Australia’s Net Zero Challenge

Australia is a relatively small player in global emissions: we account for around 1.3% of total annual CO2 emissions, with a significant proportion of these resulting from the production of exported goods. However, we are also a large fossil fuel energy exporter, and a wealthy nation with significant capacity to adopt new technologies to reduce our emissions footprint. Our recent commitment to achieve net zero emissions by 2050 will bring about profound changes in our economy, but despite the Government’s modelling suggesting otherwise, constraining emissions does come at an economic cost.

Australia’s emissions in 2005 were 624 million (metric) tonnes of carbon dioxide equivalent (Mt CO2-e), which have fallen by approximately 19.7% to 501 Mt CO2-e¹ in 2021. Much of this reduction is due to Land Use, Land-Use Change and Forestry (LULUCF), (-122 Mt), with a smaller contribution from electricity generation (-33 Mt). Over this 16-year period, emissions have also increased in some sectors, including stationary energy ², transport, and fugitive emissions ³ .

The government rightly points out that this reduction is faster than any other major commodity-exporting country. Our economy has grown by 45% over this period, and our per capita emissions have declined faster than most other developed nations. While the renewable industry would have the public believe otherwise, deployment of renewables in Australia is running at a world-leading pace. Australia installs approximately 200-250 watts of renewable capacity per person per year, which is around 4-5 times that of the US, Europe, Japan, and China.

We are already on track with our current government policies to significantly reduce CO2 emissions to 439 Mt CO2-e by 2030, which is a 30% reduction against 2005 levels ⁴. Under a higher technology take-up scenario, this would reduce further with a 35% reduction anticipated. However, global emissions accounting isn’t concerned with per capita figures and reductions in GDP intensity. It’s concerned only with cumulative CO2 emissions. Based on the rate of abatement over the last decade (-1.5% per annum), Australia would still have emissions of over 320 Mt CO2-e per year by 2050. With our new and more ambitious 2050 target, our current trajectory will have to change.

Australia’s Long-Term Emissions Reduction Plan

The Australian Government has recently committed to a net-zero emissions target for 2050 as part of the Glasgow COP26 climate talks and released a whole-of-economy plan ⁵ to achieve this. The Government will invest more than $21 billion to support the development and deployment of priority low emissions technologies by 2030. It will continue to play a direct role in driving research and development and catalysing on co-investment from business and other partners. The government’s approach in prioritising R&D and cost reductions is preferable to the deployment of existing and relatively high-cost technologies.

The priority low emissions technologies along with their cost targets are:

• clean hydrogen (sub $2/kg)
• ultra-low-cost solar (<$15/MWh)
• energy storage (<$100/MWh)
• low emissions materials (marginal costs of $700/tonne for steel and $2,200/tonne for aluminium)
• carbon capture and storage (compression and hub transport <$20/tonne CO2)
• soil carbon ($3/hectare per year).

These targets are very challenging, but if achieved, will contribute to the global emission abatement efforts. However, we need to be cognisant of the fact that Australia is largely a global technology adopter, and most gains are assumed to come from scaling up in manufacturing and deployment.

The modelling is misleading

The Plan was supported by a separate modelling document ⁶ which provided economic modelling of the impacts under various scenarios. The modelling suggests that in a scenario where we succeed in driving down technology costs and accelerating their deployment at scale across all sectors, Australia can get within 85% of net zero by 2050 with a ‘voluntary’ incentive of around $24 per tonne CO₂-e in 2050. It concludes that over the long-term, technology cost reductions typically exceed expectations, and on this basis it’s likely that further technology breakthroughs and cost reductions, beyond those modelled, could close the remaining gap to net zero emissions by or before 2050.

