10 things you should know about Net Zero Emissions

There’s been a lot said in the media, in politics and in business lately about Net Zero Emissions. But what even is it? This top ten list will get you started!

1.    Net zero emissions is not zero emissions

Human activity causes a lot of greenhouse gas emissions – from burning fossil fuels, leaking methane from mines and oil wells, deforestation, livestock burps and more. One approach to fighting climate change would be to eliminate all these emissions. But some sources of emissions are much harder, slower or more costly to eliminate than others. Getting to overall absolute zero may not even be possible in activities like grazing livestock or cement manufacture (or it may! We’ll see how innovation goes.)

Fortunately, human activity can also remove greenhouse gases from the atmosphere – such as by reforesting land, locking up carbon in durable materials, or pumping carbon dioxide deep underground. The costs and achievable scale of these options vary too.

‘Net zero emissions’ is a state of balance, where remaining emissions are fully offset by durable removals. Achieving net zero for a business, a country or the world will certainly involve cutting a lot of emissions because it’s just not possible to reforest enough land or stick enough carbon underground to offset the world’s emissions today.

In a net zero world some regions and companies would continue to have some net emissions; some would be neutral; and some would have net negative emissions (storing more than they emit). It’ll be complicated, but aiming for a state of balance looks a lot more achievable than absolute zero right now!

2.    All climate policy roads lead to net zero sooner or later

You may have heard about global temperatures rising (and they are), but we do have a say in the amount of change in global temperatures we can expect. This depends on the total amount of greenhouse gases in the atmosphere, not just the amount added in any one year. For example if we cut world emissions by 10% this year, we wouldn’t get 10% less climate change next year. In order to stabilise temperatures at any particular level, the total level of greenhouse gases in the atmosphere has to stabilise. That won’t happen until new emissions hit net zero and stay there.

3.    2050 is the focus for net zero, but it’s complicated

At the request of the 189 countries in the Paris Agreement, in 2018 the Intergovernmental Panel on Climate Change (IPCC) reported on what it would take to keep global warming below 1.5°C above pre-industrial levels – one of the key goals of Paris.

The IPCC assessed dozens of modelled pathways submitted by the world’s researchers and concluded that the world would need ongoing emissions reductions that hit net zero by around 2050 to stay below 1.5°C warming. We could delay global net-zero to around 2070 if we accept higher warming of 2°C – but that pathway would involve serious consequences for lives and livelihoods.

This is the best scientific advice we have on the critical global dates for net zero. But dividing up this massive task among individual countries and companies is not a matter of science – it’s a job for economics, ethics and politics. Unsurprisingly, there are many opinions in the mix! But increasingly, the commitments of advanced economies and leading companies have converged around 2050 as the focus for net zero.

4.    Net zero has a lot of fans (but not everyone, yet)

A large and increasing number of nations, regions and businesses have committed to net zero emissions, mostly targeting 2050.

In Australia all States and Territories target net zero by 2050 at the latest. The Federal Government’s evolving position at the time of writing was to achieve net zero as soon as possible, preferably by 2050 if not sooner.

Among Australia’s top ten trade partners, six have committed to net zero by 2050 (Japan, New Zealand, South Korea, the United Kingdom, the United States and Taiwan); and China (including Hong Kong) has committed to net zero before 2060. That leaves India, Singapore and Malaysia yet to commit.

Among the OECD club of advanced economies, 33 out of 37 members have already committed to net zero by 2050. As well as economies already mentioned this includes all of Europe, Canada, Chile and Colombia. Australia, Israel, Mexico, and Turkey have not yet committed.

Australia is – depending on who and what you count – the 14th largest greenhouse gas emitter in the world. Of those larger than us, just over half (seven) have committed to net zero by 2050 or 2060.

The United Nations reported in September 2020 that 22 regions, 452 cities, 1,101 businesses, 549 universities and 45 of the biggest investors had committed to net zero as part of the UN Race to Zero campaign. And ClimateWorks Australia currently tracks 52 Australian business and government organisations with commitments to net zero by 2050. Commitments are likely to grow significantly in the leadup to the Glasgow UN climate summit in November 2021.

