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On a hot January afternoon in 2026, the Australian economy looks deceptively familiar: coal trains still snake towards export terminals, suburbs hum with air conditioners, and gas peakers fire to keep the lights on as rooftop solar fades with the sun.1
Beneath that surface, however, the numbers tell a sharper story of accelerating climate risk and a narrowing window for orderly transition.1
Australia’s climate has already warmed by about 1.5 degrees since records began in 1910, amplifying heat extremes, damaging infrastructure and productivity, and raising the economic costs of fire, flood and drought.1
Electricity generation has changed quickly, with renewables supplying close to 40 per cent of national grid power in 2023 and hitting record moments above 70 per cent in the National Electricity Market, yet coal remains a major backbone of supply and exports.2
At the same time, agriculture, heavy industry and resources continue to contribute a large share of emissions while underpinning regional jobs and export income, making transition design a core economic question rather than a niche environmental one.4
Federal and state governments now face a 2026 policy choice: whether to lock in a credible pathway to net zero that also boosts productivity, or to delay reforms and risk disorderly shocks in prices, employment and trade competitiveness later in the decade.5
The policies adopted this year will help determine whether Australia can cut emissions fast enough to meet its targets while sustaining real wage growth, attracting investment, and cushioning households and regions exposed to structural change.5
The 2026 policy baseline
Australia enters 2026 with a legislated national target to cut emissions by 43 per cent below 2005 levels by 2030 and to reach net zero by 2050, supported by a package of federal laws including the reformed Safeguard Mechanism for large emitters and a strengthened Renewable Energy Target framework.1
The Climate Change Authority’s recent Sector Pathways Review sets out potential technology pathways across electricity, industry, transport, resources, agriculture, land and the built environment, emphasising accelerated deployment of known technologies rather than speculative breakthroughs this decade.1
State and territory governments have layered their own commitments on top, from Victoria’s and New South Wales’ renewable energy zones and coal exit timetables, to Queensland’s public‑ownership based transition plan and South Australia’s high‑renewables grid experience.2
Economists at the Productivity Commission and Treasury describe the net zero shift as a major reallocation of capital and labour that, if handled well, can lift long‑run productivity by delivering cheaper, cleaner energy, but warn that policy gaps and uncertainty risk stranded assets and higher transition costs.5
At the same time, official projections highlight that existing policies alone leave a shortfall to more ambitious 2035 trajectories consistent with Australia’s fair share of global efforts, meaning 2026 decisions on standards, tax settings and public investment will shape future target credibility.1
Central to this year’s policy debate is how to sequence reforms so that coal‑dependent regions, emissions‑intensive trade‑exposed industries and farm communities can adjust without abrupt employment shocks or sudden price spikes for households.5
Powering the economy: energy, firming and the grid
The electricity system sits at the heart of Australia’s transition because cutting power‑sector emissions enables decarbonisation in transport, buildings and some industrial processes through electrification.2
By 2023 renewables already supplied almost 40 per cent of national electricity generation, driven by wind and large‑scale solar backed by a surge in rooftop solar that now sits on more than three million homes.2
The Australian Energy Market Operator’s 2024 Integrated System Plan finds that to reach 82 per cent renewable electricity by 2030 while maintaining reliability, the National Electricity Market needs to roughly triple its capacity, add at least 6 gigawatts of large‑scale renewable generation each year and build extensive new transmission lines to connect renewable energy zones to load centres.2
AEMO’s optimal development path projects that firming capacity, including batteries, pumped hydro and flexible gas, must at least quadruple by 2050, with about 49 gigawatts of dispatchable storage and 15 gigawatts of flexible gas generation needed to manage variability and keep the system secure.2
Industry leaders warn that transmission bottlenecks, social licence challenges and planning delays are now among the main constraints on investment, with projects facing multi‑year approval processes and community concerns about land use, benefit sharing and environmental impacts along new corridors.2
In 2026, policy priorities identified by energy economists include faster, coordinated transmission planning, clearer community benefit frameworks, and updated market rules that properly reward flexible demand, storage and fast‑ramping resources that support a high‑renewables grid at least cost.2
Reserve Bank research on the employment impacts of clean energy suggests that while job losses in coal power will be concentrated in specific regions, the build‑out of renewables and transmission can create more roles nationally, underscoring the importance of skills and regional planning rather than slowing the phase‑out schedule.5
Industrial decarbonisation and clean‑tech competitiveness
Industry and resources account for a large share of Australia’s emissions and export earnings, including steel, aluminium, LNG, coal, alumina and other energy‑intensive products that face growing decarbonisation pressures from trading partners and global investors.3
The Climate Change Authority’s industry and waste pathways work highlights that deep cuts are technically feasible through electrification, fuel switching to hydrogen and renewables, process changes and carbon capture in some sub‑sectors, but notes that investment cycles, asset lifetimes and global competition make the 2020s a critical window for decision‑making on new plant and refurbishment.3
Analysis by Grattan Institute and others argues that Australia’s strongest comparative advantage lies in “green metals”, using abundant renewable energy and emerging green hydrogen supply to produce low‑emissions iron, alumina and ammonia for export, rather than exporting raw materials and importing embodied emissions from offshore processing hubs.3
The updated National Hydrogen Strategy, released in 2024, sets targets for producing half a million tonnes of green hydrogen annually by 2030 and up to 15 million tonnes by 2050, prioritising applications in iron, alumina and ammonia where hydrogen can be used efficiently at scale and where global demand for low‑emissions commodities is emerging most quickly.3
Economists caution that hydrogen and green metals still face a “green premium” – the current cost gap between zero‑emissions production and conventional methods – which means 2026 policy settings must carefully target support, for instance through time‑limited production incentives, contracts‑for‑difference or risk‑sharing finance that can crowd in private capital without locking in inefficient subsidies.3
