In response to the COVID-19 pandemic, the world’s largest economies have begun positioning their recovery packages to be socially and environmentally sustainable, unlocking additional investment opportunities. Currently, over 50% of Australia’s two-way trade involves countries that are committed to achieving net zero emission targets by 2050, with this proportion set to rise over the coming years. The Business Council of Australia’s (BCA) open endorsement of such emission targets has fuelled hopes of improved energy policies, however, as the BCA notes, it’s easier said than done as Australia still relies on coal for the generation of 70% of its electricity.
The Investor Group on Climate Change (IGCC) represents Trans-Tasman investors1 – with funds under management worth more than $2 trillion – concerned with the effects of climate change on investments’ values. The IGCC’s report, ‘Mapping Australia’s Net Zero Investment Potential’, aims to quantify the investment value required in each sector and asset class for two different scenarios: the business-as-usual ‘hothouse’ scenario and the ‘orderly transition’ scenario.
This scenario is characterised by the ongoing climate policy uncertainty with no clear, long-term framework to promote the efficient allocation of capital across the economy. Consequently, in this scenario total investment in the economy falls significantly under, with lost investment opportunities amounting to -$265 billion by 2050. By sector, the largest losses are projected to be in:
- Renewable and clean technology: -$65 billion
- Green hydrogen production: -$63 billion
- Carbon sequestration2: -$42 billion
- Transport infrastructure: -$31 billion
Investments in such potentially high-growth yet unpredictable sectors can only be made more viable for investors through constructive climate and energy policies. Without private investments, the public sector will have to carry a disproportionate load of the investment required to achieve emissions targets, meaning building more forward-facing infrastructure as a share of their total work, leading to higher costs for the government and, in turn, the taxpayers.
Orderly Transition Scenario
In this scenario, clear long-term policies and market signals promote a timely and orderly investment pathway to net zero emissions, limiting global warming to just 1.5 degrees Celsius by 2050, in line with the objectives of the Paris Agreement. The sectors predicted to provide the largest investment opportunities by 2050 are:
- Renewable and clean electricity production: +$385 billion
- Green hydrogen production: +$350 billion
- Transport infrastructure: +$104 billion
- Carbon sequestration: +$102 billion
- Electricity transmission and distribution: +$98 billion
The projections are based on lower regulatory risks and the broad uptake of clean technologies, which increases incentives for the private sector to build and operate infrastructure assets. Shane Rattenbury, ACT Minister for Climate Change and Sustainability, has affirmed that the “government doesn’t need to spend money, they just need to set [a] clear policy”, believing in the importance of policy in unlocking investment in the energy space.
The Morrison Government
After being voted into power in 2018, Scott Morrison’s primary aim within the energy and climate change space was to reduce the price of electricity, with coal remaining a key instrument in achieving this. Recently, the government refused to commit Australia to a net zero emissions target and instead focused their climate policy on a technological roadmap which envisions Australia investing $18 billion over ten years into new technologies covering hydrogen, energy storage, ‘low carbon’ steel and aluminium and carbon capture and storage. Mr Morrison has publicly said that he is “more interested in the doing” when asked about the 2050 target, hence the heavy technological investment. He remains disinterested in committing to a definitive zero emissions target while Labour leader, Anthony Albanese, a strong proponent of the net zero emissions target, has been an open critic of the government’s new technology roadmap proposal, damningly declaring “a roadmap without a destination is a road to nowhere.”
What Could the Government Do and Why?
EY believe the stimulus packages being rolled out in response to the current pandemic could be utilised in more pressing and impactful ways to secure the greatest long-term growth prospects and to align with net zero targets. Some examples include the fast-tracking of the transformation of energy, both on the demand and supply side, including the use of hydrogen and renewable energy as export market; fully developing grid technologies from virtual power plants to large-scale batteries and building a more integrated transmission network. Additionally, EY recommend pivoting government spending onto infrastructure and development in order to drive demand for more sustainable products and materials, and to fast-track emissions reduction efforts. Consequent effects include new opportunities across manufacturing, construction, infrastructure and development of trade and export market, all of which are areas that required a rethink pre-COVID.
In conclusion, the significant investment opportunities created by an orderly transition to net zero emissions economy are in danger of being squandered due to a lack of investor confidence in the growth prospects of sectors such as renewable energy, carbon sequestration and transport. With trillions of dollars in capital under their management, investors will be increasingly critical as governments become more fiscally challenged after the deployment of immediate COVID-19 relief. Therefore, it becomes imperative for the Australian government to adopt forward-looking policies to reinforce and encourage private investment, which will prove beneficial on both an environmental and an economic standpoint.