About the Investor Group on Climate Change
The Investor Group on Climate Change (IGCC) is the leading network for Australian and New Zealand investors to understand and respond to the risks and opportunities of climate change. Its members include the countries’ largest superannuation and retail funds, managing more than A$4.6 trillion locally. These members invest with a multi-decade horizon on behalf of more than 15.8 million Australians and millions of New Zealanders.

Evolving the Safeguard Mechanism
The 2026-27 review of the Safeguard Mechanism presents a critical opportunity to accelerate Australia’s energy transition and strengthen industrial competitiveness. The IGCC argues that without reform, the scheme will impose costs on industry without developing new competitive advantages. Current research indicates the present design will not drive significant on-site abatement, potentially worsening the credibility challenge associated with an overreliance on offsets. Reform is necessary to manage transition risks and support the growth of new industries.

Key findings and insights
A primary finding is that a 5-7 per cent annual decline rate from 2031-2035 is proportionate to Australia’s 62-70 per cent target for 2035. However, modelling suggests that Australian Carbon Credit Unit (ACCU) prices only reach $100 per tonne by 2040, which is not high enough soon enough to motivate a shift from offsetting to on-site abatement. Consequently, the current scheme may deliver almost zero additional on-site abatement between 2030 and 2035. Better tailored finance vehicles could deliver a 20 per cent (10 Mt/year) increase in on-site abatement, while lowering the participation threshold could add 5 Mt/year.

Strengthening long-term investment certainty
Institutional investors identify policy and regulatory uncertainty as a leading barrier to capital deployment. In 2026, 56 per cent of respondents highlighted this as a barrier, up from 40 per cent in FY24. Delayed decarbonisation escalates physical damage risks across portfolios; climate damage is projected to reduce Australia’s GDP by 14 per cent annually if current global policies continue, wiping $6.8 trillion from the economy by 2050.

The abatement task is unevenly distributed
Extractive sectors generally have stronger margins and more accessible transition options compared to manufacturing. Approximately 29 per cent of the extractive sector’s abatement task is available on-site below $120 per tonne, which is roughly 2.5 times the share available to manufacturing. Applying a single scheme-wide decline rate creates a transfer from manufacturing to extractive industries, as fossil fuel facilities can generate credits from cheap on-site abatement and sell them to facilities with harder transitions.

Remaining an attractive destination for capital as our trading partners transition
As major trading partners decarbonise their industrial bases and price carbon at their borders, Australia’s competitiveness will depend on whether its exports can enter those markets. Policy settings must drive an efficient, least-cost transition from fossil-fuel-based exports to renewables-based exports, such as critical minerals processing, green metals, and low-emissions cement.

The Safeguard Mechanism 2026-27 review
The Australian Government’s review has two objectives: determining if the 2023 reforms are working as intended and informing policy settings to achieve the Safeguard Mechanism’s share of the 2035 target. Key issues include setting decline rates for 2031-35, scheme coverage, and arrangements for emissions-intensive, trade-exposed (EITE) facilities. The scheme currently covers facilities emitting more than 100,000 tonnes of CO2-equivalent annually, representing about 30 per cent of national emissions.

IGCC goals for the review
IGCC members have identified four core objectives: delivering lowest-cost efficient abatement, encouraging earlier on-site abatement, expanding carbon signals, and ensuring the mechanism delivers its proportional share of the 2035 Nationally Determined Contribution (NDC). They recommend that the government adopt an average 7 per cent decline rate each financial year from 2031 to 2035 to align with the top of the NDC target range.

Recommendations to ensure the mechanism delivers
The report provides seven primary recommendations. These include setting an average 7 per cent decline rate with sector-specific differential rates and developing a metric to inform these rates based on marginal abatement cost curves. To improve price visibility, the government should broker Contracts for Difference (CfDs). The IGCC also recommends replacing the current Cost Containment Measure (CCM) price cap with a price corridor (a floor and ceiling) and building an enduring framework for financial support, such as production subsidies or tax concessions. Finally, the scheme’s coverage should be expanded by lowering the facility threshold to 75,000 tonnes of CO2-equivalent in 2031, progressively reaching 25,000 tonnes by 2037.

For the government’s further consideration
Additional measures suggested include capping the surrender of ACCUs at a system-level to motivate on-site investment without causing individual facility non-compliance. The IGCC also recommends removing or phasing out Diesel Fuel Tax Credits, which currently discourage mine fleet electrification. The mechanism should be extended to include a carbon signal for electricity generators, and a Safeguard liability should apply to coal generators from their stated closure dates to discourage life extensions.

Complementary measures
To support the mechanism, the government should implement a border carbon adjustment focused initially on cement, clinker, and lime. Other suggested actions include measures to accelerate methane abatement (recognising it is 80 times more potent than CO2 over 20 years), enduring electricity market reforms, and a policy package to support the demand and production of Low Carbon Liquid Fuels.