Emissions reduction and hydrogen


Budget Review 2021–22 Index

Stephen McMaugh

The Government has stated its commitment to reducing Australia’s emissions through technology investment, with the Technology Investment Roadmap a core element of Australia’s long-term emissions reduction strategy. The 2021–22 Budget provides funding to support initiatives under this roadmap and the priority low-emissions technologies identified in the First Low-Emissions Technology Statement 2020—including the development of hydrogen capabilities and carbon capture and storage (CCS), as discussed below.

In Budget Measures: Budget Paper No. 2: 2021–22 (pp. 138–9) the Government made an overall commitment of $1.6 billion over ten years from 2021–22 (including $761.9 million over four years from 2021–22) to incentivise private investment in technologies identified in the Government’s Technology Investment Roadmap and Low Emissions Technology Statement. The Recycling and Clean Energy and Resources Technology and Critical Minerals Processing road maps, developed under the Modern Manufacturing Strategy, were announced by the Prime Minister in October 2020 and funded in the
2020–21 Budget (see Budget Measures: Budget Paper No. 2: 2020–21, p. 120 and the Parliamentary Library’s Budget Review 2020–21). These road maps also outline some of Australia’s expertise and opportunities to develop and deploy low-emissions technologies.

As announced in April 2021, the three major funding themes for the initiatives (over ten years) are:

The Budget provides $643.4 million over four years ($1.2 billion over ten years) for these three major themes as well as towards efforts to reduce the cost of soil carbon measurement, new agricultural feed technologies, developing a carbon-offsets scheme in the Indo-Pacific region and to further support implementation of the Technology Investment Roadmap and Low Emissions Technology Statements.

The Prime Minister said ‘Australia is already collaborating with our trading and strategic partners, including Germany, Japan, Korea, Singapore, the UK and the US’. The Budget provides an additional $565.8 million over ten years from 2021–22 to back low emissions technology and international partnerships and initiatives by co-funding research and demonstration projects. The Prime Minister appointed Australia’s former Chief Scientist, Dr Alan Finkel, as Special Adviser to the Australian Government on Low Emissions Technology in December 2020. Dr Finkel will play a key role in brokering these new international partnerships.

The Budget also provides $81.7 million over four years (part of a $279.9 million commitment over ten years) to help realise emissions abatement activities in large industrial facilities by establishing a ‘below baseline crediting mechanism’ through adjustments to the Emissions Reduction Fund, as discussed below (Budget Paper No. 2: 2021–22, p. 138).

Hydrogen

In December 2018 the Council of Australian Governments Energy Council established a Hydrogen Working Group, chaired by Australia’s then Chief Scientist, Dr Alan Finkel, to develop a Hydrogen Strategy. Implementing the strategy is intended to deliver a clean, innovative, safe and competitive hydrogen industry, and help Australia to become a major global player in the hydrogen market by 2030. The Government released the National Hydrogen Strategy in 2019 and has continued to outline its support for hydrogen through the First Low-Emissions Technology Statement 2020.

The Australian Renewable Energy Agency (ARENA) has funded a number of hydrogen projects and recently announced conditional approval of $103.3 million for three commercial-scale renewable hydrogen projects using large-scale electrolysis at Karratha and Warradarge (Western Australia) and Wodonga (Victoria). The Clean Energy Finance Corporation also has a $300 million Advancing Hydrogen Fund that will initially prioritise investment in projects from the ARENA funding round that are eligible for CEFC funding.

Through the 2021–22 Budget, the Government is providing $61.8 million over four years for the development of four additional clean hydrogen hubs in regional Australia (Portfolio Budget Statements 2021–22: Budget Related Paper No. 1.9: Industry, Science, Energy and Resources Portfolio, p. 50). This builds on $70.2 million provided in the 2020–21 Budget to support the development of a technology-neutral regional hydrogen export hub (Budget Paper No. 2: 2020–21, p. 119). As announced by the Prime Minister in April 2021, the new measures are for ‘clean hydrogen’. The 2019 Hydrogen Strategy defines clean hydrogen as being ‘produced using renewable energy [green hydrogen] or using fossil fuels with substantial carbon capture and storage (CCS) [blue hydrogen]’ (p. xiv).

