22: Net Zero Carbon. Demystified

Net Zero Podcast Transcript.

6 May 2022

Tony Wood. Energy Program Director. The Grattan Institute

Ross MacDowell. Burgernomics Podcast Host.

Ross: Welcome to Burgernomics, demystifying economics with Ross MacDowell.

Ross MacDowell: Hello, everyone. I'm Ross MacDowell and welcome to Burgernomics, the podcast that demystifies economics. Firstly, let me say it was very gratifying seeing the use of Burgernomics on the front page of The Age newspaper being used to illustrate inflation through a hamburger.  Analysis, Cherelle Murphy, EY’s chief economist pioneered on our inflation podcast the week before.

We come to today's Burgernomics topic which is demystifying carbon net zero. Carbon net zero will create massive shifts within the Australian economy, both pluses and minuses. The $86 billion Australia would receive from export sales of coal and liquified natural gas will disappear over the next 30 years. Net zero will help reduce massive insurance payouts caused by bad weather events related to global warming.

Net zero will cause billions of dollars to be spent introducing new technology to transfer Australian industry to net zero carbon emission by 2050. Will the change to net zero cause consumer prices to rise to cover the cost of the transition? Will they be huge government subsidies required to shift many industries into net zero putting pressure on our taxpayers? To answer these questions and economically demystify carbon net zero, I'm joined today by Tony Wood, the director of the Energy Program for the respected Grattan Institute.

From 2009 to 2014, Tony was the program director of Clean Energy Projects at the Clinton Foundation, advising governments in the Asia-Pacific region on effective deployment of large-scale, low emission energy technologies. Tony, welcome to the Burgernomics Podcast.

Tony Wood: Thanks, Ross.

Ross: Tony, when framing a discussion about net zero, I looked at it from many perspectives. Coming back to one, the majority of Australians don't understand what net zero is and what its implications are for them. Last week, I was speaking with a campaign director for a federal election candidate, one whose policies is climate change, a local government department head, and one of Australia's largest pastoralists. Not only did none really understand what net zero is, they were honest enough to admit so.

There are obviously people deeply knowledgeable on the subject such as the heads of energy companies, whose photos are in the newspapers every day, experts such as yourself, but there is a real frustration amongst so many people that net zero is going to have big effects on every household expenditure, on the obligations of small business, but the media debate seems to have been hijacked by vested interests talking at a level of knowledge most people can't relate to. Some put it this way, "Here we go again, the billionaires and the corporations have hijacked another area to make millions from government subsidies and I'll probably be paying for those. I don't understand and I'm getting mad."

Tony, in the simplest terms using your master's degree in physical chemistry, please describe what is net zero?

Tony: Well, Ross, one level, it's a very simple concept but it's a term that's only crept into our language in the last three or four years. I never heard net zero being talked about the way it has. Not only does every government in this country, both sides of politics have signed up to net zero by 2050, many companies have also signed up to net zero. Some of them will before 2050. A lot of agricultural organizations themselves have signed up to net zero by even 2030, so what the hell did they sign up to if they don't know what it is.

I think part of this, of course, is there's a bit of a lemming factor going on here, they're all decided this is a good thing, we better be part of it and we'll work out what it means later. Now, what it means could be tricky if you haven't thought it through. Net zero broadly means we are needing to reduce emissions effectively to the point where we're not putting any greenhouse gases into the atmosphere by 2050. However, what we do know now is that as we start to do the things that are easier today to reduce emissions will gradually become a long things that are harder to do today. Some of them because the technologies are expensive and some of them is because we don't even know what the technologies are yet.

That means that they could very well be by 2050, still, some areas where certain emissions will be either too expensive or we just don't know how to reduce them. Therefore, what we have to do is say, "Okay, if we're putting a tonne of carbon dioxide or emitting the greenhouse gas into the atmosphere, every one of those has to be offset by taking a tonne out of the atmosphere, so the net is zero. The pluses equal the minuses, we still get to, in an economic sense, zero or in an accounting sense, zero, but we're doing it by way of having desirable-- There will still be some physical emissions.

You and I, if we are alive in 2050, I'm not sure I will be, we'll be breathing CO2 out. We going to have to take some CO2 out of the atmosphere because the overall physical environment can't deal with gradually creeping up more and more emissions. We have to get to the point where it's effectively, what we're doing as humans is effectively zero. I know that the natural system used to balance the pluses and the minuses quite happily. People, animals, emitting greenhouse gases were offset by oceans and plants, absorbing greenhouse gases.

Ross: Is that because of population of the world was a lot smaller?

Tony: Two things, firstly, the population was smaller, but then we started to do a whole lot of stuff that rapidly increased the emissions. The agricultural revolution was the first thing and the industrial revolution was the second. Suddenly, the whole system got blown away. Suddenly, we went through a system that could deal with 200 billion tons a year of greenhouse gases in and out, the imbalance in a system that could deal with 200 billion tons a year is only about 4 or 5 billion tons only, but it adds up and it's like a bathtub.

Ross: Let me ask you a super basic question. We talk about tons of gases being put into the atmosphere and tons of gases being taken out. Gas is lighter than air, rises up. How are we talking about a weight of tons of gases? Is that the weight of whatever was burned or created the emission or is it literally up there in the air, things weigh tons because a lot of people are confused by that?

