Failing to navigate the transition to a lower-emissions economy could have a disruptive impact on WA’s standard of living.
A warning light is flashing for Western Australian industry after the European Union parliament last week signalled its intention to pursue green import tariffs.
The EU has been ambitious about its plans to cut emissions, and this policy would mean levying a charge on incoming products from sources deemed to have insufficient emissions reduction strategies of their own.
The move would create a green firewall around the trading block and help defend EU industry from being undercut by countries with weaker approaches to climate change.
Luckily for WA, merchandise exports to the EU were $4 billion in the 12 months to January, about 2 per cent of the state’s total.
But other countries would likely follow. That explains why resources businesses are taking their own actions.
Some LNG cargoes are being sold with emissions fully abated, and iron ore miners are putting forward cash for research to help steelmaking customers reduce emissions.
WA’s second biggest export is LNG, worth $27 billion in the year to June 2020. LNG is also a big emitter.
Operator Chevron released more than 10 million tonnes of carbon dioxide in the 2020 financial year, a 22 per cent reduction on 2019 driven by carbon capture and storage.
Natural gas could have a continuing role, even in a world with net zero emissions in 2050, with the International Panel on Climate Change’s mitigation pathways work suggesting use could fall between 13 and 62 per cent.
It’s clear, however, that WA’s export prowess could be challenged as the world cuts emissions.
There’s much made of the potential for hydrogen and green manufacturing jobs in WA, yet the case for the state’s competitive advantage down the value chain remains to be built.
Businesses have previously invested in iron ore value adding in WA and met challenging economics, with Rio Tinto’s Kwinana HIsmelt one example.
A much-touted opportunity is producing green steel, which uses renewable hydrogen in place of metallurgical coal. Steelmaking is a multi-step process.
Iron ore is first converted to pig iron or direct-reduced iron before the iron is made into steel.
Grattan Institute energy program director Tony Wood told Business News a global move towards use of green steel might give Australia a chance to move down the value chain, although there would be many factors that would impact competitiveness.
“Australia can do this,” Mr Wood said.
“The sooner we start planning, the better.
“We’re trying to build a market on both sides at the same time, demand and supply Mr Wood said green steel production cost about twice as much as normal steel, and the hydrogen price would need to be cut by about a third to make it competitive.
Research and scale could help bridge that gap, he said.
The move to green steel was likely a longer-term opportunity, Mr Wood said, because steel accounted for about 7 per cent of global emissions.
Australia’s edge will be in renewable hydrogen production.
Solar and wind potential in Australia is globally notable and stronger than potential competitors such as Indonesia.
Transport costs for hydrogen were likely to be more expensive than coal, Mr Wood said, as the gas needed to be liquefied at a very cold temperature or converted into ammonia.
Mr Wood said using hydrogen domestically would therefore give a cost advantage, which could alleviate the wage differences between Australia and other jurisdictions.
But it is not a slam dunk for WA.
Grattan’s modelling in a 2020 report suggests the east coast will likely be the right place for this manufacturing rather than the Pilbara, due to its greater population.
Wage and construction costs in the Pilbara are likely to make it cheaper to manufacture the steel on the east coast, which consequently would imply hydrogen production on the east coast, near where it will be used.
WA would ship the iron ore across.
Grattan’s modelling suggests east coast steelmaking may be about 8 per cent cheaper than WA, although there’s room for changes in assumptions.
However, WA may be positioned well for the first stage of the process, extracting the iron from the ore before shipping east, Mr Wood said, as it was less labour intensive.