5.    There’s no one weird trick to net zero

Emissions and removals come from many sources and there are typically many options for solutions in each sector. While climate discussions often focus on electricity generation and are full of enthusiastic advocates for one technology or another, a lot of different solutions are going to be needed.

Figure 1 Australia’s expected emissions in 2020, by sector.
Source: Australia’s emissions projections 2020 (DISER). LULUCF is land use, land use change and forestry.

Excitement about individual solutions is understandable – there are tremendous advances in solar energy, battery storage, hydrogen, livestock food additives and much more. But none of these is the whole solution, and all of them face competing approaches that could turn out to be better solutions in particular places and times. We need a tapestry of solutions to reach net zero.

6.    Electricity is not everything (but it may get much bigger)

Electricity generation produces just a third of Australia’s current emissions, and that share is falling as the power sector ramps down high-emissions plants and connects up more renewables. But electricity may well be part of the answer to hitting net zero in industry, heating and transport. Electrification is a common theme in many of the options to clean up those activities.

Electric cars obviously need more electricity, but if hydrogen cars become a thing, making their fuel would take lots of electricity too. Home heating and cooking can be done with electric heat pumps and induction cooktops. In industry, heat pumps, induction, microwaves and electric arcs can replace some or all of what is done with coal and gas today.

How far electrification will go is uncertain – and it won’t be the best answer in every context. The full costs need to be considered, including how much the electricity distribution networks would need to be strengthened to manage new loads.

But it is likely that the electricity sector will need to grow as part of a net zero emissions strategy. That growth could be anything from big to gigantic. If every Australian car were electric, total power demand might go up as much as 15%. On the other hand, an export-oriented hydrogen industry might use as much power as the rest of Australia put together – and that’s not even the most ambitious scenario!

7.    Hydrogen: incredible economic opportunity or huge financial risk? Yes!

Australian governments are very excited about hydrogen, which has a national roadmap and is a core priority of the Commonwealth’s clean technology strategy. One of the reasons the government is so excited about  hydrogen is that it is a potential answer for several of the hardest-to-decarbonise activities. Hydrogen can replace coking coal in steelmaking; it can replace oil products in powering heavy long-distance transport; and it can be the basis for manufacture of key chemicals.

Hydrogen exports to energy-poor economies could also be huge, and a way to hedge our bets against the risk of declining exports of coal and gas as these economies transition to net zero.

Australia has very large potential for ‘green hydrogen’ – made via electrolysis of water with clean energy – through low-cost renewable electricity generation. We could also be a large player in ‘blue hydrogen’ – made by reforming fossil fuels and sequestering most of the emissions – through our fossil reserves and large underground carbon storage potential. Countries like Japan and Korea have much less potential, and are already investigating Australian hydrogen projects.

Hydrogen could be massive. If it was the chosen economic solution to all the problems it could technically fix, and if Australia won as big a part of the world hydrogen market of 2050 as we have in the world Liquefied Natural Gas market today, we’d be talking about investment and earnings the size of several mining booms combined.

But those are important ‘ifs’!

Hydrogen competes with other technological options in every context. Other countries will compete to meet whatever demand there is and Australia is not guaranteed anything. Amidst that uncertainty, there is plenty of room for businesses to lose a fortune by being too soon, or too late; going too big, or pitching too small.

8.    Keep an eye on your customers and your investors

The pressure for net zero is not just coming from governments. Investors and financiers are increasingly looking for information on climate risk and net zero strategies from prospective investments and borrowers. And very large businesses with commitments of their own are increasingly interested in the performance of players of all sizes in their supply chains.

Most institutional investors now have climate aligned or low carbon strategies for at least part of their portfolio. There have been prominent statements of intent to apply a climate lens from global-scale institutions like BlackRock, and the big four Australian banks. More broadly, the approach recommended by the global Task Force on Climate-related Financial Disclosures (TCFD) is becoming a more common expectation, if not a legal requirement in some places.

