In less than ten years, Australia has to cut its emissions 62–75% below 2005 levels. Given reductions in emissions over the past 20 years, that translates to cutting emissions 47–65% below current levels. As of last year, that’s about 440 million tonnes (Mt) of carbon dioxide equivalent.
Under current climate policies, official projections indicate annual emissions will fall 32% by 2035, leaving a sizeable 70–150Mt gap. That’s big. Australia’s cars, trucks and other road vehicles emitted a total of 82Mt last year, for instance.
In a new report, we show Australia will need new policies that provide clearer signals and stronger incentives to stand a chance of reaching its goal.
Policies strong and weak
Economists have long seen a broad-based price on carbon as the most efficient way to drive down emissions.
But Australia’s decades-long climate wars and the repeal of the so-called carbon tax in 2014 has effectively taken this option off the table.
Instead, we have a suite of different policy approaches in three broad groups:
Strong policies
Around 64% of Australia’s net emissions are covered by strong regulation and incentives. In electricity (34% of emissions), clear policy direction coupled with investor momentum is replacing coal and gas generation with renewables and storage. This is already driving lower prices. Emissions are projected to fall 86% by 2035. In industry (30% of emissions), the Safeguard Mechanism covering the 200 largest industrial emitters is projected to cut emissions around 40% by 2035.
Weak or missing incentives
Policies for transport (19% of emissions) and smaller industrial facilities (13%) are falling short. Compared with most advanced nations, the vast majority of transport emissions in Australia are unregulated. The government’s New Vehicle Efficiency Standard gives car buyers more low- or zero-emission options, but lacks incentives to reduce day-to-day emissions. Industrial emissions for smaller facilities are not subject to incentives or constraints.
Opt-in opportunities
The remaining 4% of net emissions come from agriculture, waste and land use. Here, carbon stored in growing vegetation (74Mt) effectively offsets most of the emissions from agriculture (82Mt) and waste (14Mt). Most agricultural operations are export-oriented and have few low-cost ways to cut emissions. The immediate goal is to work towards a future where importers of emissions-intensive food bear the costs of quality credits used to offset these emissions.
Clear policies have driven change in Australia’s electricity sector.
Steve Tritton/Shutterstock
Bridging the emissions gap
Here are six new ways to accelerate emissions cuts.
1: Fix electricity
Despite progress, there’s unfinished business in electricity policy. Current policies guide new investment but not how power generators are operated. As a result, coal and gas plant operators don’t have incentives to cut emissions.
The solution, as Grattan Institute experts have argued, is to expand the Safeguard Mechanism to cover electricity by creating a limit for total electricity sector emissions which would reduce over time.
2. Wind back fossil fuel subsidies
Incredibly, governments are still doling out fuel tax credits to make it cheaper for heavy freight to burn diesel. Removing these subsidies would boost government coffers by $4 billion a year and motivate fleet owners to shift to more efficient and lower-emission trucks. Next, policymakers could remove tax incentives encouraging Australians to buy bigger utes and light commercial vehicles.
Fuel tax credits subsidise diesel bills for trucks and heavy freight.
Rhys Moult/Unsplash, CC BY-NC-ND
3. Expand the Safeguard Mechanism
The Safeguard Mechanism requires Australia’s largest emitters to progressively cut emissions, either directly or by buying Australian Carbon Credit Units as offsets to meet their emissions obligations.
A well-regulated carbon credit system reduces the cost of complying with the mechanism by more than 60%. This enables Australia to impose more stringent obligations on industry than other nations, including in sectors such as steel and air transport that currently lack cost-effective options to cut emissions.
Expanding the Safeguard Mechanism to cover smaller industrial facilities would drive uptake of low-cost emission reductions, according to the Productivity Commission. Our research shows lowering the threshold from 100,000 to 25,000 tonnes would drive greater cuts in on-site emissions, boost demand for carbon credits, and increase long-term credit prices.
4: Tackle carbon credit price malaise
Carbon credits act as a visible carbon price. If their value goes up, businesses have an incentive to reduce their direct emissions and rely less on credits. But this logic only stacks up if investors are confident in policy settings – and expect the carbon price to rise over time.
Reaching net zero will require a rising carbon price. We project credit prices will be flat or falling over the next three years, at around $35 per tonne of carbon dioxide equivalent, before growing to around $70 per tonne by 2035. But we cannot rule out the chance of prices staying low. If this happens, it will suppress business investment in directly reducing emissions.
Governments should reduce this risk by transparently intervening if prices are too low, such as by stepping in to buy credits. As maximum prices are already set through the cost containment measure, this would effectively create a price corridor similar to the Reserve Bank’s target range for inflation.
We find higher prices could lead to an extra 80Mt in cuts by big industrial facilities over ten years, with less reliance on credits.
5. Remove handbrakes on investment
In 2023, the Safeguard Mechanism underwent reform. But these reforms aren’t yet leading to investment in low-emissions facilities and equipment due to weak carbon credit prices, policy uncertainty and a slow start to obligations.
The government could bring forward the next review of the mechanism to this year to align it with the carbon credits review and make policy announcements possible earlier. This would give investors the certainty they need to invest.
6. Expand carbon credits to include nature
Linking carbon credits to promoting nature outcomes could boost the value proposition. Moving from the current carbon focus to “nature positive carbon credits” would reward landholders for using their land to store carbon and restore habitat and put upward pressure on credit prices.
No time to waste
Australia is already living through the consequences of climate change.
To do its part in preventing climate change from worsening, Australian policymakers need to design and introduce more policies to reach its new emissions target.
Reform is never easy. But most Australians know full well that the costs of doing nothing will be far greater than the costs of sensible policy action.