Australia risks falling short of its 2035 emissions reduction target unless clearer and more confident policy signals unlock business investment in deeper decarbonization, according to the EY Net Zero Centre’s Australian Carbon Market Outlook 2026. The comprehensive analysis reveals a troubling disconnect between the nation’s climate ambitions and the market mechanisms designed to achieve them.
The analysis shows Australian Carbon Credit Unit (ACCU) prices are projected to remain flat at AUD $30–35 per tonne of carbon dioxide equivalent until at least 2028, a level unlikely to drive the medium and higher cost abatement needed for meaningful emissions reduction. Prices are projected to rise gradually to around AUD $70 per tonne by 2035, but the report, “A time for clarity and confidence: Australian Carbon Market Outlook 2026,” warns that without stronger, better sequenced policy mechanisms, investment may lag the pace required to achieve Australia’s 2035 target of a 62–70 per cent reduction from 2005 levels.
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Industrial Sector Faces Mounting Pressure
The pressure is particularly acute for Australia’s industrial sector, which is responsible for more than a quarter of national emissions and over 80 per cent of Safeguard Mechanism obligations. Under the Safeguard Mechanism, each facility has an emissions baseline, the limit it must stay under, and these baselines decline by 4.9 per cent each year to 2030.
The Safeguard Mechanism, introduced in 2016 and significantly reformed in 2023, applies to industrial facilities emitting more than 100,000 tonnes of carbon dioxide equivalent per year. This covers around 215 of Australia’s largest greenhouse gas-emitting industrial facilities, including oil and gas producers, mining operations, and heavy manufacturing plants. These facilities collectively account for approximately 28% of Australia’s total emissions.
The report finds that without clearer policy signals before 2028, businesses may delay investment in long lead abatement technologies such as electrification, process heat transformation and land-based carbon removals, increasing their exposure to rising compliance costs and risking greater market volatility. This creates a challenging dynamic where facilities face steadily tightening emission limits but lack sufficient economic incentive to invest in the transformative technologies needed to meet those limits.
“Australian organisations have matured in their baselining, risk assessment and scenario planning, but stable prices alone won’t unlock the scale of investment required for long term emissions abatement,” says Emma Herd, EY Australia Climate Change and Sustainability Services Partner and EY Net Zero Centre Co-Lead. “We need clearer, more confident policy settings to give businesses the certainty to act at scale and invest in practical, funded, operational emissions reductions.”
Understanding the Australian Carbon Market Landscape
The Australian carbon market operates primarily through Australian Carbon Credit Units, which represent one tonne of carbon dioxide equivalent either avoided or removed from the atmosphere. These credits are issued by the Clean Energy Regulator through certified projects such as reforestation, soil carbon enhancement, and methane capture.
ACCU prices have fluctuated significantly due to changes in policy, market demand, and international influence. Peak ACCU prices neared $55 in early 2022 but later stabilized around the $30–$35 range by mid-2023. The anticipation of Safeguard Mechanism reforms drove much of the 2022 price surge, as market participants expected tightening regulations would increase demand for carbon credits.
Current ACCU spot prices rose from around $33 at the end of Q1 2025 to around $35.50 at the end of Q2 2025, with prices increasing to around $36.95 on 22 August 2025. This relatively modest price movement stands in stark contrast to what analysts believe is needed to drive substantive decarbonization investments across the economy.
Policy Levers for Accelerating Decarbonization
The EY report highlights several policy levers that could strengthen abatement incentives and provide businesses with the clarity they need to plan with confidence. These recommendations represent a comprehensive approach to addressing the gaps in Australia’s current carbon policy framework.
First, the report recommends bringing forward the Safeguard Mechanism review to report by the end of 2026, enabling earlier policy announcements to remove the current handbrake on investment. The scheduled review in 2026-27 is intended to examine whether the scheme’s design is appropriately calibrated and effectively delivering emissions reductions in line with Australia’s targets, but earlier clarity would allow businesses to make investment decisions with greater confidence.
Second, extending coverage of the Safeguard Mechanism by bringing more facilities into scope would lift demand for Australian Carbon Credit Units. According to the Productivity Commission’s Clean Energy and Net Zero report, this expansion could provide over $900 million in national benefits by 2035. The Commission has emphasized that market mechanisms are the best way to reduce carbon emissions at the lowest cost to the economy.
Third, establishing a carbon price corridor, or alternative policy action to reduce the risk of very low credit prices, would improve investor confidence and motivate orderly abatement. The current system includes a price cap set at $75 per tonne (rising by CPI plus 2 percent annually), but lacks a corresponding price floor that would provide downside protection for investors in abatement projects.
