Aus emissions: output or intensity - part one

In the Paris Agreement, Australia committed to reducing its greenhouse gas emissions by 26-28 per cent on 2005 levels, by 2030. 

Under the Government’s current policy to use carry-over credits from the Kyoto Protocol - a previous treaty - Australia is on track to achieve the lower bound of its commitment. However, the Conference of the Parties (COP25) in Madrid in December 2019 did not confirm that Australia would be able to use carry-over credits. This decision has been postponed until COP26 in Glasgow in November 2020. 

"In the absence of new technology take-up over and above what is already factored into the projections, further policy action may need to be taken.”

In 2018-19, Australia’s greenhouse gas emissions were 532.0 million tonnes of carbon dioxide equivalent gas (Mt CO2-e). This was 0.1 per cent lower than 2017-18 and 0.4 per cent lower than five years ago, when the carbon pricing scheme was repealed.

Emissions from industry and households - excluding land use, land use change and forestry (LULUCF) - were 551.3 Mt CO2-e in 2018-19. This was 0.1 per cent lower than 2017-18 but 4.8 per cent higher than 2013-14.

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Not close enough

The Government’s emissions projections, as at December 2019, estimated that without carry-over credits, Australia’s 2030 emission levels will be 16 per cent below 2005 levels. This projection takes into account policies including the Emissions Reduction Fund, Climate Solutions Package, Large-scale Renewable Energy Target and the Small-scale Renewable Energy Scheme, and energy performance, refrigeration and air conditioning measures. It does not take into account the impacts of potential future policies and measures, particularly the electric vehicle strategy.

Stronger technology uptake would move Australia closer to the 26-28 per cent target but still undershoot it, according to the Government’s sensitivity analysis of the current projections.

Despite this, Prime Minister Scott Morrison has said, with regard to the use of the carry-over credits, that Australia might be “in the position where we don’t need them”.

The Paris Agreement also prescribes that countries communicate their targets every five years and that each successive target should “represent a progression beyond the previous one and reflect the highest possible ambition”. As the impacts of climate change from anthropogenic greenhouse gas emissions materialise, pressure is building, in Australia and globally, to reduce emissions more quickly.

When asked whether the Government would consider changing its 2030 target, Prime Minister Morrison has said, “we want to reduce our emissions and do the best job we possibly can and get better and better and better at it”. In the absence of new technology take-up over and above what is already factored into the projections, further policy action may need to be taken.

As the Government has said it will not put the economy at risk to cut emissions, ANZ Research assumes the intent would be to implement policies that limit the direct impact on economic output. As total emissions are the product of the level of output and emissions intensity, this implies deeper cuts to intensity would be required.

Slowing progress

Although overall emissions intensity has fallen by 40.2 per cent since 2004-05, progress has slowed in recent years.

 Emissions intensity fell by 2.5 per cent year-on-year on average in the five years to 2018-19; half the average 5.2 per cent year-on-year fall of the previous five years (including LULUCF). Ex-LULUCF, emissions intensity fell 1.5 per cent year-on-year, on average, in the past five years, compared with 3.2 per cent year-on-year over the previous five years.

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Australia’s emissions per capita (ex-LULUCF) are the highest in the Organisation for Economic Co-operation and Development (OECD).

OECD data for 2017 shows Australia’s per capita emissions were:

• 14 per cent higher than the US;
• 16 per cent higher than Canada;
• 31 per cent higher than New Zealand;
• 217 per cent higher than the UK; and
• 327 per cent higher than the lowest per capita emitter, Sweden.

Including LULUCF, Australia is the second-highest emitter per capita after Iceland.

Australia’s reliance on coal-fired electricity, high use of cars and air travel, and the scale of the agriculture industry are key reasons for its high per capita emissions.

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Australia’s per capita emissions have been trending down since the mid-2000s. However, over recent years, per capita emissions have not declined as quickly as they did during the late-2000s and early-2010s.

Per capita emissions fell 1.6 per cent year-on-year on average in the five years to 2018-19, compared to 4.2 per cent in the previous five years (inc-LULUCF). Ex-LULUCF, emissions per capita fell an average of 0.6 per cent year-on-year in the past five years, compared to 2.1 per cent year-on-year in the previous five years.

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Deeper cuts

The 40.2 per cent fall in emissions intensity since 2004-05 has only achieved a 12.9 per cent fall in total emissions - and total emissions are ultimately what matters. Ex-LULUCF, emissions intensity has fallen an estimated 27.5 per cent and total emissions have risen by 5.7 per cent over the same period.

So if Australia does not use carry-over credits under the Paris Agreement or if it sets itself more ambitious reduction targets, deeper cuts to emissions intensity will be required. In this case, as the industries with the highest emissions intensities, utilities, agriculture, mining and transport would likely be the focus of additional policy intervention.

The electric vehicle strategy should put downward pressure on transport emissions intensity, but it is unclear how soon and by how much. Mining emissions intensity is expected to continue to rise rather than fall in the near-term. In this case, greater investment in carbon capture and storage could balance lower emissions intensity with sector growth in the medium-term.

Further support for renewable electricity generation, transmission and storage could significantly and sustainably lower emissions intensity. In addition, renewable energy offers substantial investment and export opportunities.

Catherine Birch is a Senior Economist at ANZ