Boardroom Energy

This week:

Understanding the methane pledge

Green steel deal

The subsidy that wasn’t there

The impact of removing fossil fuel “subsidies” in Australia

– Chart of the week: Australia’s methane emissions

In Brief

Week one of Glasgow COP26 is drawing to a close with all the breathless urgency we have become accustomed to from the world’s biggest annual climate trade fair. Australian Prime Minister Scott Morrison arrived after the G20 meeting in Rome and promptly held a breakfast with Australian business leaders. It’s a continuation of an enduring Australian/Earls Court tradition to go to the UK then hang out with other Australians.

In case you missed it, iron ore magnate Andrew Forrest is also in Glasgow, calling for an end to fossil fuel subsidies that don’t appear to exist. The fuel rebates he is talking about deliver him $300 million a year, which is small change. We look at both the subsidy claim and the Twiggy claim in more detail. Forrest managed to get on the stage with US President Joe Biden as a member of the First Movers Coalition. Presumably first mover includes those still yet to move.

Biden launched his methane pledge to cut methane emissions by 30 per cent by 2030. It’s clever politics but difficult to deliver. Australia did not commit, with agriculture contributing around 52 per cent of our total methane emissions. We take a deeper look. The Economist used the Glasgow focus to point out that green finance and net zero pledges by companies is unlikely to become a global climate saviour. Perhaps the biggest announcement on climate didn’t come from Glasgow at all, but rather from Washington as the EU and Us announced a new bilateral steel deal to reduce emissions and isolate China. We take a closer look.

On the weekend the ACCC announced it would look into the APA Group interested in acquiring AusNet Services. By Friday APA’s interest had cooled. Edify Energy is looking to sell its plans for large scale batteries it hasn’t built yet, part of the 14GW, 50-plus list of battery projects all on the drawing board but as yet unable to get to financial close.

Understanding the methane pledge

At the Glasgow climate talks US President Joe Biden initiated a non-binding pledge to cut methane emissions by 30 per cent by 2030. It was supported by more than 100 countries, but not Australia.

US officials have been working with the EU on getting support for the pledge since September. It’s a voluntary deal within a voluntary deal – national commitments made under the Paris Agreement are non-binding and the methane pledge is the same. That works for Biden as he would have no chance of getting such a commitment ratified by the Senate at the moment.

Biden’s own domestic politics underpin this latest push. Unable to make progress on a national climate strategy, targeting methane is both scientifically valid and creates a renewed focus and sense of purpose. Delivery on methane abatement in the US, as in Australia, will be politically and technically challenging.

Methane is a potent greenhouse gas when released in the atmosphere. It is lighter than air and decomposes to carbon dioxide after around 20 years. As such it is 86 times more potent than CO2 when considered over a 20 year timeframe, and 34 times more potent over a 100 year time frame.

Natural gas is predominantly made of methane, and is produced in large quantities by livestock (both from the animals and their manure) and from anaerobic decomposition or organic matter in landfills. Methane also escapes from coal mining. It’s much more difficult to contain it in open cut coal mines. In the US natural gas contributes 30 per cent of its methane emissions, livestock 36 per cent, landfills 17 per cent and coal mining 7 per cent.

The challenging part of reducing methane in livestock is that they are highly disaggregated sources of emissions and are found in politically sensitive regions and communities. Landfill gas emissions are already at least partly captured and recovered, but full recovery will require a completely new and more expensive approach to waste management.

Fugitive emissions from the gas industry is technically the most accessible. Fugitive emissions from the gas industry have increased with increased production. Reducing fugitive emissions can make a big difference to the emissions profile of gas production.

All this kind of works for Biden, who can pivot to focus on areas of abatement that have already been under scrutiny and development. It’s a new narrative that is likely to find additional resources thrown at it from Biden’s $555 billion climate package if it manages to get through Congress.

Australia has not signed up to the methane pledge. That’s a predictable response given 52 per cent of our methane emissions come from the farm sector and Prime Minister Scott Morrison has just endured a difficult and protracted deal on net zero by 2050 with The Nationals. Given the US has been pitching this plan since September, it’s reasonable to assume that not supporting the methane pledge was one of the many demands made by the Coalition junior partner before they would let Morrison fly to Glasgow.

It’s the kind of objective that might easily turn up as a dot point in Labor’s climate policy strategy currently under development.

Australia’s methane emissions reflects the composition of the economy: 52 per cent from agriculture, 22 per cent from coal mining, 13 per cent from land clearing, 11 per cent from landfills and 8 per cent from oil and gas. Reducing methane emissions is important, but it’s not going to be easy.

