Energetics' Insights

The reaction to President Trump’s announcement to withdraw from the Paris Agreement was both global and local.  We saw swift condemnation from around the globe as well as from US State and city leaders, such as New York and Pittsburgh - where the mayor quickly stated that “we will follow the guidelines of the Paris Agreement for our people, our economy and the future”. 

Worldwide, businesses joined the chorus of objections, not only condemning the US’ decision as irresponsible in the face of the growing threat of climate change, but also re-affirming their commitment to the goal of limiting warming to within two degrees.  Looking across the statements made, we saw the clear message that abandoning The Paris Agreement would be a backwards step for the US economy as investor, consumer and public support are aligned to drive innovation and implementation of low carbon technologies. 

So as we consider the long term implications of a US withdrawal or attempts to re-set the terms of the Paris deal, the question begs – is this just political grandstanding for the sake of being seen to fulfil an election promise? Is President Trump really going to let China take the lead on climate action with the Chinese President stating earlier this year, his readiness to do so?  Will Trump let America miss out on the trillions of dollars that are set to flow into renewables and clean energy generation technologies?  It’s hard to imagine and certainly flies in the face of Trump’s rhetoric, “make America great again”. 

What is apparent in 2017 is that there are many compelling reasons to be part of a global agreement to address climate change and that being on the outside denies a nation significant economic benefits.

Echoes of Australia’s experience    

Australians are only too familiar with the issue of climate change being turned into a political football. At what was arguably its peak, former Prime Minister Tony Abbott, campaigned on repealing the carbon tax during the 2013 election declaring it to be a “wrecking ball ” for the Australian economy. After his election, Abbott fulfilled his campaign promise and repealed the Clean Energy legislative package on 1 July 2014. However there was a void to be filled.  Abbott recognised that climate change remained an issue requiring a policy response and favoured an incentive-based scheme which has been developed in the lead up to the 2013 election.  Direct Action is now Australia’s climate change policy with the $2.6b Emissions Reduction Fund and the Safeguard Mechanism as the key policy instruments. During the same time, the Renewable Energy Target was reviewed and reset to the current 33,000 GWh.

However both concern and momentum grew for additional mitigation policy measures in the face of the perceived inadequacy of the existing policy framework and targets.  This issue is now extending to concerns for a vision and plan to transition to a clean energy led power generation fleet.  Over the last three years, we have seen the perceived inadequacy of national targets and uncertainties produce the following responses:

• Increased State and Territory policies, including:
• ACT set a target to achieve carbon neutrality by 2050 and to be powered by 100% renewable energy by 2020
• South Australia is working to be carbon neutral by 2050 and have 50% renewable energy in its energy mix by 2025 (will be achieved 2017)
• NSW net zero emissions by 2050
• Victoria net zero emissions by 2050 and 40% renewable by 2025.
• A lack of capital investment in aging energy infrastructure
• A paused renewable energy sector which is now rapidly catching up. This ‘pause’ drove up renewable energy certificates prices in the short term resulting in higher electricity prices
  Another consequence was the devaluation of Australia’s standing within the global community on climate action. 

Times have changed

Lifting the finger off the climate policy pause button in Australia arguably began when the Government developed its Nationally Determined Commitment ahead of COP21.  While some commentators criticised the 26-28% reduction target as inadequate, it nonetheless represents a substantial challenge for Australia given our heavy dependence on coal fired power.
Today we are one of 147 parties (out of 192 signatories to the UNFCCC), making the Paris Agreement the fastest global agreement in the history of the UN. Since Paris COP21, the global Financial Stability Board examined the systemic risk of climate change. Released in December 2016, their Taskforce on Climate-related Financial Disclosure (TCFD) draft recommendations focused on enhanced governance, disclosure and forward-looking scenario analysis so that investors and regulators can better evaluate climate-related risks.

Locally, Geoff Summerhayes’ (APRA) speech¹, “Australia's new horizon: Climate change challenges and prudential risk” focused on climate risk within the context of Australian business. Summerhayes was explicit in stating that climate-related risks are financial in nature. He expects “….greater emphasis on stress testing for organisational and systemic resilience in the face of adverse shocks …..we would expect to see more sophisticated scenario-based analysis of climate risks at the firm level ….”.  Also, some months before, SC Noel Hutley issued an MOU on “Climate Change and Director’s Duty”² commissioned by the Centre for Policy Development and the Future Business Council. Hutley was explicit about director’s fiduciary duty to consider foreseeable physical and transition risks from climate change.

Businesses across Australia have certainly listened. International businesses have listened. BlackRock, responsible for over US$5 trillion of investment funds, is listening as they seek to understand how Boards’ manage climate change risk³, and declaring that ‘coal is dead’⁴ as they look to invest in renewable energy projects here in Australia.

Looking to the future: we cannot go backwards, the momentum for a low carbon economy is clear

Australia’s climate policy has experienced dramatic see-sawing over the past decade, but now in 2017 we have emerged with record levels of investment in renewable energy. More than $7.5 billion was invested in large scale wind and solar projects in Australia last year ⁵.

Australian businesses have also read the market signals. Pragmatically businesses are evaluating their risk profiles using science based targets, re-evaluating their markets, investing into low and zero carbon technologies, electrifying their operations and examining offsite opportunities. Most attractive currently are corporate Power Purchase Agreements for low cost renewable energy purchasing, although we have also seen a resurgence in carbon offset markets. The prime drivers here are commercial consideration and the need to manage climate risk - no longer is sustainability viewed as a “nice to have”.  This was made painfully obvious to ExxonMobil⁶ as their shareholders recently moved to demand that the company “annually describe how global efforts to limit warming to two degrees will affect its operations”.

The key issue currently for Australia now is how we modernise, innovate and evolve our energy mix – now and for the future.
This week we will see the release of final report of the Finkel Review into the future of the National Electricity Market.  As the bulk of Australia’s emissions reduction opportunities are to be found in decarbonising our energy mix and with billions of dollars flowing into clean energy generation, it is hoped that Finkel’s recommendations set Australia on the path for a low emissions, low cost future that ensures our industries are globally competitive and active participants in the carbon markets emerging across the world.

French President Macron said in an impassioned speech following Trump’s announcement, we need to “make our planet great again”.  As difficult as it is for Australia to wean itself off coal fired baseload electricity, it is within the power generation sector that the major emissions reduction opportunities lie.  The Federal Government must ensure that we seize the opportunity now to plan our transition to our clean energy future – there is no going back to the age of coal.