Carbon costs set to rise: 7% decline rate, 15 Mt cuts, more firms

Australian investors are being warned that the current carbon-compliance regime is mispriced. Covered facilities have cut emissions by less than 1% in two years, leaving a 10 Mt gap to the 2035 target. The proposed rise to a 7% annual decline rate and broader coverage would tighten carbon liabilities, lift demand for offsets, and shift relative costs onto profitable fossil fuel producers.

On 17 August 2026 the Investor Group on Climate Change released the Futureproofing Industry report, commissioned from EY, arguing that Australia's Safeguard Mechanism is too weak to meet the country's 2035 emissions target and recommending that hundreds more businesses be brought into the scheme. The report lands at a politically sensitive moment: a review of the Safeguard Mechanism is already under way, and days earlier Climate Council research found that covered facilities cut pollution by less than one per cent over two years. The government has separately announced an ambition to cut national climate emissions by 62 to 70 per cent by 2035. The central recommendation is to raise the average annual emission decline rate for covered facilities from 3.3 per cent to seven per cent between 2031 and 2035, and to apply higher rates to coal, oil and gas producers. The report says current settings would leave Australia about 10 megatonnes short of its 2035 target, while the stronger limits would cut an additional 15 megatonnes and push facilities toward onsite abatement rather than relying on offsets.

“

Covered facilities have cut emissions by less than 1% in two years, leaving a 10 Mt gap to the 2035 target.

The Safeguard Mechanism is Australia's flagship industrial emissions policy. It applies to facilities that emit more than 100,000 tonnes of greenhouse gases per year, including coal mines, liquefied natural gas plants, steelworks and manufacturers. Covered facilities receive emission limits that can be met through direct carbon cuts, credits or offsets. The proposal to expand the mechanism's coverage would capture hundreds more Australian businesses, broadening the carbon-compliance perimeter well beyond the largest emitters. That is a material shift in regulatory risk for mid-sized industrial firms and for investors who have begun pricing carbon liabilities into corporate valuations.

The report's most distinctive proposal is differentiation by industry. Rather than a single decline rate, it calls for fossil fuel producers to face higher emission reduction requirements than hard-to-abate sectors such as aviation and metals processing. The logic is twofold: coal, oil and gas producers tend to have higher profit margins and greater technical opportunities to decarbonise, while some hard-to-abate sectors still lack commercially ready solutions. Frankie Muskovic, policy director at the Investor Group on Climate Change, framed the change as a rejection of a one-size-fits-all decline rate, arguing that differentiated limits would ease the burden on industries where abatement is hardest. This approach would shift a larger share of the adjustment cost onto fossil fuel producers, a move likely to be welcomed by climate campaigners but resisted by resources companies and their investors.

For climate policy, the report is a signal that private capital is pulling ahead of government ambition. The Investor Group on Climate Change comprises institutional investors whose members have long asked for stronger, more predictable carbon policy. By commissioning EY to model alternative Safeguard Mechanism settings, the group is effectively providing a policy blueprint that government could adopt. The recommendation to raise the decline rate from 3.3 per cent to seven per cent is a sharp tightening; it would more than double the required annual reduction intensity over the 2031-2035 period. If the government adopts it, facilities would face a shrinking emissions budget at a time when many are also dealing with energy costs, technology uncertainty and international competitive pressure.

The market implications extend into Australian carbon credit units and offset demand. A higher decline rate and broader coverage would increase demand for credits and offsets, potentially supporting prices and investment in land-based and industrial abatement projects. At the same time, the report's emphasis on onsite cuts could reduce long-term reliance on offsets, directing capital toward electrification, fuel switching and efficiency projects inside facilities. Investors will be watching whether the government's Safeguard Mechanism review endorses the higher decline rate, the broader coverage, or the differentiated treatment for fossil fuel producers. Each choice would create different winners and losers across Australian industry.