Green steel deal

With the world’s eyes on the COP26 event in Glasgow, we may be looking on the wrong direction for the next major step on decarbonisation. Bilateral trade pacts centred around a US-EU alliance may be the way forward and may give Australia pause for thought on its own approach. The first step is a US-EU trade deal on steel and aluminium where the two major economies drop tariffs on each other’s output and offer to do the same for any other party that meets their standards for lower emissions production.

The deal is subject to import volume limits. This is to deliver a second key objective of the deal, namely to reduce global oversupply. This is code for preventing China “dumping” surplus steel on to the world market and suppressing prices. The details of the emissions standard are yet to be worked out. As a first step, the United States and the EU will create a technical working group charged with sharing relevant data and developing a common methodology for assessing the embedded emissions of traded steel and aluminium. Unlike the COP26 negotiations where all countries have a say, this methodology will be set by the two parties and other countries will have to respond to it.

It’s assumed that Chinese steel and aluminium, at their current emissions intensities, will fail to meet the standard. China produces more than half the world’s steel and aluminium. But it consumes the majority of its own output, so the initial impact on the sector overall of the US-EU deal may not be that great. Longer-term, if this deal provides a blueprint for more carbon-intensity trade deals, and is extended to manufactured goods, then China will potentially face a bigger challenge.

For Australia, the picture is complicated. In steel we are a small producer, representing only 0.3 per cent of world production. But we are by some distance the largest producer of the raw materials – iron ore and coking coal. Most of this output is exported, and much of it to China. The other key customers are India (top for metallurgical coal), Japan, Korea and Taiwan (both coal and ore). In practice, the deal is unlikely to change demand for ore significantly, however the destinations may shift if trade flows are affected by the deal. In the longer-term, the deal may underpin efforts to replace metallurgical coal in the steel-making process, but that is easier said than done.

On the aluminium front, Australia has a more significant share of the market, ranking 6th in the world for production. On average around two thirds of the emissions embedded in aluminium come from the power needed for electrolysis of alumina. So, it makes a big difference where that power comes from. Around thirty percent of electricity used to produce aluminium is from hydro power, but over half is from coal power. So, the deal will hand a big advantage to hydro-based producers. Australian aluminium has a higher emissions intensity than the global average due to the high share of coal still in our power mix. The devil will be in the detail – Bell Bay in Tasmania may get assigned the grid average emissions intensity or it may be allowed to claim that it is powered by renewables, given local generation is all hydro/wind.

There are of course also potential opportunities. Korean steel giant Posco is looking at Australia as a strategic regional base with a view to sourcing low cost green hydrogen here. But it’s not a gimme – other countries are also under consideration. And cheap, transportable hydrogen is still a concept under early development. Conversely, it’s early days to be sure of the impact of the US-EU deal. It may not survive a change in US presidency, or the working group may struggle to agree a methodology. But if it does persist then it could be more impactful than anything agreed in Glasgow this week.

The subsidy that wasn’t there

Since the start of this century environmental campaigners have claimed the existence of massive subsidies being paid to support the consumption of fossil fuels. This is separate and in addition to the absence of a domestic or global scarcity price for greenhouse emissions. It’s a slightly odd construct. The proponents of this thesis suggest the easiest way to decarbonise is to simply remove these various and gratuitous forms of government assistance for coal, gas and oil. It would seem the lowest of low hanging fruits in the war on carbon.

So how do such obvious and enormous subsidies endure and, in some cases, increase over decades? There seems to be a inferred conspiracy, that successive governments of different stripes are somehow obliged to continue making these payments, possibly against their will. Governments are normally looking for ways to cut costs and increase revenue. How else could you explain it?

The fossil fuel subsidy claim predictably re-emerged at COP26 in Glasgow this week when BloombergNEF released a new report claiming G20 countries paid nearly $600 billion in 2020 to support fossil fuels. According to its Climate Policy Factbook, Australia made the podium of per capita fossil fuel subsidies from 2015-19 by paying out $542 per person, or more than $18 billion per annum. That’s a lot of money. Where did it all go?

The biggest source of these “subsidies” is direct government transfers and tax breaks by the Australian Government, which have been aggregated in a report by the OECD. By far the largest source of fossil fuel subsidy is attributed to the exemption from the fuel tax, known as fuel tax credits. This is paid where businesses are using fuel in applications that do not use public roads – like farming, mining and operating machinery. This exists because the fuel tax has been designed to work as a proxy for a road user charge.

It is worth pausing to consider this logic. The OECD and BloombergNEF consider a fossil fuel subsidy to be where a national government puts a tax on the consumption of a fossil fuel, but then exempts some users. So, logically, if the size of the fossil fuel tax was increased, the size of the fossil fuel subsidy would increase too. That doesn’t make much sense.