Tony: It is a little confusing because we have this thing called the atmosphere and we live in that, and it creates an environment in which it doesn't feel like things weigh very much. You only have to think about what happens if you jumped into the water and how the water has some buoyancy and hold you up, and it seems like you're lighter than you were when you were standing on the side of the pool. Same thing applies here. If you went into space and you float around, there's no gravity and it feels like you're weightless. That's the term people use, weightlessness. Of course, the problem there was the way they breathe.

Air, the gases that make up the air, nitrogen mostly and oxygen, which we breathe, and small percentages of things like carbon dioxide, all have weights. The weight is just a way of measuring the amount of the gas that's in the atmosphere. The amount of carbon dioxide that's in the atmosphere is about 400 parts per million. It doesn't sound very much but is enough to make a difference because it shifts this thing called the climate in a way that eventually if you keep adding to it, it's very tricky.

It's like a bathtub. If the bathtub is full, you keep adding to that, it's going to overflow. The only way to deal with that, if you want to keep putting water into it is to open the plug a little bit, all up in something, and a drain, and take some out. That's what net zero is just about. Everything we're putting in has to be balanced by taking something out.

Ross: The experts say that the world needs to remove 6 billion tons of carbon dioxide from the atmosphere by 2050 if we're to avoid climate change. So far, our efforts have enabled us to remove 10,000 tons apparently, which is 0.0001%. We're not going too well, so far. If we look at shipping, for example, the shipping industry contributes submissions exactly the same size, almost is the country of Germany. This is a huge issue, isn't it, for the world. If we've developed so far, we've got so many activities going on that's creating so many greenhouse gases to try and get them back because the bathtub is overflow. To use your great analogy is a huge, huge, political and economic effort.

Tony: Yes, look the best way. I normally think about your point about the 6 billion tons is like a budget we've only got so much and we can spend it sooner or later. The problem is we're spending it all now and we're going to run out of budget very soon, the way we're going and then we're going to be the real problem because it's going to be almost physically impossible to get to this magical net zero.

In fact, what we have to do is be taking even more emissions out, greenhouse gases out of the atmosphere in 2050, because we're going to have to be in a negative position to make up for the fact we oversold their budget and we had to borrow money to pay back the bank and the bank is the environment so that's a big problem. It's emerging as a result of this and we've got so many sectors about community, our society, or if you like our economy that are adding to this problem and we're nowhere near addressing all those sectors.

We tend to get lot focused about electricity, but electricity is only one, a big one of the areas where we are adding emissions greenhouse gases to the atmosphere, and we're not doing much about it.

Ross: Okay. We're putting all these, the greenhouse gases into the atmosphere. How do we get them out of the atmosphere?

Tony: Right, the natural system does a lot of it already for us. It was doing it before the agricultural revolution and it still does so the two things that naturally absorb greenhouse gases are trees and plants and soil, sorry is the second one and the third one is the oceans. Now the oceans are pretty well run out of their capacity to do much more for us so that's probably not something we're going to get a lot more mileage out of into the future. One way to do this and people will talk about this is that we can plant more trees, we can stop cutting down trees. That wouldn't be a bad idea.

Then finally, we can literally take greenhouse gases out of the air. Basically, it's like a vacuum cleaner. It sucks. It's like a big fan that sucks air through it. Even though the concentration of greenhouse gases is only 400 parts per million, it can still separate the greenhouse gases from everything else, the nitrogen, the oxygen, and from the air, and then once it's separated that it can do something with that such as, for example, bury it underground, or even turn it into something else, some solid material. There's no longer a problem from a climate change perspective.

Now some of those things at the moment are eye-watering the expensive, but they may be the things we have to do so there's not many things we can do. I've just listed all of them that you can do to take greenhouse gases out of the atmosphere. We do it, some of it already right now in Australia, some farmers are paid to grow more trees. Some are being paid to put carbon back into the soil because what we've done over the last 200 years with our incredibly efficient agriculture, we've taken a lot of nutrients out of the soil. We put some of them back with fertilizer, but we've also taken carbon out of the soil and that carbon is now in the atmosphere. What we can do is put some of that back into the soil.

Now, the problem is that as the temperature is increasing because of a changing climate, that very temperature increase is itself taking carbon out of the soil so we've got a fight in our hands. We're doing things, on the one hand, to increase the concentration that greenhouse gases in the atmosphere at the same time, we've got to try and do things to take that emissions out of the atmosphere. We've got to get on the right side of that equation and then the things that have to be done, but they're not easy and they're not cheap.

Ross: Two questions, if we grow more forests to take greenhouse gases, absorb them out of the atmosphere, how long does that take? If I go and plant a forest, put some trees in, what's the processing rate?

Tony: Yes, look, basically what tends to happen is trees tend to be, they grow pretty fast early, and they tend to back what most of us, we slow down as we get older and so they tend to be more effective early on. Now, if you start where there was no trees at all, then planting trees, those trees as they grow, what they're doing is turning the carbon in the air, the carbon dioxide in the air, into carbon in the tree.

