‘I think the big change from 20 years ago, was that at the time there was limited knowledge in the community about climate change as an issue.’, says Tim Nelson, Executive General Manager, Energy Markets for Iberdrola (formerly Infigen Energy), one of Australia’s leading energy economists. ‘Increasingly, people who were young or at school at that time are in the workforce. They are forming the base of companies and civil society and they are far more aware of the long-term detrimental impact of climate change and demanding action from governments and civil society leaders and business.’
No longer a ‘hundred-year’ weather event
A recent study by the World Meteorological Organisation (WMO) found that over the past 50 years a weather or climate-related disaster has killed 115 people globally and caused losses of US$202 million every day. Together, that accounts for over 11,000 reported disasters due to weather, climate, and water extremes, over 2 million deaths and US$ 3.64 trillion in losses.
Even if we go back to just 2019/2020, and the catastrophic bushfires in Australia, the world watched as people huddled around waterways trying to escape the fires. We’ve seen the fires rage through the Mediterranean this year. The Dixie Fires swept through California becoming one of the largest fire in the state’s history burning through over 3900 kms in the Sierra Nevada mountains in October. We’ve seen floods in Germany that left over 180 people dead. Record heat in the Americas earlier this year saw temperatures soaring to 54C.
‘Wil Anderson has a line in his stand-up routine, where he says, ‘In my day, a once in a hundred-year weather event actually happened once every hundred years’. So, there is a much greater level of awareness and of experience. There is also a greater level of opportunity for de-carbonisation due to technology improvements as well as more awareness of the stranded asset risk that is created by countries sticking their head in the sand. Australia is probably the most vulnerable to sticking its head in the sand. I often say to people, it doesn’t really matter what Australian politicians say about the future of coal and gas. What matters is whether the current overseas buyers of those products continue to want to buy them. Because of their own domestic political pressures, many of our top trading partners for those commodities have signalled that they do not want them in 2040 or 2050.’
‘If Australia were a company, then the rational response would be to start pivoting now. You wouldn’t want to wait and then suddenly face structural change because that would bring a whole bunch of problems. But progressively shifting over time brings you great opportunity to minimise the impact to communities and workers and focus on a just transition. It also gives you plenty of time to think about what the new industries look like in a carbon-constrained world. Australia is really blessed because it has lots of solar, lots of great wind resources, lots of prospects in the longer term for green hydrogen, green minerals and other low-carbon industries. We are going to need a lot of the things that Australia can produce to make the products that are required to decarbonise.’
Tim also notes that the UNFCCC process had mainly been a top-down framework until the recent evolution of Nationally Determined Contributions (NDCs). ‘The innovation at the Paris summit six years ago was that it became much more about countries building commitments together from the bottom-up, through the nationally determined contributions and ratcheting these commitments up over time. It was facilitated by greater political pressure within each country requiring political leaders to show up at these events with a much higher level of ambition and commitment.’
What is a just transition?
Even as ambition and commitment grow, the other discussion that is becoming front and centre is that of a just transition. While the imperatives for the net-zero transition are in our face, there are also equally compelling narratives for a just transition. ‘When I think about a just transition, I think it is aimed at ensuring that nobody is left behind because of the transition away from emissions-intensive activities to non-emissions intensive activities. For example, there are communities in Australia that are heavily reliant on carbon-intensive goods — coal mining communities, gas exploration and production communities. And it is not just the workers. It is all the downstream and upstream activities that occur. The person who owns the local earthmoving company, or the person that does the fencing. There is a whole bunch of industries that are built in and around these communities. And they’ve all got partners and children and parents. There is a reliance on these emissions-intensive products and commodities to generate economic activity for the area.’ It would be grossly unfair, Tim says, for the rest of Australia to say, well as this transition happens, we’re going to throw you to the wolves and not ensure that your living and livelihood are not detrimentally impacted. We want to help communities through the transition.
Another side of the just transition is the impact on individuals who may not have the resources to make their own personal transition to net zero. The classic example is the access to solar PV to green their own homes. The number one barrier to people taking up solar PV on their rooftops, is whether they own their own homes. So straight away, Tim points out, there is a huge issue right across Australia as we go through a housing crisis, and housing affordability increasingly becomes an issue around generational inequality. ‘So, you’ve got a group of people who can’t participate and can’t extract those benefits from changing their energy consumption.’
