Australia’s emissions strategy should be a countdown to zero - Grattan Institute

All Australian governments have embraced net-zero emissions as the objective of climate change policy, more than 70 per cent of global greenhouse emissions are now covered by net-zero pledges, and many corporations and industry associations have signed up to some version of a net-zero target.

Yet few, if any, of these bodies have clear plans to achieve the objective or even a clear understanding of the meaning of “net zero”.

Real commitment to the objective will flow from such an understanding.

For much of the period in which climate change has been debated, the objective had been focused on peaking and then reducing emissions, usually to achieve a specific percentage reduction target. Things have evolved.

The Paris Agreement formally recognises that limiting climate change requires achieving a global balance between emissions and removals of greenhouse gases to and from the atmosphere. That means no net emissions – “net zero”.

The Paris Agreement is committed to achieving this sometime in the second half of this century, but the earlier it happens the greater the chance of keeping global warming below 2 degrees, let alone 1.5 degrees.

It would be neat if all emissions were stopped. There would be nothing to balance and temperature increases due to human-induced activities would also slow and stop. The real world is far from being this neat, as shown by the numbers for each of the key sectors that contribute to Australia’s total of about 500 million tonnes of emissions per year.

Electricity is responsible for about 170 million tonnes per annum. It is the one sector where emissions have been consistently falling over the past five years and where the trend is projected by the Government to continue.

As was covered in a Grattan Institute report earlier this year, around 90 per cent of these emissions could be avoided by a shift to renewable electricity, balanced with transmission and storage for reliability, at a modest cost. Based on today’s technologies and economics, avoiding the last few per cent would be hard and expensive, meaning that the cheapest solution would be gas generation with the emissions being offset by CO2 removal from the atmosphere.

Industrial and transport emissions are around 160 and 100 million tonnes per annum respectively. Shifting from gas to electricity and from internal combustion engines to electric vehicles should be underway now if these sectors are to contribute to reaching net-zero by 2050. Yet, in both sectors there are areas where reductions look to be very hard or very expensive, or both. These include steel and cement manufacturing, some heavy vehicles, and aviation transport.

Agriculture, the sector most directly threatened by a changing climate, produces about 77 million tonnes of emissions per annum, three-quarters of which come from cattle and sheep. While the industry is committed to reduce these emissions, the prospects for going close to their elimination over the next 30 years look tough.

The most likely outlook is, after applying much of what we know now and major efforts on low-emission technology research and development, we will still produce some tens of millions of tonnes of emissions by mid-century. These will have to be balanced, or offset, by removals to achieve net zero.

In the absence of a market-based policy linked to a target, removals must be paid for by the government, achieved via some form of regulatory obligation or on carried out on a voluntary basis by companies with their own net-zero commitments.

The Commonwealth Government established its Emissions Reduction Fund to pay directly for offsetting credits (ACCUs) created by emissions reduction and removal activities. The Fund’s budget is $2.55 billion and is on track to reduce emissions by about 11 million tonnes in 2021, with an average contract price well under $20 per tonne.

Government payments are not the only way to deliver removals. Large companies that exceed their baseline emissions under the Safeguard Mechanism can pay for offsetting credits to meet their liability, and companies undertaking voluntary activity to meet net-zero objectives can do the same. The cost of voluntary offsetting varies widely.

Companies choosing overseas units can find them for as little as US$1.30 each; those choosing ACCUs are paying spot prices well above AU$20 per tonne. This spot price is projected to increase considerably in future as more companies make such commitments, and demand could increase even more substantially if international action, voluntary or otherwise, makes Australian offsetting credits with well-documented integrity an attractive proposition.

While there are many different sources of emissions across multiple sectors, there is only a small number of removal activities. The key ones are planting trees, putting carbon back into our soils and directly removing CO2 from the atmosphere and burying it. The potential for such removals and their integrity as “real” removal are subject to much debate, partly because the technologies and their measurement and verification are relatively immature, partly because climate change itself threatens the permanence of carbon stored in trees or soil.

Much research and development are needed across many areas of reduction and removal technologies. In the meantime, the uncertainty around removals is enough to mean we should look to emissions reduction as the primary net-zero strategy.

The numbers above demonstrate why a net-zero framework is needed, but also show it is unlikely that direct funding from governments and voluntary funding from companies will be enough to deliver both the emissions reductions and the removals that balance to zero.

The government has set the objective as net zero and initiated funding to support technologies that will help boost supply of reduction and removal credits. But supply ultimately responds to demand; and the best demand signal would be a strong political and policy commitment to achieving net-zero. The creation, payment and liabilities that flow from these and voluntary actions will grow over time; governments urgently need to consider the regulations that should govern the creation and trading of these offsetting credits.

Australia is well-positioned to achieve a net-zero emissions target by 2050. Actions taken now to deliver cost-effective reductions, drive down the cost of low and zero-emission technologies, and support the case for removals will determine whether that target can be achieved cost-effectively.

Tony Wood

Energy and Climate Change Program Director
Tony has been Director of the Energy Program since 2011 after 14 years working at Origin Energy in senior executive roles. From 2009 to 2014 he was also Program Director of Clean Energy Projects at the Clinton Foundation, advising governments in the Asia-Pacific region on effective deployment of large-scale, low-emission energy technologies.

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