Net zero: from ambition to action

Sam Luxton’s obituaries described an extraordinary man. One who stood at the cross-over of fundamental science and engineering, creativity and innovation. One who encouraged critical thinking and a focus on the bigger picture. A man who used language efficiently and effectively – something I will strive for tonight! And interestingly to me, as an engineering graduate, an engineering professor who made his first-year students read Zen and the Art of Motorcycle Maintenance, in the hope that it would teach them to listen for and be open to alternative paths.

In this spirit, I decided to call this lecture ‘From ambition to action’, because Sam Luxton seemed to me to be someone who combined tremendous imagination with the practicality required to make real-world changes. And while I started out as an engineer, today I am a policy wonk, and my job requires combining imagination with practicality to bring on change in the best interests of Australians.

Tonight, I want to do cover four things.

I want to start with a bit of the big picture, about what ‘net zero’ is, and why it is an opportunity.

Then I want to talk about two roles for policy to deliver on these ambitions – industry policy and carbon policy.

And then I want to zoom out to the bigger picture again, and talk about the society and the natural environment that all of this takes place within. Because these affect the size of our ambition and our capacity to achieve it.

Climate change is happening

It is beyond doubt that climate change is happening. In 2024, the World Meteorological Organisation identified more than 150 significant climate-related disasters world-wide,¹https://wmo.int/publication-series/state-of-global-climate-2024 from six typhoons in a month in the Philippines, to wildfires in the US and Europe, and floods here.

As I speak, wildfires are raging in southern Europe, Scotland (not exactly known for a hot dry climate) is under an extreme fire-danger warning, and scientists here in South Australia are undertaking the grim task of assessing damage from the algal bloom that has devastated 500km of the southern coast.

It is also beyond doubt that climate change is driven by human activity. Yes, the climate has always changed, because to responds to the forces upon it. And today, that force is us, and more specifically, the fossil fuels we consume to power our lives.

A certain amount of climate change is baked in, as those events I referred to earlier make clear. The task in front of us is to do what we can to stop it being worse.

This is often shortened to ‘net zero’ – the idea that if we can balance the carbon dioxide we put into the atmosphere against what can be taken out through natural and other processes, we can help the climate come back to an equilibrium.

That task is largely one of eliminating fossil fuel consumption.

For Australia, this has been a tough problem to grapple with. White settlement and growth coincided almost exactly with the industrial revolution, which was only possible because of the extraction and consumption of fossil fuels.

The first coal was mined in Australia in Newcastle in 1798. The first steam engine began operating in 1815, to grind grain for flour.²https://www.austehc.unimelb.edu.au/tia/829.html The first mining of ores took place at Glen Osmond in 1841, followed soon after by Burra and Kapunda, and the first smelter (also at Glen Osmond) in 1845. By 1850, exports of copper and lead from South Australia earned more than Australia’s exports of wool and wheat.³https://www.mininghistory.asn.au/mining-history/ We had cars, at least a few, before we had a national parliament.

It is hard to imagine an Australia without fossil fuels.

But imagine it we must, if we are to reach net zero. And beyond imagining it, we must make it real. As Sam Luxton might have urged us, listen for and find an alternative path.

Net zero is an opportunity

This imagining starts from where we are, with what we have.

What we have in Australia, are minerals. Some of the world’s best, and some that make up for in quantity and accessibility what they lack in quality. These minerals have been behind the growth of modern Australia, whether the gold rushes of the 19th Century, or the iron-ore boom we have ridden since the 2000s.

Importantly the minerals we have are exactly the ones that will be in high demand as the world moves towards net zero. Iron ore, to make steel for wind turbine towers. Bauxite to make aluminium to provide frames and mounting racks for solar panels. Lithium, for batteries, and cobalt, copper, vanadium, zinc… the list goes on.

But currently, these minerals only have value if we combine them with fossil fuels. It is fossil fuels that power the process of transforming minerals into metals; metals into components and commodities; and from there into products and services that we, and the world, want.

Where does this leave us if fossil fuels are no longer an option to turn ores into metals?

Can we find the alternative path?

