Australia’s climate transition is increasingly debated not only in terms of emissions targets and energy security, but also whether investors have confidence in the predictability of policy directions to make long-term capital investments. Recent research on corporate investment indicates that a lack of confidence in a country’s future policy environment can delay or redirect capital expenditure, particularly for long-lived and irreversible projects. The Commonwealth Government, therefore, needs to strengthen existing mechanisms and structures to support investor confidence in Net Zero projects, which could be achieved by bolstering the Safeguard Mechanism.

Maintaining a predictable investment environment is critical to mobilising the private capital needed to finance decarbonisation at the scale and pace required to achieve its Net Zero ambitions. The Net Zero transition requires large-scale investment in clean energy, infrastructure and industrial transformation. In a global market where countries compete to attract sustainable investment, a clear and credible transition framework can play an important role in determining where capital is allocated. For Australia, this is particularly important given its reliance on emissions-intensive industries and the scale of investment required to transform its energy system and industrial base.

The importance of investor confidence reflects a broader finding in financial market research, suggesting that credible climate policy frameworks reduce regulatory ambiguity and improve the efficiency with which private capital is allocated. Importantly, credibility does not require policies to remain unchanged; rather, it depends on durable institutions and transparent transition pathways that allow investors to anticipate how policy settings are likely to evolve over time.

Australia’s Safeguard Mechanism provides an example of such a framework. However, its effectiveness depends on whether it can create the conditions necessary to support the long-term investment required for industrial decarbonisation.

The Safeguard Mechanism as a policy signal?

Australia's Safeguard Mechanism provides a useful test of whether policy credibility can influence investment behaviour. Although the mechanism attracts less public attention than broader debates about renewable energy targets or electricity prices, it has become a central component of Australia’s industrial decarbonisation framework.

The mechanism was first legislated in 2014 under the National Greenhouse and Energy Reporting Act and came into force in 2016. Given its flexibility and the rising level of emissions, the mechanism was heavily reformed in July 2023 by creating tightening baselines over time towards Net Zero by 2050. It currently applies to Australia’s largest industrial facilities and, beyond its compliance function, it sends a clear signal to firms and investors around emission constraints, shaping expectations about the future direction of Australia’s transition.

Early evidence from the first compliance year indicates that many facilities responded to the tighter baselines by generating or acquiring compliance credits, while aggregate net emissions from covered facilities declined relative to 2022-23, providing initial evidence that the mechanism is beginning to operate as intended. However, given the recent implementation of the reforms, evidence on their long-term effectiveness remains limited.

Nevertheless, compliance with declining baselines does not necessarily translate into long-term decarbonisation. The effectiveness of the mechanism depends on whether it creates sufficiently strong incentives for firms to invest in direct emissions reductions and the availability of viable alternatives. If emissions baselines are perceived as insufficiently stringent, or if firms can meet obligations primarily through offsets rather than investing in direct abatement, the mechanism may have a weaker impact on accelerating technological transformation.

The framework also does not address all barriers to decarbonisation, particularly the availability, cost and reliability of low-emissions energy required by emissions-intensive industries. Therefore, while the Safeguard Mechanism provides an important policy signal, its ability to mobilise investment depends on its integration with broader reforms in carbon markets, energy infrastructure and industrial policy. Its effectiveness ultimately hinges on a broader transition system capable of delivering decarbonisation that is both economically viable and technically feasible. Signals are therefore not enough. Investor confidence depends on those measures being interconnected with broader reforms, so they are not perceived as window dressing should political headwinds change.

Challenges to effective implementation

Realising the full potential of the Safeguard Mechanism requires overcoming several implementation challenges.

One key issue is the role and credibility of Australian Carbon Credit Units (ACCUs). ACCUs provide flexibility for facilities that cannot immediately achieve required emissions reductions through operational changes. This framework helps to lower compliance costs and supports a more gradual transition. However, concerns about offset integrity and transparency remain, as the mechanism places few limits on their use. When offsets are cheaper than on-site abatement, firms can remain compliant while deferring direct emissions reductions, which blunts the investment signals the mechanism is intended to send. To ensure that the Safeguard Mechanism delivers its intended emissions reduction outcomes, the role of ACCUs should be progressively narrowed through stronger limits on their use, while maintaining flexibility for hard-to-abate emissions. This would ensure that offsets complement, rather than substitute for, investment in on-site emissions reductions.

A second and increasingly prominent challenge is electricity affordability and reliability, which requires substantial investment in renewable generation, transmission and storage infrastructure. Recent debates about electricity prices show that the transition challenge is not solely technological but also economic. Volatility in wholesale electricity markets, delays in infrastructure delivery, and uncertainty about future generation capacity can increase costs and undermine confidence among households and businesses. Addressing these challenges requires coordinated investment in transmission networks, renewable generation and storage, alongside streamlined planning and approval processes and stable energy policies that reduce uncertainty and encourage long-term private investment.

A further challenge is the commercial readiness of low-emissions technologies. While the Safeguard Mechanism creates incentives to reduce emissions, commercially viable alternatives remain limited for many emissions-intensive industries, including cement, steel, chemicals and Liquefied Natural Gas. Achieving deeper emissions reductions therefore depends not only on regulatory incentives but also on continued technological innovation, demonstration projects and the large-scale deployment of low-emissions industrial technologies. This includes expanding funding for research, development, and demonstration; supporting pilot and first-of-a-kind projects; leveraging public institutions to de-risk private investment; streamlining approval processes; and providing long-term policy certainty to mobilise investment in the large-scale deployment of low-emissions technologies.

Implications for Net Zero investment

Collectively, these challenges illustrate that the credibility of the Safeguard Mechanism depends on a broader, interconnected set of regulatory and investment-enabling measures. Firms are more likely to respond to declining emissions baselines when they are supported by credible carbon markets, affordable and reliable low-emissions energy, commercially viable technologies and a stable regulatory environment that provides confidence for long-term investment decisions.

Credible policy frameworks can function as a ‘hidden subsidy’ for Net Zero investment by reducing risk premia, improving capital allocation and enabling private investment without requiring direct government expenditure. By providing greater visibility over future regulatory conditions, such frameworks support long-term capital commitments for decarbonisation. Signals alone are, however, insufficient; they must be complemented by a wholesale transition system that demonstrates a deeper commitment to the energy infrastructure, market arrangements, and technological pathways needed for feasible and cost-effective emissions reductions. Thus, policy frameworks such as the Safeguard Mechanism should be viewed not as a substitute for effective transition design, but as a foundation that enables other policies and investments to achieve Net Zero outcomes.

Mona Mashhadi Rajabi is a Lecturer in Business Analytics at the UTS School of Accounting and Finance and the Decarbonisation Stream Lead at the Centre for Climate Risk and Resilience.

Martina Linnenluecke is Professor of Environmental Finance at the UTS School of Accounting and Finance and Director of the Centre for Climate Risk and Resilience.

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