Calculating the costs of net zero emissions
The term ‘net zero emissions’ has been everywhere in recent months. It’s been the focus of debate and discussion across radio, TV, newspapers and social media.
It’s the term used to describe the point where the amount of greenhouse gas released into the atmosphere is equally balanced with the gas being removed from the atmosphere.
It’s also a necessity if we are to limit global warming to less than 2 degrees. 195 countries agreed upon this target as part of the 2015 Paris Climate Accords.
Governments, businesses and communities around the world are increasing their efforts to reach net zero emissions. Here in Australia, every state and territory has set an ambitious target of net zero emissions by 2050 or sooner. And CSIRO’s ambitious Climate Resilient Enterprises initiative is helping Australian Industry prepare for a changing climate.
Meeting the challenge of net zero will require a range of technological solutions delivered at unprecedented speed and scale. This means many people are questioning how to make that that transition to a low-carbon economy without sacrificing economic growth.
But a recent CSIRO report Exploring Climate Risk in Australia approaches the issue from a different angle. It asks, instead, what the financial implications might be if we delay the transition to net zero emissions.
Dr Stuart Whitten is a Senior Principal Research Economist with CSIRO Land and Water. He is also project leader for the recent report.
“Our intention was to identify the transition risks as our economy decarbonises,” said Dr Whitten.
“There are going to be sectors exposed to risk under any decarbonisation pathway. But this is particularly so if we delay now and then need to undergo a more rapid transition later. The report is an important first step in identifying those risks.”
In Australia, every state and territory has set an ambitious target of net zero emissions by 2050 or sooner.
Exploring different scenarios
Central banks and supervisors recognise the significant risks that climate change presents to the global economy. Those risks may be complex and uncertain in scale, geographic scope and timing but they are nonetheless very real.
To build a better understanding of the risks of climate change – including how they are influenced by drivers such as policy settings, financial markets, demographic and economic growth and atmospheric emissions – researchers use scenario analysis tools to test potential impacts.
Decision makers across government and industry can then use the resulting long-term projections. The projections are also used by investors looking to identify where to conduct further analysis or engagement, and industries seeking an understanding of risks to their sectors.
In 2021, the Network for Greening the Financial System released a set of six climate-related scenarios. Scientists use these scenarios as a common starting place to examine risks.
In the recent work led by Dr Whitten and his team in collaboration with KPMG and Energetics, two of those scenarios were contextualised to Australia.
The two scenarios were:
- Current Policies, which considers the outcomes that may result from a business-as-usual approach, and
- Delayed Transition, which considers the outcomes of delaying the start of the transition to a low carbon economy until 2030.
The research focused particularly on transition risk. This is the potential deterioration in profits and economic development as a result of policy, technological, or social change.
Net zero and the Australian context
We know we face a number of unique challenges when it comes to emissions reduction in Australia.
Our climate, geography, emissions-intensive industries and decentralised electricity grid all need to be given due consideration. We are also exposed to regulatory risk from outside our borders, due to the interconnected nature of global markets.
However, we also benefit from a number of distinctly Australian advantages, including unmatched renewable energy and mineral resources, strong research institutions, and well-developed skills in low emissions technologies.
It’s vital that we find ways to capitalise on those advantages, because a significant economic contribution is made by Australian industries exposed to climate-related impacts.
The agricultural sector is highly exposed to climatic shifts. Adaptation will be essential to maintain ongoing productivity in the sector. Other sectors such as mining and offshore gas are often located in areas exposed to physical hazards, while fossil fuel extraction industries are vulnerable to shifts in demand from global trading partners.
CSIRO’s ‘Exploring Climate Risk in Australia‘ study is a first step towards quantifying the exposure of the Australian economy to climate-related risk and highlighting some of the challenges of assessing this exposure.
What did the net zero report find?
A lot of the public debate around net zero emissions has focused on changes to Australia’s electricity system. This includes the challenges in existing fossil fuel electricity generation. But according to Dr Whitten, these challenges have less future influence on our net zero trajectory than many people think.
“The modelling revealed that in Australia we are not as exposed as we might have thought in some areas. In the electricity sector, for example, we already have a strong transition plan.”
“But we are definitely exposed in mining and other emissions-heavy industries like mineral processing. We don’t have a counterfactual of a smooth transition. But in general we can say that a faster transition will be a harder one for those fossil fuel intensive industries.”
As the transition to a low carbon economy accelerates, emissions intensive sectors will decline, while we will see growth in renewables, electrification and alternatives. CSIRO’s analysis demonstrates the elevated risks to emissions intensive industries – particularly coal and to a lesser extent gas.
The analysis also illustrates that impacts will vary across Australia and that some states are more exposed than others. Sectoral impacts of rapid decarbonisation in the coal industry particularly impact Queensland. Whereas overall economic impacts on household income and consumption are highest relative to current levels in NSW and Victoria.
This variability in sectorial and overall economic impact illustrates the need to differentiate between sectoral risk to business and more general changes in risk to household finances.
The report reveals a number of other findings that are likely to prove useful to stakeholders and key decision makers. They include:
- Under the ‘Delayed Transition’ scenario, rapid decarbonisation delivers lower gross state product (the measure of value adding that occurs in an economy) than under a ‘Current Policies’ scenario in all states except the ACT. This means that production and income will be lower than under a ‘Current Policies’ scenario.
- A ‘Delayed Transition’ will likely require a high reliance on negative emissions technologies like direct air capture using ‘artificial trees’ or bioenergy with carbon capture and storage (BECCS). The analysis notes not to underestimate the challenges of deploying, scaling and commercialising these technologies.
- A reliance on offsets (such as sequestering carbon in vegetation) could delay the transition to a low carbon economy if they are deployed in preference to decarbonisation and structural abatement.
“We’re pleased that this work adds to the growing range of evidence as we adjust and adapt to the need to decarbonise,” says Dr Whitten.
“It’s an important first step in identifying which industries have a greater opportunity or exposure to climate-related risk if the transition to a low carbon economy is delayed. But we also see it as a call to action. A lot more work now needs to be done.”
What comes next?
Australia’s target of net zero emissions by 2050 provides a clear economic signal for decarbonisation. However, the current 2030 target of 26-28% reduction on 2005 emissions would leave significant decarbonisation required in the latter two decades. As the modelling has shown, that rapid transition leaves some sectors and states exposed to increased risk.
Dr Whitten believes there are three areas that are worthy of particular focus, in terms of smoothing that transition, and further characterising the risks ahead for Australia.
“The first point to make is that in this report we didn’t put a lot of focus on the physical risks of climate change,” says Dr Whitten. “Things like extreme weather events or changing climate conditions. We undersell those because they are difficult to predict and will intensify beyond the model period, and as it’s clear they will have ‘negative’ economic consequences that’s definitely an area that requires further research.”
“The second point is that there needs to be more awareness of how different risks interact with each other, especially when we’re looking at our connections with the rest of the world.”
“And third, I think it’s worth highlighting the range of decarbonisation options already available across the economy. For example, increased electrification across the economy drawing on growth in renewables. Or reducing agricultural emissions through a range of crop and livestock practices. As more and more of these emerging technologies mature and are adopted by different sectors across our economy they will catalyse an even greater range of new opportunities that can make a material impact on emissions reduction. ”