As it turns out the OECD has an extremely broad definition of what constitutes fossil fuel subsidies. Beyond reduced fuel excises and taxes, accelerated depreciation in mining is a subsidy, funding for technologies to reduce emissions from coal mining, advanced resource exploration including work on underground storage for greenhouse gases and hydrogen, underground water and minerals used in the supply of low emissions technologies like batteries are all subsidies. One-off payments to assist households facing high electricity prices is also classified as a fossil fuel subsidy.

The fundamental weakness of this thesis is that it is partial in its accounting. These claims report only concessions, not the taxes on which they are based, or the revenues claimed by governments from fossil fuels, which are much, much greater. State Government royalties levied from coal mining were more than $5 billion in 2019-20. Australia earns more than $100 billion a year from coal and gas exports. A key reason for political resistance to declining fossil fuel production is its economic value for key regions, not its dependence.

Emitting greenhouse gases has an environmental cost which is not currently included in the production and consumption of fossil fuels. It should be. Claiming spurious fossil fuel subsidies is false, misleading and does not progress the climate policy debate. It appears to be typical of activist research designed to substantiate a campaign claim rather than genuine inquiry used to help solve a complex problem.

The impact of removing fossil fuel “subsidies” in Australia

Andrew “Twiggy” Forrest has called for an end to fossil fuel subsidies. He considers that they are a key barrier to his plans for green hydrogen and ammonia to power the world. But does Twiggy know what the implications of his call really are? As they say on the internet “the answer may surprise you”.

By the far the largest figure in most calculations of fossil fuel subsidies is the fuel tax credit. This is available to businesses for diesel and other fuels consumed in uses on private roads, off public roads and for non-fuel uses. Forrest’s major business, Fortescue Metals Group (FMG) received $300m of such credits last year. The fuel for his private jet also receives a significant excise rebate too. Given his comments about rebates, it’s likely that he does know that his business costs would rise if the rebates were phased out. Of course whether a rebate of excise already paid is actually a subsidy is a moot point, but it’s regularly counted as such in exercises to tally up fossil fuel subsidies.

Presumably he also realises that farmers will also face higher costs as they are also beneficiaries of the fuel rebate, as are many other regional businesses.

Because coal, oil and gas have to be mined, and exploring for them is risky, governments keen to encourage this mining activity (to get royalties and local employment) often offer tax breaks for exploration expenditure and sometimes for constructing production facilities as well. Getting a tax deduction for expenditure is barely a subsidy, but there is an argument that the standard tax code would require the deduction to be claimed over the life of the mine rather than in one hit. In most cases, these tax breaks are available for all forms of mining, including iron ore, FMG’s product. As they will be for a range of metals and minerals needed for the energy transition, in renewables , batteries and electrolysers.

Forrest is also implicitly calling for the cancellation of a grant to one of his other companies, Squadron Energy. They are in line for a $30m contribution to their proposed Port Kembla power station under the Underwriting New Generation Initiative. As this is ostensibly a gas generator it qualifies as a fossil fuel subsidy (it’s certainly a subsidy!), even though Forrest prefers to talk about it as a green hydrogen-fuelled plant, which it may end up being. This would arguably turn the subsidy into a renewable subsidy, which he probably approves of. Perhaps it’s best to think of this as a kind of Schrodinger’s cat situation where it is potentially both at the same time.

Outside of Forrest’s own business interests, most of FMG’s employees presumably live in regional WA where the mines are based (or are FIFO and so get cheaper air tickets because of the aviation fuel rebate). Electricity in regional WA, and right across Northern Australia is provided from small, expensive regional grids and microgrids. Accordingly, it is subsidised, usually to the levels paid in capital cities such as Brisbane and Perth. The OECD counts electricity consumption subsidies as fossil fuel subsidies, because electricity is typically at least partially produced by fossil fuels. Forrest may not realise he’s calling for his workers to pay higher electricity bills (not to mention pensioners, those on life support, and other consumer groups who get extra help with their bills as a welfare policy). The Australia Institute goes further and counts all expenditure on fossil-fuelled power stations by the state-owned electricity providers that service northern Australia as a “subsidy”.

None of this is to suggest Forrest is insincere, or that some of the policies described above are worth reconsidering. But the issue of “fossil fuel subsidies” is a more complex one that it appears at first glance. Frankly this is a reflection of our deep societal and economic dependence on these fuels, a dependence that we are trying to shift.

Chart of the week: Australia’s methane emissions

Source: Australian National Greenhouse Gas Inventory