The legacy of Australia’s bushfires
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It’s impossible not to be moved by the human and environmental disaster wreaked by recent fires across so much of eastern and southern Australia. For those of us outside the country, the harrowing images on television and the internet tell only a fraction of the story. Through the incredible dedication of Australia’s firefighters – both professionals and volunteers – and recent rainfall, the bushfires mercifully now appear be coming under control.
The underlying reason for the severity and duration of this summer’s bushfires was not a lack of preparedness. Australia is arguably the most prepared country on earth in terms of wildfire prevention and control. The reason was weather. With average maximum daytime temperatures some 2.1 degree Celsius above average and rainfall 40% lower than normal, 2019 was both the hottest and driest year in Australia’s recorded history. A perfect storm.
Inevitably, the debate on Australia’s response to climate change has rapidly ascended to the peak of the national political agenda. With muddled climate change commitments, Australia remains one of the highest per head emitters of carbon globally. Aiming to ‘meet and beat’, CO2 emission reduction goals sounds great but is less impressive when those goals are modest to begin with.
Australians know this and given the conditions that created this summer’s bushfires, more and more are now urgently demanding action on climate change from their politicians.
Time for (some) change?
I’ve spoken with all sides of the debate in Australia and I’m increasingly convinced there will be movement in the current administration’s climate change stance. Put bluntly, this will come despite the Coalition government winning the last two general elections on a climate policy ticket of doing as little as possible on emissions, while supporting growth in the extraction industries.
Earlier this month, Prime Minister Scott Morrison discussed his views on the bushfires and potential change in climate policy in a half hour interview with ABC. While being open to amending policy and reducing emissions further (to ‘meet and beat’ the 26-28% reduction target by 2030), the Prime Minister stressed he will only do so with balanced consideration for Australia’s broader economic interests. Put bluntly, jobs come first.
The Prime Minister also clarified that there will be no resuscitation of Australia’s previously abandoned carbon tax proposals. The government will achieve its policy goals ‘without a carbon tax, without putting up electricity prices, without shutting down traditional industries upon which regional Australians depend for their very livelihood’, the Prime Minister said.
To understand this position, it’s critical to remember just how much revenue Australia’s natural resources and energy exports generate (and employment in the key swing state of Queensland). An increasingly important component of Australia’s economy, in the 2018-19 fiscal year mining and resources represented almost 10% of GDP.
And this contribution is continuing to rise. The Office of the Chief Economist had projected that resource and energy export earnings, dominated by coal, iron ore and LNG, will reach a record A$285 billion in the financial year 2019–20. Pretty impressive, though weaker commodity prices and the coronavirus outbreak will likely dent this number.
Policy response- Domestic emissions coming into focus, but not Scope 3
Given the obvious importance of export revenue to Australia’s economy, I expect future policy efforts on climate change to be largely restricted to domestic consumption and emissions (a fraction of what Australia produces and exports). This will likely continue whatever the outcome of the 2022 general election. Revenue generation from exports is just too critical to both federal and state budgets for whoever forms the next government to disrupt.
This means that in Australian environmental policy, much of the Scope 3 emissions, i.e. those released through end-use, become the responsibility of countries to which Australia’s resources are exported, not the producer within Australia.
This is now happening. Mining projects in New South Wales are set to have this key uncertainty removed, with the state government looking to legislate against Scope 3 emission considerations for coal project development approvals. In the case of Glencore and Peabody’s United Wambo project, approval was provided subject to a condition that coal is sold to countries that are signatories to the Paris Agreement.
Similarly, in its approval of the Rixs Creek Continuation Project, the New South Wales Independent Planning Commission concluded that Scope 3 emissions are the end customer’s responsibility.
It is worth noting, however, that a number of the major mining companies are unilaterally taking a proactive approach on Scope 3 by seeking to influence emissions reduction across end-use products. In FY20, BHP for example intends to set Paris-aligned public goals related to Scope 3 emissions.
As ESG investing accelerates, who is going to fund coal?
Government support for natural resources in Australia may not be evaporating, but capital to develop new projects is a different matter. Securing investment for coal projects is becoming far tougher, particularly for thermal coal, as banks and investors agree stricter ESG criteria in response to shareholder pressure.
Some are going further. The world’s largest money manager, Blackrock, has announced it will no longer invest in companies that derive more than 25% of revenues from thermal coal in response to what it sees as ‘a fundamental reshaping of finance’ to address the threat of climate change.
Many of the banks I have spoken to rule out investing in ‘new projects’ or ‘new customers’, though notably will continue to support existing clients and assets. And most are still open to metallurgical coal projects.
Australia will recover from its devastating bushfires; it’s that kind of country. But I suspect for its politicians at least, things will never quite be the same again.
APAC Energy Buzz is a blog by Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.