Oil and gas contribute to climate change
6.1
The threat of climate mitigation measures to the oil and gas industry depends on the extent to which any future international climate change agreements affect the fossil fuel industry. It will also be affected by Australia's responsibilities under those agreements and the extent to which unilateral actions taken by other countries affect Australian oil and gas exports and revenue to Australian taxpayers.
6.2
A recent international report assessed the discrepancy between world governments' plans for fossil fuel production and global production levels that would be consistent with 1.5 and two degrees Celsius (C) increases in global temperatures. It found:
Governments are planning to produce about 50 per cent more fossil fuels by 2030 than would be consistent with a 2C pathway and 120 per cent more than would be consistent with a 1.5C pathway.
6.3
In May 2021, the International Energy Agency (IEA), traditionally a fossil fuel advocate, warned of the need for urgent action to achieve net-zero emissions by 2050 to even allow the chance of limiting global temperature rise to 1.5C:
As the major source of global emissions, the energy sector holds the key to responding to the world's climate challenge … beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our pathway, and no new coal mines or mine extensions are required.
6.4
Similarly, in August 2021, the Intergovernmental Panel on Climate Change (IPCC) Working Group I report definitively linked human causes to climate change, in particular the increase of greenhouse gases released by burning fossil fuels (coal, oil and gas), deforestation and agriculture.
6.5
While the report does not make specific recommendations as to which actions should be taken, the United Nations (UN) Secretary-General, Antonio Guterres, stated that:
…this report must sound a death knell for coal and fossil fuels, before they destroy our planet. Countries should also end all new fossil fuel exploration and production and shift fossil fuel subsidies into renewable energy.
6.6
The Reserve Bank of Australia (RBA) has also warned that climate change, if not addressed, is exposing the financial system to risks that will rise over time. This view has been supported by the Business Council of Australia (BCA), which observed that 'the movement of the world's finances and assets is increasingly out of step with government action'.
6.7
The RBA's 2019 Financial Stability Review contained a section on financial stability risks from climate change, including physical, transitional and liability, with flow-on effects to oil and gas operators. The RBA warned that:
Transition risk will be greatest for banks that lend to firms in carbon-intensive industries and to individuals or businesses that are reliant on these firms. Other financial institutions investing in carbon-intensive industries, such as superannuation and investment funds, are also exposed to the risk that climate change will diminish the value of their investments. This could occur both through direct investments in carbon-intensive industries, or indirect investments in banks that lend to these industries.
6.8
The Australian Prudential Regulation Authority (APRA) also identified a range of climate-related financial risks. These are described in Figure 6.1. Its research showed that only around one third of its regulated entities viewed climate risks as material. Numerous sources have pointed to risks which are directly relevant to the oil and gas industry, including those relating to difficulties attracting capital and obtaining insurance, decreasing value of assets, the possibility of stranded assets, and increasing threat of litigation.
6.9
These risks are already being realised in the oil and gas industry. A number of submitters told the committee that, increasingly, Australia is facing global and national moral, ethical, reputational and environmental risks resulting from oil and gas exploitation. They expressed concerns about the significant, direct economic impacts expected to be realised for example through trade tariffs on Australian exports because of lack of climate action, and the direct impacts of climate change. Sustainable Living Australia warned that emissions, including those resulting from oil and gas:
… will result in vast costs to the global and Australian economies from lost agricultural production, damage from increased heatwaves and extreme weather events, increase in activity and spread of pathogens, loss of water resources and sea level rise. These costs will far outweigh the putative benefit of exploiting the resources.
6.10
Mr Piers Verstegen, from the Conservation Council of WA, told the committee that, not only have economic benefits not be realised to the greatest extent possible, but that industry costs are set to increase the longer Australia delays action on emissions and that these will be borne by taxpayers into the future, a view shared by Lock the Gate Alliance.