Now, exactly the opposite of course happens when you cut down the tree and burn it, but that's what's happening here so if we start with an area of Australia, which was previously cleared because of agriculture, but many parts of this country, because we use European practices that were really not appropriate for our soils and our landscape, they're very unproductive. What we could do is plant trees on agricultural land. That's not really productive and that's a positive. That would mean the trees would grow as they get to maturity, they would slow down and then the tree would be sitting there.

The really important question of course then is what happens to those trees? Because if there's a bush fire, the emissions, the carbon goes back into the atmosphere again. If you cut the trees down, if you turn them into furniture, they might stay out of the atmosphere for a long time. If on the other hand, that wood is burned or it's just left on the ground to decay, goes back into the atmosphere.

That's part of the natural cycle so we've got to think about how we intervene in a permanent way to take those greenhouse gases out of the atmosphere and it's the permanency that becomes the important issue. Particularly if someone's going to be paid to do this, which is what, if you want to get credit and economic credit for doing this, then you better be sure, we better be sure that the things that people are doing are actually taking greenhouse gases out of the atmosphere permanently.

Ross: We'll get to some of that shortly, but okay. To take greenhouse gases out of the atmosphere, via technology or the methods that they're now trying to pioneer, are we talking about putting great big fat tubes, sticking up from a factory into the sky and literally vacuuming out air and processing it and then pumping it into containers in the ground. What's the actual situation?

Tony: Well, the actual situation, this is a very early stage of technology, and who knows how this is going to develop, but literally what these things look like very big fans, and what they do is they suck like a big fan. Does it takes the air in one side and blows it out the other. What this is doing is it takes the air in, it's got material inside it, inside the machine, but having sucked the air through it absorbs the carbon dioxide in that air, right? The rest of the air goes back into the atmosphere.

The carbon dioxide has now been absorbed. What do you do with it? Well, one answer is you basically bury it. That's what's called carbon capture and storage. It can be done and is done in some parts of the world already in different ways. Basically, it can be put deep underground into either oil and gas fields that were depleted many, many years ago, or it can be put into what are called deep sail on aquifers, deep under the sea, or deep under the ground. If we understand what we're doing, then that will start there for a long time.

Now, this is like a big rubbish stone when you think about it. It doesn't sound like a great long-term solution, but to some extent, in some areas, it may be one of the few solutions that we'll have because the alternatives are much worse. Now, I think largely this idea would be eventually a very small part of the solution as we understand it today because it has had those other aspects. Technically, the chemistry's fine. You could turn that carbon dioxide, that you've sucked out of the atmosphere into something else. You could turn it into carbon calcium carbonate, which is limestone.

You could make building materials out of it but the cost of doing that is very, very high indeed. Many companies around the world are trying different technologies to do something with carbon dioxide, to turn it back into what it was before. Some sort of hydrocarbon, even to artificially make a fossil fuel again, and basically make the carbon dioxide keep going round and round and round and not permanently up into the atmosphere.

Those things are still a fair way off in terms of being anywhere near economically viable or financially viable, but they may be the suite of things we have to do because some of the areas that we're dealing with become very, very difficult. To actually reduce the emissions completely, therefore using technologies like this may be the answer, which is why it makes sense to work on them. Even though they're still at a very early stage.

Ross: I'm aware that I think it's Porsche that developing a fuel for the normal internal combustion engine. The one that most of us still use that has zero emissions and they're using that type of technology or another type of technology. Are you aware of that?

Tony: Yes. Look, there's basically, when you think about what goes on here, the fuel that we're talking about, fossil fuel are hydrocarbons. They're a combination of carbon and hydrogen and so what happens when we burn them, the energy is released and that's what gives us the things we like, the momentum in the car, the hot food that we want to eat, and so on and so forth. What happens is we separate the carbon and the hydrogen.

What happens with that is that the carbon becomes carbon dioxide and goes into the atmosphere. What we want to do is simply reverse that process and take the carbon out of the atmosphere and turn it back into a hydrocarbon and do it again, and again, and again, just go round and round and round now. The way you could use that is use renewable energy as the driver for that chemistry. The problem is that doing that is still diabolically expensive. It's relatively easy to burn a hydrocarbon and turn it into carbon dioxide.

It's much harder to do a reverse chemical process and turn that carbon dioxide back into the hydrocarbon because you're going to have to get the hydrogen from the hydro part of it. This is the hydrogen, it's going to come out of some place. Hydrogen doesn't float around. Hydrogen exists in its natural form in two ways, one is in water and the other isn't the original hydrocarbon I've just been talking about.

That's not an easy thing to do, but you can understand the incentive to do it would be is very high because it means you could then have an internal combustion engine pretty much what we've got today, and not have to think about. We're going to have to try and find ways of having electric cars.

Now companies like Porsche are probably having a bed each way because Porsche also sell an electric car.

Ross: Do you think that that's a possibility? This is huge, massive social pressure for electric cars, but maybe there doesn't need to be because there'll be a technical solution to keep the internal combustion engine technology. Even though it's old, we're still developing alive and as effective as an electric car or more effective as an electric car in terms of emissions.

