Industrial compliance will reshape ACCU demand, just as low-cost supply faces constraints
Australia’s net emissions were approximately 443 MtCO₂e in 2025. For the country to meet its 2035 target (i.e. 62–70% below 2005 levels) would require a further 46–51% reduction compared to 2025. Around 86% of Australia’s net emission reductions between 2005–2025 came from the land use, land-use change and forestry (LULUCF) sector. Government projections indicate these will moderate towards 2030, increasing the need for emission reductions elsewhere, including the industrial sector, which we assume the Australian carbon price will incentivise. Note, this refers to the land sector as a whole. Australian Carbon Credit Unit (ACCU) supply, based on individual registered projects including non-land sources such as landfill gas, could still rise.
The main policy driving industrial emission reductions is the Safeguard Mechanism (SME). It covers 208 of Australia's largest industrial facilities across mining, oil and gas, manufacturing, transport and waste, setting each facility an emissions limit (i.e. a baseline) that tightens over time. These facilities emitted a combined 132.8 MtCO2e in 2024–2025, ~30% of national net emissions.
Expectations are the baseline will decline by 4.9% annually through 2030, subject to adjustments. Facilities exceeding their baseline must cover the excess by surrendering ACCUs or Safeguard Mechanism Credit units (SMCs), currently treated as equivalent and interchangeable. An ACCU represents one tonne of verified emissions, avoided or removed, by a recognised, registered abatement project, such as vegetation regeneration, plantation forestry or landfill gas capture. SMCs, by contrast, are issued to the Safeguard Facilities that emit below their own baseline. ACCU demand therefore depends on the compliance gap that remains after facilities have cut emissions and used available SMCs. This is illustrated in the graph below, taken from CRU’s Energy Transition and Decarbonisation Service.
On the supply side, ACCU issuance totalled ~23 M units in FY2026, with outstanding holdings from prior years of ~61 M. Human-induced regeneration (HIR) – a relatively low-cost method in which landholders manage land to allow native vegetation to regrow – has been the largest single source of low cost carbon credits, accounting for ~40% of issuance in FY2026 and ~32% of cumulative issuance.
Other major sources include waste and landfill gas (i.e. ~24% of FY2026 issuance) and savanna fire management (i.e. ~7%). However, the HIR method could no longer be used for new project registrations from 2023. Existing projects can continue issuing credits throughout their remaining periods. The proposed Integrated Farm and Land Management (IFLM) method could allow new regeneration-type projects, similar to HIR. However, its timing, uptake and eligibility requirements remain uncertain, so the extent to which it can offset the closure of HIR is not yet clear.
Apart from HIR, other sources offer limited scope to significantly increase supply. Among non-vegetation sources, waste and landfill gas is the largest, but projects registered in recent years have been small. 'Other' sources (i.e. ~13% of FY2026 issuance) increased mainly because of a single carbon capture project, while savanna fire management is limited to eligible areas in northern Australia. “Other vegetation” sources – about 6% of the total and mainly comprising of legacy avoided-deforestation projects – are declining. Additional vegetation-based supply would therefore need to come mainly from plantation forestry and permanent environmental plantings that account for most new vegetation registrations since mid-2023, but only ~8% of FY2026 issuance.
These methods are also typically more costly than HIR, raising credit supply costs. CSIRO estimated direct abatement costs for HIR of ~A$5 /tCO2e, compared with ~A$10–30 for plantation forestry and A$20–30 for permanent environmental plantings, excluding agricultural opportunity costs.
For permanent plantings, gross margins of ~A$250 /ha/y and yields of 5–9 ACCUs/ha/y imply additional opportunity costs of ~A$28–50 /ACCU, bringing indicative combined costs to ~A$48–80 /ACCU before financing and other adjustments. Marginal land, continued grazing and environmental payments may improve project economics.
The Safeguard Mechanism review could tighten the market
ACCU demand is closely tied to the SMC baseline. For a given level of emission reductions at industrial facilities, a faster fall in the baseline generates demand for ACCUs, and vice versa. Under current rules, the baseline falls at 4.9%/y up to 2030, but a review of the SMC is underway that will set the post-2030 rules. To learn more about potential changes, CRU clients can see our previous analysis here (if interested, request a demo here). Potential changes include a steeper baseline reduction and the devaluing of ACCUs relative to SMCs.
