Australia safeguard review turns on SMC-use vs ACCU fungibility as regulator weighs cap settings
Canberra's safeguard mechanism rethink could reshape demand for Australian Carbon Credit Units and shift power-sector decarbonisation economics.
The Clean Energy Regulator's safeguard mechanism review has reached the point where the relative treatment of safeguard mechanism credits (SMCs) and Australian Carbon Credit Units (ACCUs) will decide how much genuine abatement the policy delivers, according to observers tracking the process.1
The mechanism covers Australia's roughly 200 largest industrial facilities, and its settings push liable entities toward either buying offsets or investing in on-site abatement. Officially launched in late May (2026-05-28) as a "contentious piece of work," the review is attempting to redesign a scheme that has yet to drive sustained demand for abatement investment.1
The core design question is whether SMCs and ACCUs remain fully fungible under the reformed mechanism. Industry participants argue that allowing unlimited ACCU use keeps compliance costs manageable, while analysts caution that generous offset access dilutes the incentive to cut emissions at source.1
The regulator's own framing suggests it sees the tension. Facilities that have reduced emissions below their baselines generate SMCs, which can be banked or sold. ACCUs are generated by approved offset projects outside covered facilities. If a tonne of ACCU buys the same compliance outcome as an SMC, the price signal for on-site abatement weakens.1
Observers point to a structural problem that predates the review: the volume of ACCUs entering the market from human-induced regeneration projects has outstripped demand fundamentals in recent years, keeping credit prices soft even as the government raised its safeguard ambition. A review that preserves current fungibility without tightening supply controls risks embedding a low-carbon-price equilibrium where covered entities buy the cheapest credits and defer capex on abatement.1
There is also a parallel being drawn to the electricity sector. About 90% of battery owners do not participate in dynamic pricing programs such as virtual power plants, according to a separate analysis flagged during the review period.2 Policy mechanisms that rely on voluntary engagement consistently underdeliver, and the safeguard review faces that same pressure if its final design assumes liable entities will actively pursue abatement rather than purchase offsets.1
Tightening ACCU eligibility or restricting fungibility would raise compliance costs for gas processors, steelmakers and airlines — many of which have already signalled they expect a workable middle path rather than a dramatic tightening. The regulator must navigate that political constraint while defending a mechanism whose credibility rests on requiring real emissions reductions.1
The government's own projections assume the safeguard scheme delivers a growing share of national abatement out to 2030. If the final settings allow covered entities to satisfy a large share of their obligations with ACCUs, the mechanism risks becoming a fiscal transfer to offset projects rather than an industrial decarbonisation policy.1
Timing compounds the pressure. Facilities face annual safeguard assessment periods from July each year, meaning any change to baseline methodologies or credit treatment will carry immediate market implications for both SMC and ACCU pricing. Energy regulatory reviews in other markets have surfaced the same structural concern: utility sector analysts have noted that by the time formal consultation concludes, industry participants have often already structured positions around the existing framework, narrowing the practical scope for retrospective design changes.3,1
The treatment of existing ACCU holdings carries legal risk regardless of which direction the regulator moves. A grandfathering provision would ease transition but lock in current market dynamics for longer. A stricter approach that revalues legacy credits faces challenge from entities that have contracted forward ACCU purchases on the basis of the existing rules — a constraint the regulator will need to address explicitly in its draft settings.1
Draft settings are expected in the coming months. ACCU prices could re-rate downward if the review confirms loose demand assumptions. A tighter mechanism with restricted offset eligibility would likely support them. Covered entities that have already contracted forward ACCU purchases are waiting on that document, because it will set the terms under which those contracts retain or lose their compliance value.1