There are other things we have in abundance. We have space, and we have sunshine. And wind. Between those three things, we have access to extraordinary amounts of zero-emissions energy.

The annual solar radiation falling on Australia is about 58 million petajoules (PJ),⁴https://arena.gov.au/assets/2013/08/Chapter-10-Solar-Energy.pdf which is more than 10,000 times our annual energy consumption; and about 14 per cent of annual global energy consumption.⁵https://unstats.un.org/unsd/energystats/pubs/yearbook/2022/t03.pdf

This is where the story of eliminating fossil fuels flips, from one of threat, to one of opportunity.

Put our mineral endowments and our energy endowments together, and we can make metals. The metals the world wants, without the emissions, without making climate change worse. Potentially, if Australia maintains market share in so-called critical minerals, we can generate twice the export income that we currently earn from coal. And that’s before we do any value-adding.

This is the opportunity that comes with net zero. A pathway to continued prosperity and flourishing in a net-zero global economy.

Now, this makes sense in a spreadsheet, or an academic paper, or a book, or a report.

But.

The vestigial engineer in me knows it’s not simple. We don’t live in spreadsheets. We live here, in the physical world. Turning visions into physical reality is the job of engineers. And the role of policymakers is to create an environment that helps them.

There are two parts to policy that I wanted to lay out tonight: industry policy; and carbon policy. These aren’t substitutes, they are complements, and we need to do both to support the transition to net zero and grasp the opportunities that it brings.

Industry policy

Governments use industry policy to alter the structure of an economy by encouraging resources to move into sectors that are perceived as desirable for future development.

Industry policy makes markets more efficient, by correcting for under-investment in research and development. When a market player develops a green technology, other firms can use this knowledge without sharing the costs (‘technology spillover’). As a result, firms have little incentive to invest in research and development. Technology spillover is even more relevant for clean energy technologies, because they tend to be particularly complex and uncertain, and therefore more costly.

Given the market alone will not drive these breakthrough innovations, the government must have policies to do so. This is why we have ARC grants, universities, CSIRO, and CRCs.

However, just doing this isn’t enough.

Many of the key technologies needed to decarbonise are already known, thanks to government-supported research and development. The International Energy Agency estimates that almost half the cumulative emission reductions needed to achieve net-zero emissions by 2050 come from technologies that are at the demonstration or prototype stage.

These technologies need investment to become commercially viable. But their costs and performance are expensive and uncertain, and therefore unattractive to investors. In financial jargon, they aren’t ‘bankable’.

Investing in low-emissions capital is more expensive, and early investors face higher costs than followers. This isn’t just the cost of the kit – finance costs are higher for technologies that are new and not well understood.

Many low-emissions industrial products are materially the same as emissions-intensive ones. Green steel and ‘black’ steel will look and feel the same, and will largely have the same properties. So it’s hard to sell green steel as ‘better’ and ask buyers to pay more for it.

Even if there were enough people willing to pay this ‘green premium’, early movers cannot bank the full value of projected higher long-term revenues from low-emissions industrial products. The profitability of green investments is affected by ever-changing political factors, such as the level of ambition to phase out fossil fuels. And this increases risk.

The final reason we need industry policy is that existing industrial assets have lifespans. A new clean technology might be proven at demonstration scale, but if it is still high-cost when a major facility reaches a refurbishment point, then that refurbishment is more likely to use incumbent, polluting technology rather than the new, clean alternative. It is the capital cycle, as well as the innovation process, that drives real-world change.

Industry policy is how governments share risk with industry to get over these barriers. Industry policy puts the government balance sheet behind technology change, but in a way that reduces the need for government support over time. Industry policy is there to share risk if the capital cycle dictates that an asset must be replaced, but the new technology is still more expensive. Industry policy is what speeds up the journey from the lab to the bank.

Industry policy is back in vogue world-wide, as countries grapple with the challenge of getting to net zero within the next 25 years. It is a change as profound as the original industrial revolution – but over a shorter timeframe and with a critical deadline.

Australia is still feeling its way with industry policy. We have some good examples – the funding ecosystem we created to drive the renewable energy sector from around 8 per cent of electricity to around 40 per cent is an incredible achievement.

