Australia’s Carbon Pricing: A Model for Developing Countries?
Living in Australia, I recently discovered that the country has a rather unique approach to carbon pricing. Unlike many developed nations, Australia does not have an economy-wide carbon price — a surprising fact for a wealthy country. Even more interesting, Australia once had a carbon pricing system in 2012, but this progressive policy was abolished in 2014.
At first glance, this might seem like a step backward. But before jumping to conclusions, let’s take a closer look at how Australia manages carbon emissions today. While its approach may not be as comprehensive as the European Union (EU) Emissions Trading System (ETS), it has certain characteristics that developing countries could learn from when designing their own carbon pricing mechanisms.
Australia’s Short-Lived Carbon Price (2012–2014)
In 2012, the Australian government, led by Prime Minister Julia Gillard, introduced a fixed-price carbon tax as a first step toward an emissions trading scheme. The tax started at $23 AUD per tonne of CO₂ and applied to the 500 largest polluters across electricity, industry, and waste sectors.
And it worked. Emissions from these sectors declined, as shown in the chart below. However, in 2014, the policy was repealed by the Abbott government, making Australia the first country to remove an existing carbon pricing mechanism. Since then, no direct carbon price has been reintroduced.
Australia’s Current Approach: The Safeguard Mechanism
Since 2016, Australia has managed industrial emissions through the Safeguard Mechanism. Unlike an economy-wide carbon price, this system applies only to large facilities emitting over 100,000 tonnes of CO₂ per year — and only covers direct (Scope 1) emissions. As of November 2024, just 219 facilities fall under this policy. That’s a surprisingly small number for an entire country!
What’s even more unusual is how Australia sets emission baselines. In most carbon pricing systems, industries are held to common benchmarks — such as all coal power plants needing to stay below 700 kg CO₂ per kWh, with limits tightening over time. But Australia takes a more lenient approach: each facility’s baseline is based on its own historical emissions, rather than a sector-wide standard. Essentially, facilities compete against their own past emissions rather than against industry bencmark.
To be fair, the goal is to gradually transition these individual baselines toward industry best practices by 2030. In the meantime, facilities must reduce emissions by an average of 4.9% per year.
If they exceed their baseline, they must offset the excess by purchasing carbon credits:
- Australian Carbon Credit Units (ACCUs): Credits generated from mitigation projects, often in land use and forestry (e.g., reforestation).
- Safeguard Mechanism Credits (SMCs): Credits earned by facilities that emit less than their baseline.
As for the cost? The market price for ACCUs ranges between $25–40 AUD per tonne of CO₂ (Clean Energy Regulator, 2024; CoreMarkets, 2025).
What Could Go Wrong?
While the Safeguard Mechanism helps regulate emissions, it potentially has loopholes that make it far from ideal — especially for a developed country. Three weaknesses I can imagine:
1️⃣ Splitting operation
The mechanism only applies to facilities emitting more than 100,000 tonnes of CO₂ per year. If I were running a company, I’d consider splitting operations into two separate facilities, each emitting just under the limit.
2️⃣ Shifting emission scope
The policy only covers direct (Scope 1) emissions. It could mean easy workaround. Large industrial facilities, such as mining operation, smelting plants, etc., tipically generate their own electricity onsite (counted as Scope 1). The company could decide to simply sell off their power assets or purchase electricity from utilities (which would shift emissions to Scope 2, outside the mechanism).
3️⃣ Carbon leakage
With no Carbon Border Adjustment Mechanism (like the EU’s CBAM), companies may find it easier to relocate operations to countries with weaker climate policies. This “carbon leakage” means Australia risks losing business while still failing to reduce global emissions.
Without tighter regulations, the Safeguard Mechanism could become more of an accounting trick than a real climate policy.
What Can Developing Countries Learn?
Australia’s Safeguard Mechanism may have its flaws, but it also has some unique characteristics that developing countries can learn from. While policies like the EU ETS set a high bar, not every country has the capacity to implement such a complex system from the start. Three lessons for developing nations:
1️⃣ Keep It Simple — Administrative Efficiency
One of the biggest advantages of Australia’s approach is simplicity. The Safeguard Mechanism only monitors around 200 facilities, making it relatively easy to manage — even with basic administrative tools like Excel. For developing countries where technical expertise and resources are limited, starting with a simple system that focuses on the largest emitters can be a practical first step. Once officials gain experience, the system can gradually expand to cover more sectors and facilities.
2️⃣ Allow a Gradual Transition
Unlike stricter systems, Australia’s mechanism gives industries time to adapt. For large facilities, reducing emissions isn’t as simple as flipping a switch — it requires major investments in new technologies, which can take years to plan and implement. Setting baselines based on what industries can realistically achieve helps avoid the risk of an overly ambitious policy failing because no one can comply. However, regulators must also stay vigilant — industry lobbyists will always try to keep baselines high under the excuse of “economic feasibility.”