As a result, we model three baseline reduction rates from 2030. The lower case assumes the baseline will continue to fall at 4.9%/y (i.e. no change to current policy), a high case lifts this to ~11.1%/y and the base case falls between the two, at ~6.8%/y. We have not made any modelling assumptions about the future value of ACCUs relative to SMCs.
CRU models the ACCU market as a supply-demand model, factoring in ACCU and SMC supply and demand to determine overall ACCU holdings, after compliance needs. The level of ACCU holdings influences prices – high holdings indicate a surplus and limit upward pressure, while falling holdings could support price increases. To date, supply has far exceeded demand, which is why the Australian carbon price remains below the EU ETS, but forecasts suggest this could change in a few years.
Our forecast differs from the Australian government forecast, both in its assumptions about annual ACCU issuance growth and the rate of abatement at industrial facilities.
Both forecasts expect a steady increase in ACCU issuances. However, the government assumes ACCU supply will simply rise to meet higher demand – with a sharp uptick in issuances beyond 2030. We believe availability of suitable projects, speed of deployment and rising credit supply costs will limit their ability to close any shortfall; and we constrain ACCU issuance growth to 0.5 tCO2/y, or ~2.0%/y, from 2026 in all cases.
The Australian government assumes more than double this growth in ACCU issuances. The government also assumes stabilisation of ACCU demand after 2037 on the assumption that industrial facilities will begin to decarbonise at a rate similar to the baseline reduction. This implies an emission reduction rate at industrial facilities of ~2.8%/y over 2030–2040, or ~3.5x the recent historical performance. We think this is unrealistic.
We take a different view and assume industrial facilities would, in the first instance, draw on ACCU holdings rather than decarbonise, but that ACCU supply will not grow fast enough to meet the shortfall. In this situation, industrial facilities will still need to decarbonise faster than their current rate. Therefore, the Australian carbon price will need to rise to a level that incentivises sufficient industrial decarbonisation in a way that compliance needs can be met. This is the basis of our modelling.
Currently, ACCU holdings are increasing annually as issuances far exceed demand. Under these conditions, the Australian carbon price is determined by ACCU credit supply costs (i.e. the cost of the marginal project).
With strong supply availability of low cost carbon credits, the price is stable at our estimate of ~A$40 /tCO2 (~$30 /tCO2). However, our forecast shows future supply lagging behind demand and ACCU holdings declining. As the surplus tightens, carbon prices will increasingly reflect the cost of reducing emissions through technology at industrial facilities. Our abatement curve sets out technological decarbonisation costs to achieve different emission reduction levels, and can be used to determine the carbon price needed to maintain a balanced market.
Under our base case: The SMC baseline emissions threshold falls at ~6.8%/y from 2030, and emissions covered by the SMC need to fall by ~1.2%/y during 2030–2040 to ensure compliance needs can be met, given ACCU availability. For reference, average emissions reduction from 2020–2024 were ~0.8%/y, so the 2030s require a rate ~1.5x higher. Under the base case, ACCU projects remain the marginal supply of compliance credits, and we forecast a carbon price of ~A$86 /tCO2 by 2040, at the upper end of expected project costs.
Note that the base case used here differs from the base case in our long-term carbon price analysis. Here we are modelling a policy-driven carbon price rather than one underpinned by a longer-term emissions trajectory. Given the forecast price here is lower than our long-term price up to 2040 shows there is a divergence between current policy and longer-term emission aims.
In our upper case: The SMC baseline falls at ~11.1%/y, implying industrial emissions must fall at ~2.3%/y over the 2030–2040 period, or ~2.9x the 2020–2024 rate. In this situation, technological decarbonisation at industrial facilities provides the marginal supply of compliance credits and we forecast a price of ~A$134 /tCO2 by 2040 is needed to incentive sufficient supply of SMCs.
In the lower case: The SMC baseline continues to fall at 4.9%/y and required emission reductions slow to ~0.4%/y, or ~0.5x the 2020–2024 rate. In this situation, lower cost ACCU projects set the marginal cost, and we forecast a price at around today’s level in 2040.
If you want to discuss our carbon price forecasts, please get in touch and we’ll be happy to talk through our thinking. Our ACCU forecast is updated quarterly and can be accessed with a subscription to the CRU Energy Transition and Decarbonisation service. If interested, request a demo here.
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