But we’ve also had some missteps. We put too much money up for hydrogen before the industry was ready to absorb it, and as a result undermined confidence in the role of hydrogen as an alternative fuel.

There is a worrying trend at the moment towards announcing billion dollar ‘green’ funds for this industry or that one, before the policy design work has been done to determine what’s actually needed.

These announcements sometimes seem timed more to prevent distressed facilities collapsing financially.

These missteps have triggered three criticisms of industry policy.

The first is that governments are not best placed to set the direction of the economy. This argument says that governments simply do not have enough information to choose which industries or firms to support, and that governments should not pick winners but should rely on market forces to determine the winners.

This can be addressed by good policy design. Government support for industry should resemble a portfolio. This means selecting a direction the economy should head in and then choosing not the ‘winners’ but the ‘willing’ – companies that are willing to take the risks and make the investments to transform.

The risk lies not in ‘picking winners’ so much as ‘losers picking government’, leaving little capacity to support willing, viable firms that could be engines of growth.

As in any investment portfolio, failure of some ‘bets’ is expected. The key is to stop supporting the losers. Well-designed industry policy has clear guidelines on when to ‘pull the plug’ and redirect support to more promising projects or firms.

Similarly, using a broad range of risk-sharing tools, from recoupable grants, to loans, underwriting, and equity, allows governments to share in the upside from the ‘winners’.

The second criticism is that industry policy brings with it the risk of rent seeking – that well-connected firms may be able to use their financial power, connections, and influence to get money.

The solution to rent seeking is better institutional design. Here, governance structures are critical. Funding should be administered at arms-length from government. Funding administrators should set clear targets and milestones for deploying funding, and pull the plug if these aren’t met. There should be accountability and transparency.

This protects from the temptation, which faces every industry minister, to prop up uncompetitive incumbent firms to preserve jobs, and call that ‘industry policy’.

The third criticism of industry policy is that carbon pricing, or a carbon tax, can do it better. This isn’t true – as I said earlier, industry policy helps carbon policy work better.

Carbon prices or taxes are very effective at speeding up the deployment of new technology once it’s proven, widely available, and commercially tested.

If you have a shelf full of solutions, the carbon price will take them off the shelf and deploy them in the economically efficient order. But carbon taxes do not put the technologies on the shelf in the first place. They don’t lower early-stage risk.

This is why we need industry policy alongside carbon policy.

But the reverse is also true. Grasping the opportunities that net zero brings requires large amounts of capital, far beyond what government balance sheets can bear. It’s not enough to use industry policy to make the new way cheaper. We can move faster if we make the old way more expensive.

Carbon policy

This is where carbon policy comes in. I say ‘carbon policy’ not ‘carbon tax’, because we have options in how we make polluters pay for the damage that carbon emissions cause. And not all of these are taxes

If we want fossil fuel use to be less common, we have to make it harder to use fossil fuels. We are doing this a little, but we could do it better.

Currently, Australia’s largest 200 industrial facilities face a constraint on how much carbon they are allowed to emit.

This is called the Safeguard Mechanism. It applies an emissions cap for each large industrial facility. If the facility emits less than its cap, it receives a credit. If it goes over the cap, it has to either buy a credit from another facility, or buy an offset that represents a reduction in emissions elsewhere in the economy.

Over time, the caps will be progressively lowered, forcing facilities to change their processes to stay under their caps or to avoid having to buy credits.

This functions as a price on carbon, albeit one that doesn’t raise revenue for the government. And because of the cheap price of offsets, and the caps being high at the moment, it represents a very low price – around $7 per tonne of carbon.

This is only about 10 per cent of the ‘social’ cost of these emissions – the best guess at the economic value of the damage they cause. And it is a tiny percentage of the cost gap between green production and current production for many metals and other industrial commodities.

The carbon price embodied in the Safeguard Mechanism will grow over time, as emissions caps come down. But it won’t bring about transformative change while companies are allowed to transfer all their liability for emissions to other sectors of the economy via offsets.

Next year, the federal government will review the operations of the Safeguard Mechanism, and this would be an ideal opportunity to revise its settings so that they support faster deployment of modern, green technology.