Businesses with large supply chains are also increasingly looking to their suppliers to help achieve emissions goals. For example, Woolworths Group seeks to reduce absolute emissions across its supply chain by 19% by 2030. BHP is looking to support emissions cuts from its customers, as well as itself and its suppliers.

Understanding the implications of net zero for your business and developing some medium- and long-term plans to manage it is likely to be increasingly helpful when engaging with investors, suppliers and customers.

9.    Net zero plans for business: different strokes for different folks

The implications of net zero for businesses will differ widely, because businesses and their opportunities are very diverse. Businesses need to look at the makeup of their emissions and consider which elements are potentially within their control, and which require external assistance.

Transition options are generally clearest for electricity. While there is continuing uncertainty, suppliers can see many of the technologies that they will use to cut their emissions. But electricity customers fall into three broad categories: small and medium customers, who may consider installing clean self-generation or contracting with retailers for cleaner power; larger customers, who may consider larger self generation (like Sun Metals) or contract directly with large renewables projects (Business Renewables Centre – Australia offers information on how to do this successfully); and the largest and most intensive energy users, who need especially firm prices and still find contracting for renewables difficult.

Options are much more diverse for industrial emissions, and often less clear. Recent case studies find significant current opportunities for the partial substitution of renewable energy for gas and coal in process heat, but full substitution is some way off in most contexts. The Australian Industry Energy Transitions Initiative, in which Ai Group and several leading members participate, is charting transition pathways for key ‘hard to decarbonise’ Australian economic sectors including aluminium, chemicals, iron and steel, LNG and selected metals. The options identified so far are exciting, but the mix is quite different from one activity to another and more work is needed.

10.    The net zero goals of others may affect Australia more than our own

A lot of net zero discussion focusses on Australia’s choices and their impacts on our economy. But we are highly exposed to the decisions of others: ultimately the fate of our most emissions intensive exports depends on choices that other countries make about their energy systems and emissions.

Those choices are starting to be made. Most of Australia’s current exports of coking coal, thermal coal and natural gas go to countries that have now adopted net zero emissions goals. This strongly suggests a long-term megatrend of declining demand, declining export volumes and weak prices. Of course, such a megatrend would also be overlaid with shorter-term rallies and busts in these famously cyclical commodity markets. Moreover, it remains to be seen how fast medium-term implementation policies will catch up with this long-term ambition. And there is technological uncertainty as well – while carbon capture and storage does not look competitive in the power sector, it might be in heavy industry; that would preserve some demand for gas and coking coal. All that is certain is that Australia will have to be ready for the results of overseas choices.

Another set of international choices that bear close watching is the push for climate in trade policy. Two major aspects of this are the inclusion of climate commitments in trade deals, such as the negotiations on an Australia-EU Free Trade Agreement; and the imposition of carbon border adjustment mechanisms (CBAMs), or ‘carbon tariffs.’

A border adjustment would impose a carbon price on imports equivalent to the costs paid by local producers of the same products. The EU is developing a border adjustment and political leaders have agreed it should commence from 2023; the Biden Administration and legislators from both parties have proposed similar ideas for the United States. The EU has declared its CBAM will be fully compliant with its World Trade Organisation commitments, and it is plausible that it will not disadvantage businesses from Australia (or anywhere else). However, there is keen worldwide interest in the EU CBAM. It could become the focus for major trade tensions – or a cause for pioneering cooperation. Either way, this is one to watch!

Hungry for more?

If this list has just whetted your net zero appetite, catch Ai Group’s Net Zero webinar, or go deeper with our proposed strategy for net zero and energy advantage. You can keep track of our work on net zero, climate and energy on our website; or our work with other organisations to build consensus on a successful transition at the Australian Climate Roundtable.

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Tennant Reed
Tennant is Principal National Adviser – Public Policy at Ai Group. He has worked heavily on climate and energy issues, advising Ai Group’s Leaders’ Group on Energy and Climate Policy and developing reports on natural gas supply, energy prices and energy efficiency. He also works on a range of issues related to manufacturing and innovation. Previously he was an adviser in the Department of Prime Minister and Cabinet, working on fiscal policy, stimulus and infrastructure.

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