Why sectoral pathways shine the spotlight on 2035

Emma Herd, Co-Lead EY Net Zero Centre & Partner, Climate Change and Sustainability

To decarbonise our economy by the middle of the century, we must have 2035 in our line of sight today. Sectoral pathways can help.

The Climate Change Authority is currently reviewing six sectoral pathways to understand the opportunities and obstacles as we move towards net zero by 2050.

What will it take for each sector of Australia’s economy to decarbonise? How fast is fast enough? Where do we need to accelerate action? Where do we prioritise investment and incentives?

These were some of the questions up for discussion during a panel session I joined at the Australasian Emissions Reduction Summit in September.

We need forward-looking analysis to understand how our industry sectors could and should be decarbonising to meet the goals of the Paris Agreement. Importantly, we need to understand how our biggest sectors contribute to GDP, employment and prosperity now and how this will change over time as we decarbonise.

For governments, sectoral pathways inform carbon budgets, targets and trajectories; they support policy setting; and they allow tracking of performance and progress.

For industry, sectoral pathways help companies to unpack risks and opportunities, understand their disclosure obligations, undertake scenario analysis, formulate strategic plans, deploy capital, and track their progress.

Investors and capital markets need sectoral pathways to gain a complete and qualitive understanding of their risk exposure; to understand where they should be going and where they should be growing. Sectoral pathways will also be foundational to the Australian sustainable finance taxonomy , which is currently in development and for which I co-chair the Taxonomy Technical Expert Group.

We need consistent national sectoral pathways because we are currently operating with imperfect and asymmetric information. Global work is not quite right for Australia; bespoke company analysis is specific, proprietary and often incomplete.

Sectoral pathways are also a reality check of progress. We have big net zero goals. Industry sector pathways tell us what we need to be doing; and from that we can assess whether we are taking action or just talking about it.

The clock is ticking

We’ve bent the curve on emissions, but Australia still generated 465.9 million tonnes of carbon dioxide equivalent in the year to March 2023.

Our largest carbon emitting companies are making some progress towards net zero, but are failing to back up their decarbonisation plans with capital, according to benchmarking undertaken by Climate Action 100+ .

Few people have their heads in the 2035 game or have internalised the step change required to stay the 1.5°C course. The Australian Government’s 43% emissions reduction target, while a good step in the right direction, is not fully aligned with the Paris Agreement.

The work of the Victorian Government to set its 2035 climate action target is illustrative of the step change ahead. The Independent Expert Panel – of which I was a member – recommended a 2035 target of 75 to 80% below 2005 levels. That’s almost a doubling of action, in terms of emissions reduction, in five years.

So, what is required? And what is achievable?

We know, more or less, how to get to 2035 even with those ambitious targets. But then there’s a long, fat tail of emissions that we genuinely do not know how to eliminate. Why? Because there are complicated trade-offs and technological innovations that haven't yet been commercialised, deployed or scaled.

Action begets action

To borrow from the former US Secretary of State : we are dealing with the “known knowns” and the “known unknowns”. But then we have “every other tonne of emissions in the economy”. We face an interconnected and incredibly complex challenge.

But decarbonisation isn’t all about counting the cost. There are huge opportunities for Australia if we get this right. Every country and every continent is decarbonising – and we can use sectoral pathways to determine where we are best positioned in the supply, value, capital and innovation chains.

The EY Net Zero Centre, for instance, has found Australia could become an “energy superpower” . Growing our share of green iron and steel production, mining of critical ‘new economy’ minerals and expanding our use of green hydrogen for domestic use, for instance, could lift national income by $40 billion by 2050.

When we start thinking about sectoral pathways it’s tempting to see them as linear and aim for perfect sequencing of activities and technologies. But we find a single intervention in one industry can catalyse a chain reaction of opportunity in other industries.

The EY Net Zero Centre’s latest report, Changing Gears , makes this clear. Your company doesn’t need to be one of the 215 facilities captured by the Safeguard Mechanism (SGM) to be influenced by reforms. At least one of these SGM facilities is a part of every other Australian company’s value chain – and these facilities are now on a net zero trajectory.

The Climate Change Authority will reveal its recommendations for the six sectoral pathways in August 2024. We can expect these to align with 2035 national emissions reduction targets, which the Authority is currently developing.

These targets will be ambitious, and the only way to achieve them will be with compounding activity. This activity should have started a decade ago. But if you didn’t start a decade ago, start today. Because action begets action.