Fourth, strengthening targeted transport sector incentives, including options such as winding back access to fuel tax credits or introducing an ACCU-linked carbon fuel charge as part of wider road user charging reforms, could address one of the major gaps in Australia’s emissions reduction policy framework. The transport sector, particularly heavy vehicles, remains largely outside the carbon pricing mechanism.
Fifth, aligning carbon and biodiversity markets through “nature positive Australian Carbon Credit Units” that reward land sector abatement and priority nature repair through measurable on-ground action would create co-benefits for both climate and environmental outcomes. This approach recognizes that land-based carbon sequestration projects often deliver significant biodiversity benefits alongside carbon removal.
The 2035 Target Context and Challenges
The 2035 emissions reduction target represents a critical milestone on Australia’s path to net zero by 2050. The Albanese Labor Government accepted the Climate Change Authority’s independent advice and set the 2035 climate change target at a range of 62% to 70% reduction on 2005 emissions. This target is described as both ambitious and achievable, representing a credible contribution to global efforts to keep global warming well below 2°C and keep 1.5°C within reach.
The Climate Change Authority’s 2035 Targets Advice finds that an emissions reduction target of 62–70% from 2005 levels represents Australia’s highest possible ambition taking account of relevant legislative matters, is achievable, and is in Australia’s national and economic interest. The Authority recommended the Australian Government should aim for the top of the 62-70% range, prepare for breakthroughs and setbacks, and not rule out ‘overachievement’ should greater emissions reductions prove possible.
According to Norton Rose Fulbright’s analysis, this target forms the basis of Australia’s third Nationally Determined Contribution (NDC) under the Paris Agreement and marks a critical milestone on Australia’s journey to net zero by 2050. The NDC notes the 2035 target will be delivered through a multi-year carbon budget for the years 2031–35, providing more flexibility than annual targets while ensuring cumulative emissions stay on track.
The target represents a significant step up from Australia’s 2030 target to reduce emissions to 43% below 2005 levels by 2030. Current projections show Australia’s emissions are progressing towards 42.6% below 2005 levels by 2030, indicating the nation is largely on track for its near-term goal but faces a steeper climb to reach the 2035 target range.
Declining Baselines and Compliance Pressures
The modelling indicates that declining Safeguard Mechanism baselines are placing growing pressure on high emitting sectors, making early action critical to manage compliance costs and volatility. Under the reformed mechanism, baselines are calculated using output-based benchmarking based on emissions intensity, with the default decline rate of 4.9% per year applying to standard and landfill baselines up to 2030.
Facilities that exceed their baseline must offset excess emissions by surrendering Safeguard Mechanism Credits (SMCs) or Australian Carbon Credit Units (ACCUs). In some cases, facilities can apply to average their emissions over a longer period through multi-year monitoring periods, reduce their baseline decline rate if they qualify as trade-exposed baseline-adjusted (TEBA) facilities, or borrow from their baseline from a future year with interest applied.
Preliminary data for the 2024-25 Safeguard Mechanism period reveals a fascinating contradiction in Australia’s industrial climate policy. While total emissions from covered facilities fell by 2.4% (a reduction of 3.2 MtCO2-e), the number of facilities exceeding their baselines surged. The preliminary 15.7% reduction in SMC eligibility and 48.9% increase in total exceedance across the scheme highlights that ACCUs and SMCs remain a vital part of compliance strategies.
“The Safeguard Mechanism is no longer a paper tiger; it has teeth,” noted industry analysts at ClearBlue Markets. “With baselines set to decline by roughly 4.9% annually, the pressure will only intensify. For Australia’s industrial giants, the ‘grace period’ is over.”
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Investment and Technology Challenges
“Extending incentives to more sectors and strengthening the signals that support the Australian Carbon Credit Unit market will be essential to achieving orderly, efficient decarbonisation,” says Dr Steve Hatfield Dodds, EY Parthenon and EY Regional Chief Climate Economics and Policy Officer, for Oceania. “Australia has strong foundations in place, but the next decade requires acceleration, moving from frameworks to funded, operational change. A failure to provide investment-grade certainty before 2028 risks higher long-term compliance costs for industry and a slower, more volatile pathway to meeting the 2035 target.”
The challenge is particularly acute for technologies with long development and deployment timelines. Electrification of industrial processes, advanced carbon capture and storage, hydrogen production, and significant expansion of renewable energy all require substantial upfront capital investment and multi-year planning horizons. When carbon prices remain flat and policy settings uncertain, businesses rationally delay these investments, potentially creating a rush of activity closer to compliance deadlines that could drive up costs and create supply chain bottlenecks.