3️⃣ Balance Industry Protection with Climate Goals
Though not explicitly stated, the Safeguard Mechanism is designed to protect Australian industries. The limited coverage and loopholes provide companies with ways to reduce compliance costs if needed. There’s even a special provision called Trade-Exposed Baseline-Adjusted (TEBA), which lowers the baseline for facilities that see their revenues drop by more than 3% due to compliance costs.
While I’m not a fan of prioritizing economic growth over environmental protection — because if every country did this, no real progress would be made — I do believe developing nations deserve the right to grow their industries and economies. Many of these countries lack proper public services, have lower historical emissions, and face pressing social challenges. A carbon pricing policy that balances economic growth with climate responsibility is crucial for their development.
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More details about Safeguard Mechanism if you’re still interested to learn
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A Closer Look: Baseline Setting
For government officials in developing countries, how emission baselines are set is a critical lesson from Australia’s Safeguard Mechanism. Different industries operate in vastly different ways, so a one-size-fits-all approach to setting baselines doesn’t work. Australia recognizes this by using different baseline-setting methods depending on the type of industry:
1️⃣ Standard Baselines
2️⃣ Landfill Baselines
3️⃣ Sectoral Baselines
1️⃣How Standard Baselines Work
For most facilities, the baseline is tied to production levels — meaning the more a company produces, the more emissions it’s allowed, within a declining limit. The formula is:
Facility baseline = ∑ Production × emissions intensity × decline factor
Where:
Production = Output of the facility (e.g., tonnes of iron ore, tonne-kilometres of freight)
Emissions Intensity = Emissions per unit of production (e.g., kg CO₂ per tonne of steel)
Decline Factor = Annual reduction rate (default 4.9% per year until 2030)
New facilities and products that don’t have an established emissions intensity benchmark must follow international best practices (see table below).
What Developing Countries Can Learn
- Tailor baseline-setting to different industries instead of applying a single method across all sectors.
- Link emissions limits to production levels so that industries are encouraged to grow more efficiently rather than being penalized for expansion.
- Use gradual decline rates to ease industries into compliance while pushing them toward lower emissions.
- Adopt international best-practice benchmarks for new facilities to ensure new investments are cleaner from the start.
This system is far from perfect, but it provides a realistic transition path that developing nations can modify to fit their own economic and industrial structures.
2️⃣Sectoral Baseline Setting
One of the most unusual features of Australia’s Safeguard Mechanism is how it handles electricity sector emissions. Unlike other industries where baselines are set facility by facility, power generation is treated as a single sector-wide entity.
How It Works
Instead of monitoring each power plant individually, Australia aggregates emissions from the entire electricity sector. A single sector-wide baseline of 198 Mt CO₂-e applies to all power plants connected to the country’s five main electricity grids. This number was set based on the highest annual emissions recorded between 2009–2014.
Why It’s Strange
This approach does not push each power plant to improve its efficiency based on industry benchmarks. In most countries, power plants must reduce emissions per unit of electricity generated — but here, the whole sector is treated as one.
Why did Australia choose this method? There’s no official explanation, but I have two theories:
- Australia’s success in incentivizing renewables? Perhaps Australia believed that other climate policies — like the Renewable Energy Target (RET) or state-level initiatives — have been sucessfully implemented. Renewable electricity generation grew from contributing less than 10% in 2010, to more than 25% of national electricity generation in 2021 (Australian Energy Council, 2023). The government might see little need to enforce extra pressure through the Safeguard Mechanism.
- Protection to coal industry? Australia has huge coal reserves and a strong coal industry that employs around 50,000 people (Mineral Council of Australia, 2025). Stricter carbon limits on coal-fired power plants could hurt jobs, increase electricity prices, or make coal plants unprofitable. The government may have prioritized energy security and economic stability over strict emissions cuts.
Lessons for Developing Countries
For policymakers in developing nations, this case raises important questions:
- Should emissions limits apply facility by facility or sector-wide?
- If a country depends on fossil fuels for jobs and energy security, how should it transition responsibly?
- Can sectoral emissions be reduced through other policies, rather than strict facility-by-facility regulations?
3️⃣Landfill Baseline Setting
Australia’s Safeguard Mechanism also applies to landfills, but with a different approach to setting baselines. Unlike factories or power plants, landfills don’t produce a tangible output — they provide a service (waste disposal).
