As Australia works towards its goal to reach net zero emissions by 2050, the Climate Change National Framework for Adaptation and Mitigation) Bill 2020 comes at a crucial time to aid the cause. Institute for Energy Economics and Financial Analysis (IEEFA) comments on components of the Climate Change Bill 2020, and provides more detail on the increasing pressure being brought to bear by globally significant financial institutions – banks, insurers and asset owners/asset managers – as well as Australia’s major trading partners and a growing number of global and Australian corporate leaders. REGlobal presents the key highlights from the report:
The net zero emissions target by 2050 is a rational and much-needed emissions reduction target. It is key for Australia to set and meet a net zero emissions target to keep in line with the Paris Agreement to limit warming to less than 2 degrees (and aiming for 1.5 degrees) above pre-industrial levels. The emissions target of net zero by 2050 is aligned with many other countries such as the UK, France, Denmark, New Zealand, Japan and South Korea, and China by 2060.
Australia must align itself with world trends on emissions to maintain strong trade in a net zero emissions world. It is key to signal to Australian industry the need to develop green products and services that will flourish in a net zero emissions world and strengthen Australia’s global competitiveness. Deloitte has recently reported that inaction on climate change will have the effect of curtailing Australia’s economic growth to the tune of $3.4 trillion and 880,000 fewer jobs in just 50 years. However, by choosing a new growth pathway including focusing on low emissions, Australia could grow the economy by $680 billion, with 250,000 more jobs in just 50 years.
A net zero emissions target will mitigate climate change, protecting society and the environment from huge economic losses due to unchecked climate change. Adaptation is also key as Australia is already seeing the catastrophic impacts of climate change, evidenced by the Black Summer bushfires. A net zero emissions target and a framework for reaching this target will allow Australia to develop the plans necessary to adapt to climate impacts, such as extensive pre-planning prior to bushfire season and developing drought-resistant agricultural crops.
- The Long-Term Emissions Reduction Objective
The financial, community and environmental risks associated with climate change are a critical issue for Australia today. The opportunities are likewise enormously significant, if we as a country can marshal our human capital, technology and engineering skills, phenomenal wind and solar resources, vast land mass, plus the financial power of Australia’s world leading superannuation structure, which has built a $2.8 trillion pool of savings. Australia should, and most likely will, be a world leader in zero emissions industries of the future. The employment, investment and export opportunities should not be underestimated.
To be effective on climate action, Australia needs a very clear objective with a clear end date, along with interim targets to build initial momentum, as well as guide policy and planning to best unlock private investment and ingenuity, at least cost.
An independent arbiter is needed to guide policy and provide crucial accountability. For too long the lack of a bipartisan approach on climate in Australia has undermined investor certainty by failing to provide required policy and regulatory framework for medium and long-term planning and decision-making.
COVID-19 highlighted the power of the National Cabinet to most effectively leverage co-ordination of Federal and State Government actions when addressing a national emergency. Our scientists have long flagged the global climate emergency and growing risks of more frequent, more extreme weather events resulting from climate change, and the significant role of human activity in this regard.
We endorse that the Act would see the establishment of a Climate Change Commission (CCC) to advise the government on policy-setting and reporting based on the advice of experts, including on business and economics, free of near-sighted political and private vested interests and rent-seekers.
An economy-wide net zero target by 2050 for Australia
In line with the Paris Agreement and the Intergovernmental Panel on Climate Change’s best available science, this Act to establish a net-zero target by 2050 for Australia is an excellent move that will set a clear timebound target and end destination. A legally binding goal, along with interim targets, will restore business and investor confidence that our governments at all levels are collectively heading in the right direction to best manage this critical financial risk at least cost to Australian consumers, while maximising the business, employment and export opportunities that will arise.
We believe this is critical for Australia’s economic prosperity, for ensuring intergenerational equity and to start to restore Australia’s international standing. Australia is far from a global leader today. China’s pledge in September 2020 to peak emissions before 2030 and the aspiration to deliver net zero emissions by 2060 was a globally significant event – a clear and resounding commitment to the delivery of the Paris Agreement and the key principle of the ‘ratchet-up’ of ambition clause. That Japan and South Korea rapidly followed suit with formal pledges of net zero emissions targets by 2050, along with the statement of intent by President-elect Joe Biden committing to the same, means that all of Australia’s main trading partners have elevated their political ambition. Any equitable understanding of the concept of ‘common but differentiated responsibilities’ means that it is overdue time for Australia to commit to an economy-wide net zero target by 2050, or earlier.
This is entirely consistent with the guidance from the Australian Prudential Regulatory Authority (APRA), the Australian Securities and Investment Commission (ASIC) and the Reserve Bank of Australia (RBA). Our leading legal counsel has likewise raised expanded understandings of the Fiduciary Duties for Australian Directors with respect to climate risks. And momentum is building, rapidly.
