Australia’s new government to focus on renewable expansion, carbon market reforms

The new Australian government is poised to boost renewable energy deployment and introduce carbon market reforms while raising an interim emissions target, with the previous administration's defeat widely attributed to its perceived lack of climate action.

In the federal election earlier this month, the Labor Party secured enough seats to oust the Liberal-National Coalition—but it was the Greens and climate-focused independents that enjoyed unprecedented support.

Anthony Albanese, the Labor leader who was sworn in as prime minister on 23 May, promised to "end the climate wars" and build Australia into a "renewable energy superpower" following the victory.

While the counting of postal and absentee votes continues, Labor is expected to form a minority government or hold a slim majority in the lower house. The Greens and crossbenchers that advocate radical climate action are likely have some sway in future legislation.

"This election … makes clear that Australians know that decarbonizing the economy is at the heart of a stronger future," trade body Business Council of Australia CEO Jennifer Westacott said in a statement.

Australia has experienced flooding, heatwaves, and bushfires in recent years that scientists believe are linked to the rise in global temperatures.

Polling by Sydney-based Lowy Institute shows an increasing number of Australians want the government to take strong action to counter climate change by cutting emissions, even if that involves significant costs.

But Australia was one of the last developed countries to set a net-zero target by 2050 under the Coalition, and many environmentalist thinktanks believe its current interim goal of cutting GHG emissions by 26-28% by 2030 from 2005 levels lacks ambition.

Labor has pledged to raise the 2030 target to a 43% cut, while the Greens want a 75% reduction. Climate Analytics estimated the former's ambition could help cap global warming at 2 degrees Celsius and the latter's at 1.5C.

Based on campaign promises, observers said the new government's decarbonization policies will likely center around carbon trading reforms and renewable energy expansion.

A better mechanism

There have been heated debates over the market integrity for government-sponsored Australian Carbon Credit Units (ACCU), which are generated from projects that reduce or avoid GHG emissions.

Andrew Macintosh, the former chair of the ACCU mechanism's integrity committee, recently questioned the projects' actual decarbonization effects and highlighted some issues related to those based on avoided deforestation, human-induced regeneration of native forests, and combustion of methane from landfills. Labor and the Greens both vowed to review the scheme.

John Connor, CEO of Melbourne-based Carbon Market Institute, which represents carbon market participants, said in a statement that the election outcome will provide "a timely platform for the renovation of Australia's carbon market governance and ambition."

With a swathe of independents that campaigned on climate action, the coming parliament will likely "act on the perceptions that some of the emissions reductions were 'hot air,'" consultancy Demand Manager CEO Jeffery Bye said.

"I would expect a tightening of the regulations and bureaucratic treatment of these methodologies to enhance the integrity of the scheme," Bye told Net-Zero Business Daily by S&P Global Commodity Insights.

On the demand side, the current regulatory regime—known as Safeguard Mechanism—sets baseline emission levels for 215 Australia companies with annual Scope 1 emissions exceeding 100,000 metric tons (mt) of CO2-equivalent and allows those major emitters to acquire ACCUs to offset their excess emissions.

But critics said the mechanism has limited decarbonization effects because the Coalition was too willing to raise the baselines, and that the emitters seldom need carbon credits.

In the financial year 2020-2021, just 14 of the 215 emitters exceeded their limits. They surrender about 420,000 ACCUs for the period, which Bye estimated were worth A$12 million ($8.6 million) at the time.

But Labor promised to reform the Safeguard Mechanism based on the Business Council's recommendations, which will reduce the baselines "predicably and gradually over time" to help reach the net-zero target.

With the party aiming to reduce the emitters' total emissions by 5 million mt of CO2e/year from 2023-34 through 2030, Bye estimated their annual ACCU demand will grow to 213 million units in the period. The strong demand signals contributed to a 17% hike in spot ACCU prices to A$35 after the election.

"[The planned reform] points to an increase in activity in the ACCU market that has already flowed through to higher prices," Bye added.

The Business Council has called for lowering the Safeguard Mechanism's threshold to cover companies with emissions over 25,000 mt of CO2e/year, and the issuance of a type of new credits for those that can stay below their emission baselines. The credits then can be sold to those with excess emissions as offsets, but it's uncertain how or whether they can be converted to ACCUs, which voluntary buyers have also been demanding.

Such design could theoretically incentivize decarbonization investments, but Bret Harper, research director at Melbourne-based energy consultancy RepuTex, cautioned that their impact on the carbon market could be mixed.

