Building on Australia’s potential
The Business Council of Australia (BCA) is committed to affordably and reliably achieving net zero by 2050 and supports the setting of ambitious but – importantly – achievable 2035 targets on the pathway there.
BCA members cover every part of the economy, from resources, energy, manufacturing and agriculture, to transport, technology, telecommunications, professional services, banking and health.
This report was developed with a bottom-up analysis and takes an investment approach based on current costs and technologies. It is focused on what business needs to do, with the right policies, to shift to a decarbonised economy.
It analyses the different emissions reduction scenarios and examines the policy levers needed across seven key sectors: electricity and energy, resources, transport, industry, buildings, agriculture, and land (land use, land use change and forestry). This report does not capture the longer-term costs of climate inaction or economic benefits of new investment, though the Business Council recognises these are critical inputs to the net zero challenge.
It finds that on the current policy course, Australia can achieve around a 50 per cent reduction by 2035 with progress on project approvals and the building of energy infrastructure.
From there the report highlights the different pathways required in order to deliver target ambition ranging from around 50 to around 70 per cent emissions reductions by 2035. Those pathways include fixing the EPBC Act, significant capital investment and further enabling reform. It also shows the higher the target, the greater the effort required.
Among the most important challenges and opportunities facing our nation is facilitating an orderly transition to net zero by 2050, that best serves our economy and our community. The choices we make now will have significant impact on our productivity growth, our competitiveness as a nation, and living standards now and into the future.
The BCA’s analysis is designed to inform the national discussion on Australia’s next NDC, ensuring ambition is matched with a clear, practical plan to deliver.
Background
In signing the Paris Agreement, Australia has committed to doing its part to limit global temperature increases to well below 2.0°C (and pursue efforts to limit temperature increases to 1.5°C) by reducing its emissions and achieving net zero by 2050. The BCA fully endorses Australia’s participation in the Paris Agreement and fully supports Australia’s climate legislation enshrining this participation.
Simply getting to net zero in the year 2050 will not be enough to limit global temperature increases to well below 2.0°C. An often overlooked fact is that the world economy must do so within the available emissions budget set by the Intergovernmental Panel on Climate Change between now and 2050. This is why interim emission reduction targets are so critical.
Among the most important challenges and opportunities facing our nation is facilitating an orderly transition to net zero by 2050 — one that best serves our economy and our community. How we transition will have a strong bearing not only on our emissions levels, but on our productivity growth, our competitiveness as a nation and living standards over the longer term.
Transitioning the economy presents an opportunity for Australia to develop new, competitive green export industries. The rate and pattern of global decarbonisation is uncertain and influenced by a great many factors well outside Australia’s control. Our economy and its variously integrated sectors need to be ready to leverage the upside of global decarbonisation.
Escalating global uncertainty means that fundamentals like cost of living and national security are front of mind. The transition represents both challenges and opportunities at the household level, including on the cost and reliability of energy, on the way we use our land, on our patterns and modes of travel, on existing and new product choices, on the type and quality of jobs and on the wages received for doing those jobs.
Australia’s 2035 emission reduction target needs to be both ambitious and achievable if we are to continue to do our part under the Paris Agreement while also serving our economy and our community. This is an enormously complex and important public policy issue and understandably there is a range of views about how best to strike this balance between ambition and achievability.
We hope that this report can make a valuable contribution in this regard.
Purpose
The purpose of this report is to inform the debate about Australia’s emission reduction potential and to be constructive in the process for determining Australia’s 2035 target settings under the Paris Agreement.
As an informative piece, this work is not prescriptive about the appropriate settings for Australia’s 2035 emission reduction target. In our view, Government is best placed to consider the wide range of advice from different stakeholders, including its own agencies, and to integrate this advice with other national policy priorities in determining the most appropriate target settings for Australia.
With this in mind, the BCA has taken an investment perspective when assessing Australia’s emission reduction potential from 2025 to 2035. To support this, McKinsey & Company (McKinsey) was engaged by the BCA to develop a ‘bottom up’ analysis (evidence base) to frame Australia’s emission reduction potential to 2035. This analysis included extensive stress testing of technology cost and effectiveness assumptions, and real world barriers and enablers to the deployment and adoption of technologies by businesses across the economy.
Our approach is based on an assessment of potential investments in currently available technologies, and on current technology cost projections — site by site and asset by asset in some cases — to build up a picture of Australia’s emission reduction potential over the next ten years. We acknowledge that there is always the possibility of new technologies emerging and cost reductions in existing technologies over the next ten years, that have not been captured by our approach. Positive technology surprises in this regard could increase Australia’s emission reduction potential.
