Reinvigorating Australia’s national climate policy

Ai Group chief executive, Innes Willox.

The domestic and international effects of the COVID-19 pandemic have had impacts on energy prices and emissions that look positive at first glance – a pre-existing decline in wholesale electricity prices has steepened; a global oil price crash and weak East Asian gas demand have pushed spot gas prices far down; and early signs are that global and Australian greenhouse gas emissions have been significantly depressed.

However, all these effects appear temporary or come with significant baggage. Australia’s long-term interest in a global energy advantage and a successful transition to net zero emissions require continued attention and action on these issues. There are opportunities to advance these long-term goals while also speeding recovery from the economic effects of the pandemic. Ai Group chief executive, Innes Willox, writes.

Australia has a strong national interest in successful global efforts to limit climate change; in contributing to that success by achieving net zero emissions by 2050; in safely managing the change we cannot avoid; and in increasing our competitiveness and shared prosperity in the process. We have opportunities to emerge strongly from the pandemic through reform and investment across energy and the clean economy – or the risk of a reversion to uncompetitively high energy costs if we do not manage well.

It is fundamentally important that we inform economic policy and reform across multiple portfolios by adopting a clear, agreed and national vision for successful transition to net zero emissions. Setting that vision will help the development of robust and pro-competitive strategies for gas, electricity and a broader clean economy.

Natural gas is an important part of Australia’s economy today, as a fuel for dispatchable power; a heat source for industry and households; a feedstock for plastics and chemicals; and an export commodity. In the course of a transition to net zero emissions, Australia should minimise the exposure of our economy and society to risks from high gas prices or short supply, with a strategy including four steps: facilitation of new supply options that make long-term sense; expansion of alternative fuels including biogas and hydrogen; a heavy focus on demand reduction through gas efficiency and electrification; and continued policy reform to promote a competitive and secure local market. The federal government’s recent announcements include exploration of new supply, hydrogen and competitiveness measures. There is still more to be done on demand efficiency, however.

Reliable electricity is crucial to all households and the continuity of all businesses, and electricity costs play an important role in household budgets and the competitiveness of many industries. Australia should maximise long-term opportunity in a net zero emissions world and reduce medium-term risks to electricity price and reliability. Achieving competitive, reliable and clean electricity requires that we: renovate our power markets; enhance our electricity networks; de-link power prices from volatile fuel export prices; manage coal closures effectively; improve energy productivity and management across the economy; aim for globally competitive costs for energy infrastructure delivery; and close the emissions gap in electricity market designs and policies. The recent federal announcement of $250m to accelerate three major transmission projects is a significant step.

Successful transition to a competitive net-zero economy extends well beyond electricity and gas, to industry, transport, agriculture and more. Building a broader clean economy demands that we develop clear and practical transition pathways across all sectors and ramp up platforms for supporting clean economy innovation and cost reduction.

Such pathways and platforms (like the expanded ARENA and CEFC that are taking shape) are important to bring low- zero- and negative emissions options forward and lower their costs, but they do not substitute for climate policy mechanisms to drive efficient mass uptake and scale-up while preventing loss of trade competitiveness. Some clean technologies appear highly price-competitive with high-emitting options even without placing a value on emissions – variable renewables have become extremely cheap and both batteries and light battery-electric vehicles look set to become so.

However, other options may always involve some degree of cost premium; for instance, conducting industrial or power generation activities with carbon capture and storage is inherently more expensive.

More fundamentally, emissions reduction and sequestration have a value derived from the impacts and risks of climate change that we wish to avoid. Unless we recognise that value and embed it in policy instruments, emissions will not reduce as far or as fast as is in Australia’s national interest.

There are numerous specific opportunities to build a clean economy. Fostering a hydrogen economy should be a high priority and public investment should ramp up considerably from the levels contemplated when the National Hydrogen Roadmap was adopted pre-pandemic. Carbon capture and utilisation or storage does not currently look likely to be a competitive technology in electricity generation, but it remains a very important option to address heavy industry emissions, alongside hydrogen, bioenergy and electrification. Transport electrification and hydrogen integration needs major focus, particularly given the parallel concern over Australia’s lack of transport fuel security.

It is also important to manage risks to our existing exports through economic hedges, a more diverse economy and fair transition and opportunity for communities, workers and supply chains.

All of this is a tall order, but well within the capabilities of a talented and richly endowed country – and strongly in the interest of a nation whose future prosperity requires both success on climate and a new energy advantage.