November 2020 saw 22 of Australia’s top corporate leaders announce a new Climate Leaders Coalition to collaborate on ways to reduce emissions in line with the Paris Agreement.
November 2020 also saw Australian investors likewise endorse this net zero emissions by 2050 target. Led by the Investor Group on Climate Change (IGCC), which represents institutional investors with total AuM of $2 trillion, the Australian Sustainable Finance Initiative (ASFI) – comprising 80 organisations across major banks, insurers, super funds, civil society, and stakeholders – released its Roadmap that sets out a bold plan to align Australia’s financial system to support a thriving Australian society, a healthy environment and a strong and prosperous economy.
Global investor intent is also increasingly loud and clear. The Net-Zero Asset Owner Alliance, managing a combined US$5 trillion, announced in October 2020 plans to lower its portfolio carbon emissions by as much as 29% over the next five years under its 2025 Target Setting Protocol. This is a clear example of the need for a timebound, long-term net zero emissions target to be accompanied by interim timebound targets. This group’s message is clear, that “deep emissions cuts are required” from all of the thousands of companies owned by the investors and that the group would work with boards willing to adjust their business models. Australia’s leading companies will have to comply with this global imperative, regardless of the current lack of policy ambition evident in Australia.
National economy-wide emissions budgets and plans for reducing greenhouse gas emissions
IEEFA strong endorses the key point that the Act will establish a process to meet net-zero emissions by 2050 by requiring the setting of five yearly emissions budgets, based on advice from the CCC which considers factors like technology readiness and the best available science. This creates the conditions necessary for business to plan and invest over the medium and long term.
Setting clear interim targets is a key priority to ensure that we deliver on the long term objective of reaching net zero emissions by 2050, or sooner. IEEFA understands that the Act will require the Government to provide five yearly emissions reduction plans, one year in advance to parliament, to allow for added scrutiny. These plans will be multi-sectoral, dealing with energy, agriculture, waste etc. Emissions reduction ambitions will be balanced by cost-efficiency and affordability. For energy, specifically, the Australian Energy Market Operator (AEMO) and Energy Security Board (ESB)will continue to advise Government and the Commission. This will ensure that we manage the trilemma of security, reliability and affordability, whilst also driving decarbonisation as a fourth clearly defined priority.
By having comprehensive plans set in advance, investors and businesses can also align core objectives with government support in emissions reduction areas. Most importantly to IEEFA, in the creation of these plans, the Government must consult the community, workers, scientists, the business sector, and leverage Australia’s best scientific, engineering and financial experts, and be as free as possible from private rent-seeking fossil fuel lobbyists seeking to delay and obfuscate the accepted science
2. Australia: A Renewables Export Superpower
The potential is huge; capital is ready, the economics and technology are lining up, policy clarity is needed
To IEEFA, a technology readiness assessment shows that the opportunities for Australia to see huge new investment ($200bn+ by 2040 is a conservative estimate), employment, economic and export gains are real. Australia is blessed with first class renewable resources, an exceptionally low population density, a world scale A$2.8 trillion capital pool, record low interest rates, a history of building world-scale export industries, and strong trade relationships with the world’s largest fossil fuel import nations, all of whom have just embraced a net zero emissions target.
The risks to Australia of not embracing the science and these opportunities are likewise enormous: 2018/19 saw Australia export A$100bn of fossil fuels, and this will be just A$70bn in 2020/21, with the risk of halving again by the end of this decade or two according to the latest October 2020 International Energy Agency (IEA) World Energy Outlook modelling of the Net Zero Emissions by 2050 (NZE2050) global outcome.
A constructive Federal policy framework is the missing link to accelerate investment, boost employment and drive growth in research, development & deployment (RD&D). Many of the Federal tools are established (ARENA, CEFC, CSIRO), and the state governments are 100% unified by net zero emissions targets, but lacking the financial resources. But this is the next space race, Australia is far from alone.
A $200bn+ investment opportunity for 500% renewables
The NSW Government has just committed to a $32bn investment opportunity for 12GW of variable renewable energy (VRE), 2GW of storage, including pumped hydro storage (PHS), plus grid interconnect upgrades. NSW is one-third of the Australian population, so if the equivalent of this was rolled out nationally, that is ~A$100bn. The AEMO integrated system plan (ISP) assumes some $10bn of investment in grid capacity expansions by 2030 and rooftop solar growing five-fold to 50GW by 2050, a likely incremental $40bn investment when behind-the-meter storage is included. While some voices have said the cost to Australia’s heavy industry and hence employment are too valuable to risk with actions to protect our country’s future, this call for fear and vacillation is diametrically opposite to the leadership shown by Korea Zinc’s Australian Sun Metals commitment to be 100% zero emissions energy powered by 2040, announced in November 2020.