Tony: Look, when you look, this is why the economics of these things become very important because if we've decided that the fundamental environmental social challenge is to reduce emissions, we're now getting talking about what's the lowest cost way of doing it. One way to do that, to measure that is the relatively economics of doing certain things.

The difficulty with this process is that what we're talking about now is that as best we know it now in the early part, still of the 2020s, some things are going to cost almost certainly a lot more than other things.

It's almost certain the case that right now, electric vehicles in totality, considering all the things that have to go into the electric system, including the charging facilities would be cheaper than trying to re-engineer a hydrocarbon to make a fuel that could be used in a car. Now that doesn't mean that some of these more exotic technologies won't be essential when there won't be solutions, which are as easy as electric vehicles. There are areas of, for example, making cement, making steel, think about burping cows and sheep, aircraft fuels. We're not going to have it a long extension cord running aircraft on electricity is big challenging.

Right now, many companies are looking at can they have electric planes. Some are looking at hydrogen fire-powered planes. Some are looking at exactly the same thing you mentioned in terms of making a hydrocarbon and fuel artificially. Now, for airplanes, that may be a cost-effective solution, even though it would be very expensive. If we are going to have to reduce emissions from air travel, then maybe making an artificial hydrocarbon fuel would be the best answer. Very difficult to say.

That's why, because it is difficult to say, some companies are having a bit each way. Some of the startup companies are aggressively going after these new technologies and good luck to them. What we need is a political-economic environment, which creates the incentive for these entrepreneurs to get out there and come up with the innovations because we don't have the answers yet, Ross.

One of the issues here is could be developing those technologies, which we're going to need in the 20s, 30s, and 40s. Right now, there's a lot of stuff we could do, which is very cheap and easy to do and relatively low cost but as we get further down the track, the harder ones that will emerge and what we should be doing now is thinking about those early and having companies and people with the skills, the inventiveness, and the entrepreneurial skills to develop those technologies.

Ross: In taking up the development of the technology and the application of it that requires investment, massive investment. The International Energy Commission says that the world needs $385 trillion invested in the next 30 years to meet the net zero target by 2050. Currently, 2.6 trillion is invested in global energy, but only 19% of that is in renewables. People are still investing a whole lot more money in non- renewable energy. The International Energy Commission says that if the world's current pledges to net zero were implemented in full on time, emissions would only be cut by 20% by 2030.

If everybody did what they said that they were going to do, which is nowhere near fast enough to meet the 2050 target. This does get back to the technology we're talking about and incentivizing companies to want to put money in. That's the economics of the situation in terms of investment rate of return, a whole lot of areas. Obviously, the money is going to be attracted to the areas at the higher rates of return and the easiest technology develop, but not to the other areas, is that where politics and government come in to force changes.

Tony: There's a lot of things in our lives that we don't think about where there would be cheaper ways to do it, but we don't because most of the time, there are regulations that prevent it. For example, we don't just arbitrarily throw rubbish around everywhere. There are penalties associated with it. Companies have limits on what they can put into the environment, into the waterways, all those sorts of things. It's not always been the case, but eventually, people work out that actually, whilst it will cost money to have a cleaner environment, it's a more healthy environment. People are prepared to pay that money.

This idea that there are things that markets don't measure very well by themselves. Don't put a value on them easily is what's called-- These things are external to the natural markets. The role of governments is to say, "Look, we, as a society, do value the environment. We do value doing something about climate change. We do value having cleaner air. How we going to reflect that in providing a combination of incentives and penalties or regulation to cause what you were talking about? You could do either or both. Most of the time, it's probably better to do both. You have regulations which say, look, there are certain things you need to do.

We know how to do them for God's sake, just get on and do them. Well, for example, we could and should have regulatory standards on emissions from cars. What that would do with we, firstly, we'd have much more efficient internal combustion engine cars, which will be better for us anyway. They'd be cheaper to run over time. At the same time you can create, so you have regulations on one side, that we think we know how to do. They need to lot start to create some incentives maybe to help companies do and individuals do the things we don't quite know how to do yet, or they're a bit more expensive. For example, for a while, wind and solar were more expensive than coal and gas. Governments, including Australia, including the federal government under John Howard, put in place a program to say, "Look, we want beginning of the relatively small amount of our electricity to come from renewables and adding that percent is been increasing ever since it started at about 2%. It's now getting close to 30%. The projections are that by the time at the end of this decade, it will be more like 70%. Most of that has actually been done as it's turned out at relatively small cost, the cost work high early, but the benefits have now come through because that renewable energy is now cheaper than the coal and gas that's replacing. This will happen in many cases.

Now, in some cases, it may not be the case that the green version is cheaper than the black version because we're adding some extra steps to the process. If you want to take a nuclear power station, for example, if you didn't bother about containing the radioactive waste, it would be cheaper, but no one would ever in there, hopefully, while the streams ever consider doing such a thing, but we've never thought about this because we always insisted that nuclear power stations in the parts of the world where they have them we're required to contain their radioactive waste. We've never said that a coal-fired power station has to contain its greenhouse gas waste. That's what we're talking about.

