The big picture


Australia’s commitments under the Paris Agreement

In December 2015, the parties to the United Nations Framework Convention on Climate Change adopted the Paris Agreement: a landmark agreement to combat climate change and take steps to shift their economies towards a sustainable, low carbon future.

The purpose of the Paris Agreement is to hold the increase in global average temperature to ‘well below 2°C above pre-industrial levels’. The Paris Agreement also sets an aspirational target of a 1.5°C limit. The parties also aim to reach carbon neutrality (ie achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases) by 2050. The Paris Agreement is grounded in the idea of common but differentiated responsibility. It requires parties to communicate nationally determined contributions (NDCs), which are publicised intended reductions in greenhouse gas emissions, specific to each participating nation. These NDCs will be reviewed at five-year intervals, enabling parties to demonstrate a progression and increased ambition over time. The Paris Agreement has no mechanism for enforcing compliance against parties – rather it relies on transparency to incentivise ongoing participation in the framework it creates.

Australia’s Intended NDC, which the Federal Government published in August 2015 in advance of the Paris Agreement being adopted, committed Australia to implementing an ‘economy-wide target to reduce greenhouse gas emissions by 26 to 28 per cent below 2005 levels by 2030’. Australia has, however, qualified its targets by reserving the right to adjust its target ‘should the rules and other underpinning arrangements of the agreement differ in a way that materially impacts the definition of our target’. Australia has not made a commitment in relation to carbon neutrality for the second half of this century.

Subheading

The Federal Government outlined its approach to action on climate change in the Climate Solutions Package, published on 25 February 2019. This is a continuation of its direct action policies and promises direct investment in low-cost emissions abatement technology and clean energy through a climate fund. Federal Energy and Emissions Reduction Minister Angus Taylor has also flagged the development of a technology roadmap which will guide government investment in clean technology solutions. The focus of the investment will shift away from wind and solar, which Angus Taylor now considers to be ‘commercially viable”, to storage and grid integration technologies. In addition to these policies, the Federal Government is seeking to rely on carry over units from the Kyoto Protocol (the targets for which Australia had managed to exceed). This practice was the subject of extensive negotiation at the Conference of the Parties to the UNFCCC in Madrid in December 2019 (COP25). Several groups of countries opposed the practice which Australia was proposing to adopt, although the issue was not resolved at COP25. State governments, by contrast, have made more aspirational commitments, with all states and territories adopting a target of net zero emissions by 2050. Similarly, the Federal Labor opposition has adopted a 2050 goal of net zero emissions, a position supported by the Business Council of Australia and the Australian Industry Group. Third party research institutes, including Climate Action Tracker, have rated Australia’s (as well as many other nations’) commitments as being incompatible with a 1.5°C or 2°C limit.

Key risks and opportunities

As with all areas of policy, the current Federal Government’s approach is subject to change. We also note it is not comprehensive as there is no clarity on the country’s commitments post-2030. However, Australia’s climate policy landscape presents considerable risk due to: the diverging climate change policies of Australia’s two major political parties;

  • the increasing divergence between the Federal Government and developments at state and territory level, where schemes incentivise investment in certain areas and there is widespread legislation for zero carbon futures;
  • other countries, including the UK, calling on countries not currently committed to carbon neutrality by 2050 to deepen their commitments to combatting climate change;
  • the EU indicating it intends to use trading arrangements (including a free trade agreement, and potential border tax adjustments) to pressure Australia to deepen its commitment to carbon abatement;
  • shifting public opinion on climate change and demands for more expansive action on climate change from the Government are increasing in regularity and force;
  • the business community, which is facing an increasingly complex legal framework in relation to climate change risk and governance, is beginning to take the lead on climate change risk management. To an extent, this leadership appears to reflect a business imperative to future-proof businesses in a country where the policy framework lacks long-term certainty; and
  • the shape of any post COVID-19 economic stimulus and recovery plan.

The Federal Government’s current Direct Action Plan for managing climate change involves establishing funds or grants to support projects and emerging technologies which contribute to reducing carbon emissions. These present opportunities to businesses that can avail themselves of funding or other incentives. A further opportunity exists for agile businesses – the law in this area is changing rapidly and nimble businesses which can change the way they work quickly and efficiently to navigate the changing environment will be better placed. For example, organisations will be able to benefit from incentive schemes if they are able to spot opportunities early and adapt. Similarly, businesses which prepare early for likely regulatory reform may be placed at a competitive advantage over peer organisations if incoming regulation restricts their business in material respects.

Asking the right questions

  • Based on the available data, is your organisation’s investment strategy aligned with the Paris Agreement’s 1.5°C warming target, and the goal of reducing emissions to net zero by 2050?
  • Should your organisation consider adopting a ‘shadow’ carbon price to mimic the effect of the domestic implementation of the Paris Agreement’s 1.5°C warming target?
  • Has your organisation considered what opportunities may be presented to your business by the Paris Agreement (and domestic emissions abatement policies)?
  • Does your organisation’s board and executive team have sufficient support and resources to enable it to ‘horizon scan’ and identify early any key regulatory shifts which may have business model implications for your organisation, and consequential costs and expenses?
  • Increasingly, the private sector is playing a greater role in shaping energy and climate change policy due to demands from stakeholders and changes in other aspects of regulation. Does your organisation have a clear idea of the climate change policy expectations of its peers, competitors and stakeholders, including investors, lenders, suppliers and customers?
  • Should your business participate in the public debate on climate change, through industry groups and robust corporate reporting, to advocate for future federal and state government policy aligned with your organisation’s objectives and strategy?
  • Would any such engagement be compatible with the policy expectations of your organisation’s key stakeholders and peers?
Australia’s directors nominated climate change and energy as the top issues they want the Federal Government to address in both the short and long term.

Australian Institute of Company Directors, Director Sentiment Index: Research Findings Second Half 2019 (October 2019) (presenting the results of a survey of more than 1,200 company directors)

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