Decarbonising our export mix is both a major opportunity and a significant challenge for Australia. Our prosperity is founded on trade; and 80% of Australia’s exports are to countries that have made pledges to get to net-zero by 2060. Moreover, the momentum to decarbonise is growing. More than 2,250 companies have committed to meeting science-based targets for emissions reductions—up from just 215 in 2018. Capital markets and consumers are sending similar signals. Australia is an island, but we can’t separate ourselves from global currents.
Going “carbon light” will not be easy. Australia is a carbon-intensive economy, producing the second-highest emissions per capita in the G20 (after Saudi Arabia). In addition, much of our economy is in high-emissions sectors. Major exports include coal, iron ore, gas, gold, beef, and aluminum oxide.
That is why it will take courage, and a willingness to leverage our innovation capacity, to put Australia firmly on the carbon light path: up-ending the status quo is not for the timid.
And that brings us to the critical question: How can Australia seize the decarbonisation momentum? To answer that question, let’s look specifically at energy, which is the largest single contributor to emissions, and which affects every aspect of the global economy. There are five major areas where Australia can excel.
Producing and exporting green energy. About 60 percent of Australia’s current electricity mix is coal- or gas-powered, but new generation capacity from renewable sources is now cheaper, and investment is accelerating. Renewable energy will help decarbonise Australia’s transport, building, and industrial sectors. There will also be opportunities to export. Trading partners in East and Southeast Asia do not have the space, climate, or geography to generate all the green energy they need. In Japan, for example, the generation cost of renewable energy is likely to be double the cost of Australia’s. McKinsey estimates that Japan, Korea, and Taiwan are likely to meet 20–40 percent of their total power demand with imported green energy. With the right investment, Australia could reasonably expect to capture a 20 percent share—an export opportunity of $15 billion–$20 billion a year for those three markets alone.
Reconfiguring energy-intensive industry. In a decarbonised world, energy-intensive heavy industries will need to decarbonise their fuel sources while capturing and storing residual emissions. Given our strengths in raw materials, renewable energy, infrastructure, and skills, Australia is well placed to be a global leader in producing low-emissions iron, steel, alumina, and fuel.
For example, automotive companies are making substantial commitments to decarbonise. Australia’s low-cost renewable energy, bauxite and iron ore deposits and existing infrastructure creates the opportunity to produce significant amounts of green aluminium, green iron, and green steel for the global market.
Producing the minerals needed for a net-zero future. The shift to renewable energy is creating a new demand mix for natural resources. For example, as electric vehicles (EVs), wind power, and solar cells scale up, demand is rising for nickel, lithium, copper, and rare earths. Australia is well placed to supply and – using our low-cost energy advantage – process more of these minerals.
Innovating to discover new energy solutions. Transitioning to a decarbonised energy system will require rapid innovation in the way we generate, store, and distribute energy. From more efficient electrolysis cells to make hydrogen to novel forms of heat storage, Australian firms are innovating and discovering new and more efficient ways to provide affordable and reliable green energy.
Exporting decarbonisation and climate adaptation services. Australia is building capabilities in decarbonisation, sequestration, and adaptation. With investment and promotion, these could become globally significant. Specific opportunities will play out across the emissions value chain. Consider financing: industrial players will require green loans and equity issuances to develop decarbonisation technologies; transport businesses will need capital provision and leasing or financing arrangements to support the charging and fuel infrastructure EVs will need; and power and infrastructure players will require investment to enable the transition to net-zero. Financial institutions can also help businesses of all kinds manage climate-related financial risks through the creation of sectoral models, climate-risk stress testing, and enterprise risk management frameworks.
These are profound changes and will require extraordinary amounts of capital. The first three opportunities alone could add $75 billion to the economy each year, and up to 120,000 direct new jobs. Importantly, many of these jobs can be created in communities which will be most affected by our trading partners’ shift to low-emissions energy and materials. For example, in the coal and gas industries drivers, machine operators, and maintainers will have skills transferable to renewable-energy production, minerals processing, and hydrogen.
Australia has stable governance, export infrastructure, a sophisticated financial system, abundant natural resources, and a wealth of human capital. Plus, we have land to spare and strong trading links to the world’s fastest-growing region. Helping the world reach net-zero is well within our considerable capabilities.
Moreover, we have demonstrated the ability to adapt. In the 1980s, Australia undertook substantial economic reforms. In the 2000s, it built a world-class liquefied natural gas industry from scratch. Now it is time for another big change—going carbon “light”.
Decarbonisation will revolutionise the global energy market like nothing since Edison’s lightbulb. The energy transition has begun, and Australia can neither stop or control it. What is within our control is how we manage the transition—and whether we capture the opportunity to provide the new energy and materials the world requires. Australia has the endowments to prosper – but they are not unique, and others are moving. Companies that move quickly to reallocate capital across their portfolio, build green businesses, capture market share and price premium with sustainable products, decarbonise their operations and create a compelling brand and reputation can thrive.
Fortune—in the form of new economic opportunities and a healthier environment—truly will favour the bold.
David Dyer is a Partner and Leader in McKinsey & Company’s Sustainability practice.
This opinion editorial was originally published by The Australian.