The Safeguard Mechanism Australia requires large industrial facilities to keep their net scope 1 emissions at or below an annually declining baseline set by the Clean Energy Regulator. Around 215 facilities are currently covered. If emissions exceed the baseline, the facility must surrender Australian Carbon Credit Units (ACCUs) or Safeguard Mechanism Credits (SMCs) by 31 March each year or face civil penalties.
Most CFOs at covered facilities understand that obligation is well enough. The part that gets less attention is the market they are about to buy from. ACCU prices vary by methodology, vintage, and supply conditions. Brokers set their own margins. Spot pricing and forward pricing tell different stories depending on when you enter. The compliance mechanism is straightforward. The procurement environment around it is opaque.
Before that conversation with a broker happens, Clima Markets gives you independent visibility into the ACCU market.
This blog covers what the Safeguard Mechanism is, who it applies to, how baselines are set and why they decline, what happens when emissions exceed those baselines, the flexibility mechanisms available, and what the scheduled 2026-27 review could change for covered facilities.
What the Safeguard Mechanism is
The Safeguard Mechanism is Australia’s policy framework for setting legally declining emissions limits at the country’s largest industrial facilities. It sits under the National Greenhouse and Energy Reporting Act 2007 and is administered by the Clean Energy Regulator.
The scheme was first introduced in 2016. It was substantially reformed in 2023 and commenced in its current form on 1 July 2023. The core change in the 2023 reform was the introduction of annually declining baselines, which convert what was previously a static cap into a binding reduction trajectory.
The Safeguard Mechanism currently covers approximately 215 facilities. Together, these facilities represent roughly 28% of Australia’s national greenhouse gas emissions. The scheme targets scope 1 covered emissions only. It does not apply to scope 2 or scope 3 emissions at covered facilities.
There is no opt-out provision. If a facility meets the coverage threshold, the obligation applies automatically.
Source: DCCEEW Safeguard Mechanism Overview
Which businesses and facilities it applies to
The coverage threshold is 100,000 tonnes of CO2-equivalent in scope 1 covered emissions per year. Any facility that meets or exceeds this threshold in a reporting year is a covered facility under the Safeguard Mechanism Australia framework.
The sectors represented are heavy emitting by nature. They include coal mining, oil and gas extraction, LNG processing, aluminium smelting, steel production, cement manufacturing, chemical processing, domestic aviation, and large landfill operations. In practice, the list is concentrated. A relatively small number of companies operate the majority of covered facilities. Several mining and LNG operators manage multiple facilities, each with its own separate baseline.
The term “responsible emitter” under the NGER Act refers to the entity that has operational control of the facility. This is the entity that holds the reporting obligation and bears the compliance requirement. In joint ventures and multi-party operations, identifying the responsible emitter can involve detailed legal analysis of operational control arrangements.
To determine whether a facility is covered, the starting point is the facility’s NGER registration and reporting history. Facilities already registered under the NGER scheme and reporting scope 1 emissions above the threshold will have received baseline determinations from the Clean Energy Regulator. Facilities that believe they may be approaching the threshold but are not yet registered should review the NGER reporting requirements on the CER website.
One forward-looking item: the scheduled 2026-27 review of the Safeguard Mechanism may consider lowering the coverage threshold to 25,000 tonnes of CO2-equivalent per year. If that change proceeds, it would bring a substantially larger number of facilities into the scheme. Companies operating facilities with emissions between 25,000 and 100,000 tonnes should be tracking this review closely, even though the obligation does not yet apply to them.
Source: Clean Energy Regulator
How the baseline is calculated and why it declines
Each covered facility receives a Safeguard Mechanism baseline Australia determination from the Clean Energy Regulator. This baseline is the maximum amount of net scope 1 covered emissions the facility is permitted to produce in a given financial year. Going over it triggers a compliance obligation.
Baselines are calculated using a production-adjusted emissions intensity framework. The CER uses either facility-specific emissions intensity values (based on the facility’s own historical performance) or industry-average emissions intensity values, depending on the facility’s circumstances and the available data. The baseline is then derived by multiplying the applicable emissions intensity value by the facility’s production output.
“Production-adjusted” means the absolute baseline moves with output. If a facility increases production, its baseline rises in absolute terms. If production falls, the baseline drops. But the emissions intensity itself must decline year on year. The facility can produce more, but it must produce more cleanly.
The mandated decline rate is 4.9% per year, applied from FY2024 through to 2030. This rate was set to align the scheme with Australia’s legislated emissions reduction targets.
Some facilities receive different treatment. Trade-Exposed Baseline-Adjusted (TEBA) facilities are those operating in sectors where international competition creates a risk of emissions leakage. TEBA facilities receive a reduced decline rate, which lessens the annual tightening of their baselines relative to non-TEBA facilities. The TEBA designation is made by the CER based on defined criteria.
Here is a simplified example. Suppose a facility has a production-adjusted baseline of 200,000 tonnes of CO2-equivalent in FY2024. With a 4.9% annual decline, that baseline drops to approximately 190,200 tonnes in FY2025 and around 180,880 tonnes in FY2026, assuming production remains constant. If production rises, the absolute number may be higher, but the allowable emissions per unit of output still falls. The direction is one way.