We're retrospectively saying, "Look, we have been getting away with pollutant for free and we've not been paying for the environmental impact of that era." In many cases, we didn't even realize what the hell we were doing for so long. We now know that we can't continue to do that. What we're talking about here is saying, "Look, we've now got to start doing in those areas, which are putting greenhouse pollutants into the atmosphere." The same thing we do with every other area of pollutant.

In some cases, as we get of the technology that developed the cost will come down, we know they'll come down and they will be cheaper. Then the alternative would've been. In some cases, there will be an extra cost to have the clean diversion, but as with most of other things in our lives, we pay a bit more to have the clean diversion.

Ross: In economics, we talk about market forces and we exist in Australia, which is a market capitalist economic system. Mostly determined by market forces, but government intervenes in a whole lot of areas that we don't provide or can't provide for ourselves. What would happen if you let solely market forces determine how we get to net zero at 2050, would there be a lot of things that people couldn't afford and there would be a uproar or it would all go swimmingly well because the capital markets would distribute money. According to the different rates of returns to the industries to develop a net zero objective.

Tony: Look, when a device, whatever it might be, provides greater value to the consumer, then people buy it. For example, I've got a thing called the mobile phone. Now I don't know about you, but I know my kids don't use it as a phone. They use it as a mobile communications device because it does a lot of stuff that a phone never did. When you provide people with renewable electricity, they get electricity, it doesn't do anything different. It's the same commodity.

It becomes a little bit more challenging to think about well, our company is going to go and develop low mission technologies in that sort of a world, because the actual thing you're providing is not, it doesn't the actual benefit that the consumer gets from that is no different from the would've got from the black, the green version is no better in that sense than the black version. The thing we're missing, of course, in that, what I've just said is the environmental damage that the black version is doing or the environmental benefit that the green version gets.

Would the market put a value on that and would we paid for it? I think the real question for me is, look, we could regulate the hell out of all this. The government could just about do the lot we could re-nationalise the electricity system, the government could do it all even today. The Commonwealth government spends spending the best part of 5 billion on a thing called the emissions reduction fund, where they are paying companies to reduce greenhouse gas emissions. Now, I've got no problem with that because what it's doing is stimulating the activity that we need.

Then progressively as the things that we are doing become more cost-competitive, or we put in place the regulation to say, "Look, right now, we're going to help you as a government." Because we think developing technologies is important and there is a role for government to help companies through the early-stage technology risk period. Once you've got past that, however, we are now going to require you to adopt the green diversion because it's now commercially viable. All we've decided that's now where we have to go if we're going to get the net zero.

What then happens is that the early stage of developing what a relatively expensive technologies compared to the alternative become cheaper and the market takes them up and we pay for them and so on and so forth. I think the one, electricity, for example, many people would say, "Well, renewable energy is already cheaper. Just let the market do it." The problem there is that we've still got some ways to go before we get to high levels of renewables. As we do that, we're going to have to build a lot more transmission and batteries and other things.

There really remains a role for government to maintain that momentum, but most of the capital can and should come from the private sector. That will apply to all other areas of our lives. This is not an area, I believe where governments need to be spending money in the infrastructure. For example, like we sometimes get, would often get with other parts of infrastructure, like a lot transport infrastructure, health infrastructure, education infrastructure, the natural owner of that tends to be government with the energy system, right through, from electricity to industrial activity that uses a lot of energy to transport.

Even though agriculture, market systems tend to work better on average than the government systems. That doesn't mean, when I say markets, I mean well-regulated markets, I don't mean a free for all.

Ross: Let's look at one example. I want to talk about carbon credits and I want to use an example to illustrate carbon credits. Let's look at a farm for example. It's a beef farm.

The beef farm has lots and lots of grass that the beef cattle eat and the beef cattle to put it crudely fat, a lot of methane gas. To grow the grass, they require fertilizer and the production of that fertilizer creates a lot of emissions, a lot of greenhouse gases, the operation of the farm also uses trucks and some tractors and creates carbon dioxide as a result of the diesel. That farm is putting carbon into the atmosphere, but the amount of grass that the farm grows also to feed the cattle also absorbs a lot of carbon out of the atmosphere.

If you are able to audit how much greenhouse gases the grass is absorbing compared to how much the operation of the farm is putting into the atmosphere, in terms of carbon, you would have an operation that might have a lot of what might be, let's say, King Island, which is a very green island. Down there, they might be an operation that is drawing more carbon out of the atmosphere, even though they're growing cattle. Then you might go to a more arid part of the country where the reverse is the opposite.

You've got a farm operation here that may be in deficit or surplus in terms of its carbon situation. If it was in deficit at some stage in the future, they may need to buy carbon credits to offset their operation, to bring it back to net zero. Have I got that right?

Tony: Yes.

Ross: Okay. That would be an ongoing audit situation because some of those farms might go from being a net emitter to a net absorber. It creates a whole lot of problems. Doesn't because as you said, with the bush fire example, if you have set up a market of selling people the carbon credits, which means that they're net zero, what happens? They commit to a contract of 25 years. Then over those years, there are good years and bad years, there's drought, which would mean in those years that there are a net emitter and other good years that there are a net absorber. How does that work? How does that situation of a carbon credit market work?

