Introduction
The economic and environmental imperatives of the need to reduce emissions are clear. Australia must have an active, detailed policy programme to achieve the goal of achieving net zero emissions by 2050, which was set by the Liberal government in 2021.
This particular bill is a genuinely empty piece of legislation that proposes to duplicate Australia's Nationally Determined Contribution (NDC) of 43 per cent by 2030 and net zero at 2050. This bill has been described by the Minister responsible for this legislation as 'not necessary'.
I have previously indicated that I would carefully examine this bill and the various policy issues associated with emissions reduction as part of this Senate Environment and Communications Legislation Committee inquiry.
The key issues to consider focus on the cost of the transition, how taxpayers can be protected from unnecessary cost, market signals and the role of particular sources of energy.
Ultimately, what matters is the outcome, not the embroidery. In the case of this threadbare bill, the primary issues do not reside in the bill itself. Rather, they are linked to the broader policy environment, with particular reference to the parties of government.
The following sets out the key issues which I expect will be addressed in the policy formulation processes of the parties of government in Australia.
1. How much is the cost of the transition?
The key question is: how much will it cost the nation to get to net zero emissions? We need to know the cost so we can seek the private sector capital required given there are clear public benefits from decarbonisation.
There would be a cost of replacing the existing energy generating assets, for example, but the real question is: what is the marginal investment required across the sectors?
The costs of decarbonisation of energy, transport, industry need to be considered clearly as they are quite separate tasks.
A range of interested parties have prepared estimates of the capital costs. The Business Council of Australia has provided information on notice regarding the costs of the major components. This has also been done in part by certain think-tanks.
It is possible that Australia has not thought carefully enough about the costs. This is the view of ANU's Professor Frank Jotzo who says he does not know the exact cost:
To my knowledge, no comprehensive and authoritative estimate for Australia is available. But it must be said that the IEA [International Energy Agency] does not place a particular emphasis on Australia as one country—or, should we say, continent. This actually goes to a broader point of the need to strengthen the capacity and capability in Australia to provide very detailed analysis on the technological and economic aspects of this transition.
The BCA, in consideration of the capital costs, have referred to Dr Alan Finkel's 2017 estimation of $890 billion that will be required to be spent 'on power generation, transmission and distribution by 2050 to meet our net zero target.'
They expect that 'other sectors are likely to require similarly large investments.' Furthermore, they referred to the recent Sydney Energy Forum, which 'reported that globally, annual private investment in 2030 will need to be 8 times the amount invested in 2021 globally. This includes investments needed to scale across all clean energy supply chains, including low-emissions fuels, energy infrastructure, electricity generation and end-uses.'
In response to questions on notice, the Department of Climate Change, Energy, the Environment and Water did not provide a clear answer on the capital cost for Australia's transition, and referred primarily to the Australian Energy Market Operator's (AEMO) figure of $300 billion required to be spent in the National Electricity Market (NEM) to 2050.
Equally, the Treasury did not provide the answer to the key question on capital cost in the time allocated.
When asked about the costs, the Investor Group on Climate Change (ICGG) noted that 'there has been significant analysis of the employment and economic opportunities associated with a transition to net zero emissions in Australia but there has been no quantification of the economywide investment opportunities.'
However, in 2020 the IGCC quantified 'the value of investment needed in each sector and asset class under an orderly transition to net zero emissions in Australia' over the medium term:
Mapping the multi-billion dollar investment opportunity in the medium term: Investment in renewable and clean electricity production through the period 2020 to 2050 is the sector that will emerge as the largest investment opportunity over all ($385 billion). After 2030, commercial scale opportunities in green hydrogen production hit scale, leading to substantial investment in this emerging industry. By 2050, green hydrogen is the second largest investment opportunity at nearly $350 billion. The next largest opportunities to 2050 are transport infrastructure ($104 billion), carbon sequestration ($102 billion), and electricity transmission and distribution ($98 billion).
Much of this capital will need to come from overseas as Australia has rarely had enough capital to fund our investment needs.