6.11
With Australia's current liquefied natural gas (LNG) projects contributing approximately 1.5 per cent to the global carbon budget—projected to rise to 3.4 per cent over the next 20 years—Mr Milligan and Professor Newman also submitted that there will be not just local, but global costs arising from Australia's gas industry. They estimated that global greenhouse gas (GHG) amelioration costs arising from Australia's gas would be between $307–$629 billion—raising questions about who should pay.
6.12
Several submitters discussed the need to balance the risks associated with oil and gas exploitation against the benefits. Submitters identified a variety of additional risks, not directly related to climate change including:
negative impacts on property rights (including native title), land devaluation, rights to shared natural resources (including in relation to agriculture, clearing of bushland);
pollution and/or environmental damage;
damage to heritage, including indigenous heritage places; and
public and/or employee health and safety.
6.13
An increasing number of commentators are advocating for greater government action in relation to climate change, security and resilience:
Australia is ill-prepared to deal with the consequences of global climate change because we lack decisive policy action, both in terms of mitigating the threat, and an understanding of, and preparedness to respond to, climate–security risks. Sadly, successive Australian governments have been, and continue to be, 'Missing in Action' regarding their obligation to the citizens of Australia – especially their obligation to prevent, protect and prepare for the ever-increasing impacts of the climate crisis.
…
Australian Governments have had plenty of warnings, not just from climate scientists, researchers, allies, trading partners, activists and first responders, but from within their own ranks. A 2018 Australian Federal Parliamentary Senate Inquiry identified climate change as "a current and existential national security risk". It recognised that Australia and its neighbours are in the region most exposed to climate impacts, and that climate change is: "threatening the health of Australians, their communities, businesses and the economy; heightening the severity of natural hazards; increasing the spread of infectious diseases; and creating growing water insecurity threats to agriculture." It also noted the failure so far to adopt a fully-integrated, whole-of-government approach to climate–security risks. There has been no substantial policy response from the Government since the report was released. Politicians simply lauding the 'resilience' of Australians doesn't actually make us a resilient nation.
6.14
The viability of oil and gas companies' social license to operate is being questioned with an increasing number of shareholder and advocacy group or individual legal actions being brought against oil and gas and government. Action and suits centre around the impacts of oil and gas projects on emissions and climate targets, on human rights, the spread of disinformation by the oil and gas industry, and the harm caused by oil and gas emissions.
6.15
Professor Chandler believes that companies will be 'under increasing pressure to act sustainably and maintain the confidence of the communities on which their business rely'. While Mr Milligan and Professor Newman warned that the industry is on notice:
In general, the social license for the LNG industry is already under scrutiny over poor corporate citizenship, primarily led by some aggressive taxation planning, and the perceived underperformance in social return (in the broader sense) by most proponents.
6.16
It has been anticipated that the next decade will see an increase in litigation as well as an evolution in the courts' reasoning and findings, with one lawyer warning that 'what you'll see is a growing body of knowledge, a growing body of reasoning that starts to place very real pressure on companies and governments who fail to act swiftly'. As early as 2016, law experts warned that:
[the explosion] … is being driven by the development of new international and national environmental laws and principles, by recognition of the linkage between human rights and environmental protection, by the threat of climate change, and by public dissatisfaction with the existing general judicial forums.
Addressing climate and other risks
Leave oil and gas resources in the ground
6.17
Sustainable Living Armidale strongly recommended that in order to reduce emissions and address climate change, oil and gas reserves should be left untouched, except to meet commitments required domestically during the fossil fuel wind down period. Australian Parents for Climate Action similarly argued for the rapid reduction in fossil fuel extraction, echoing the findings of the Australia Institute which found that 60 per cent of Australians support the IEA pathway of not approving new gas, oil or coal projects.
Gas' essential role in lowering emissions
6.18
The Australian Petroleum Production and Exploration Association (APPEA) highlighted the essential role of gas in helping Australia access secure and reliable energy as well as its role as a raw material in manufacturing processes. It also highlighted its use in lowering emissions, both globally and locally, as gas emits half the emissions of coal.