Put simply, this analysis is intended to estimate the investment costs associated with different levels of 2035 target ambition and to identify the critical areas where new or augmented policies are required to deliver on those different levels. We note that in some cases there are operational cost savings over time associated with new capital investment.
To be clear, we have not attempted to include any longer term considerations for the Australian economy in this 10 year analysis — in terms of the costs of climate inaction and climate impacts. Nor does this 10 year analysis attempt to measure GDP benefits associated with new investment in the economy. However, we fully recognise that these considerations are a critical part of this net zero challenge. The BCA’s 2021 report, Achieving a net zero economy — a ‘top down’ analysis of all costs and benefits to the Australian economy from 2020 to 2070 — does include the costs of climate inaction and climate impacts and the GDP benefits associated with new investment in the economy.
The evidence base presented in this report includes three emission reduction scenarios from 2025 to 2035 that ratchet in ambition based on rates of technology deployment and adoption, and changes in economic activity across the electricity and energy, resources, industry, transport, agriculture, buildings and land sectors of the economy. It also includes the identification of key cross cutting enablers and critical unlocks for achieving emission reductions across these seven sectors.
At the commencement of this work the most recent emissions inventory available for Australia was the National Inventory Report 2022. We note that Australia’s emissions are slightly higher in the National Inventory Report 2023. We also note that Australia’s most recent quarterly emissions projections reveal the return to a downward trend in national emissions. The nature of economic activity means that emissions levels will continually rise and fall slightly across sectors and the national economy in the short term, irrespective of the long term trend in emission levels. The very minor variation between the three emission data sets referred to above is immaterial to this analysis and the findings of the work more generally.
This evidence base is the result of a 12 month collaborative effort between McKinsey and the BCA. While there is general alignment between our two organisations on the evidence base, the views expressed in this report are those of the BCA and as such are not intended to represent the views of McKinsey.
Insights
- While the electricity and energy sector and the land sector have driven the bulk of Australia’s emission reductions over the last two decades, we can’t continue to rely on these two sectors alone to do the heavy lifting forever — all sectors have an important role to play in achieving net zero by 2050.
- The bulk of the emission reduction task to 2035 will fall to electricity and energy, resources and industry with smaller contributions expected from transport, agriculture and buildings.
- While there is potential for scaling up Australia’s land sector abatement substantially beyond the next 10 years, simply maintaining the size of Australia’s existing carbon sink to 2035 — which is at an historical high — requires additional effort.
- Achieving around a 50 per cent 2035 emission reduction target requires ongoing effort and progress — Australia’s current electricity and energy infrastructure build rate remains a significant challenge.
- Achieving around a 60 per cent 2035 emission reduction target would require a significant policy push from governments, and sustained investment actions from the private sector to encourage widespread deployment and adoption of low emission technologies, and to breakthrough bottlenecks in attaining project approvals, social licence and skilled workforce scaling.
- Achieving around a 70+ per cent 2035 emission reduction target would necessitate deeper rates of deployment and adoption for some low emission technologies prematurely, and could risk trade offs in Australia’s export activity and associated carbon leakage, depending on global demand for emissions intensive goods and the effectiveness of carbon leakage policies.
- New capital investment to deliver emission reductions to 2035 is substantial, ranging from $200 billion to over $500 billion for all sectors.
- The economic return for investing in low emission technology and infrastructure is positioning Australia to grow competitive green export industries to offset the decline in our emission intensive exports as the global economy decarbonises.
- The business case for many low emission technologies needs significant additional funding support before these technologies can be deployed and adopted commercially, notwithstanding the possibility of new technologies emerging and cost reductions in existing technologies over the next ten years.
- The efficiency and effectiveness of Australia’s regulatory approvals system needs to improve significantly to enable a rapid acceleration in build rates of electricity and energy and other low emission technology and infrastructure.
- A comprehensive approach to scaling skilled labour capacity through cross industry reskilling, international migration, vocational education and training and university programs, is a critical enabler to the transition.
- While Australia’s 2030 emission reduction target is achieved in all scenarios in this analysis, addressing challenges to achieving the 2030 target is absolutely critical to building the momentum needed to achieve a more ambitious 2035 target.
- Electrification is the largest and broadest decarbonisation lever at our disposal, but the economy also needs natural gas and liquid fuels to transition in an affordable, secure, reliable and competitive way.
- Australia needs a nonpartisan national Net Zero Roadmap to coordinate, prioritise and target action and investment that can unlock its full emission reduction potential.
- If target ambition is not matched with policy ambition, if we do not get the fundamentals right and if we fail to attract the investment needed over the next decade, then Australia risks squandering its green economic opportunity and locking itself into a disorderly and more costly transition to net zero.