How Landfill Baselines Are Set
Landfill baselines are based on non-legacy emissions, meaning they only account for emissions from recently deposited waste. The calculation considers:
- A default methane capture efficiency rate (assumes a certain percentage of methane is captured and not released)
- A near-surface methane oxidation factor (adjusts for methane that naturally breaks down before reaching the atmosphere, based on the National Greenhouse and Energy Reporting (NGER) scheme)
- A declining baseline factor (aligned with the Safeguard Mechanism’s 4.9% annual reduction target)
Lessons for Developing Countries
Legacy waste vs. new waste: Unlike industrial facilities, landfills can’t just upgrade equipment to reduce emissions. Their emissions depend on waste already buried, making it difficult to enforce short-term reductions. By excluding legacy emissions, the Safeguard Mechanism focuses only on what landfill operators can actually control — new waste and methane capture systems.
What Happens If a Facility Exceeds Its Baseline?
Unlike strict carbon pricing schemes, Australia’s Safeguard Mechanism offers multiple ways for facilities to comply if they go over their emissions baseline. Rather than imposing harsh penalties, the system provides flexibility, making it one of the most industry-friendly carbon mechanisms in the world.
How Facilities Can Avoid Non-Compliance
A facility is considered to be in an “excess emissions situation” if it exceeds its baseline and does not take corrective action by April 1 of the following financial year. To avoid penalties, companies can choose from five options:
1️⃣ Buy Carbon Credits (ACCU or SMCs)
Facilities can offset their emissions by purchasing Australian Carbon Credit Units (ACCUs) or Safeguard Mechanism Credits (SMCs).
2️⃣ Apply for a Trade-Exposed Discount (TEBA)
If a facility can prove that complying with the Safeguard Mechanism has caused at least a 3% drop in revenue, it may qualify for a lower baseline decline rate.
3️⃣ Borrow from Next Year’s Baseline
Facilities can carry forward some of their excess emissions, effectively borrowing from their next year’s allowance. But there’s a cost: 2% interest (2024–2026); 10% interest (2026 onwards)
4️⃣ Request a Multi-Year Monitoring Period
Instead of reducing emissions immediately, facilities can request a 5-year compliance window. This allows companies to emit more than the baseline in one year as long as their average emissions stay below the baseline over the entire period.
5️⃣ Claim an Exemption for Exceptional Circumstances
If excess emissions are due to natural disasters, criminal activity, or other uncontrollable events, a facility can apply for an exemption from penalties.
A Hidden Carbon Tax?
Companies exceeding their emissions baseline must offset the excess by purchasing carbon credits — either from the market or directly from the government at $75 AUD per tonne (2023–24). This price increases annually by CPI + 2%.
In theory, most companies will find cheaper ACCUs or SMCs in the market. But if these become too expensive or unavailable, companies must purchase directly from the government — effectively making this a backdoor carbon tax.
This price cap serves as a cost-containment measure, preventing extreme spikes in carbon credit prices that could burden businesses. The government also commits that all revenue is allocated to the Powering the Regions Fund, supporting emissions reduction projects.
ACCU vs. SMC: Two Carbon Credit Systems, One Market
Australia operates two separate but interconnected carbon crediting systems:
1. Australian Carbon Credit Units (ACCUs)
2. Safeguard Mechanism Credits (SMCs)
Both represent one tonne of CO₂ equivalent emissions and are tradable financial instruments. However, they differ in how they are generated and their purpose.
Since 2015, ACCUs have been primarily purchased by the government to fund carbon abatement projects. The Emissions Reduction Fund (ERF) oversees 37 approved methodologies for ACCU generation. Most credits come from: a) Land-based projects — Reforestation, soil carbon, savanna burning, b) Industrial projects — Carbon capture & storage (CCS), landfill gas capture.
SMCs are new credits introduced under the reformed Safeguard Mechanism. Unlike ACCUs, these credits don’t fund new projects — they simply reward facilities that reduce emissions below their baseline.
Final Thoughts
Australia’s Safeguard Mechanism may not be perfect, but it offers valuable lessons for developing countries looking to design their own carbon policies. Its administrative simplicity, gradual transition approach, and industry protection measures demonstrate a practical way to balance economic growth with climate action.
Rather than adopting complex cap-and-trade systems like the EU ETS, developing nations can start with targeted policies for large emitters and gradually refine their frameworks.
Ultimately, climate policies must be tailored to local economic realities. Developing countries should aim for a just transition — one that reduces emissions without sacrificing economic progress.
Read further
- https://carbonmarketinstitute.org/app/uploads/2023/03/SMCs-vs-ACCUs.pdf
- https://www.dcceew.gov.au/sites/default/files/documents/safeguard-mechanism-document-production-variable-definitions-2024.pdf
- https://www.anthesisgroup.com/au/insights/safeguard-mechanism-101-what-you-need-to-know/
- https://australiainstitute.org.au/wp-content/uploads/2020/12/Carbon-price-10-years-on-web.pdf
