Cap-and-trade frameworks for reducing fossil fuel emissions: insight from Australia’s safeguard mechanism and its impact on the coal sector

Background: Under Australia's National Greenhouse and Energy Reporting Scheme, the reformed Safeguard Mechanism employs a cap-and-trade framework to meet domestic emission reduction targets and international obligations under the Paris Agreement. It remains unclear whether the reformed policy provides sufficient incentives to drive emissions reductions, particularly in the coal mining sector. This is critical given Australia's targets of 43% below 2005 levels by 2030 and net-zero emissions by 2050.Methods: Using operator reported emission intensity data, we calculate the applied emission intensity used in setting facility emission caps (baselines) under the policy, to observe trends in future emission caps across mine types and locations. To evaluate the strength of economic incentives under the policy, we establish a high price carbon offset scenario, under the Australian Government's cost containment measure, to compare the maximum unit cost of offsetting for each mine facility. This is assessed within the context of historical fluctuations in the coal commodity price.Results: Through ex-ante analysis, we found that most open-pit coal mines will experience an increasing emission baseline over the policy lifetime, while most high-emitting underground mines will experience a rapidly decreasing baseline. Under the high price scenario, the unit offset cost across all mines is within the bounds of historical fluctuation in the monthly commodity price of Australian coal between 2019 and 2024. With respect to coal, to achieve the aims of the Safeguard Mechanism, this analysis indicated that the emission reduction contribution (ERC) would need to increase from 4.9% to 9.2%.Conclusion: Economic incentives within the policy do not provide adequate material incentive for coal mine operators to invest in emission reduction strategies. The policy imposes a weak and non-binding emission cap, particularly for the coal mining sector, which may impede its efficacy as an emission reduction policy. Reform to the Safeguard Mechanism is required to incentivise industry emission reduction in the Australian coal sector.