Australia's present system involves different types of carbon units. Two particularly important concepts are Australian Carbon Credit Units and Safeguard Mechanism Credits.
Australian Carbon Credit Units
Australian Carbon Credit Units, or ACCUs, can be generated by eligible projects that avoid greenhouse gas emissions or remove carbon from the atmosphere under Australia's carbon credit framework.
Eligible ACCUs may be surrendered by Safeguard facilities as part of their compliance strategy.
Safeguard Mechanism Credits
A facility whose emissions performance is below its applicable baseline may be able to generate Safeguard Mechanism Credits.
These credits can create an additional economic incentive for facilities to outperform their required emissions baseline.
Why use an emissions market?
The economic attraction of emissions trading is flexibility.
Government does not necessarily have to determine exactly which technology every business must adopt. Instead, an emissions constraint or price signal allows individual businesses to compare different options and determine which response makes economic sense for them.
A company might electrify equipment, improve energy efficiency, change fuels, redesign an industrial process, invest in new technology or use eligible emissions units.
Those choices matter because the cost of reducing one tonne of emissions can vary considerably between industries and facilities. A market-based system can help direct reductions toward opportunities where they can be achieved more efficiently.
Why the design of the system matters
Simply creating a carbon market does not guarantee meaningful emissions reductions. Its effectiveness depends heavily on the rules surrounding it.
If emissions limits are too generous, facilities may comply without delivering substantial reductions.
Carbon credits need credible measurement and additionality if they are to represent genuine emissions reductions or removals.
Trade-exposed industries can face competitive pressure when domestic carbon constraints differ substantially from those overseas.
Long-lived industrial investment depends partly on confidence about the future direction and durability of climate policy.
Some industries already have commercially mature alternatives while harder-to-abate sectors may have fewer practical options.
The costs and benefits of the transition can fall differently across workers, households, regions and industries.
Australia's 2030, 2035 and 2050 targets
The effectiveness of Australia's industrial emissions policies matters increasingly as national climate targets become more demanding.
Australia has committed to reducing greenhouse gas emissions by 43% below 2005 levels by 2030.
Its 2035 target is a reduction of 62–70% below 2005 levels, while the longer-term national objective is net zero emissions by 2050.
Meeting those targets requires reductions across electricity generation, industry, transport, buildings, resources and land use. Carbon markets and industrial baselines are therefore only part of a much broader transition.
Is the Safeguard Mechanism a carbon tax?
No. The Safeguard Mechanism is not an economy-wide carbon tax with a single government-set price applied to every tonne of Australian emissions.
It is better described as a baseline-and-credit system applying to large industrial facilities. Facilities operate against emissions baselines and can use different strategies to meet their obligations.
The existence of tradable credits means market prices can influence the cost of compliance, but that is structurally different from imposing one fixed carbon price across the economy.
What changed since the 2008 Garnaut Review?
The most obvious change is the scope of Australia's carbon policy.
The policy debate surrounding the original Garnaut Review centred on the prospect of a broad national emissions trading system. Australia subsequently introduced a carbon pricing mechanism in 2012, which was repealed in 2014.
Today's Safeguard Mechanism is considerably narrower. Instead of imposing an economy-wide carbon price, it concentrates on major industrial emitters.
But the fundamental economic challenge identified during the Garnaut Review remains: Australia needs to reduce emissions while managing the cost of transition across a complex, trade-exposed economy.
Why carbon pricing still matters
The political terminology surrounding carbon pricing in Australia has changed dramatically over the past two decades. The underlying economic problem has not.
Australia still needs mechanisms that encourage businesses to invest in lower-emissions technologies and processes while allowing flexibility in how reductions are achieved.
The Safeguard Mechanism represents one contemporary attempt to create that incentive for major industrial emitters.
Its long-term effectiveness will depend on whether baselines drive genuine reductions, whether carbon units maintain environmental integrity, whether low-emissions technologies become commercially viable and whether policy provides sufficient certainty for major investment.
Frequently asked questions
Does Australia currently have a carbon tax?
No. Australia does not currently operate the economy-wide fixed carbon pricing mechanism introduced in 2012. Current federal industrial emissions policy operates primarily through the Safeguard Mechanism and associated carbon units.
Is the Safeguard Mechanism an emissions trading scheme?
It is not a conventional economy-wide cap-and-trade scheme. It operates as a baseline-and-credit system for major industrial facilities, with declining baselines and tradable units.
What is an ACCU?
An Australian Carbon Credit Unit represents an eligible tonne of carbon dioxide equivalent avoided or removed through a project registered under Australia's carbon credit framework.
Which companies are covered by the Safeguard Mechanism?
The mechanism applies at the facility level rather than simply to particular companies. It generally covers facilities producing more than 100,000 tonnes of carbon dioxide equivalent annually.
Why is the 2008 Garnaut Review still relevant?
It provides historical context for many questions Australia continues to face: how emissions should be valued, how businesses should be encouraged to reduce pollution and how climate policy can achieve reductions without imposing unnecessary economic costs.
