The 2023/24 financial year marked the first compliance period under the reformed Safeguard Mechanism, which took effect on 1 July 2023. Under the updated framework, the 219 large-emitting facilities covered by the scheme were required to reduce their greenhouse gas emissions for the 2023/24 financial year beneath assigned baselines by the first compliance deadline of 1 April 2025.
While the reforms were designed to drive operational efficiency and incentivise the implementation of technological improvements for large emitters, the first year of compliance has presented significant complexities. Many facilities have had to rely on flexible emissions management options under the scheme, or, where direct reductions were not feasible, offsetting excess emissions through the use of Australian Carbon Credit Units (ACCUs) or Safeguard Mechanism Credits (SMCs) to avoid penalties imposed by the Clean Energy Regulator (CER or the Regulator).
Compliance complexities
Proactive approaches
The first compliance period under the reformed Safeguard Mechanism required covered facilities to proactively assess their obligations, as early intervention was critical to achieving optimal outcomes and reducing compliance costs which would, in turn, help manage financial and operational risks.
Proactive organisations assessed their exposure and modelled emissions scenarios over future compliance periods, to align strategies with long-term capital planning in addition to any decarbonisation goals. Forward planning under the scheme allowed safeguard facilities to assess the full suite of available emissions management options, factoring in baseline determinations, projected ACCU/SMC costs, and the feasibility of implementing emissions reduction measures – ultimately driving down compliance costs.
Strategic determinations
A threshold challenge for compliance was identifying the corporate entity with operational control over a facility, as this entity is legally responsible for meeting Safeguard Mechanism requirements. In cases where the allocation of operational control was blurred between an owner and an operator of a facility, regulatory determination was required to clarify responsibility for compliance with the safeguard scheme and conversely to identify the corporation with an entitlement to generated SMCs.
While the CER can issue a declaration of operational control, obtaining a decision may take up to six months. To formalise obligations under the scheme where there is such uncertainty, some entities have established contractual arrangements to allocate compliance responsibilities among the parties involved.
Facilities also faced complexities in defining their operations in order to determine applicable emissions intensity values to assist in forming their required baseline. Baseline determinations depend on whether a facility is new or existing:
- Existing facilities: Baselines account for facility-specific circumstances, easing initial compliance costs and allowing time for emissions reduction planning.
- New facilities and new products: Baselines are set using international best-practice emissions intensity values, adapted for Australian conditions.
Facilities seeking to apply under the ‘existing facility’ baseline framework encountered challenges, particularly where limited production had occurred before 1 July 2023, as facilities needed to demonstrate historic production to meet the ‘existing facility’ statutory definition. Additional complexities arose for facilities that extended their operations or introduced associated activities which had the potential to undermine an ‘existing facility’ application, potentially subjecting the facility to a best-practice emissions intensity determination despite the operations relying on existing infrastructure. In these circumstances, successful applications to the CER to classify these operations as ‘existing facilities’ resulted in significant long-term compliance cost savings.
Leveraging compliance flexibility
Proactive planning and emissions modelling allowed facilities to effectively explore flexible compliance mechanisms under the scheme. Following the end of the 2023/24 compliance period, facilities were required to report covered emissions under the National Greenhouse and Energy Reporting (NGER) scheme. Facilities that exceeded their calculated baselines were able to make applications to the CER to manage excess emissions using compliance flexibility mechanisms. These included applications for:
- Multi-Year Monitoring Periods (MYMP), to defer compliance requirements until the end of a multi-year period of up to five years if emissions reduction activities were expected to bring emissions below the collective baseline for the MYMP;
- Trade-Exposed Baseline-Adjusted (TEBA) status, to reduce the baseline decline rate for facilities that met certain cost impact criteria, for up to three years; or
- a borrowing adjustment determination, which allows facilities to borrow up to 10% of the next year’s baseline, with a 2% interest penalty.
While these flexibility mechanisms provided relief for facilities exceeding their baselines, practical challenges arose when facilities struggled to satisfy all application criteria or meet statutory deadlines, which were set well before the April 2025 compliance cutoff. Facilities with excess positions that did not pursue these options were required to surrender ACCUs or SMCs to avoid potentially significant penalties from the Regulator depending on the scale of excess emissions.
Compliance challenges from the 2023/24 period underscore the need for proactive emissions management, a clear understanding of compliance obligations and early engagement with the Regulator to optimise compliance costs and minimise regulatory risk.
