Australia making progress on carbon, but more work to do

12 October 2015

Australia will need to nearly double its historic rate of decarbonisation, to 4.4 per cent annually, if it is to meet its goal of a 26 percent decrease in carbon emissions on 2005 levels by 2030, according to a PwC report released today.

PwC's 7th annual Low Carbon Economy Index (LCEI) tracks the rate that G20 countries are decarbonising their economies by measuring decreases in their ‘carbon intensity,' or the ratio of carbon emissions relative to GDP growth. Breaking the link between growth and emissions is seen as essential in avoiding the worst impacts of climate change.

Since 2000, Australia's carbon intensity has fallen by an average rate of 2.4 per cent annually, well below the 4.4 per cent required to reach the target that Australia will take to the United Nations Climate Change Conference in Paris this December.

However, according to Mark Coughlin, PwC Australia's Energy, Utilities, and Mining leader, Australia has made good progress recently in its efforts to reduce carbon intensity.

"Australia's average decarbonisation rate since 2000 actually puts it amongst the top five best performers in the G20. In 2013 and 2014 the decarbonisation rate was 4.5 per cent and 4.7 per cent respectively, so if we can maintain that rate we will hit the Government's 26 per cent target."

Yet for all the positive signs in 2013 and 2014, Coughlin believes the door is open for Australia to do more.

"The fundamental question remains as to whether Australia's targets are ambitious enough, or consistent with what other countries are doing to limit global warming to within 2 degrees of pre-industrial levels. We know that across the G20 we need to achieve an average annual reduction in carbon intensity of 6.3 per cent out to 2030. Based on how Australia has tracked historically, you could argue there's scope to be more ambitious. "

Pointing to examples in the US and Europe, Coughlin said that the changes required to shift carbon intensity could be significant.

"The US shale gas revolution resulted in a 3 per cent per annum reduction in carbonisation as did the restructuring of German industry and energy generation settings after reunification," he said. "We need to acknowledge that keeping our planet's warming to within 2 degrees will take a major intervention. Make no mistake – we cannot escape what is being proposed by the G20 for the Paris meeting in December."

"To address the emissions gap, the Paris agreement will need a process to review progress and a ratchet mechanism to raise ambition in future. These elements in the Paris deal are critical because any delay will mean future reductions will need to be faster, deeper and, as a result, more costly."

What it means for business

According to Coughlin, the implications for Australian industry are far-reaching.

"Companies should anticipate both more ambitious climate policies in the near term and the prospect of physical climate impacts in the longer term," he said.

The report describes three consistent themes that have emerged from the Intended Nationally Determined Contributions (INDCs), that is, the publicly declared country commitments that will be taken to Paris:

  • A rapid investment in renewables and their share of the energy mix
  • The engagement of the financial services sector in delivering this investment, as well as assessing the sector's exposure to instability as a result of climate change
  • A focus on coal-fired power generation in countries' decarbonisation pathways.

"The levels of investment needed for the low carbon transition will require not just the mobilisation of investors, but also the creation and innovation of financial products to finance and insure the projects involved," Coughlin said. "At the same time, financial institutions will need to start assessing their exposure to climate risks."

Time for Australia's energy mix to evolve?

Australia's power and utilities sector accounted for 35 per cent of total emissions in 2013, followed by agriculture, forestry and fishing (18 per cent), manufacturing (13 per cent), and mining (12 per cent).

94 per cent of Australia's energy demands are still met by coal, oil and gas, however the proportion of energy consumed from these sources has shifted significantly in the last five years. Since 2009 energy consumption from coal has slipped 18 per cent, while consumption from oil and gas has increased 6.1 per cent and 15.8 per cent respectively. Energy consumed from renewables rose by 72 per cent over the same period.

According to Coughlin, Australia's energy mix will need to continue to evolve to keep Australia on track to meet its 2030 emissions target.

"There's no doubt that the trend towards a more diverse energy mix will continue - in fact it must if we want to reach the target that the Government is taking to Paris in December," he said.

"Energy producers that rely on coal, gas, and oil will be very much part of the solution. The key for these businesses will be taking a portfolio view, and looking for opportunities to diversify into wind, hydro, solar, and emerging technologies. That will be the best insurance policy against the impact of future regulatory focus and changing customer demand."

Globally, decarbonisation rate doubles

Carbon intensity fell globally by 2.7 per cent in 2014, the steepest decline in seven years of the PwC analysis. Global GDP growth of 3.2 per cent in 2014 was achieved with 0.5 per cent growth in energy related emissions.

2014 was also the first year that more than one country (UK, France, Germany and Italy as well as the EU as a whole) achieved a decarbonisation rate of 6.3 per cent or above, the rate required globally to limit warming to two degrees. Of these, the UK achieved a record-breaking 10.9 per cent reduction in carbon intensity – the result of a strong economy, lower coal use and a warmer winter.

China, the world's largest emitter, is the best performing non-EU country, with a decarbonisation rate of 6 per cent.

The analysis showed that carbon intensity rose in five countries: South Africa, India, Brazil, Saudi Arabia and Turkey.

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