The point about all these numbers is that it is an eye watering cost. We need to reduce the cost to the taxpayer. That can be done by acknowledging and addressing the key issues set out in this report, particularly in section 3 below.
2. How do we keep the lights on and keep the costs down?
One of the key issues that concerns many Australians is keeping the lights on at a reasonable price as the nation undertakes this very complex and expensive transition.
We must ensure Australia can keep the lights on and maintain our historical cost advantage on energy supply. It is also important that we maintain fairness in the community to ensure that lower income Australians are able to afford electricity.
The Australian Parliament receives expert advice from AEMO which has published a thorough analysis of how the nation can keep the lights on during this transition.
In AEMO's 2022 Integrated System Plan, a roadmap is set out for the NEM which details how guided 'investment in low-cost renewable energy, firming resources and essential transmission remains the best strategy to deliver affordable and reliable energy, protected against international market shocks.'
To provide consumers with reliable, secure and affordable energy, the market will need to meet the increased demand through a 'nine-fold increase in utility-scale variable renewable energy (VRE), and a near five-fold increase in distributed solar photovoltaics (PV)', as we move away from coal.
Further to this, we will need to 'treble the firming capacity from alternative sources to coal', which would include 'utility scale batteries, hydro storage, gas-fired generation and smart behind-the-metre VPPs (virtual power plants)'.
Ten thousand kilometres of new transmission will also be needed to connect this low-cost generation firming with consumers, in a way that is 'low cost and low regrets for consumers'.
As this transition occurs through to 2050, peaking gas-fired generation is needed to add supply durability in the face of potential shortfalls in VRE, storage, distributed energy resources or transmission.
On top of that, this economy-wide transition must occur while the NEM's electricity delivery doubles by 2050 to keep up with consumer and industry demand, and coal-fired generation is phased out at an increasingly faster-rate with 60 per cent of capacity withdrawn by 2030.
To ensure the lights stay on, the enormous investment in these new technologies must be made as soon as possible and without ideological constraints. AMEO's analysis is supported by the work of former Chief Scientist Alan Finkel and the Grattan Institute.
It is an incredibly expensive transition and it will rely heavily on the capacity of Australia to capture new domestic and foreign capital.
3. What are the key signals to send the market?
It is clear that the market is looking at two key signals if Australia is to attract the capital required. One, the market wants certainty that the parties of government are committed to emissions reduction.
The Leader of the Opposition, Mr Peter Dutton MP, has made significant statements on the Opposition's 2030 emissions reduction target.
Following statements that the Opposition would drop the 26-28 per cent target for 2030, the Leader of the Opposition said on 11 August 2022 that it is 'likely to come in well north of 35 per cent, maybe 40 per cent plus… We'll have a very credible policy, I can promise you, by the time of the next election…'
Noting the Leader of the Opposition's statements, the Business Council of Australia stressed the benefits of bipartisan support to driving investment:
I think business wants as much bipartisanship as we can achieve. We were very pleased when both political parties came to the net zero target. We were very supportive of that, because that is in fact the first big anchor for business certainty about where we are heading. We were very supportive of both major parties coming to the net zero position, so we would be strongly supportive of a more ambitious Coalition target.
The clear statement from the Leader of the Opposition that Australia will maintain a strong commitment to emissions reduction in the next decade will help drive investment.
Two, the market wants policies to achieve emissions reduction. These are the policies which are designed to reduce emissions in energy, transport and industry, for example. Some options for these policies are set out in section 4.
The question of whether to have a target legislated is not one of these two key components. The Minister for Climate Change, the Hon Chris Bowen MP, has himself said that the bill is not required. If the bill is not required then surely it could never be essential to attracting investment.
Minister Bowen said on 26 2022 July that 'this legislation is not necessary for the Albanese government to embark on the policy actions…'.
According to an analysis I commissioned through the Parliamentary Library, a minority of G20 nations have legislated targets. In the G20 analysis, just eight of the twenty countries have a legislated target. Twelve of the twenty nations have a policy to support their NDC, not a law.