‘What just transition really means is that the costs that we incur as we transition or as we adapt aren’t just borne by those who are directly affected by it but are borne by all of us in a fair way. Likewise, the benefits can then be distributed across the broader community as well. So, it’s really focussed on how we make sure people don’t get left behind and that includes individuals, communities, workers, and all of the people who may be affected by the transition.’
Driving positive action
It is important that organisations, companies, and governments stay focused on a transition rather than doing things unnecessarily rapidly which could have some unfortunate outcomes for parts of Australia. ‘For instance, can we transition to 100% renewable energy in the next three years? We probably could. But would the costs of that be significant because of the compression within a three-year period? It probably would. Would we get a better outcome if we planned to do this over a decade? Absolutely.’ This Tim notes is a little bit like divestment which he points out is a very blunt tool. ‘If I withdraw capital from an organisation that is not performing very well on an emissions score, the question I need to ask myself is how is that going to affect fundamental change. Rather than focusing on divestment, I would encourage people to be far more focussed on what they should invest in that would generate a positive return and a positive result for society.’
For example, if more capital is made available to companies doing R & D and commercialisation of better storage or electric vehicles or new technologies, that allow us to generate and use energy more efficiently, then that positive action can lead to change that will drive more of that substitution in the market structure, more quickly. ‘If everyone withdrew all their capital today from oil and gas and coal companies, it would force the price of coal and gas up but there is no existing substitute ready to go. There needs to be a gradual withdrawal of capital from those sectors and a continuous injection of capital for sectors that will provide the solution. We still need electricity. At present electricity is powered by many different types of technologies. Can we complete the transition in 10 years? Absolutely. Could we complete the transition in 18 months? Not without very significant disruptive impact on many communities.’
Governance leaders must plan the evolution of the business model
From a governance perspective, company directors need to think about what the plan and the evolution of the business model is. In the short term, Tim says, offsets may be reasonable way of moving forward for some industries. Aviation for instance. It is probably reasonable given the lack of substitutes for aviation at the moment, to look to offsets in the short to medium term. ‘The question really is what is the plan for the long term? How are you structuring your business and looking through the lens of strategy and governance and reporting? How are you communicating to your stakeholders that you have a meaningful plan to move from offsets to real abatement to new technologies. That I think is where offsets really have a role. Where they don’t have a role is in sectors where cost-effective abatement mechanisms exist today.’
In his role, as the Executive General Manager, Energy Markets at Iberdrola, Tim has been working with BHP in South Australia to provide them with a 100% renewable energy option for their Olympic Dam site. Olympic Dam has some of the world’s richest copper deposits. As such the reduction of emissions for mining operations will then make the site a sustainable producer of a commodity that is significant for achieving global emission reduction objectives. ‘I think this type of positive action should be focussed on by investors and stakeholders. If the company had elected to purchase offsets, then that would have been questionable, when there are real options for abatement in the electricity sector, to purchase renewable energy as they have done. So again, offsets have a role, but more in the sectors where there are very challenging circumstances, and the technology is not available yet to reduce emissions in a meaningful way.’
Tim says our National Greenhouse and Energy Reporting (NGER) Framework is an excellent one and overseen by one of the most highly regarded regulators in the world — the Clean Energy Regulator (CER). ‘The framework is very useful in providing information for stakeholders about what scope 1, scope 2 and scope 3 emissions look like. I think the TCFD then gives you a framework for how you communicate that information in a meaningful way. What is your strategy? How does it integrate with your risk framework? What are the metrics that you are disclosing to your stakeholders? How are you aligning that with your executive remuneration? And how is that meaningful?’
Tim also encourages directors, officers and companies to look at the emerging transparency framework that the Clean Energy Regulator is putting in place. This he says is a very useful framework for disclosure. ‘When you say that you are 100 per cent carbon neutral, where are you buying the certificates from? What are the certificates representing? Are they representing a unit of new renewable energy? Or are they representing a methane flaring project somewhere in the developing world? Because those two things are very different from a consumer or risk perspective.’
Ultimately, climate change is a stock issue. It is about how much emissions have already been produced. And most of that has been emitted by the wealthy countries. ‘It is true to say that some of the less wealthy nations have rapidly caught up with their annual emissions. But the historical accumulation is largely due to countries like Australia, the US and European nations. That is why it is our responsibility to take it far more seriously and take urgent action to reduce our emissions.’