A time for clarity and confidence in Australia’s carbon market
A new report from EY’s Net Zero Centre argues Australia has reached a decisive point in the development of its carbon market. Titled A time for clarity and confidence: Australian Carbon Market Outlook 2026, the report assesses whether current policy settings and carbon price signals are strong enough to deliver credible emissions reductions while maintaining economic competitiveness (1).
Australia now has a 2035 emissions reduction target, reformed Safeguard Mechanism settings, and a growing reliance on Australian Carbon Credit Units. EY’s central question is straightforward. Are current incentives sufficient to change behaviour and guide long-term investment, or are carbon prices still too low to matter.
For investors, that single question sits at the heart of transition risk and opportunity.
What the report is designed to address
The report is structured around four themes: context, complications, clarity and change. Together, they describe the evolution of Australia’s carbon market from policy design to implementation, and identify where further refinement is needed to improve confidence.
EY concludes that while recent reforms have strengthened the policy framework, price signals across much of the economy remain underpowered. Without clearer and stronger incentives, emissions reductions risk being delayed and capital misallocated.
Carbon markets, EY argues, are no longer a niche policy tool. They are becoming central to Australia’s economic transition.
ACCU prices and the incentive gap
One of the report’s most important findings concerns ACCU pricing. As per the report, current ACCU prices under existing policy settings are around $30–40 per unit in real 2025 dollars. EY’s modelling shows these levels are materially below what is required to drive efficient, economy-wide abatement.
EY compares current ACCU prices with carbon values already used by Australian regulators and infrastructure planners:
Australian Energy Regulator interim carbon value of around $75 per tCO₂e.
NSW Government carbon value of around $70–80 per tCO₂e.
Infrastructure Australia carbon value of around $80 per tCO₂e.
In effect, ACCU prices are roughly 60–70% below accepted policy benchmarks. EY argues this underpricing weakens investment signals and increases reliance on offsets rather than internal emissions reductions.
The Safeguard Mechanism and future price signals
EY is broadly supportive of the reformed Safeguard Mechanism, describing it as a credible foundation for orderly decarbonisation. However, the report stresses that outcomes depend heavily on price expectations and policy clarity.
Cost containment arrangements under the Safeguard Mechanism place an effective upper bound on compliance costs. EY’s analysis shows this pathway rising toward around $75 per ACCU by the mid-2030s, increasing thereafter in real terms.
Lifting ACCU prices closer to these levels would materially alter behaviour. EY estimates that higher prices could drive around 80Mt of additional internal abatement to 2050, while reducing reliance on credit purchases as a share of compliance.
For investors, this reinforces the importance of long-term price trajectories rather than current spot prices.
Where abatement incentives remain weak
The report identifies significant gaps in Australia’s abatement incentives. Transport, buildings and parts of industry account for a similar share of emissions as Safeguard-covered facilities, yet face much weaker price signals.
EY models scenarios where extending abatement incentives or introducing ACCU-linked mechanisms could materially lift demand. Including transport fuels under an ACCU-linked framework could increase demand by around 7.6Mt per year to 2040, potentially lifting equilibrium prices by around $10–15 per unit, depending on supply response.
These scenarios suggest future policy evolution is more likely to support higher and more stable carbon prices over time.
Nature repair and carbon markets
The report also explores how carbon markets could support nature repair. EY argues that aligning carbon incentives with biodiversity outcomes could improve social acceptance while delivering environmental benefits at scale.
The report highlights analysis showing that leveraging ACCUs to support large-scale habitat restoration could avoid direct government expenditure of around $7.3Bn per year for 30 years, while still delivering the land-sector removals required for net zero.
EY cautions that stronger demand for nature-based credits is likely to place upward pressure on ACCU prices, reinforcing the need for careful policy design and supply integrity.
What this means for investors
For investors, the report sends a clear signal. Carbon pricing is becoming a defining element of competitiveness, not simply a compliance cost.
While ACCU prices of $30–40 may persist in the near term, EY’s analysis suggests these levels are inconsistent with Australia’s long-term emissions targets. Medium to long-term prices closer to $60–90 per ACCU are more aligned with regulator benchmarks, Safeguard cost containment pathways and net zero modelling.
For carbon market participants, this points to tightening fundamentals over time. For broader transition investors, it reinforces the case for assuming stronger carbon incentives when assessing emissions-intensive assets and decarbonisation strategies.
The Bottom Line
EY’s Australian Carbon Market Outlook 2026 should be read as a call for coherence rather than radical reform. The report argues Australia has laid the foundations for an effective carbon market, but current price signals remain too weak to drive efficient, economy-wide decarbonisation.
For investors, the takeaway is clear. Carbon markets, abatement technologies and nature-based solutions are likely to operate in a higher price environment over time. Positioning for stronger and more credible carbon incentives now may prove critical as policy clarity continues to improve.
References
EY Net Zero Centre. A time for clarity and confidence: Australian Carbon Market Outlook 2026. EY, 2026. https://www.ey.com/en_au/newsroom/2026/01/flat-carbon-prices-to-2028-risk-australias-2035-climate-target
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