Introduction to the investor group on climate change
The Investor Group on Climate Change (IGCC) is a collaboration of Australian and New Zealand institutional investors focused on the impact of climate change on investments. The IGCC represents investors with more than A$4.6 trillion in funds under management, acting as custodians for the retirement savings of over 15.8 million Australians and millions of New Zealanders. The group highlights that current global climate policies, if continued, are projected to reduce Australia’s Gross Domestic Product (GDP) by 14 per cent annually, wiping $6.8 trillion from the economy by 2050.

The core challenge for this review
The Safeguard Mechanism (SGM) is currently effective at delivering abatement while maintaining low compliance costs, but it fails to sufficiently incentivise on-site industrial abatement. Without reform, the scheme presents a cost to industry without fostering new competitive advantages. Modelling indicates that most on-site abatement motivated by current Australian Carbon Credit Unit (ACCU) prices is not materialising due to unpriced costs, including learning gaps, local deployment challenges, and policy uncertainty. This creates a risk of locking in emissions-intensive assets and an overreliance on land-sector offsets.

Key findings and insights from IGCC’s futureproofing industry report
Research suggests that under current settings and a 7 per cent decline rate, about half of the abatement will be met through offsets by 2040. A plateau in additional on-site abatement is expected between 2030 and 2035. Fossil fuel facilities are identified as having approximately 2.5 times the low-hanging fruit abatement available under $120/t compared to other industries, primarily through fugitive methane reduction. Furthermore, improving the flexibility of financial supports could add an additional 10Mt of on-site abatement from 2030 to 2035.

Core recommendations
The IGCC proposes a synergetic package of reforms for implementation. This includes setting a scheme-wide decline rate of 7 per cent per annum from 2031 to 2035, aligned with the upper end of the 2035 Nationally Determined Contribution (NDC). The group recommends implementing a ‘Reinvestment Contribution’ on the surrender of ACCUs to generate capital for industrial transformation. Other measures include administering Contracts for Difference (CfDs) to improve ACCU price visibility, consolidating durable financial support for on-site abatement, and progressively lowering the SGM eligibility threshold.

Reinvestment contribution
The Reinvestment Contribution is proposed as an alternative to ACCU discounting or caps. It involves a small dollar amount collected on ACCU surrender, which is pooled into a trust and recycled into the scheme as concessional finance. Modelling of a $10 contribution per ACCU suggests a 48 per cent increase in on-site abatement (+19Mt) and a 7 per cent decrease in long-run compliance costs to 2050. This mechanism aims to help facilities overcome costs that are not currently motivated by the market ACCU price.

70 per cent emissions reduction-aligned decline rate with sectoral differential decline rates
A 7 per cent aligned decline rate is projected to drive 15 Mt in increased average annual abatement. The IGCC argues for differential decline rates at the sector level, specifically suggesting 2 per cent higher declines for coal, oil, and gas. This approach ensures that sectors with more ready abatement options, such as fugitive methane management in extractive industries, take them up, rather than transferring the compliance burden to manufacturing sectors with higher structural transition costs.

Investment clarity and contracts for difference
The current lack of forward price visibility for ACCUs discourages investment in on-site abatement. The IGCC recommends the government issue CfDs to underwrite new ACCU supply and create bankable price paths. This would facilitate price discovery and provide the market with certainty regarding future price expectations. Additionally, the IGCC suggests replacing the current Cost Containment Measure (CCM) with a price corridor to protect facilities from volatility while allowing prices to rise predictably in response to demand signals.

On methane and novel credit generation
The IGCC suggests that accountability for methane reduction be established within the Australian Government, bridging the gap between reporting rules and mitigation efforts. For facilities where on-site abatement is cost-prohibitive, a novel Safeguard Mechanism Credit (SMC) generation method is proposed. In this scenario, the government would fund upfront decarbonisation costs and recoup the investment by selling the resulting SMCs once the facility is operational.

Scheme coverage and complementary measures
The IGCC recommends lowering the SGM facility threshold in three steps to 25,000 tonnes CO2-equivalent from 2031 to 2037, which could motivate 5 Mt of additional annual abatement by 2040. Complementary measures suggested include implementing a border carbon adjustment for trade-exposed commodities like cement and lime, and applying an SGM liability to coal generators at their closure date. The group also advocates for the dual representation of methane emissions using both 100-year and 20-year Global Warming Potentials to better reflect the gas’s potency.