Voluntary action is assumed to be supported by the Government either through an Emissions Reduction Fund-style incentive, for abatement activities that are additional to business-as-usual, or by other enabling actions (such as providing information to consumers, investing in enabling infrastructure, or co-investing to de-risk and reduce the cost of deploying low emissions technologies). All action is taken voluntarily by the private sector to either reduce their emissions or purchase offsets ⁷ , consistent with investor expectations and consumer preferences. A central role is played by low emissions electricity and electrification of road transport which are projected to substantially decarbonise, even under current trends.

Other scenarios modelled that have more conservative technology assumptions show that costs increase exponentially. A scenario which requires 100% of net zero and limits international offsets to the same volumes as ‘the Plan’ finds marginal abatement costs of $80/t CO₂-e in 2050. With conservative technology cost assumptions and no international offsets, these costs rise to as high as $400/tonne.

The underpinning economic modelling used in the plan is unlike virtually all other emission modelling previously used in Australia. Global climate action involves bearing costs today in exchange for benefits in the future, with those upfront costs borne unequally amongst society. Adding constraints which force business and households to make higher cost choices than they would otherwise make has a negative impact on productivity, economic output, and employment. All credible modelling exercises in the past have shown this.

Parts of the modelling document that support the plan echo this sentiment. It states that “reducing gross emissions and the emissions intensity of production involves a range of economic costs. Larger emissions reductions can be achieved at lower costs with advanced technology. However, advanced technology does not make emissions reductions costless, or without consequences.”

However, the key headline from the work says we are all better off. Australia’s economy will continue to grow, and each Australian will be almost $2,000 better off in 2050 compared with the ‘no Australian action’ scenario, with advanced technology cost, associated deployment and the avoided capital risk premium driving these gains. The messaging is that adopting a target of net zero emissions by 2050 provides significant economic benefits to Australia.

There are two contributing factors to this calculated net benefit. The first, and less significant factor, is the avoidance of international retaliation. In a world committed to more ambitious climate action, Australia would likely face some form of negative global response if it did not commit to a 2050 emissions target, in line with other developed nations. This could be in the form of increased capital costs, trade action or lower demand for Australian exports, reflecting potential consumer concerns about a perceived lack of action on climate. The analysis in the report assumes that a 100-basis point risk premium from 2031 would reduce investment in Australia by an average of 5.5% over the period to 2050, thus reducing productivity growth. This is projected to reduce gross national income (GNI) and economic activity (GDP) by 0.9%, with the impact declining to 0.5% by 2050. While the magnitude of this can be debated, few would argue that it doesn’t exist.

The second and more significant factor is the benefit associated with successful R&D programs. The plan argues that investment in R&D will lead directly to advancements in technology. This isn’t new; the stretch goal for most of these technologies was previously committed through ARENA programs ⁸ , prior to the announcement of the net zero target. Arguably these should also be included in the ‘no action’ scenario. It is difficult to see how stating a commitment to net zero improves the likelihood of these technology breakthroughs coming about. Either they do or they don’t. Rhetoric and targets have little to do with R&D success.

Government investing in R&D to support low emission technologies should be supported. Well directed R&D funding can provide good long-term returns for taxpayers. Alternatively, simply rolling out more of the same existing technologies (as most of the renewable energy industry would have us do) is not necessarily an efficient way of reducing emissions. Renewable advocates would have us develop great swathes of countryside into solar and wind farms or build large amounts of electrolyser capacity to produce hydrogen now, despite most projections having the costs of these technologies falling dramatically over the next couple of decades. Apparently, we’re being ‘left behind’ or missing the ‘economic opportunities’ by not installing high-cost technology now.

Why the plan has disappointed some

Many climate activists and those involved in the development of renewables have found the plan wanting. It doesn’t deliver a new mechanism to accelerate development of current technologies through additional subsidies, or bring forward the closure of existing coal-fired generators.

In recent years we’ve seen significant voluntary activity by corporates underwriting renewables to lower the Scope 2 emissions of high-profile and climate conscious businesses. While this will continue, renewable developers have found progress much more difficult in recent times. Projects have struggled for financial viability and increased development costs. Having to contribute to network augmentation and system support has meant prices offered haven’t met counterparties expectations of low-cost renewables.

