Towards net zero: Practical policies to reduce industrial emissions

by Tony Wood, Alison Reeve, James Ha

22.08.2021 report


Governments need to act now to curb industrial emissions if they want to achieve net zero by 2050.

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The industrial sector is responsible for 30 per cent of Australia’s emissions, and 80 per cent of this comes from just 194 large facilities. Curbing emissions from these facilities will have a material impact on the likelihood of reaching net zero emissions by 2050.

The Commonwealth’s existing Safeguard Mechanism sets baselines for big industrial emitters. It should be modified and extended. Existing facilities should be encouraged to reduce their emissions using technologies that are available now. New and replacement facilities should meet emissions benchmarks substantially better than existing ones.

Just about every capital investment decision the industrial sector makes from now on will have repercussions for emissions in coming decades. Governments need to send the right signals so these decisions don’t lock in emissions.

This is the second of a series of five reports Grattan will publish in the lead-up to the international climate conference in Glasgow in November, showing how Australia can build momentum towards net-zero carbon emissions by 2050.

The climate clock is ticking. We can’t wait around for an economy-wide carbon price, even if that is the most efficient solution. This report identifies sector-specific policies Australia should implement to set us on the path to net zero.

State governments should expand energy savings schemes to encourage emissions improvements across thousands of smaller industrial facilities. These energy savings schemes are already successful at reducing energy use and emissions in the residential and commercial sectors.

The federal government should establish an Industrial Transformation Future Fund to support low- and zero-emissions industrial asset replacements from the 2030s onwards.

Net zero by 2050 is a tough target. It requires an unprecedented pace of asset replacement and renewal, starting now. Our series shows how we can start reducing emissions with practical proposals that could be adopted by both sides of politics.


1. Ensure incentives to reduce emissions in large industrial facilities drive systemic change

  • Amend the Safeguard Mechanism so all facilities use the same method to establish their baselines.
  • Adjust the Safeguard Mechanism to allow below-baseline crediting, except for the electricity sector.
  • Amend the Safeguard Mechanism so that baselines continue to reflect actual emissions.
  • Allow third-party purchase of below-baseline credits, with government playing an underwriting role.
  • Change Safeguard Mechanism baselines over time to a trajectory that contributes to meeting Australia’s emissions targets. Do not exempt any facilities.
  • Establish separate emissions intensity benchmarks for new Safeguard Mechanism facilities that are substantially lower than the industry average; and ensure they remain lower as the industry average improves.
  • Remove administrative provisions in the Safeguard Mechanism that allow facilities to avoid consequences for breaching baselines.

2. Assist small and medium industrial facilities to reduce energy consumption and emissions

  • Continue to align the four existing state energy efficiency obligations.
  • State governments with energy efficiency obligations should ensure these schemes encourage greater uptake of emissions reduction opportunities in small and medium industrial facilities. If uptake is slow, governments could purchase certificates created in the industrial sector additional to scheme targets.
  • States without energy efficiency obligations should develop policies to reduce emissions from small industrial facilities. This could include adopting energy efficiency obligations from other states while maintaining a mandate to innovate.
  • Encourage use of the instant asset write-off to replace older industrial equipment with with newer, lower-emissions versions.

3. Put in place the building blocks of large-scale industrial transformation in the 2030s and 2040s

  • Establish an Industrial Transformation Future Fund to generate the government funding that will be required to close the risk gap for transformational industrial investment.
  • Put in place policies to ensure access to finance for investments in low- and zero-emissions industry. This could include a public-private investment fund.
  • Support catalyst organisations in specific industrial areas to identify and help solve co-ordination problems and infrastructure and energy supply bottlenecks for new clean industry.