Carbon light: How Australia can power ahead in a net-zero world

The global economy is planning on decarbonising fast. Major economies are accelerating their 2030 targets around the 26th United Nations Climate Change Convention (COP26) in Glasgow, given the broad consensus to achieve ‘net zero’ by mid-century. As a relatively high-emission economy in a decarbonising world, Australia has a lot at stake. Indeed, decisions beyond Australia’s control will determine the fate of 95 percent of the 30,000 direct jobs that may be at risk in its key export industries1.

What would going “carbon light” in these industries look like for Australia, and would the upside outweigh the downside? The results are encouraging, perhaps surprisingly so. They have spurred corporate Australia to make a renewed push for the government to take a stronger role in global efforts.

Our research suggests that Australia should aggressively pursue global opportunities, which stand to add around three times the number of jobs to the energy and mining industries than there are at risk and to offer a strong long-term future for the Australian economy.

Climate change is transforming the world’s energy and heavy-industry value chains. If Australia can navigate the environmental damage and supply-chain difficulties that are likely to arise, its natural and institutional advantages put it in a good position. While the transition will not be easy, Australia has made major transitions before, and many of the communities most at risk also have the most to gain from a green transition.

We see three significant opportunities for Australia in energy-intensive sectors alone. Taken together, McKinsey analysis estimates these opportunities would add about AU $75 billion to the Australian economy each year through to 2035, as well as an additional 130,000 direct jobs over the period. They would also help Australia meet emissions targets, significantly boost productivity, and improve economic resilience for the 21st century.

1. Exporting green energy to East Asia

Australia’s high levels of solar irradiation mean that large-scale solar plants can operate at higher utilisation than elsewhere. According to McKinsey analysis, by 2035, Australia should be able to generate renewable energy at around approximately AU $17 per megawatt hour (MWh)—up to 75 percent cheaper than in other countries.

There is a catch: renewable energy is about four times more expensive to transport in bulk as it is to generate, according to McKinsey analysis. That means that Australia’s customers are unlikely to import as much green energy as they might import, say, coal or gas.

However, due to their land constraints, Japan, Korea, and Taiwan will still need to import green energy to meet their goals. Despite the costs of transportation, Australia could conservatively capture 20 percent of their demand—similar to its current trade in natural gas—and generate approximately AU $90 billion to $100 billion in capital investment, approximately 20,000 infrastructure jobs over 15 years, and approximately 30,000 ongoing operational jobs, according to McKinsey analysis.

This investment is now accelerating, with Fortescue Future Industries announcing on October 10 that it will build the world’s biggest hydrogen plant at Gladstone in Queensland near existing aluminium and liquified natural gas (LNG) infrastructure. This should provide the jobs and opportunities that many in the region fear they will lose.

2. Relocating energy-intensive industry

As they expand, the economies of East, Southeast, and South Asia will consume more than 50 percent of energy-intensive products produced worldwide—steel, cement, and aluminium in particular, according to McKinsey analysis. Historically, their production was located near end consumers because materials and fossil-fuel energy were both cheap to transport. But with the greater expense of shipping green energy, future production is likely to take place in the spaces where raw materials and green energy already exist. The economies most likely to succeed are those with resources, land, and geo-sequestration potential, as well as the infrastructure and institutions needed to convert these endowments into economic opportunity—like Australia.

This opportunity could conservatively offer Australia more than 400,000 jobs in the 15-year investment phase and approximately 35,000 continuing jobs, according to McKinsey analysis. Notably, these jobs are located where raw-material and fossil-fuel extraction already occurs. Examples of regional production include hot briquetted iron from the Pilbara, green steel from Whyalla, green aluminium from Gladstone, and Jet A-1 fuel from the Hunter Region.

3. Exporting minerals needed for net zero

The shift to renewable energy is creating a new natural-resource demand mix. Electric vehicles, wind power, and solar cells (and their infrastructure) are forecast to increase in scale by 870 times, 10 times, and 30 times, respectively, by 2060, according to McKinsey analysis. As they do, they will need proportionate amounts of nickel, lithium, copper, and rare earth metals. Australia is uniquely placed to sustainably supply and even process these minerals, which should create 4,000 to 6,000 jobs, according to McKinsey analysis.

Beyond what we have outlined above, there will be many additional opportunities for Australia.

  • The move away from internal combustion engines will create jobs. Today, Australia imports more than 95 percent of its liquid fuels, but the energy for electric or hydrogen-powered electric vehicles will be generated onshore, creating local jobs and increasing fuel security.
  • Geological and biological sequestration, such as soil carbon, will be required for hard-to-abate sectors and can generate new income streams for farmers and regional communities.
  • Given its geographic and ecological vulnerability, Australia will continue to build the expertise needed to decarbonise its economy and adapt to a changing climate. Its strengths in ecological and energy sciences, continental-scale experience and cultural diversity are strong assets in that quest. Australia’s emerging skills in decarbonisation and adaptation services could become another export as regional cities and nations seek help to build resilience to changing conditions.

Australia may be facing a generational energy shock, but it has already survived similar situations. The 1970s oil shock and stagflation led to microeconomic reforms that set Australia on a path of 27 consecutive years of economic growth. More recently, Australia succeeded in building an LNG industry from scratch and, after a decadelong $200 billion expansion, became the world’s largest LNG exporter. Similarly, when the cities of Newcastle and Wollongong lost their steel industries in the 1990s, they transitioned to new forms of industry more successfully than most hoped.

What has Australia learned from these transitions? Certainly, that it has the skills, capital, and resources to seize the decarbonisation opportunities and that it owes a just transition to the individuals and communities affected. To achieve these two aims, Australia will need the following:

  • Collaboration: working together across industries and regions, in systems planning, and in creating shared infrastructure, underwritten projects, and community engagement
  • Innovation: inventing not only new technology but also new productivity and financial approaches to ensure that potential value is captured
  • Credibility: using transparent governance, data, standards, and accreditation to ensure all partners and communities bring their talents and resources to bear

Australia is facing a global economic transition that it cannot stop. Fortunately, the “lucky country” can make its own luck. Blessed with natural endowments, it can ensure a just transition with abundant economic and employment opportunities in the same regions that will be affected by the inevitable decline in fossil fuel exports.


David Dyer is a partner in McKinsey’s Melbourne office, where Vik Selvaraja is a consultant; Bevan Watson is an associate partner in the Sydney office.

1 Based on analysis performed on a select subset of key export commodities, including aluminium, aluminium oxide, beef, copper, iron ore, liquified natural gas, metallurgical coal, and thermal coal.

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