Australia needs better strategies to meet its net-zero emissions target

by Tony Wood

Published in The Australian Financial Review, 27 April 2021

The Prime Minister appears to be working steadily on a suite of funding announcements to support a climate change target for Australia of net zero emissions by 2050.

All our states and territories and many companies have embraced various forms of commitments to such targets. Yet there are few strategies to meet these targets, and little clear understanding of what a net zero target means.

In 2020, according to the federal government, Australia added 513 million tonnes of greenhouse gases to the atmosphere, measured as carbon dioxide or equivalent. To reach net zero means every tonne of greenhouse gas emitted must be matched by removal of a tonne from the atmosphere. Any strategy to meet a net zero target needs to fully recognise the scale of the task.

From our baseline year of 2005, Australia’s emissions fell on average by 6.5 million tonnes per year until last year. While this success should be recognised, the government’s latest published projections are for an average annual fall of 3.5 million tonnes through to 2030, falling short of our current target under the Paris Agreement. The current end point for our target is 455 million tonnes in 2030.

The challenge is even if the Prime Minister is justified in his optimism that the 2030 target will be achieved, to then meet a net zero target by 2050 would mean average annual reductions of around 23 million tonnes year on year over the 20-year interval.

The good news of the past five years is emissions from the electricity generation sector have been consistently falling, and that sector is on track to over-deliver its proportionate (one-third) share of the 2030 target. This outcome is due to federal and state government policies supporting utility-scale wind and solar farms and rooftop solar, and from the closure of coal-fired power plants.

The bad news is emissions from other sectors (the remaining two-thirds) – including transport, agriculture, and industry – are either close to flat or growing, and there are no policy mechanisms to drive reductions in these sectors except for the Commonwealth’s Climate Solutions Fund (CSF).

The practical task is to dramatically reduce emissions from every sector of the economy wherever technically and economically possible, and to offset what should be a small remainder with removal, or “negative emission” technologies.

This prioritisation arises because negative emissions technologies such as soil carbon, tree planting or direct air capture are limited, expensive and/or hard to do.

At a physical and technical level, there are three action areas on which we should focus.

The first is to adopt the technologies we know can reduce emissions at an affordable cost. These include further expansion of renewable electricity, the electrification of personal and small-commercial transport and of gas use, and ongoing CSF support for changes in agricultural practices.

The second is to drive down the cost of known zero-emission technologies that are currently too expensive. This is where the government’s focus on technology is correct.

It includes carbon capture and storage in a narrow set of applications and manufacturing technologies associated with green hydrogen production, and storage for a potential range of applications.

The third is to support research into areas where no clear solutions yet exist, such as cement production and many areas of agriculture.

Building a complete strategy

Technology development is only one leg of a three-legged stool of actions that could constitute a complete strategy.

After implementing the relatively cheap and easy actions, the cost of the green alternatives increases, even with our most optimistic estimates of technical progress.

For example, as we move towards around 90 per cent renewable electricity, the cost of maintaining a reliable grid with more transmission and storage adds a green premium approaching $40 per tonne of avoided emissions – affordable but not trivial.

And even at the government’s stretch target of $2 per kilogram for hydrogen, there will still be a premium for zero-emission steel, ammonia, etc.

The second leg of the stool is policy to drive the deployment of all these zero-emission technologies as their costs fall – the green premiums will not otherwise be paid. An economy-wide emissions price remains the lowest-cost alternative.

The deployment of zero-emission technologies at the necessary scale and pace will require substantial investment. Existing, traditional markets are likely to need more innovative financial structures.

Government co-funding of flagship pilot projects in areas such as green steel, and greater government funding of the national electricity transmission grid, are two possibilities.

Efficient financial markets and the active participation of the corporate sector form the third leg of the stool.

The technology and financial market legs have major challenges. Yet they are doable. The policy leg, at least for now, is harder.

Both the federal government and opposition are constrained by their recent history that keeps first-best policy off the table. The federal government is leaning heavily on the technology leg.

And in electricity, the federal, state and territory governments are all pursuing unilateral subsidy and underwriting programs and bilateral side deals to effectively kill any possibility of a co-ordinated, national framework.

Australia’s best hope for the near term is a combination of sector-based, technology-driven policies that will deliver progress in the right direction. Over time, this approach will become increasingly expensive and ineffective. Long-term environmental and economic success in meeting a net zero emissions target will depend on returning to first-best policies.