Global carbon dioxide (CO2) emissions from fossil fuels and industry have increased dramatically over the past 20 years and in 2019 reached a record high of 36.7 billion metric tons1. With the energy sector the main cause for the rise in CO2 emissions, and global energy demand expected to continue increasing in the coming decades, there will likely be even faster growth in wind, solar and other renewable energy sources.
Earlier this month, LGT Crestone’s Chief Investment Officer, Scott Haslem, and Head of Sustainable Investment, Amanda MacDonald, met with Professor Tim Flannery to discuss how latest developments in climate change are likely to impact Australia. Professor Flannery explained that as the world becomes more unified in its position to reduce the use of fossil fuels, Australia is in the ‘box seat’, where it stands to benefit from its abundant supply of clean energy and mineral resources.
The trajectory to net zero is now much steeper
With CO2 emissions at record levels, Flannery explained that the trajectory to meaningfully reduce carbon emissions is now much steeper than previously forecasted—from both an economic as well as a social perspective. Over the longer term, Flannery is particularly interested in carbon drawdown and the means we have at our disposal to remove CO2 from the air. Carbon drawdown is the point in the future when levels of greenhouse gases in the atmosphere stop climbing and start to steadily decline, stopping catastrophic climate change as quickly, safely and equitably as possible2. “In a few decades, that capacity will be like gold in the bank—and if it can be done cost-effectively, it will be a great asset to us.”
So, what does the steeper trajectory to net zero mean for Australia? Flannery expects we will need to reduce emissions by around 8% per annum for the next decade—although he concedes that Australia could do more in terms of emissions reductions than the average country. This would give less fortunate countries an opportunity to play “catch-up” in the race to net zero.
“We’re a wealthy nation; we’re small and agile; and we’re blessed with incredible assets in terms of clean energy and minerals. If one takes the view that Australia should increase its emissions targets to beyond those of the average country, we would be looking at a 75% emissions reductions target by 2030 versus the Government’s current target of 43%.”
Notwithstanding this is a stretch target, this has significant implications for the future of electricity, transport, and industrial processes. Reducing emissions by 75% by 2030 would require electricity to be fully decarbonised over that time frame. It would also require us to be well progressed in decarbonising transport, and starting to lay the foundations for decarbonising industrial processes. While we have made inroads into decarbonising electricity, he feels we are behind the curve in decarbonising transport, and we are a long way from where we need to be in terms of decarbonising industrial processes.
Flannery emphasised that the transition to net zero will require that emissions are reduced in a strategic way, with a set program and a defined purpose. While COVID lockdowns only saw carbon emissions fall by a limited amount, he explained that we should not compare this with what will happen in the future. “Lockdowns weren’t designed to reduce emissions. What we do in the future will be specifically tailored to reduce emissions—and it’s going to be on a bigger scale and will build prosperity.”
The future of clean energy
Flannery discussed the growing trend towards a more unified world position to reduce the use of fossil fuels, and explained how the shift to renewable energy has been gaining speed. Indeed, South Australia has become a global leader in the move from coal generated energy to wind and solar. According to the Institute for Energy Economics and Financial Analysis, the state has moved from no renewable energy to 60% supply in just 14 years3.
He also explained how the use of clean energy assets has been “delivering power to the people in a very meaningful way”. According to the Department of Climate Change, Energy, the Environment and Water, Australia has the highest uptake of solar globally, with around 30% of homes with rooftop solar PV. Flannery explained that this has delivered freedom from monopolistic markets. He also discussed how non-democratic governments have been using fossil fuels as a tool to suit their agenda, but that as clean energy has become cheaper, democracies have embraced the shift away from their dependency on fossil fuels. This is particularly evident in Europe, where the European Union has vowed to cut its reliance on Russian fossil fuels by 2027 by scaling up renewable energy4. Flannery sees fossil fuels becoming more enmeshed in the political struggle and that Australia stands to benefit from its abundant supply of clean energy, such as wind and solar.
We are in the ‘box seat’ to meet the growing demand for commodities
As well as being blessed with cheap, clean energy, Flannery touched on the benefits Australia will likely reap from its abundance of mineral resources. “Everything is set for Australia to make the best use of those resources and carry out initial manufacturing processes in Australia using clean energy.”
Flannery discussed the advances that have been made in steelmaking in the last few years and how Thyssenkrupp, one of the world’s largest steelmakers, has recently announced that it will be replacing its coal-fired blast furnaces with new direct reduction systems. He believes the direct reduction process is particularly suited to Australia’s iron ore types. New direct reduction processes, such as that used by Boston Metal, uses electricity as a primary input, completely eliminating the need for coal in steel production. This process differs from the hydrogen-based process, which he explained is not as efficient in its usage of heat energy. “The problem with using hydrogen in a blast furnace is that the by-product of hydrogen is water, and this robs the blast furnace of heat energy.”
"Our research shows wave energy could contribute up to 11 per cent of Australia’s energy (enough to power a city the size of Melbourne) by 2050, making it a strong contender in Australia’s renewable energy mix.” CSIRO, 2022.
The last great barrier is storage
While lithium ion batteries perform well, Flannery feels their potential for long-term, large-scale storage may not be as significant as some are expecting. “There are likely to be alternative solutions that will provide us with the grid stability we need.” He touched on various technologies that show great potential, specifically wave energy and sand batteries. “Southern Australia has some of the best wave energy assets in the world, and the trialling of a wave energy generator on King Island for the past 12 months has shown huge potential.”
He referred to a recent study by CSIRO (The Commonwealth Scientific and Industrial Research Organisation), which suggests that wave energy technology could reduce our dependence on batteries by a considerable amount. Another alternative solution are sand batteries, which have been deployed at scale in Finland. A sand battery is a high temperature thermal energy storage that uses sand or sand-like materials as its storage medium5. “Sand batteries are very efficient because sand is a marvellous thermal insulator, so it can store heat energy at very high temperatures for months.”
The real engine of change is society, business, and capital markets
Looking to the future, Flannery explained that the Government has a critical role to play in setting targets, particularly as the trajectory to net zero is now so steep. He believes that market mechanisms, such as carbon pricing, will likely be insufficient, and that the real engine of change will be society, business, and capital markets. He explained that if capital is not deployed efficiently, it is unlikely we will get to where we need to go. “Capital is the key theme that makes everything turn round. I suspect that capital will be scarce for those very large projects, so it needs to be allocated wisely to those projects and approaches which show the best chance of paying off and making the change we all want to see.”
Many asset owners underestimate the scale and direction of change we are going to see
While some of the problems associated with climate change still appear distant on the horizon, Flannery believes that it is important to take a precautionary approach. We know what the impacts of climate change are likely to be and we have an idea of timelines, so by taking a precautionary approach, we can start planning now for something that may occur in time to come. That way, investors can conserve the value of their assets and act wisely. “Sometimes you can act too early, which is a risk – but looking over the whole trajectory with climate, that’s a lesser risk than waiting too late.”
You can watch the video with Professor Tim Flannery on the website. To learn more about how we can help you build resilience into your portfolio and capitalise on the opportunities, speak to your investment adviser.
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1 Statista n.d., Annual CO2 emissions worldwide from 1940 to 2020.
2 Project Drawdown n.d., https://drawdown.org/
3 Institute for Energy Economics and Financial Analysis 2021, Zero to 60% in 14 years - South Australia's success in transitioning to renewables.
4 European Commission 2022, REPowerEU: Joint European action for more affordable, secure and sustainable energy.
5 Polar Night Energy n.d., Sand Battery.