According to the Parliamentary Library, the G20 countries that do not currently have a legislated target are Argentina, Australia, Brazil, China, India, Indonesia, Italy, Mexico, Saudi Arabia, South Africa, Turkey and the United States. All but one have either detailed their NDC in policy documents, or via public declarations.
4. Outcomes not embroidery
Policies to get emissions down are the most important elements of this discussion. There is a strong view from business that this is lacking and more policy is required. New policies could include transmission initiatives and greater emphasis on externality reduction through tax policies.
One key policy Australia should adopt is a carbon reporting mechanism for companies across all three of the 'emissions scopes'. This would provide the detail investors require to make judgements about the risk profile of companies themselves.
The ICGG provided testimony on the need for Australia to put in reporting mechanisms for companies that deals with scope 1, 2 & 3 emissions, in-line with the International Sustainability Standards Board (ISSB) global standards:
I think we have the advantage that some of the work is actually being done for us internationally through the International Sustainability Standards Board, which is establishing global standards, which is actually really important for investors because the last thing we want is market fragmentation, with different standards in lots of different countries... The whole point is setting the parameters so business can prepare. At the moment, we're in a situation where there's uncertainty in the market about when it's going to happen.
The Financial Services Council called for a principle based mandatory climate disclosure regime to be developed:
We want a mandatory climate disclosure regime, and we've called for that and think that is a priority. But it should be a principle based regime; it shouldn't be overly prescriptive.
The IGCC has said that as the ISSB global standards are likely to be finalised by the end of 2022 or early next year, Australia should then start a process to implement these standards domestically with a view of completion by 2024/25.
I asked the Treasury about their view on a possible Australian disclosure regime but did not receive an answer to my question on notice. Australia should look to be a leader in this key area of corporate governance and law as we seek to attract marginal capital.
We should also look to ensure that we have integrity in the carbon credit system.
I note the announcement of an independent review last month into the Australian Carbon Credit Units (ACCUs) to be led by Professor Ian Chubb AC, which will be completed by the end of this year. The outcome of this review should look at every opportunity to establish a world leading carbon credits governance regime.
This should include looking at cryptography and digital assets, a sector in which Australia has established a leadership position.
In response to a question I asked, the Department of Climate Change, Energy, the Environment and Water has confirmed that the use of digital assets and cryptography in carbon crediting may be considered by the Independent Review. Further, the Clean Energy Regulator is developing an Australian Carbon Exchange which 'will be designed to support emerging markets and technologies such as blockchain and non-fungible tokens.'
It is critical that the Review looks at all possible technology options when considering Australia's carbon credits accounting scheme.
5. Value of policy certainty
It is essential that the parties of government work to provide the market with the maximum level of policy certainty which promotes investment in Australia.
As a result of recent statements provided by the Leader of the Opposition, it is my view that Australia now has its strongest level of bipartisanship on emissions reduction policy.
The Liberal government delivered the net zero 2050 commitment. This has been matched by the Labor Party as the other party of government.
The only questions are therefore twofold: what targets will apply in the interceding year and which policies will apply to drive emissions down.
Bipartisanship will be crucial to this, and the Opposition Leader stated on 19 June 2022 that with regard to a 2030 target of 43 per cent emissions reduction he is 'happy to see it go much higher', and again on 11 August 2022 stated that the Opposition's policy promises to be 'very credible' by the next election, with a view to the investment, research and development needed for the transition.
As stated by the Business Council of Australia (BCA) CEO, Ms Jennifer Westacott, bipartisanship 'creates greater certainty and, in addition to that, a stabilisation of the policy framework and the mechanisms by which we get to these targets, which also drives business investment decisions.'
Further to this, the BCA President, Mr Tim Reed, has welcomed 'the opposition taking a stronger stance on decarbonisation and lifting those targets' and 'to the extent that that can be aligned across the parliament, it will only do good in terms of not only us achieving the decarbonisation goals but us actually securing the economic future of our nation.'
6. Transition fuels (gas)
Scientists and global investors have been clear on the need for gas to be available as a transition fuel as coal is dialled down for domestic energy generation.