6.19
It told the committee that natural gas accounts for around 10 per cent of the National Electricity Market generation and 21 per cent of Australian electricity generation. However, it warned that the transition to lower emissions would require more gas-fired electricity generation for the 'foreseeable future', particularly for 'on call' generation to manage falls in renewables output or spikes in demand. APPEA estimates that gas-fired generation needs to produce around 50 per cent of Australia's electricity by 2030 to meet the Paris agreement emissions targets in stable, cost-efficient way.
6.20
Likewise, Frontier Economics highlighted the vital role of gas in transitioning to lower-emissions electricity generation:
Gas-powered generation has an important role to play in enabling lower-emissions generation sources, underpinning security of electricity supply. It also has an important role to play in providing reliability and maintaining affordability during peak demand periods and during extended periods when renewable generation is low.
6.21
This view was not supported in all submissions. The Institute for Energy Economics and Financial Analysis (IEEFA) contended that renewables are aggressively penetrating the energy market, at lower cost and with much lower emissions. IEEFA and others said that gas is not a transition fuel but rather a 'bridge to nowhere' and that there should instead be direct transition to cleaner, more sustainable energy sources.
6.22
Research has shown that investment in gas can divert investment away from emerging technologies and reinforce investment in fossil fuels, rather than enabling transition. Mr Morrison agreed, telling the committee:
Gas is not the transition fuel to a lower emissions energy system as it was touted. The experience in Australia has shown that the rise in renewables has often come at the expense of gas-fired power plants, which are more or less now used as peaking plants instead of providing baseload power.
6.23
Mr Milligan and Professor Newman also noted that:
Natural gas may be considered to be a low carbon fuel when compared to oil and coal but still in aggregate contributes significantly to the hazard of climate change caused by anthropogenic emissions. Further, if fugitive emissions of methane are poorly managed, it can be the most damaging of all fossil fuels.
Oil and gas transition and diversification
6.24
Some submitters suggested that the oil and gas industry is well positioned to transition and diversify to maximise their role as providers of transition energy supplies in other ways such as by utilising renewable energy and carbon capture and storage (CCS), using Australian carbon offsets to create new jobs, and transitioning to the production of green hydrogen production.
6.25
Strategic Sustainability Consultants and Global Goals Australia called for oil and gas companies to make greater financial investment in research and development to drive sustainable development and improve efficiency, as well as to reduce the social and environmental impacts of their operations.
6.26
The BCA noted that Australia has considerable potential to store carbon, mitigating and offsetting carbon emissions, thus providing an additional income stream for landowners and the agricultural sector and potentially enabling carbon credit exports. The RBA has recently advised that 'negative emissions technology or advances that lower the carbon intensity of fossil fuel energy could enable countries to continue to use fossil fuels, even while producing net-zero emissions'.
6.27
Chevron Australia and the CO2CRC told the committee that about the potential for CCS to maximise oil recovery, at the same time sequestering carbon dioxide, with the potential for net negative emissions, with CO2CRC advising:
That means that, while we actually have an economic recovery of our oil reserves, we would, even including the combustion of the newly produced hydrocarbon, still have more CO₂ sequestered than is actually combusted or polluting the atmosphere through the recovery. That's the concept that we are driving forward and that's what we see as the paradigm shift in a more nuanced energy transition as we phase out hydrocarbons over decades to come.
6.28
However, this vision for CCS is not shared universally, with Dr Jim Stanford from the Centre for Future Work stating:
… the emphasis on carbon capture and storage is misplaced for several reasons. First of all, it is going to facilitate the continued production and overreliance on fossil fuels in Australia's energy system and in our economy by somehow saying, 'If we get carbon capture and storage to finally work, we can keep doing what we're already doing.' But the reality is that the rest of the world is not going to be buying our fossil fuels whether we continue to produce them or not, given the accelerating transformation that's happening globally. So this, in a way, is giving false hope, I would say, to industries that have to be grappling with a transition that is already upon us. Secondly, there are the opportunity costs of the money that's spent on carbon capture and storage itself. The past experience with these technologies has been very negative, in terms of the amount of money that has been spent and the still dubious feasibility of the technologies. Thirdly, it sends, I would say, a negative signal to investors and businesses and the rest of the world that Australia is still thinking about how to preserve fossil fuel production, rather than jumping on the bandwagon of renewable energy technologies and all of the industrial spin-offs that those could produce. So I think, for all those reasons, that aspect of the climate plan that has been discussed in the last couple of weeks is quite misplaced.
