Gas and power

Australia should tighten SMCs, link carbon markets: CMI

Australia should tighten SMCs, link carbon markets: CMI

Sydney, 23 June (Argus) — The Australian government should consider tightening requirements for Safeguard Mechanism Credit (SMC) generation and signalling a role for international carbon credits under the safeguard mechanism, industry body the Carbon Market Institute (CMI) said today. Current safeguard mechanism settings "raise several issues", including uncertainty on how much of SMC generation to date reflects new abatement investment, as opposed to pre-existing headroom or operational variability, CMI said in a policy briefing outlining priorities for the federal Labor government's upcoming review of the scheme. The government will lead a wide-ranging public review over July 2026-June 2027. The review is expected to recalibrate several compliance market settings, with two years of data now available since the reformed mechanism started in July 2023 . Market participants widely expect more stringent measures will be needed to meet the country's 2035 legislated target to reduce greenhouse gas (GHG) emissions by 62-70pc from 2005 levels . But there are uncertainties over the likely changes given the multiple options at the government's disposal . SMC generation and use under scrutiny The CMI recommended recalibrating specific design settings, including SMC generation and use, to better drive onsite abatement at safeguard facilities. This could include introducing a differentiated baseline for SMC crediting that is more ambitious than the declining baseline, which establishes the minimum level of emissions accountability. Under the reformed mechanism, facilities that emit more than 100,000t of CO2 equivalent (CO2e) scope 1 emissions in a fiscal year face declining baselines and need to surrender Australian Carbon Credit Units (ACCUs) or SMCs if their on-site abatement activities were not enough to keep their emissions below thresholds. They earn SMCs if emissions fall below baselines. SMC issuances fell by almost 20pc year-on-year in 2024-25, but remained relatively high at 6.7mn units , with Shell and mining group Anglo American leading issuances and recording increases despite declining baseline rates. Baselines are set using a production-adjusted, emissions-intensity framework calculated based on data from July 2017-June 2022. The framework is initially weighted towards site-specific emissions intensity values, transitioning to industry average emissions intensity levels by 2030 . Some of the largest emissions reductions last year came from facility closures and production cuts, rather than actual decarbonisation, sustainability advisory firm Anthesis had previously noted. Risks around cost containment mechanism The CMI also warned that uncertainty remains over whether the amount of ACCUs available under the cost containment mechanism (CCM) can sustain the safeguard mechanism during a credit crunch in the future. Safeguard facilities can access ACCUs under the CCM at fixed prices that increase annually by inflation rate plus 2pc. The price started at A$75/t CO2e ($52.52/t CO2e) in 2023-24 and has risen to A$82.68/t CO2e for 2025-26. There were 5.72mn ACCUs under the CCM last month , which would make just over half of the 10.83mn ACCU safeguard demand in 2024-25 . CCM volumes could rise significantly over the next five years, depending on the outcome of exit arrangements for fixed delivery carbon abatement contracts . But safeguard surrender demand is also expected to rise sharply over the same period. The government should consider linking Australia with international compliance markets, as access to international carbon credit units could support safeguard facilities if domestic ACCU supply tightens, according to CMI. "Well-designed access to high-integrity international units provides an important compliance pathway and would help mitigate the risk in the event the cost containment reserve is unavailable," it noted. Other recommendations include repurposing the government's future ACCU purchasing role to underwrite investment in on-site abatement through a guaranteed purchase of future SMCs at the CCM price, or via a carbon contract for difference model. The institute also suggested redirecting the government's purchasing strategy towards new and emerging ACCU methodologies, including engineered removals or carbon dioxide removal (CDR). By Lawrence Wen and Juan Weik Send comments and request more information at feedback@argusmedia.com Copyright © 2026. Argus Media group . All rights reserved.