Business expectations align with EY’s projections, with survey respondents anticipating ACCU prices will double over the next decade. More than two-thirds (72%) of respondents in the Carbon Market Institute’s survey stated that stronger laws and policies are the most important tool to scale up private investment in climate solutions. There is also strong support for expanding the Safeguard Mechanism so that it covers more facilities that have substantial emissions.
Supply and Demand Dynamics
The Australian carbon credit unit supply for 2025 remains strong, with 6.5 million ACCUs issued in Q2 2025. The total issuance for the first half of the year was a record 9.5 million ACCUs. Annual supply is tracking to meet the Clean Energy Regulator’s estimated range of 19-24 million.
Given the time required to develop, implement and credit new projects, it is expected that ACCU supply to 2030 will be dominated by existing projects and projects currently being developed and registered. As existing projects reach the end of their crediting period, new methods and project development will be critical to securing future ACCU supply.
Recent progress on new ACCU methods includes the Department of Climate Change, Energy, the Environment and Water consulting on a new draft landfill gas method and new proposed savanna fire management methods. The draft new landfill gas method addresses recommendations from the Independent Review of Australian Carbon Credit Units (Chubb Review) to have upward sloping baselines that account for business-as-usual emissions reduction likely to occur at landfills without the ACCU Scheme.
Significantly, 74 landfill gas projects (representing 43% of total landfill gas projects) have crediting periods ending in 2026. These projects account for around 3.8 million ACCUs each year, and about 80% of annual issuances from landfill gas projects. The extension of crediting periods means that projects ending in 2026 would remain a material part of ACCU supply until 2038, helping to maintain supply stability during the critical transition period.
Market Evolution and International Linkages
EY’s previous analysis suggested ACCU prices could double to around AU$75 before 2035, coming in just below the Australian Government’s cost containment measure. The EY Net Zero Centre has undertaken additional scenario modelling and analysis to understand the impact of policy on Australia’s carbon credit market, finding that Australia’s carbon market could deliver an additional 20 million units annually by 2035, up from 17 million units in 2022.
The evolution of Australia’s carbon market is occurring against a backdrop of increasing global integration of carbon pricing systems. While the proposed reforms do not currently permit the use of international carbon credit units, the government has indicated it will consult on amending legislation that enables high integrity international units to be included in the Australian National Registry of Emissions Units and provide a mechanism for such units to be used for compliance at a future time, if warranted.
The emergence of more efficient markets trading high-integrity carbon credits through a small number of exchanges linked to multiple registries in a coherent global framework represents a future state that business leaders must incorporate into their strategic planning. This international integration could provide additional liquidity and price discovery benefits to the Australian carbon market while maintaining high environmental integrity standards.
Review Timeline and Policy Uncertainty
The scheduled Safeguard Mechanism review in 2026-27 will examine crucial questions about the scheme’s future direction. The review will consider policy settings including the costs and availability of domestic offsets; the appropriate treatment of international units; the suitability of arrangements for emissions-intensive, trade-exposed activities; whether the cost containment measure is sufficient; and treatment of flexibility mechanisms beyond 2030, such as banking and borrowing and multi-year monitoring periods.
The review will also have regard to important issues of sovereign capacity for the transition to net zero, the impacts on recent investments, technology readiness, progress with carbon border adjustment mechanisms, and efficiency of Australian production against international competitors. As part of the review, the Climate Change Authority will advise the government on the extent to which on-site abatement is being driven by the reforms, and whether any additional incentives are required.
However, the timing of this review creates a dilemma. Industry participants note that due to the target range, baseline reductions from 2030 onwards will be harder for industry to forecast until the Safeguard review is complete. A 62% NDC implies an indicative 4.82% decline rate, a 65% NDC implies an indicative 5.5% decline rate, and a 70% NDC implies an indicative 6.85% decline rate. This uncertainty makes long-term investment planning challenging.
Land-Based Carbon Removals and Nature-Positive Solutions
The report provides updated modelling of ACCU price trajectories, Safeguard Mechanism obligations and emerging abatement opportunities across industry, transport and land‑based activities such as reforestation, soil carbon projects and habitat restoration. The integration of carbon and biodiversity markets through nature-positive ACCUs represents a significant opportunity to address both climate change and biodiversity loss simultaneously.
Land-based carbon removal projects offer co-benefits that pure industrial emissions reduction cannot match. Reforestation projects provide habitat for native species, improve water quality, reduce erosion, and create rural employment opportunities. Soil carbon projects can improve agricultural productivity while sequestering carbon. Savanna fire management projects conducted by Indigenous ranger groups combine cultural land management practices with carbon abatement.