Tony: You're putting your finger on what I think is going to be one of the really important challenges, but it's a solvable challenge. That's emerging both in Australia and globally. We've had situations where, for example, companies who were exposed to a regulatory requirement to a reduce emissions in Europe were able to pay somebody in China to reduce their emissions. They were able to claim that as a credit against their obligation in Europe.

The Europeans worked out after a while, but that wasn't necessarily a good idea because a lot of these projects in China were pretty dodgy and these credits were themselves, not really what they were supposed to be. They reduced the capacity for those companies in Europe to use those credits. This world is expanding rapidly. Australia has one of the most well-recognized carbon credit creation mechanisms. It's still exposed to criticisms that things go wrong that are going on, are not being properly measured. It's a debate that we have to have to make sure that people are paying for stuff. They get what they're paying for.

The way this works is somebody with, and a farmer could be, you could have two farms. One of which is in credit, one of which is a deficit. A farm can say, could it probably right now, the way it works is you need someone to create a process by which buyers and sellers can get together of these activities. What you could do obviously is you could-- if the two farms were next to each other, one farmer could just, they could sell out to the other one.

You just combine the two sets of numbers together, but more logically what happens is that the idea that says, "Well, I am on my property. I am planting more trees than I would've otherwise done. I'm absorbing more carbon. I'm going to do something to absorb carbon dioxide from the atmosphere. I'm going to grow more grass. I'm going to grow more trees. I'm going to put the carbon dioxide into the soil." They then register that methodology of doing things with a central regulator who says, "Yes or no, is this real?" Let's assume that they do that properly, question mark. That's what they do.

They then say, "Okay, you can now propose, you can now put that methodology forward as a contract." The government will pay you to reduce those emissions, to do the project. Every time you take 1 ton of carbon dioxide or its equivalent out to the atmosphere, by planting a tree, you then create one credit. Now you could use that to offset your own emissions on your own farm or you could then sell that credit to the regulator.

The regulator could then cancel that credit, which means that we've reduced our emissions or someone else another farm who needs them, or another industrial processor. Who's got needs to reduce their emissions either because they've got an obligation or because they're doing it voluntarily, they would then buy that credit from the market. These credits now are being bought and sold. The original activity on the first farm happened and the emissions were actually, the greenhouse gases were taken out to the atmosphere. From an accounting perspective, they're not counted until the credit has been canceled.

What happens is that it's a bit like, I've spoken to some farmers who get confused by this because they say, "Well, look, I've now planted all these trees. I've done a great thing. I've done a good thing about the environment. I've sold the credits to somebody else." As soon as you've sold the credit, you don't have it anymore. It's not yours anymore. You've sold it to somebody else. You've got the financial benefit. Someone's paid you $50 for every time you've reduced, but they own that benefit. Now they own the thing you created. They own the benefit and they get to count against their obligation or their voluntary commitment.

What you did on your farm. You can't count that anymore because you sold it. It's sort of saying, you can't have your cake and eat. You can't grow wheat and sell it and still have the wheat.

Ross: Sure.
Tony: Those credits can create a lot of confusion, but they are becoming a very

important part of climate change, climate addressing climate change because they're a way of doing things in the most efficient way possible. If one business can reduce their emissions more cheaply than another, instead of both trying to putting the same obligation on both in a physical sense, you put it on both in a financial sense. What basically should happen is that we reduce emissions wherever they get reduced in the lowest possible way.

Of course, when everybody gets down towards zero, then it's only those things that take greenhouse gases out of the atmosphere that can be counted as real offsets or credits that can be then used across the entire economy to meet the overall objective of net zero.

Ross: Do we currently have a regulator that has the ability to enforce better audit procedures to make sure that one farm compared to another farm is not being a bit dodgy in their core, their soil core samples to say how much carbons there or not?

Tony: Look, this is a very important area, because these are not industrial processes where things can be easily measured and they're subject to all things that go on in the environment. Things that changes the temperature themselves cause greenhouse gas emissions to go up and down. As you said, bush fires before, who carries the liability here? There's two important issues that have to be resolved and we have rules in place, but they're still evolving because this is relatively new territory. It's only been existence for less than 10 years, and we're still learning our way as to how to do this.

The two things we have to worry about is firstly, would the claims that what I'm doing to which I'm claiming a credit, are they real? Am I actually doing something which is what's called additional, am I taking greenhouse gases out of the atmosphere? Am I reducing greenhouse gas emissions? So there's a whole methodology by which this has to be justified. There are people who would say in some cases it's never perfect because we've said we are paying farmers to plant trees, but the way we've measured, it might be, we count the number of trees, da, da, da and we supposedly measure them.

Maybe some of those trees don't grow as fast as the farmer claim them we're going to grow or some of the trees get wiped out to the next drought or something right now. All of that needs to be measured and recorded and credit. That's expensive. That's a whole system that has to be put in place. That's the one of the important issues there that has to be done. The second issue is who's liable? Having said that I have reduced these emissions. Who's liable for what might go wrong in physical environment?