In contrast, voluntary action by households has virtually disappeared. Uptake of GreenPower ⁹; the voluntary scheme which allows electricity customers to select up 100% renewable energy supply –dropped to around 680 GWh in calendar year 2020, down from a peak of over 2,000 GWh a decade ago. Households want action on climate change, provided someone else is paying for it. Most are content to install rooftop solar photovoltaic (PV) panels, believing they are ‘doing their bit’ but ultimately motivated by the financial paybacks available from the generous subsidies through the Small-Scale Renewable Energy Scheme (SRES). These days we have so much solar already in the system, that incremental rooftop capacity simply results in increased curtailment of utility-scale solar PV during midday periods - when wholesale spot electricity prices are negative, with no net increase in renewable generation. If the cost of abatement from the SRES was high previously, it’s now getting ridiculous and it’s well past time this scheme is wound up.

If voluntary action is insufficient to make the necessary changes, government will likely continue to intervene. Establishment of an explicit economy-wide carbon price would allow the market to determine the least cost means of achieving abatement, however this now seems unlikely. The Government has also recently ruled out tightening baselines under the existing Safeguard Mechanism, which in the absence of explicit carbon pricing, is possibly a second-best approach.

While we can undertake any number of projections on the make-up of technologies and actions required to achieve net zero emissions by 2050, we simply don’t have any certainty about what the least cost pathway looks like and there are still many unknowns and innovations required.

Unfortunately, politics has probably poisoned market-based approaches permanently in Australia, and we’re left with Governments at all levels making long-term ‘plans’ and disruptive market interventions. While the Government’s plan has faced criticism from a number of sources, its admission that new, as yet unknown technologies will make a material contribution to abatement rings true, based on technology developments over the last decade.

While the modelling behind it is a bit misleading, the plan’s focus is the right one – get the low emission technology costs down before they are deployed at scale. This will give Australia the best chance to get to zero emissions at the lowest cost.

References

^[1]  “Greenhouse gas emissions are measured as kilotonnes of carbon dioxide equivalence (CO2-e). This means that the amount of a greenhouse gas that a business emits is measured as an equivalent amount of carbon dioxide which has a global warming potential of one. For example, in 2015–16, one tonne of methane released into the atmosphere will cause the same amount of global warming as 25 tonnes of carbon dioxide. So, the one tonne of methane is expressed as 25 tonnes of carbon dioxide equivalence, or 25 t CO2-e.” http://www.cleanenergyregulator.gov.au/NGER/About-the-National-Greenhouse-and-Energy-Reporting-scheme/Greenhouse-gases-and-energy

^[2]  “Stationary energy excluding electricity includes emissions from direct combustion of fuels, predominantly from the manufacturing, mining, residential and commercial sectors.” Page 11, Quarterly Update of Australia’s National Greenhouse Gas Inventory: March 2019, Australian Government Department of the Environment and Energy. https://www.awe.gov.au/sites/default/files/documents/nggi-quarterly-update-mar-2019.pdf

^[3]  Emissions associated with the production and transport of fossil fuels.

^[4]  Australia’s Emission Projections 2021, Australian Government Department of Industry, Science, Energy and Resources, October 2021.

^[5]  Australia’s Long-Term Emissions Reduction Plan. A whole-of-economy Plan to achieve net zero emissions by 2050. Australian Government. https://www.industry.gov.au/sites/default/files/October%202021/document/australias-long-term-emissions-reduction-plan.pdf

^[6]  Australia’s Long-Term Emissions Reduction Plan: Modelling and Analysis, Australian Government.

^[7]  International offsets are assumed to be available to the Australian economy at the global price ($40/t CO₂-e in 2050).

^[8]  The Australian Renewable Energy Agency supports the transition to net zero emissions by accelerating the pace of pre-commercial innovations and investment in R&D.

^[9] https://www.greenpower.gov.au/