The challenge lies in ensuring these projects deliver genuine, permanent carbon removal while avoiding adverse impacts on food production, water resources, or Indigenous land rights. The Chubb Review confirmed the integrity of Australia’s carbon credit market, concluding that the ACCU scheme was “fundamentally well-designed” but could be improved by applying knowledge gained through implementation and practical experience.
Transport Sector: A Critical Policy Gap
The transport sector represents one of the most significant gaps in Australia’s current carbon pricing framework. Heavy vehicles, which are responsible for substantial emissions but largely exempt from carbon pricing mechanisms, require targeted policy interventions. The EY report’s recommendation to wind back access to fuel tax credits or introduce an ACCU-linked carbon fuel charge aligns with the Productivity Commission’s findings that heavy vehicles represent a major policy gap.
Several policy approaches are being considered to address transport emissions. The New Vehicle Efficiency Standard for light vehicles introduces a welcome national approach with competitive market elements. For heavy vehicles, options include technology-neutral policies that incentivize operators to reduce emissions, road user charging reforms that price in carbon externalities, and support for alternative fuel infrastructure.
The transition in transport faces unique challenges. Unlike stationary energy sources or industrial processes where electrification or fuel switching is relatively straightforward, long-haul heavy transport requires energy-dense fuels that current battery technology struggles to provide. This creates opportunities for clean fuels including hydrogen, sustainable biofuels, and potentially synthetic fuels, but these technologies remain expensive and require substantial infrastructure investment.
Economic Implications and Investment Signals
The broader economic implications of carbon pricing and the transition to net zero are substantial. Australia’s 2035 emissions reduction target and implementation of the Net Zero Plan and sector plans are intended to continue growing the economy, strengthen industrial competitiveness, and safeguard the health and wellbeing of Australians while providing certainty and clear signals to investors to accelerate decarbonization.
However, the current disconnect between carbon price trajectories and investment requirements creates economic risks. If businesses delay decarbonization investments until carbon prices rise closer to compliance deadlines, the result could be a disorderly transition characterized by rushed investments, supply chain bottlenecks, labor shortages in clean energy industries, and ultimately higher costs for both businesses and consumers.
The alternative – a clear, credible carbon price trajectory supported by complementary policies – would enable orderly investment planning. Businesses could develop multi-year decarbonization roadmaps, make staged investments in new technologies, build internal capability and expertise, and capture early-mover advantages in emerging clean technology markets.
The international context adds further urgency. Global capital markets and supply chains are increasingly demanding demonstrable progress on climate commitments. Carbon border adjustment mechanisms being implemented by the European Union and considered by other jurisdictions could affect Australian exports if domestic carbon pricing is perceived as insufficiently stringent. A medium-sized trading country like Australia needs to be part of these global efforts to maintain market access and competitiveness.
The Path Forward: Clarity and Confidence
The EY report’s central message is clear: Australia has strong foundations in place, but the next decade requires acceleration, moving from frameworks to funded, operational change. The projected flat carbon prices through 2028 represent a critical window where policy intervention could make the difference between an orderly, cost-effective transition and a rushed, expensive scramble to meet 2035 targets.
The policy recommendations – bringing forward the Safeguard Mechanism review, extending coverage to more facilities, establishing a carbon price corridor, strengthening transport sector incentives, and aligning carbon and biodiversity markets – represent a comprehensive package that could provide the investment-grade certainty businesses need to act at scale.
The stakes are high. Australia’s climate commitments are not merely environmental obligations but economic imperatives tied to international competitiveness, investment attraction, and long-term prosperity. The global shift to clean energy represents one of the biggest economic transformations since the Industrial Revolution, presenting Australia with enormous economic and jobs opportunities given its abundant renewable energy resources, critical minerals deposits, and manufacturing capabilities.
The question is whether Australia will seize this opportunity through clear, confident policy settings that unlock investment at the scale and pace required, or whether policy uncertainty and flat carbon prices will see the nation fall short of its 2035 targets, requiring more drastic and costly interventions later in the decade. The next two years, leading up to the Safeguard Mechanism review, will be critical in determining which path Australia takes.
For Australian organizations, the message is clear: stable prices alone won’t unlock the investment required for long-term emissions abatement. Without clearer policy signals and more confident regulatory settings, businesses face growing compliance costs, heightened market volatility, and the risk of being caught unprepared when carbon prices inevitably rise. The time for planning and investment is now, even as the call for policy clarity grows louder.
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