Source: CER Safeguard Baselines
What happens when emissions exceed the baseline
If a facility’s net scope 1 covered emissions exceed its Safeguard Mechanism baseline in a financial year, the responsible emitter must acquit the excess by 31 March of the following year. The facility must surrender a number of eligible units equal to the shortfall. Failure to do so is a contravention of the NGER Act.
That answers the question directly: what happens if you exceed the Safeguard baseline is that you must surrender Australian Carbon Credit Units (ACCUs) or Safeguard Mechanism Credits (SMCs) to cover the difference, or face civil penalties of $330 per tonne of excess emissions plus $33,000 per day for each day the contravention continues.
There are three compliance tools available to a covered facility.
- The first is on-site abatement. This means operational changes, process efficiency improvements, fuel switching, or technology deployment that reduces the facility’s actual emissions. On-site abatement is the only compliance tool that physically reduces the facility’s emissions output.
- The second is the purchase and surrender of ACCUs. Australian Carbon Credit Units are generated by approved offset projects and can be bought from the secondary market. When surrendered to the CER, each ACCU cancels one tonne of CO2-equivalent against the facility’s excess. ACCU compliance Australia obligations are a significant driver of demand in the broader ACCU market, and facilities that need to purchase units in volume are price-sensitive to methodology, vintage, and timing.
- The third is the use of SMCs. Safeguard Mechanism Credits are earned by facilities that reduce their net emissions below their baseline. These credits can be banked for future use or sold to other covered facilities. SMCs provide a direct facility-to-facility compliance pathway within the Safeguard Mechanism itself.
The 31 March surrender deadline is fixed & does not shift. For most covered facilities, the compliance window runs from the end of the financial year in June through to the following March, giving approximately nine months to confirm final emissions figures, determine the shortfall, and source the required units.
There is a transparency requirement. Facilities that surrender ACCUs equal to more than 30% of their baseline are required to file a public statement with the Clean Energy Regulator explaining why on-site abatement was not sufficient to address the excess. The requirement is a disclosure obligation. It does not prevent ACCU use. It does create an additional reporting layer for facilities relying heavily on purchased offsets.
Facilities that know what the ACCU market is doing before they start buying are in a different position than those who go blind. Clima Markets publishes live pricing across every methodology independently. No broker, no margin, no commercial interest in what you choose.
Source: CER Managing Excess Emissions
Flexibility mechanisms available to covered facilities
The Safeguard Mechanism includes two formal flexibility mechanisms for facilities that cannot meet their baseline in a single financial year.
The first is the Multi-Year Monitoring Period (MYMP). A facility can apply to the Clean Energy Regulator for a monitoring period of up to five financial years. During this period, the facility must demonstrate a credible trajectory toward compliance, supported by an approved abatement plan. The MYMP keeps the baseline in place but changes the timeframe over which the facility is assessed, allowing short-term exceedances to be offset by future reductions within the monitoring window. CER approval is required, and the application must be lodged well before the relevant compliance deadline.
The second is baseline borrowing. A covered facility can borrow up to 10% of its baseline from the following year’s allocation. The borrowed amount is subject to a 10% interest rate, meaning the facility must repay 110% of the borrowed baseline in the subsequent year. Borrowing is a short-term bridging tool. It shifts the compliance burden forward rather than removing it.
Both mechanisms require formal applications to the CER with specific deadlines that fall well before 31 March. Facilities that wait until Q1 to address their compliance position are operating in the most active ACCU buying window of the year, when demand from other covered facilities compresses availability and can affect pricing. Earlier planning tends to produce better procurement outcomes.
Source: DCCEEW Safeguard Mechanism Overview
What the 2026-27 Safeguard review means for covered facilities
The Australian Government has committed to a statutory review of the Safeguard Mechanism in 2026-27. The review is expected to assess several structural elements of the scheme: post-2030 decline rates, the eligibility of international carbon credits for compliance, TEBA arrangements, and whether the existing cost containment measure remains adequate.
One of the most consequential potential outcomes is a lowering of the coverage threshold from 100,000 to 25,000 tonnes of CO2-equivalent per year. If adopted, this would expand the number of covered facilities significantly and introduce compliance obligations for a tier of emitters that have not previously been subject to the scheme.
For facilities already covered, the practical implication is that compliance planning should extend beyond the current financial year. A multi-year compliance model that accounts for declining baselines, production forecasts, and ACCU market conditions across several financial years is more useful than a point-in-time calculation for a single year.
The Safeguard Modeler on Clima Markets is built for this. It models a facility’s compliance position against a declining baseline across financial years. For facilities with an active market position, that forward view is where planning starts.
Final Thoughts:
Every covered facility in Australia is now managing a compliance obligation that gets larger every year. The ceiling drops 4.9% annually whether or not on-site abatement keeps pace. The rate is legislated and applied mechanically, starting from a baseline that has already been set.
For facilities that will need to buy ACCUs to meet that obligation, understanding the market matters as much as understanding the obligation itself. Methodology spreads, vintage pricing, seasonal demand patterns, and forward pricing all affect what a facility pays per tonne. None of that information needs to come from the party selling the units.
Clima Markets gives Australian businesses independent visibility into the ACCU market before any procurement decision.
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The Carbon Guy