I said revise, not sweep away. In this case, I don’t think that replacing what we have with a carbon tax is the practical path to take.

‘Carbon tax’ is a phrase that starts political fights. And very few politicians will be able to resist the temptation to weaponise fear of carbon taxes for political gain. I don’t like this, but it is where our political culture is at.

A sudden announcement to implement a carbon tax will chill investment for at least five years while we have a political fight over it, take it to an election, and then either discard it (having poisoned the idea for another generation) or design it.

We don’t have five years to waste. Earlier I spoke about the relentless nature of the capital cycle, and how facilities get replaced. That cycle does not stop for climate wars. And that cycle is long – 30 years or more.

This means each industrial facility has roughly one chance between now and our net-zero deadline to make major changes to its operations so that it can survive in a net-zero economy.

If that chance is missed, emissions are locked in for another 30 years. Industry policy helps, but consistent carbon policy – that doesn’t result in political biffo every three years – is also critical for investment.

The best pathway is to reform what we have now, so that it’s more effective. And evolve it over time so that it gives us the same outcomes as a ‘simple’ – but impossible – carbon tax. This way we maximise the benefits of the big investments made into industry policy. And over time, as technology matures, allow carbon policy to take over as the driver.

Back to the big picture

Industry policy and carbon policy do not take place in a vacuum. As I’ve just explained, they are profoundly affected by politics. And they sit within a bigger picture: the picture that describes who we are, as a country and a people, how we collectively imagine our future, and how we wish to behave towards each other and towards our natural environment.

Australia’s net zero opportunity is based on abundant space, abundant mineral resources, and abundant renewable energy.

However, we have not always been particularly clever or careful in how we made the most of these natural endowments. Now we have the opportunity to be better.

Yes, there is abundant space in Australia compared to other countries, to host renewable energy projects and dig up minerals. But every square metre of that space has value to someone, somewhere, that must be considered. This might be the pasture value to a farmer. The cultural value to a traditional owner. The ecosystem value of a national park.

Currently, we are not doing well at coming together to negotiate who gets to use this space.

In mining, there is a sorry history of digging up as much as possible, as fast as possible, and selling it for as much as possible, with little regard for what this did to fragile ecosystems or cultural heritage, and without regard for securing the long-term prosperity of future generations.

In energy, right now, there are fault lines emerging in communities that might host new renewable generation, about the impacts of this new infrastructure on collective and individual values around land and space.

In my view, one common thread between these is fairness. There are benefits to be had from digging up and processing minerals, and from building and operating renewable energy to power this process.
But if these benefits (and the costs) aren’t fairly shared, then most of us will not prosper. And if we feel something isn’t fair, we tend to reject it.

For Australia to seize the opportunities that net zero brings, Australians must feel that net zero is theirs. Something done by them and for them, not to them. Something where the benefits are shared fairly.

Historically, Australian governments have not made as much from mining and resource booms as they could have. Nor have they saved the revenue they have made.

We can only dig these resources up once. It’s imperative that state and federal governments restructure their royalty and resource taxes before the net-zero mining boom, so that it generates lasting prosperity for coming generations, and so that the spoils do not accrue to only a few billionaires.

It is also imperative that we reform national environmental laws. Our current laws have the unique characteristic of being hated by almost everyone. Environment groups don’t like them because the laws mostly fail to protect the environment. Companies seeking to mine or develop renewables projects hate them because they are labyrinth, inconsistent, lengthy, and uncertain. Reform is long overdue, and needs to reflect the value that Australians place on our natural heritage.

It’s not just about laws and taxes though. All the policy in the world can’t create a sense of national purpose that is shared by all citizens. The journey to net zero will touch the lives of every single Australian, and everyone will have a part to play.

That story needs to be told, over and over, so that people can understand, prepare, and participate.

I would have loved to enlist Sam Luxton in this task, because by all accounts he was a brilliant communicator.

Instead, I am going to circle back to quote the text he assigned his first-year students: Zen and the Art of Motorcycle Maintenance: The place to improve the world is first in one’s own heart and head and hands, and then work outward from there.