6.29
The Australian Government is focussed on developing immature technologies—including hydrogen—as alternative energy sources as a way of reducing emissions and potentially reducing prices. Hydrogen is the most common chemical in the universe, can be produced as a gas or liquid, can be stored and delivered through existing natural gas infrastructure or transported on trucks or ships, making it suitable for export. It has many uses including as a fuel for transport and heating and a way to store energy.
6.30
Renewables and hydrogen projects may also offer transition opportunities for communities which are currently based around oil and gas, with Geoscience Australia (GA) identifying hydrogen opportunities near a number of oil and gas regions (for example, Bundaberg, Gladstone, Denham, Whyalla and the Hunter Valley). The Investor Group on Climate Change also noted that some of these regions home some of the critical infrastructure key to emerging growth industries, presenting these communities with new opportunities. Professor Newman told the committee:
Australia is in a perfect position to adapt to this [new net zero economy] because solar is now the cheapest form of power the world has ever known. It is significantly cheaper than anything else, and that, with batteries, is meaning the end of coal. That, with batteries and electric vehicles, means the end of oil. The various technologies in homes and businesses are meaning the end of gas as well. So we now have the technology that can enable us to make the transition, and the only other part of that equation is for industry. Industrial fuels are increasingly moving to hydrogen. Places that can produce hydrogen from solar and wind are going to be where the new economy emerges most, and that will be in regional Australia, particularly around regional ports.
6.31
Industry is also getting on board with hydrogen, with the BCA highlighted the importance of green and blue hydrogen; and the Australian Renewable Energy Agency (ARENA) announcing that $32.1 million funding for a project to blend hydrogen into their gas network at Wodonga.
6.32
In its 2021 Inputs, Assumptions and Scenarios Report the Australian Energy Market Operator (AEMO) investigated a number of scenarios for Australia's future energy growth including as a 'Hydrogen Superpower' which considers a much stronger decarbonisation objective and the potential high economic growth. It suggests that this may deliver benefits to Australia's economy through strong renewable exports, in particular hydrogen and green steel, as well as delivering net zero emissions by 2050.
6.33
As well as highlighting the transition role of natural gas and gas infrastructure the BCA pointed to the development of renewable gas alternatives such as syngas, biomethane, as well as green hydrogen as potential energy options.
Carbon pricing
6.34
The Conservation Council of WA suggested that, on the basis of a carbon price of $109 per tonne and the need for Australia to meet its Paris commitments, the six main WA LNG projects will generate a carbon liability of almost $35 billion by 2030, with costs to be borne by Australian taxpayers.
6.35
Application of a carbon price or tax on emissions has been suggested as a solution to the problem of ongoing investment in fossil fuels, including oil and gas, placing natural limitations on investment by pricing carbon, such as that legislated by the Clean Energy Act 2011 (repealed in 2014). The implementation of a carbon price could be two-staged with stage one decreasing the attractiveness of other fossil fuels without affecting gas, and stage two decreasing the attractiveness of all fossil fuels, increasing the relative attractiveness of renewable energy sources.
6.36
Per Capita strongly supported taxation changes that would result in a greater return to public revenue and argued for reinvestment of public monies:
… as long as we are still exporting fossil fuels, the return to the Australian people—and I think it's a more imperative argument now—should be sufficient to invest not only in all of the social and economic programs that we need but in carbon mitigation and decarbonising our economy.
6.37
However, Professor Chandler warned of the challenges associated with changes to the fiscal environment for oil and gas companies, including through carbon pricing. He suggested that any changes should be measured, preceded by consultation and that consideration be given in some cases to only applying changes from a future date.