Hydrogen has received a lot of interest in the last few years. In addition to targeted research, the CSIRO is supporting hydrogen technology in Australia through Hyresource, a collaborative knowledge sharing platform covering the wide range of hydrogen-related activities under way. A summary report of the Hyresource database (pp. 7, 11) shows that since 2018, financial support for activities related to hydrogen technology approximates $325 million from the states and territories, $920 million (including the 2021–22 budget) from the Commonwealth and $245 million from industry, supporting around 61 projects. The Australian Energy Market Commission also lists 48 projects (pp. 27–33) in various stages of development, with most focused on producing green hydrogen.

Australia is not alone in its efforts to develop hydrogen as an economically viable energy carrier. Other nations are making significant investments which also offer opportunities for international collaboration. For example, in February 2021, S&P Global reported on 228 large-scale projects with a combined $300 billion of proposed investment through to 2030. Projects worth about $80 billion were either in advanced planning, had passed a final investment decision, or were already under construction or commissioned. Germany released its National Hydrogen Strategy in 2020 with actions on both demand and supply to establish hydrogen in its economy, with funding to 2024 worth €8.8 billion, with an additional €2 billion for international cooperation.

Carbon Capture and Storage

CCS refers to the removal of carbon dioxide (CO2) from a source, such as coal and natural gas production facilities and power plants, steel mills, cement plants and refineries, and its long-term storage so that it does not enter or remain in the atmosphere. Carbon Capture Use and Storage differs in that some, or all, of the captured CO2 is used for industrial processes.

According to the Global CCS Institute’s Global Status of CCS Report 2020, commercial CCS facilities operating in 2020 captured 40 million tonnes of CO2. The report maps CCS projects and shows that around half of the facilities are capturing emissions from natural gas processing. The Gorgon Carbon Dioxide Injection facility on Barrow Island, Western Australia, is currently the largest in the world—with a capacity to store up to 4 Million tonnes per annum CO2, although it has suffered some technical problems and delays.

The development of carbon capture technologies and hubs, announced in April, is supported within the Emissions Reduction and New Investments under the Technology Investment Roadmap measure in the 2021–22 Budget (Budget Paper No. 2: 2021–22, pp. 138–9). This builds on the $50 million provided in the 2020–21 Budget for a CCUS Fund (Budget Paper No. 2: 2020–21, p. 119). This new funding follows the Technology Investment Roadmap, which sets related stretch goals for CCS. It extends previous support from governments for the development of CCS, including in Australia and the USA, where more than US$5 billion has been appropriated for CCS-related activities.

The Global CCS Institute report Technology Readiness and Costs of CCS outlines a number of factors affecting the cost of CCS, including: the capital intensive nature of the technology; economies of scale; the relative concentration of the CO2 stream; the cost of energy required for compression; the amenity of the available geological storage; and the distance the CO2 needs to be transported. It concludes that the lowest cost opportunities will be large-scale natural gas processing, whereas relatively dilute sources of CO2, such as the flue gas from a gas power station, are more technically difficult and more expensive to capture. The report also indicates that support is required to make the technology viable, including that the ‘strong importance of capital cost on overall CCS costs means that there are financial and policy levers available to make capital more available and lower cost for large-scale CCS projects. Tax policies also play a vital role in the incentivisation of CCS projects’ (p. 5).

Below-baseline crediting mechanism

The Emissions Reduction Fund is a voluntary scheme which credits carbon abatement which can be purchased through a reverse auction process. The scheme has a safeguard mechanism that is intended to ensure that emissions reductions purchased through the ERF are not displaced by significant increases in emissions elsewhere in the economy. The safeguard mechanism applies to large industrial facilities where the annual emissions exceed 100,000 tonnes of carbon dioxide equivalents per annum.