"Smaller facilities would have more opportunity to reduce their own emissions, especially in a couple years through electrification and potentially be issued below-baseline Safeguard Mechanism credits," Harper said. "This could potentially displace more ACCU demand from covered facilities than it triggers."

Renewables drive

Australia has seen a rapid expansion of its renewable power generation in recent years, with state governments providing strong incentives for solar and wind power additions.

To support the development, Labor committed to spending A$20 billion for grid enhancement and install 400 community batteries across the country during the campaign.

The policies, designed to enhance the Australian network's ability in absorbing renewable power, have resonated with some industry players.

In an open letter to Chris Bowen, the incoming energy minister, trade body Clean Energy Council CEO Kane Thornton said grid connection is currently the biggest challenge facing utility-scale renewable energy projects.

"The grid wasn't designed for a power system dominated by renewable energy. New transmission has been slow," he said in the letter published by RenewEconomy. "There is a clear role for government to underpin transmission projects."

Thornton added that community-scale batteries can play an important role in managing the grid and power prices. "The community loved your support for batteries and will be keen to see that program moving."

Logan Reese, an associate research director at S&P Global, said Labor's proposals could lower financial and planning barriers to bring forward grid improvements that can accelerate the development of renewable energy zones. Those are areas designated by state governments for renewable energy infrastructure.

"These renewable energy zones are … critical to advancing large-scale renewable capacity additions," Reese said.

Labor has aimed for 26 GW in renewables capacity and 82% of power generation in the National Electricity Market, composed of five regional systems on the east coast of Australia, by 2030. The share of renewables in generation was 31.4% in 2021.

But the party in general refrained from discussing how to cut fossil fuels consumption during the campaign. In contrast, the Greens aim for 100% renewable energy by 2030, effectively phasing out coal and gas power stations.

Johanna Bowyer, lead analyst for Australian electricity at the Institute for Energy Economics and Financial Analysis (IEEFA), said Labor would need to shutter a significant amount of coal generation capacity to reach its target. Data from thinktank Ember shows Australia had 24.7 GW of installed coal capacity at end-2021, giving the country the highest coal-power emissions per capita among the world's major economies

"A coal exit policy would be helpful to ensure orderly exit of coal generators and timely entry of new [renewable] capacity to replace them," Bowyer told Net-Zero Business Daily.

Green hydrogen, metals and EVs

With more renewable energy, the new government hopes to better position itself to decarbonize the transportation sector and develop hydrogen business.

In its Power Australia proposal, Labor aims to put 3.8 million electric vehicles (EVs) on Australian roads by 2030 compared with the current level of 24,000 units. The initial step is to remove import tariffs and a benefit tax on non-luxury EVs from July.

Reese said the federal government may need to work with state governments to achieve this goal. "Labor has promised to increase the share of electric vehicles in Australia, which will require a network of new charging stations that can be expedited through coordinated efforts at the state and federal level," he said.

The party has also promised to promote green hydrogen produced from renewables and allocate some money from a A$15 billion National Reconstruction Fund (NRF) to fund electrolyzers. But it has yet to unveil a detailed hydrogen strategy.

Compared with the previous government, which aimed to develop blue hydrogen produced from gas reforming plus carbon capture technology and the green variant simultaneously, Labor is expected to focus on the latter.

"There will be a shift in focus towards green hydrogen for economic not political reasons. Short term spot gas prices have more than trebled since the start of the Ukraine war [in February]. Contract prices have also risen," IEEFA Energy Finance Analyst Bruce Robertson said.

"It is price that will drive the switch from blue to green hydrogen. Gas-based products are simply not competitive," he added.

Platts assessed the production costs for Western Australia hydrogen made via polymer electrolyte membrane electrolysis (including capital expenses) at nearly $3.62/kg this week. Hydrogen produced from steam methane reforming with carbon capture and storage was assessed at $4.33/kg.

Leveraging on green hydrogen and Australia's status as the world's largest bauxite and iron ore producer, Labor plans to deploy some money from the NRF to create manufacturing bases for "green" steel, alumina, and aluminium. The Greens also proposed a A$3.5 billion Green Metrals Australia fund and a A$15 billion "Made in Australia" Bank and manufacturing fund for similar purposes.

Both parties aim to cut industrial emissions for customers at home and abroad while generating new jobs for the local economy.

However, S&P Global Metals Analytics Lead Analyst Paul Bartholomew doubted whether those proposals can succeed with high labor costs in the country.

"Australia has always struggled to add value to its mineral resources," Bartholomew said. "It's much cheaper to process minerals in Southeast Asian countries such as Malaysia."

Posted 27 May 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.