If I've got a credit, because I've said I've taken greenhouse gases out to the atmosphere and I've put them someplace in a tree, then who's liable? If that tree burns down, is it the farmer who no longer owns the credit, but still has the tree? Who's responsible if that tree burns down, either because the farmer himself burns it or if he cuts it down, who knows if a farmer is actually cut a tree down that he previously got a credit for. There's a whole lot of tricky accounting issues and they're not financial accounting, but there are things that have to be ordered and checked and count and added up. That process itself add to the cost. If we're going to be serious about this, we're going to have to do this.

In the same way, at the COP26 in Glasgow last year, Australia announced that was going to create the Indo-Pacific bubble. The idea there is that there are some parts of our region, our neighbors in the Indo-Pacific area where they could reuse emissions and their economies would benefit if they could be giving credit for that, if someone would pay them. Of course, what we don't want to do is reestablish some problems we had previously with dodgy credits in other parts of the world. What the Australian government's doing is trying to think about how would we do that?

Would it make sense for organizations in Australia to effectively pay for emissions reduction in PG or P&G or someplace? We'd get the environmental benefit of claiming it against our emissions reduction and they would get the economic benefit because they'd be paid to do something they might otherwise not have done. Of course, for our Pacific guy, this is really important because they're the first ones who are going to be the climate refugees as the oceans are rising.

You can see why this is a good idea, but you doesn't have to think about it too much for us to realize that there are some really interesting and quite challenging problems that have to be solved. If we're going to make sure that everything we're doing here, particularly when people are buying and selling things has integrity because any market without proper rules and regulations can be manipulated.

Ross: Do you think that because we're about to go through this incredible era of finding new technologies and meeting all these targets so much commercial activity from so many different areas, finance area, technology area, capital markets, agriculture, which is probably not as advanced in some ways as some of the other more sophisticated markets, do you see it as being, not the new gold rush, but what IT used to be? It all of a sudden, it'll become the area where you'll have the blokes in shiny shoes out of Collins Street, trying to go and talk to some poor farmer that doesn't quite understand what's going on and deals going to be done. There's going to be a winner and a loser.

Tony: That could happen. One of the discussions we've been having with agricultural communities is that very issue. How do they farmer better understand what they're doing if they sign away carbon credits? It may turn out that someone comes along and there was a case, I don't think Microsoft anything illegal, but basically, they paid their deal with some agricultural company in Australia to buy carbon credits.

Now a whole lot of problems suddenly became evident that there was no system to make sure that Microsoft, if they came those credits against their obligation in the United States, that same activity wasn't going to be counted by somebody else in Australia. Double counting is a problem to start with, but that farmer may very well have said, "This sounds a bloody good idea. I'll sell these credits. I'll just keep planting a few trees and I'll sell this to Microsoft and I'll get a few some money out of this."

Then a little bit later they were, "Oh, what have I done? They would've been more valuable to me because I'm now being told I've got it reduced my emissions. All the trees that I'm planting. They're already committed to Microsoft. Now I'm stuck." A lot of the agricultural community is now helping to educate themselves about how does this all work? Because land-based activity is one of the major areas where we believe today that we have an opportunity to create credits or to take greenhouse gases out of the atmosphere.

Coming back to the fundamental point, the net zero means we're going to have to be taking greenhouse gases out of the atmosphere, land-based processes, growing trees, putting it back in the soil, tend to be one of their most potentially interesting areas. Of course, this could be open to all sorts of things. You talking about people with shiny shoes. People like Mike Cannon-Brookes and Twiggy Forrest, they're people who are taking some action in these areas. I'm not sure they've got shiny shoes, but they're out there talking to farmers, talking to miners, talking to people about what they can do to take what they believe is a huge economic opportunity.

Australia is almost is a country that not only is one of the countries in the world, that's going to be worst affected by changing climate. We're already seeing it. You look at the treasurer's figures in the last budget speech of how much it's costing us to deal with bushfires and floods and droughts. It's just going to happen again and again and again. On the other hand, we've got a big country with a very small population, relatively, we've got huge renewal energy resources. We've also got huge mineral resources that are going to be necessary in an electrified world.

The opportunity is absolutely enormous, which is why entrepreneurial people Mike Cannon-Brookes and Twiggy Forrest are out there beating us up because they can see the opportunity for them. Now for Australia saying governments was to get behind this more comprehensively, the opportunity isn't just to create the economic value. You made the point at the very early part of this conversation, how we're going to lose the export revenue we get from coal and gas. We could get double that revenue by exporting critical minerals if we do it right. We in a low emissions way. The opportunity is enormous for Australia and a lot of that activity will take place in regional Australia where the jobs will be lost as a result of shutting down coal mining. It's almost one of like it's a perfect world, but that is an opportunity that will not be easier to grasp. What we don't want to do is find out in 20 years' time or 30 years' time that we stuffed it up.

Ross: In the net zero debate, what's the number one area of discussion that you find people get it wrong the most times? What's the one that--

Tony: I think it is this concept of net zero. How are you going to do this? Lots of people, lots of companies talk about, "I've committed to net zero by 2050." Everyone's to net zero by 2050. Well, what are you going to do? A lot of organizations are now-- Environmental organizations are questioning the integrity of some of these commitments. If you're an oil and gas company and you've announced you're going to be net zero by a certain date, well, by that date we're not going to be burning oil and gas so what sort of business are you going to have?