The market and the scientists agree on gas. Mr Larry Fink, Chairperson and CEO of investment management giant BlackRock, stated in his letter to the CEOs in January 2022 that 'to ensure continuity of affordable energy supplies during the transition, traditional fossil fuels like natural gas will play an important role both for power generation and heating in certain regions, as well as for the production of hydrogen.' He also stated that BlackRock does not pursue divestment from oil and gas companies as a policy.
In his evidence before the inquiry Professor Frank Jotzo hinted at the transitional role of gas in the short-term. He stated that 'presently, we're using gas, hydro and, to a small extent, battery power to balance electricity supply and demand. In future both the low costs and low-emissions mix of balancing the grid will be predominantly hydro, more and more battery because battery is becoming very cheap—that's where the big cost changes are happening—and probably in my assessment, to a small extent, gas; namely, on very high‑demand days'.
During the inquiry, the BCA restated their position on gas as an important transition fuel in our energy market going forward:
There is sufficient resource available in Australia to do that [to achieve 80% renewables in the NEM by 2030], but we do believe that supply and stability of the electricity system is particularly critical to maintaining community support through this period, and we do believe that gas will be a long-term component of the stability of supply to the domestic market.
In accounting for the role of gas, the Australian Industry Group noted that 'the advantage that gas has is that it can come in and out of the market as there is a need and a financial opportunity.'
Accordingly we must ensure that Australia's governments do everything possible to increase gas supply.
7. Nuclear
There is no reason to avoid the use of nuclear power in Australia other than for misguided ideological and political reasons. Australia has the largest deposit of uranium on earth.
If the market is prepared to fund nuclear power plants, most likely small modular reactors, there is no reason that they should not be considered. For example, they could potentially be placed where former coal-fired power stations existed.
The prohibition in law makes no sense as it restrains options the market may wish to adopt.
The Australian Radiation Protection and Nuclear Safety Act 1998 and the Environment Protection and Biodiversity Conservation Act 1999 together prohibit nuclear power in Australia. This legislation was passed in a context wherein fossil fuels were widely used and accepted without much opposition, and when energy was largely affordable.
Prohibition on nuclear power occurred as an ideological luxury, rather than out of serious policy deliberation. We are now in an era of large-scale energy transition, and we're on the clock. We have seen evidence from this inquiry that the transition will require enormous amounts of investment, and we will need to attract as much as possible.
In their testimony to the committee, Australian Industry Group questioned the wisdom of prohibiting nuclear power, and argued that the market should determine their viability:
The Australian Industry Group has no objection to nuclear playing a part in the menu of options for Australia's energy future. It doesn't make a great deal of sense for it to be simply illegal to develop nuclear energy. It does appear that nuclear energy will not be cost competitive in Australia, at least based on technologies that have a track record in the marketplace. But we should be open to technological surprise. There are high hopes for the next generation of small modular reactors. We will see how they perform in the markets where they are being commissioned.
As heard in this inquiry, what industry needs is a policy signal that is technology neutral. It seems nonsensical to conclude that nuclear power is financially non-viable if the policy signals, enshrined in legislation, are entirely negative.
Referring to other jurisdictions, the Australian Industry Group clarified that the 'economics are difficult for nuclear, and we have seen existing nuclear plants in the United States and in Europe find it hard to stay in the marketplace without a strong policy signal to keep them there, given the growth of renewables everywhere but in the United States, of cheap gas-fired generation as well in the last decade.'
Conclusion
As the Minister has said, this bill is not necessary. What really matters are the policies of the parties of government and the policies to achieve emissions reduction. There is no clear answer from the government on the cost of the transition but it is expected to easily eclipse $1 trillion.
Given the Leader of the Opposition's commitment to stronger action on emissions reduction and the non-binding nature of this bill, there is no need for this empty bill.
Recommendations
Recommendation
The market should be further supported to invest in low and zero emissions energy and transmission infrastructure required to decarbonise.
Recommendation
Australia should be a first mover in legislating an emissions disclosure regime in our corporate law.
Recommendation
Australian governments should support the supply of gas as a transition fuel.
The nuclear energy prohibition should be lifted immediately to enable the market to invest should it wish.