2023/24 Insights
On 15 April 2025, the CER published full compliance outcomes from the first period under the reformed scheme. This followed an earlier analysis report which was released in November 2024 by the Climate Change Authority (CCA). Key findings include:
- Total emissions from safeguard facilities were approximately 136 MtCO₂-e, down from 138.7 MtCO₂-e in 2022/23;
- Approximately 8.3 million SMCs were issued to 62 safeguard facilities;
- 142 facilities incurred a total liability of 9.2 Mt CO2-e because their emissions exceeded their baseline. To manage excess emissions, facilities with excess emissions surrendered:
- 1.4 million SMCs; and
- 7.1 million ACCUs; and
- 26 facilities utilised emissions management measures covering approximately 549,376 t CO2-e that would otherwise have been needed to be met through ACCU or SMC surrenders, including:
- 17 TEBA determinations;
- 6 new MYMP declarations; and
- 3 borrowing adjustment determinations.
The CER notes that these deferred liabilities will need to be brought to account in subsequent years.
The CER has also revealed that 98% of captured facilities were not in an excess position following the 1 April 2025 compliance deadline. Only five facilities captured under the scheme, under the operational control of three responsible emitters, did not meet the surrender deadline. Of these three responsible emitters, two are in voluntary administration and regulatory action has been taken against the third company.
The Regulator has the authority to impose civil penalties, calculated based on the number of days a facility remains in excess and the volume of excess emissions. Results from the first year under the reformed scheme indicate that the threat of these penalties being imposed successfully deterred facilities from being in an exceedance position following the compliance deadline.
The CER also reported that there was an uptick on engagement with captured facilities over the year, and a significant increase in planning for the development and implementation of emissions reduction strategies was noted by the Regulator.
New trading platform for SMCs
In the face of Safeguard Mechanism reforms, the Australian National Registry of Emissions Units (ANREU) system is transitioning to the Unit and Certificate Registry.
The initial unit type that will be available in the registry is the SMCs, which have been issued earlier this year to facilities that reported emissions for the 2023/24 financial year beneath their calculated baseline. It is expected that ACCUs will be added to the registry later in the year. ACCUs will continue to be managed within the existing ANREU system until they are transitioned to the new registry.
For more information on how to set up an account, or switch to the new trading platform, we suggest that you read the CER guidance material found here: https://cer.gov.au/online-systems/new-unit-and-certificate-registry/unit-and-certificate-registry-guidance.
Navigating future reforms
With more than half the covered facilities relying on offsets to comply with the reformed scheme, the data from the 2023/24 compliance period suggests that progress in operational emissions reduction has been limited. However, the CCA reports that reductions from safeguard facilities remain in line with expectations. Looking ahead, emissions reduction efforts are expected to accelerate as facility baselines continue to reduce by 4.9% annually through to the end of the decade, aligning with Australia’s legislated emissions reduction target.
These shrinking baselines, along with potential future reforms to the Safeguard Mechanism, pose challenges for covered facilities, especially those that faced compliance difficulties in the first period under the reformed framework. Further, facilities will gradually transition from baselines set using facility-specific emissions-intensity values, to baselines set using industry-average emissions-intensity values by 2030 that will place more onerous compliance expectations on safeguard facilities.
Additional challenges may arise from further expected reforms to the Safeguard Mechanism, with a scheduled review in 2026–27. This review will assess key factors, including the impact of declining baselines, the availability of domestic offsets, and the future of flexibility mechanisms beyond 2030. It will also examine whether reforms are effectively driving on-site emissions reductions and if additional incentives, such as restrictions on the use of ACCUs, are necessary to enhance operational efficiencies.
This review, in addition to initial proposed reforms, is expected to enhance transparency within the scheme. Early recommendations out of the review by the CCA suggest that safeguard facilities should be required to report their forward compliance strategies on a rolling five-year basis, detailing planned abatement measures and the expected balance between on-site reductions and the use of carbon credits. The recommendation arises from the need for effective reporting and planning to determine if the reforms are working as intended.
As the CER continues refining the safeguard regime to ensure it meets its overarching objectives, facilities will need to integrate long-term emissions modelling into capital planning. A proactive approach to on-site emissions reduction is required to meet increasingly onerous compliance requirements and unlock opportunities to create value under the reformed scheme.
