Carbon pricing for Australia's energy transition: Why now is the time to resurrect Australia's most divisive energy policy

Australia’s energy transition is entering a critical phase. The current policy landscape risks becoming fragmented, with the Large-scale Renewable Energy Target and Capacity Investment Scheme expiring in 2030, and post-2030 market settings still evolving. Simultaneously, the electricity sector faces rising demand from electrification, accelerating coal retirements, and the imperative to meet legislated climate targets. Carbon pricing offers a coherent, technology-neutral mechanism to guide investment, incentivise emissions reduction, and align market behaviour with national climate goals. This presentation, based on a report commissioned by the Grattan Institute, explores a carbon pricing approach that could reset Australia’s energy policy pathway: a sector-wide Emissions Intensity Scheme based on the Safeguard Mechanism—an approach Australia has seen before. We assessed the feasibility and impact of this mechanism under carbon budgets consistent with achieving Australia’s legislated emissions reduction targets in scenarios where the world acts to limit global warming to below 1.5°C and 2°C, using energy market modelling. We found that an Extended Safeguard Mechanism enables an accelerated, phased transition, incorporating fuel switching and industrial decarbonisation. This policy option supports system stability through continued operation of centralised assets, especially gas-fired plants. Overwhelmingly, our findings highlighted the need for stronger emissions abatement, urgently. Under current policies, legacy assets could delay the transition and jeopardise state and national climate goals. Carbon policy reform, such as the approach proposed by the Grattan Institute, could offer a more coherent framework for emissions reduction.