Australia's Safeguard Mechanism is one of Australia’s most important climate policies. It is expected to deliver approximately 28 per cent of the emissions reductions needed by 2030, making it central to Australia's pathway to net zero.

But an important question remains: is the policy encouraging companies to reduce emissions at their industrial facilities, or is it primarily encouraging them to buy carbon offsets instead?

Our new research examines the first years of the reformed Safeguard Mechanism in Australia's metals and mining sector. The findings suggest that, while the reforms have strengthened incentives to reduce emissions, compliance is currently being driven much more by carbon offsets than by direct industrial decarbonisation.

Australia's industrial decarbonisation framework

The Safeguard Mechanism applies to Australia's largest industrial facilities: those emitting more than 100,000 tonnes of scope 1 greenhouse gases each year. These facilities span sectors including mining, oil and gas, manufacturing, transport and waste.

Under reforms introduced in 2023, facilities now face progressively declining emissions baselines. Companies can comply by:

• Reducing emissions below their baseline and generating Safeguard Mechanism Credits (SMCs) for over performance;
• Purchasing and surrendering SMCs generated by other facilities; or
• Surrendering Australian Carbon Credit Units (ACCUs) generated from sectors outside of/not regulated by the Safeguard Mechanism.

This flexibility is intended to reduce compliance costs while allowing industry to transition over time. However, it also raises an important policy question: are companies investing in emissions reductions at their own facilities, or relying on external offsets instead?

Looking beyond corporate commitments

Much of the public discussion around corporate climate action focuses on what companies say they intend to do. New mandatory climate reporting requirements under AASB S2 are increasing transparency around companies' climate targets and transition plans. But an equally important question is whether those commitments translate into real emissions reductions. Our research instead asks what companies are actually doing.

We analysed climate disclosures from ASX100 metals and mining companies (derived from company annual reporting suites) and matched this with facility-level compliance data published by the Clean Energy Regulator. The study covers the first two compliance years under the reformed Safeguard Mechanism (2023–24 and 2024–25).

By linking corporate disclosures with regulatory compliance data, we were able to compare companies' stated decarbonisation strategies with how they actually met their Safeguard Mechanism obligations.

Our analysis identified four clear trends

1. Compliance is overwhelmingly driven by carbon credits rather than on-site emissions reductions.

Facilities are far more likely to surrender Australian Carbon Credit Units than Safeguard Mechanism Credits, indicating that external offsets currently play a much larger role in compliance than direct emissions reductions.

2. Companies report broad decarbonisation strategies, but offsets remain central to implementation.

Most companies describe a wide range of decarbonisation initiatives – including energy efficiency, electrification and process improvements – but offset use remains a common feature of corporate transition strategies.

3. The offsets being used raise important policy questions.

Most ACCUs surrendered by companies in our sample were generated using methods that have been the subject of significant public debate regarding environmental integrity. This raises broader questions about the role of different offset types in Australia's industrial decarbonisation strategy.

4. The extent to which firms retain and manage SMCs internally may affect the effectiveness of the SMC market. 

Credits generated through emissions reductions are often banked and managed across facilities and years, reflecting firms' efforts to optimise compliance over time. This reduces the volume of credits available for trade, potentially limiting the market's ability to provide flexibility and facilitate least-cost emissions abatement.

What does this mean for the Safeguard Mechanism?

Our findings suggest that the current design of the scheme is not providing strong incentives for direct industrial decarbonisation, particularly in emissions-intensive sectors such as mining and metals, where deep emissions reductions will ultimately be required.

Heavy reliance on external offsets may delay investment in the technologies, infrastructure and operational changes needed to decarbonise Australia's largest industrial facilities.

This matters because the Safeguard Mechanism is expected to deliver a substantial share of Australia's emissions reductions over the coming decade. If compliance continues to be dominated by offsets, policymakers need to consider whether the scheme is achieving its intended purpose.

An opportunity for reform

The forthcoming statutory review of the Safeguard Mechanism provides an opportunity to strengthen incentives for genuine emissions reductions while maintaining flexibility for industry.

Potential reform options include:

• Strengthening incentives for on-site abatement by tightening ACCU surrender rules.
• Exploring whether ACCUs and SMCs should play more distinct roles within the scheme; for example, we suggest separating the ACCU and SMC markets so SMCs provide a stronger incentive for direct emissions reductions. Ensuring SMC integrity will be essential to this reform option.
• Considering limits on the quantity of ACCUs that facilities can surrender for compliance.
• Using ACCUs primarily as a price-stability mechanism rather than the primary compliance pathway. 
• Imposing limits on SMC banking.
• Assessing whether company-level obligations could better support whole-of-business decarbonisation than the current facility-based approach.

These options involve important policy trade-offs and would require careful consideration. However, our findings suggest they deserve close attention as Australia considers the next phase of industrial climate policy.

The first years of the reformed Safeguard Mechanism indicate that compliance is currently external offset-led rather than direct decarbonisation-led. The statutory review is at a critical juncture. It must close loopholes that allow compliance without meaningful emissions reductions and better align the scheme with Australia's decarbonisation objectives.

Read our policy brief here.