Energy transition down under and the risks of it going under

Australia, the world’s largest exporter of dry bulk commodities, is charting its path toward becoming carbon-neutral in line with the Paris Agreement goals.

The country started hinting that it would join the global pledge on becoming a net-zero emitter by 2050 earlier this year, however, clear steps on how that will be achieved are still being forged.

Australia is scheduled to take part in Biden’s big climate summit, set to take place on April 22 and 23. The U.S. President has invited 40 world leaders to the virtual summit as he strives to reestablish his country as a leader in action on climate change.

Speaking ahead of the summit, Australian Prime Minister Scott Morrison said that Australia will be working on the commercialization of low-emissions technology while transforming its energy mix.

Some of the most recent energy transition projects have seen Fortescue Metals work to develop green hydrogen and BHP embarking to unlock the potential of carbon capture and storage.

The 2019 election win of Morrison and the Coalition parties came to many as a surprise in what was dubbed climate election in Australia amid strong public support to tackle climate issues in the country.

The election winners were proposing at the time rather limited measures to address global warming. But, as the average annual temperature in the country rises accompanied by water shortages, increased fire threats, and drought, the pressure for urgent action is on.

According to Morrison, Australia has lowered its emissions by 19% at the end of 2020 when compared to the 2005 levels, primarily due to a major switch to the production of renewable energy: wind and solar, which accounted for 20% of the country’s power generation in 2020.

However, for a meaningful transformation of its traditional energy generation and export sectors to take place, the country will need to reinvent its energy exports to accommodate the demand from its major trading partners.

In general terms, the country’s seaborne transport of fossil fuels is massive: thermal coal, oil, and LNG.

Data from BIMCO shows that in 2020 Australia accounted for 24.5% of the total tonne of dry bulk commodities, and 21.1% in tonne miles, due to shorter than global-average hauls.

Australia is second only to Indonesia with regard to the seaborne steam coal exportation, with a market share in most recent years of 22%.

The export of steam coal is a massive source of income to Australia, in addition to many other natural resources, the most important one being iron ore, where they are second to none, Peter Sand, BIMCO’s Chief Shipping Analyst, said in a comment to Offshore Energy – Green Marine.

Australia is mainly impacted by what its main trading partners do, and that is very much an intra-Asian market. For the dry bulk sector that is all short hauls – nevertheless important tonne miles, Sand added.

In 2020 its trading partners were primarily: 1. Japan 37%, 2. China 17%, 3. South Korea 15%, 4. Taiwan 11%, and 5. Vietnam 7%. That’s 87% for the top 5, according to BIMCO.

Specifically, this has had a major impact on LNG exports to Japan, as the country works on phasing out its nuclear power plants.

EnergyQuest estimates that Australia exported a record 78.0 million tonnes (Mt) of LNG in 2020, up from 77.5 Mt in 2019, despite impact of the Covid-19 on LNG prices.

Japan once again was Australia’s top export destination with 30.3 Mt (38%) of Australian export volume, down slightly from 30.7 Mt (40%) in 2019. Notwithstanding political tensions, China imported 29.6 Mt (37%), followed by Korea in the third-place importing 8.1 Mt in 2020.

According to WoodMac analysis, for the country to become carbon neutral by 2050, Australia will need to become a significant player in low-carbon hydrogen trade as well as being able to offer carbon storage and offset services.

To that end, Australia has already launched efforts to tap into the potential of the hydrogen industry by 2030 in line with its National Hydrogen Strategy.

Meanwhile, it appears that the country’s top two energy exports, coal and gas, are here to stay at least for the next two decades.

Despite all of the major announcements on energy transition being made recently by the global governments, including the EU, China, South Korea, and Japan, the hope pinned on green post-pandemic recovery seems to have fallen short.

The mounting pressure for the post-pandemic economic reboot to go hand in hand with the sustainability goals of the Paris Agreement, abandoning the energy sector’s reliance on fossil fuels has, sadly, failed to reap fruit yet again.

Namely, as world leaders ready for the climate summit, set to tackle global strategies on reducing emissions during this critical decade to keep a limit to warming of 1.5 degree Celsius within reach, devastating data on emissions has emerged.

Specifically, a new report from the International Energy Agency (IEA) sees global energy-related CO2 emissions rising by 1.5 billion tonnes in 2021, driven by a strong rebound in demand for coal in electricity generation.

This would be the biggest annual rise in emissions since 2010, IEA said.

The report estimates that CO2 emissions will go up by almost 5% this year to 33 billion tonnes. The key driver is coal demand, which is set to grow by 4.5%, surpassing its 2019 level and approaching its all-time peak from 2014. Oil is also rebounding strongly but is expected to stay below its 2019 peak, as the aviation sector remains under pressure.

The expected rise in coal use dwarfs that of renewables by almost 60%, despite accelerating demand for renewables, the report shows.

More than 80% of the projected growth in coal demand in 2021 is set to come from Asia, led by China. Coal use in the United States and the European Union is also on course to increase but will remain well below pre-crisis levels.

In 2021, as coal demand recovers, traded volumes are expected to follow suit.

Compared to 2020, exports are expected to rise by 31 Mt (2.4%) to 1 323 Mt in 2021, an increase in seaborne coal trade accounting for 26 Mt, data from IEA shows.

Even though this would mean export volumes will remain well below the pre-Covid volumes, Australia and Indonesia are the likely benefactors of the recovery.

As such, IEA estimates that Australian coal exports would increase by 20 Mt and Indonesian exports by 6 Mt supported by demand from India and Southeast Asia.

Australian exports to China in Jan-Feb 2021 are down by 10.7 MT from Jan-Feb 2019, according to BIMCO, while imports to Hong Kong and Singapore are up by 4.5 MT and 5.7 MT respectively.

BIMCO expects that these volumes most likely will end up in China, bringing imports on par with the pre-pandemic level.

“If difficulties of Australian coal exports to gain access to Chinese markets persist, unusual coal flows could become the new normal in 2021,” IEA said.

The demand rise from China has lifted rates across the dry bulk sector so far this year.

“Now, the force of the Chinese dry bulk imports, powered by economic stimulus, is once again fuelling the economic recovery that was shattered by the COVID-19 pandemic in China and lifting the whole dry bulk shipping market,” says Sand.

“In fact, you currently see earnings across all dry bulk sectors that have not been seen stronger since 2010.”

The rise of CO2 emissions in 2021 amid projected demand increase for coal, oil, and gas driven by the economic recovery of the world should serve as a major wake-up call for world leaders as this is not the first time sustainability goals are being sacrificed for economic gains.

“Unless governments around the world move rapidly to start cutting emissions, we are likely to face an even worse situation in 2022. The Leaders Summit on Climate hosted by US President Joe Biden this week is a critical moment to commit to clear and immediate action ahead of COP26 in Glasgow,” Fatih Birol, the IEA Executive Director, said.

For the shipping industry, sticking to our ‘old ways’ of doing business driven by low oil prices and economic growth built on fossil fuels reliance means that the industry will fail on its decarbonization mission.

As indicated in a recent study by MAN Energy Solutions, only with strong regulatory policy backed by most governments, and rapid action can the IMO and Paris climate goals be achieved.

Otherwise, the industry and the world risk perpetuating the same scenarios of spurring economic growth to the detriment of future generations.

Therefore, the industry is likely to end up producing ‘more efficient’ ships while continuing to trade polluting cargoes and burning fossil fuels.