Net zero at lowest cost hinges on incentives and approvals

Australia’s decarbonisation trajectory depends on consistent, broad-based policy frameworks and faster delivery of clean energy infrastructure, according to the Productivity Commission’s interim report Investing in cheaper, cleaner energy and the net zero transformation, released as part of a suite of papers feeding into the government’s August Economic Reform Roundtable.

The draft recommendations focus on three areas: enduring market settings in the electricity sector, expanded and neutral emissions coverage, and reforms to project approvals and climate adaptation.

Electricity sector: post-2030 market design

The Productivity Commission warns of an energy policy cliff: without new national settings, investment could stall or fragment into a patchwork of state schemes. That would increase costs, reduce efficiency, and disrupt the build profile just as the transition accelerates.

Australia’s two main renewable investment mechanisms both taper off around 2030:

• Renewable Energy Target (RET): Large-scale Generation Certificates (LGCs) can only be created until 2030, after which the scheme provides no further revenue support.
• Capacity Investment Scheme (CIS): Structured as a transitional underwriting program, the CIS offers short- to medium-term certainty but does not provide enduring, technology-neutral investment signals.

To bridge this gap, the Commission recommends governments establish long-term, nationally consistent arrangements that:

• provide technology-neutral incentives for lowest-cost clean energy, regardless of jurisdiction or generation type
• embed reliability and system security into investment signals
• phase out jurisdiction- and technology-specific subsidies over time.

The aim is to give developers and system operators predictable signals beyond 2030, ensuring efficient dispatch and sustained investment momentum.

Broadening industrial coverage under the Safeguard Mechanism

The Commission proposes lowering the Safeguard Mechanism threshold from 100,000 tCO₂-e to 25,000 tCO₂-e annually, potentially bringing mid-tier facilities into scope. The 2026–27 review should assess whether phased inclusion is appropriate, but the clear direction is towards broader coverage.

If border carbon adjustment arrangements are introduced, trade-exposed baseline-adjusted concessions should be phased out to prevent uneven protection and ensure alignment between domestic and international frameworks.

1.1 The Safeguard Mechanism covers most emissions from rail and aviation misses heavy vehicles

Transport: incentives for heavy vehicles, phasing out overlaps

With light vehicles now covered by the New Vehicle Efficiency Standard, the Commission recommends a technology-neutral incentive for heavy vehicles. This would provide equivalent signals for electrification, hydrogen fuel cells or low-carbon liquid fuels.

Residual subsidies for electric light vehicles – such as fringe benefits tax, registration and stamp duty exemptions – should be phased out to reduce duplication.

1.2 Emissions-reduction incentives in the transport sector and their issues

Carbon values and policy transparency

The Commission places emphasis on aligning all emissions-reduction policies with nationally consistent “carbon values” — benchmarks for the emissions price implied by Australia’s 2050 target. An independent agency would develop these values, which should then be applied across impact analyses to improve transparency and comparability.

Policy design should evolve in line with these benchmarks, with potential extension into hard-to-abate areas such as agriculture and household gas. The report also calls for ongoing work to ensure Australian Carbon Credit Units (ACCUs) are high integrity, with integration into all national emissions policies over time.

Accelerating approvals for priority infrastructure

Project approvals are identified as a major constraint. Key recommendations include:

• EPBC Act reform: national environmental standards, regional planning with statutory deadlines in renewable energy zones, streamlined offsets through a federal fund, and clear rules for community and First Nations engagement.
• Specialist strike team: a dedicated approvals unit within DCCEEW, combining environmental and energy expertise to process high-priority projects.
• Clean Energy Coordinator-General: an independent authority to track approvals, resolve intergovernmental bottlenecks, and advise on the National Renewable Energy Priority List.
• Transition test: amending the EPBC Act to require the minister to consider a project’s contribution to the energy transition when making decisions.

These reforms are intended to reduce lead times and regulatory risk while maintaining environmental safeguards.

Adaptation measures

Recognising unavoidable climate risks, the Commission proposes resilience-focused reforms:

• A central climate-risk database with granular hazard mapping accessible to households, insurers, builders and planners.
• A national housing resilience rating system, modelled on the Nationwide House Energy Rating Scheme (NatHERS), to provide outcome-based star ratings that account for site-specific hazards.
• A coordinated federal–state–local framework with measurable goals for improving resilience, prioritising older housing in high-risk areas.
• Legislating the Climate Change Authority to monitor, evaluate and report biennially on adaptation policy effectiveness.

Implications for the sector

For generators, retailers and investors, the report underlines the need for broad-based, technology-neutral mechanisms to scale post-2030. Jurisdictional carve-outs and subsidies are expected to decline, with national carbon values becoming central to modelling.

For developers, approvals reform — especially statutory deadlines in renewable energy zones and oversight by a Coordinator-General — could materially lower risk and financing costs. Community and First Nations engagement requirements will remain critical.

For industrial operators and transport fleets, expanded Safeguard Mechanism coverage and new heavy vehicle incentives signal both greater compliance obligations and abatement opportunities. The phase-out of overlapping subsidies will reshape fleet decarbonisation economics.

For governments and regulators, anchoring all policies against national carbon values would create consistent, transparent benchmarks for assessing cost-effectiveness, influencing policy appraisal, procurement, and investment signals across the energy system.