How can you stand there and say that you're going to be an oil and gas company in 30 years' time or 40 years' time and yet be committed to net zero in that world? That's a fundamental problem. I think that we've not yet called to account the companies who've made these commitments. Now, some companies have got clearer views about how they're going to do these numbers and you could argue that what BHP is doing, it's been gradually getting out of those high emissions areas where it can't see solutions, but it is pivoting itself towards those areas of minimal processing, which can be like green steel and all those other commodities where they can make money.

Someone's going to be left with the rest of it and that's where the challenge is going to arise. That's where I see the biggest problem is that most people have made these commitments without thinking about them and the other big issue where I think we're not getting it right is that because we've avoided for political reasons, having an economy-wide carbon price or economy-wide emission climate policy, we're stuck with the sectors individually. What governments are tending to do is focus a lot of effort on electricity, which is an area where now, because of that focus, their emissions are coming down, but the rest of the economy is not.

We've got a part of the economy, which was about a third of our emissions is coming down quite strongly, but the rest is growing and that's what I think the other problem. Because eventually net zero means across the entire economy, you can't leave anything out. You can't leave the coal mines out. You can't leave the farmers out. You can't leave the steel companies out and that's where the problem arises at the moment. We're getting that wrong because we're putting all of our effort into electricity and not into those other areas.

Ross: Two final questions before we wrap up. I asked all of my expert guests, why is economics the hero in the net zero story?

Tony: Well, for me, well, I'm not an economist, economics is just how we measure stuff and if we are going to be committed to something called net zero and we want to do it properly and do it cost-effectively. What I mean by properly, I mean how do we reduce our emissions, maintain the reliability of supply of stuff, including electricity and do that in the lowest possible cost? Like most things in our lives, the way to do that is to measure stuff. Economics is the way you measure things. Economics will help us do that in the most efficient way and it's as simple as that.

Now, that means the economic system has to be able to value things that it doesn't sometimes through markets easily value, but that's why you have things like carbon prices and other climate change policies because that brings what was an environmental externality into the economic framework, now it can be measured and now economics will tell us how well we're going.

Ross: The last question. The Burgernomics test, you have to try and encapsulate all of those years of your experience discussing energy markets, net zero, carbon emissions, and apply it to a hamburger. Goodluck.

Tony: Look, the way I think about this a little is that like many people in the world today, I'm not, but a lot of my friends and family are vegans or vegetarians and so forth. We can talk right through all the pieces of the hamburger, the bun, and the beetroot, and so forth but let's focus on the thing called the patty. Now, if there's one thing that exemplifies the challenge of net zero, it's the hamburger patty for me because most of our hamburger patties are made from beef. We know that beef is a significant emitter of greenhouse gases, and it's hard to do much about.

Now, there's lots of people who will tell you they'll be able to do things to reduce the emissions coming out of the front end, at least of the cow, and keep that energy inside the cow. There are things you could feed to the cow which will reduce that process so the beef itself might become less environmentally problematic. The farmers may offset their emissions, which means your beef patty is no longer producing less emissions on a net basis or we move towards materials which look, taste, feel, bleed like beef, but they're not beef. They're grown in a laboratory or they're grown using other plant-based materials. That's some of the choices we're going to have to make.

We're in an early stage, it's a bit like other areas of our lives where if things are growing from a very small base, big growth doesn't mean very much yet. Renewable energy was like that. Renewable energy was growing very, very rapidly, but it was still, and still is a relatively small percentage of our energy. The same thing's happening here, but you can see it starting to emerge. The number of shelf space in supermarkets that's now taken up with various versions of products that are looking to provide the same protein input and the same eating experience as meat.

Now, how that plays out remains to be seen, but I think the hamburger patty will be a great example of how we're making progress on greenhouse emissions at net zero. Have we got a beef patty that's net zero, or have we gone down a different pathway.

Ross: Something for every hamburger chain to think about. Maybe McDonald's will give you the alternative with the Big Mac original and the Big Mac net zero.

Tony: There you go.

Ross: Tony Wood, thank you very much. You've enlightened us about this topic that so many people struggle with. So many people don't tackle the conversation at a dinner party about net zero because they're scared of appearing like a bit of a deal. I think when they listen to your explanation on the Burgernomics Podcast, they will have a lot more confidence to be able to put forward their own point of view. Thank you very much.

Tony: Thanks, Ross. I've enjoyed the conversation.

Ross: Cheers. My thanks to today's podcast expert guest director of the Energy Program for the Grattan Institute, Mr. Tony Wood. Tony has the knack for making a very complicated topic in net zero sound remarkably easy to understand. Please, don't forget to rate today's net zero podcast on your favourite podcast channel and subscribe to the Burgernomics Podcast if you haven't already done so. For upcoming episodes and for a slightly edgy view of current economic events, please follow the Burgernomics Podcast on Twitter, Instagram, LinkedIn, Facebook, and TikTok.

My thanks also to Burgernomics design consultancy, Ology Creative, and our PR and marketing agency, Oliver and York. As always, I'm interested in your suggestions for topics you would like our experts to cover. Please email them to me through the Burgernomics Podcast website.