A review of the ERF, chaired by Grant King, the former Chair of the Business Council of Australia, provided its February 2020 Report of the Expert Panel Examining Additional Sources of Low Cost Abatement (King review) to the Government. The King review noted that the ERF is not well-suited to crediting abatement from industrial emitters and made a number of recommendations to expand the range of abatement activities under the scheme and increase participation. The Government agreed with the majority of the 26 recommendations of the King review, including to:

Establish a ‘below-baseline crediting arrangement’ for large facilities using the Safeguard Mechanism architecture. The arrangement would provide credits to facilities who reduce their emissions below their Safeguard baselines by undertaking ‘transformative’ abatement projects. (p. 82)

The Budget commits $81.7 million over four years from 2021–22 ($279.9 million over ten years from 2021–22) to establish the below-baseline crediting mechanism as recommended by the King review. The minister has indicated that the mechanism is to provide an incentive for facilities to reduce their emissions below their baseline, including through the deployment of new technologies.

Stakeholder reception

Stakeholder views on the budget measures were mixed. The gas industry welcomed the new funding for CCS and hydrogen, whereas the Climate Council and the Clean Energy Council maintained that the Budget lacked adequate spending on technologies that would reduce emissions.

The Chief Executive of the Australian Petroleum Production & Exploration Association, Andrew McConville, welcomed the support for hydrogen saying:

… ‘support for gas-related strategic basins is a big tick, as is the announcement for new hydrogen and carbon storage initiatives to help lower emissions’.

“Natural gas is a pathway to a large-scale hydrogen industry and our members are already at the forefront of hydrogen development and carbon capture and storage solutions and the announcement of $1.2 billion over 10 years in a technology co-investment facility will help accelerate development.

The Government’s technology neutral approach also frames a race between green hydrogen and blue hydrogen to reduce production costs and achieve its stretch target of $2 per kg. However, some researchers argue that this is not a race between equals when all related emissions and costs are accounted for.

The Chief Executive of the Clean Energy Council stated:

"Overall, tonight's Budget represents a missed opportunity to utilise our country's extraordinary renewable energy and energy storage potential to jumpstart Australia's economic resurgence and leaves leadership in reducing Australia's emissions and trajectory towards net-zero to the states and territories."

The Climate Council provided a broader perspective in relation to emissions reduction spending as part of the COVID recovery:

Data from the Global Recovery Observatory shows that Australia has spent US$130 billion on COVID recovery efforts but less than two percent of that money has been spent on solutions to reduce emissions.

In contrast, Germany and France allocated 47% and 50% of their respective recovery spending to clean solutions.

“Among major economies and our strategic allies, Australia is right at the bottom of the pack when it comes to spending on solutions that reduce emissions, create jobs and strengthen our economy,” said Climate Council spokesperson and economist Nicki Hutley.

The proposed changes to the ERF received a mixed reception at the time of their announcement. The Carbon Market Institute broadly welcomed the recommendations of the review in its July 2020 position paper and raised detailed concerns and proposed remedies relating to technical aspects of the proposed mechanism. However, the Climate Council raised concerns more broadly about the Government’s acceptance of recommendations in the King review relating to opening up the ERF to funding carbon capture and storage, which is one technology mooted for eligibility under the changes to the safeguard mechanism:

Mr Taylor released the findings of the King Review this morning, agreeing to recommendations to open up funding to carbon capture and storage projects in the Emissions Reduction Fund as well as to big emitters.

“Carbon capture and storage (CCS) is incredibly expensive. Australian governments have already spent hundreds of millions of dollars on this technology and have very little to show for it. CCS is not a climate solution, but an attempt to prolong the role of fossil fuels in the energy system,” said Climate Councillor and energy expert Greg Bourne.

Director of the Centre for Climate Economics and Policy at the Australian National University, Professor Frank Jotzo, argued that the Safeguard Mechanism baselines are set very weakly and this new measure ‘would create an incentive to do better, rather than just the existing, muted incentive not to do worse than a very unambitious standard’ (pp. 4–5).