Growing global consensus on net zero emissions
The announcement by President Xi of a net zero emissions (NZE) 2060 target for China changed everything globally, particularly when it was followed by NZE by 2050 targets from Japan and South Korea. The election of Joe Biden as the next President will likely put the U.S. back into the Paris Agreement with a NZE by 2050 target. The EU is already entirely focussed on net zero and India’s PM Narendra Modi has long set a path for electrification, combined with a 450GW of renewables by 2030 target.
Growing financial sector consensus on net zero emissions
May 2020 saw Westpac step up its commitments, followed in June 2020 by HESTA and then in July 2020 by Aware Super.
This momentum continued building with the announcement by ANZ Banking Group in October 2020 to work with all of its clients to reach alignment with the Paris Agreement.
November 2020 saw both QBE Insurance and AustralianSuper32 commit to NZE by 2050. November 2020 also saw the Climate Action 100+ (a group of 500 global investors, overseeing more than $US47 trillion AuM), added three more large Australian emitters – Oil Search, Orica and Incitec Pivot – to the global list of 167 firms to urge them to provide “good faith” plans to decarbonise every aspect of their operations by 2050, in an attempt to limit temperature increases to well below 2 degrees C.
When Prime Minister Scott Morrison says Australia won’t be dictated to by foreign governments, he ignores the fact that our largest fossil fuel customer in the world – JERA of Japan – just committed to NZE by 2050 in October 2020. And Australia’s second largest fossil fuel customer – Korea’s KEPCO – has committed to no new coal at the same time, under pressure from BlackRock and other globally significant financial institutions (GSFI). They don’t determine our government policy, but they certainly decide if they will still need to buy our LNG and thermal coal.
Having underestimated variable renewable energy deflation for a decade, October 2020 saw the IEA finally acknowledge that solar is the new king of global energy markets. The world’s largest and most successful renewable energy investor, that being the U.S. utility NextEra Energy, states that it expects green hydrogen to be as big a disruption of world energy markets next decade as batteries are today. This disruption is driven by technology, economics and finance, with multi-decade low interest rates adding fuel to the fire.
Investors into Australian NZE Industries need policy clarity
The Renewable Energy Target (RET), the Clean Energy Finance Corporation (CEFC), the Australian Renewable Energy Agency (ARENA) and the CSIRO have all played a key role in driving renewable energy penetration to a record high in 2020 to-date of 26% vs just 10% in 2010.
However, BloombergNEF calculates renewables investment collapsed 40% in 2019 as the RET was achieved, given the now energy and climate policy chaos. And investors in 2020 have seen ongoing disruption and project delays/write-downs in 2020 as the Federal Government focusses on a gas-led recovery.
Global investors recognise that infrastructure investing gives an incrementally higher return for incrementally higher risk relative to fixed income. When backed by long term power purchase agreements (PPA), renewables are a new class of infrastructure assets, free of the volatility of fossil fuel inputs and largely free of carbon emissions. Once built, PPA backed renewables have an 80-90% EBITDA margin and can provide a 25 year cashflow annuity, like a bond, with almost no technology, fuel or currency risks.
Australia is ideally placed to transition from a top three fossil fuel export nation to a world renewables export superpower with $200bn+ of new regional investments, but government policy is a key enabler given the massive RD&D ‘space race’ involved, and the risk that other countries like Germany, Korea, Russia, the UAE, Chile and/or China beat us to the prize.
3. Global Finance’s Paris Alignment Accelerates
Despite or maybe in acknowledgement of the lessons learnt during the global pandemic, there has been significant global capital momentum away from thermal coal and coal-fired power generation in 2020. There is a growing understanding that an alignment with the Paris Agreement invariably means that globally significant financial institutions will need to move well beyond coal exclusions and policy momentum to restrict global capital flows into oil and gas has built considerably in 2020.
Indeed, the trend of finance exiting coal has accelerated in 2020, with the number of new or improved policies running at 50% more than the run rate of 2019. Having commenced the year referencing “A Fundamental Reshaping of Finance” in terms of the urgent need to align with the Paris Agreement and accept stranded asset risks, BlackRock completed its divestment of thermal coal miners in May 2020. 56 By November 2020, Founder and CEO Larry Fink was describing this as a “Tsunami” of asset reallocation and change. In total, IEEFA has tracked 147 globally significant banks, insurers, and asset managers/asset owners that have implemented substantial formal coal policies since 2013. This year has seen 63 new or updated policy statements.
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