Productivity Commission work on the net zero transformation emphasises that clear, predictable carbon price signals through the Safeguard Mechanism and complementary measures can steer investment more efficiently than a patchwork of ad hoc grants, especially for large industrial facilities exposed to international competition.5
Unions and regional leaders argue that industrial decarbonisation plans must be tied to concrete regional industry strategies, including worker redeployment pathways, training programs and local content rules where appropriate, to ensure that clean‑tech competitiveness translates into secure employment rather than short‑term construction booms followed by decline.5
Agriculture, land and the hard‑to‑cut third
Agriculture currently contributes between about 12 and 18 per cent of Australia’s annual greenhouse gas emissions, dominated by methane from cattle and sheep, with the sector’s share projected to rise as electricity and industry emissions fall more quickly.4
ABARES’ 2025 snapshot notes that Australian farms are relatively emissions‑efficient by international standards, with a representative basket of commodities producing significantly lower emissions per unit of output than in the United States and the European Union, yet aggregate agricultural emissions are expected to decline only slowly over the next 15 years.4
Under current projections, agricultural emissions fall modestly from around 86 million tonnes in 2023 to about 84 million tonnes by 2040, but the sector’s share of national emissions could rise from roughly one fifth to more than 30 per cent, making it a growing constraint on net zero unless additional measures are adopted.4
Modelling for the Climate Change Authority and independent analysts suggests that improved herd management, feed supplements that cut enteric methane, more efficient fertiliser use and increased soil carbon sequestration can deliver significant abatement while boosting resilience to drought and heat stress, but require stable policy signals and credible carbon market rules to attract investment at scale.4
One recent analysis finds that if the best performing 10 per cent of Australia’s grazing land achieved soil carbon gains of about one tonne per hectare per year, the resulting carbon drawdown could cover a substantial share of the emissions reduction gap projected for 2030 and 2035, although this potential depends on soil types, rainfall and robust measurement and verification systems.4
Farm groups emphasise that any 2026 reforms to agricultural and land‑sector policies must align incentives between emissions reduction and farm profitability, for example by integrating climate objectives into drought and natural disaster programs, biosecurity frameworks, and regional development funding rather than imposing stand‑alone compliance burdens on producers.4
Households, regions and the macro economy
The central economic question for 2026 is how to manage the distributional impacts of transition so that lower‑income households and carbon‑exposed regions are not left carrying disproportionate costs while the broader economy benefits from cheaper clean energy and new industries.5
Treasury’s renewed climate and industry modelling capacity uses economy‑wide general equilibrium tools to examine how different transition pathways affect GDP, employment, wages and sectoral output, finding that earlier, well‑signalled action tends to be less costly than delayed and abrupt adjustments because it allows capital stock to turn over gradually and labour to reallocate with less disruption.5
Recent modelling on physical climate risks also indicates that failing to curb warming could impose significant macroeconomic costs through reduced labour productivity in heat‑exposed outdoor work, more frequent supply chain disruptions, and higher public spending on disaster recovery and resilience infrastructure, all of which weigh on long‑term growth.5
Reserve Bank research into job displacement in energy‑intensive industries highlights that workers who lose jobs in declining sectors often face long spells of lower earnings or non‑employment without targeted support, supporting calls from economists for active labour market policies, relocation assistance and retraining tied to identified growth sectors such as renewables, transmission, electrification and care work.5
For households, the key 2026 policy levers include targeted energy‑bill relief that does not blunt efficiency incentives, incentives for electrification of homes and vehicles, and minimum standards for rental properties so that lower‑income households can access the savings from efficient appliances and building upgrades rather than being locked into high running costs in poorly performing housing stock.5
Productivity Commission analysis frames the net zero transition as a potential productivity reform, arguing that investments in modern, flexible electricity networks and more efficient buildings and transport can reduce input costs for firms and free up resources for higher‑value activity if policies avoid locking in high‑cost technologies or duplicative subsidies.5
Investment, tax and regulation in a tight decade
Meeting Australia’s net zero commitments while supporting growth will require very large capital flows into clean energy, industrial transformation and resilience, with AEMO estimating that the optimal electricity transition alone involves annualised capital costs in the order of more than one hundred billion dollars nationally by mid‑century when spread across generation, storage and networks.2
Public finance institutions such as the Clean Energy Finance Corporation and the National Reconstruction Fund are designed to play a catalytic role, offering concessional finance, guarantees and co‑investment in projects that are commercially promising but face early‑stage risks, particularly in areas like grid‑scale storage, green hydrogen and critical minerals processing.3
Economists and international bodies such as the OECD stress that coherent tax and regulatory settings are as important as direct spending, pointing to the benefits of phasing out perverse incentives such as fuel tax concessions that encourage emissions, tightening vehicle efficiency standards, and aligning depreciation and tax rules with long‑lived clean infrastructure investments.5
At the same time, business groups emphasise the need for streamlined approvals and consistent environmental assessment processes across jurisdictions, arguing that policy uncertainty, inconsistent land‑use rules and duplication between state and federal agencies can delay projects, push up costs and deter international investors comparing Australia with other destinations for clean‑energy and green‑materials capital.3
Regulatory agencies are increasingly focusing on climate‑related financial disclosure, with moves towards mandatory reporting of climate risks and transition plans aiming to improve market transparency and reduce the likelihood of abrupt repricing of high‑emissions assets that could spill over into the broader financial system.5
The challenge for 2026 is to align these investment, tax and regulatory levers into a coherent transition framework that encourages long‑term, low‑cost capital while maintaining fiscal sustainability and avoiding short‑term cost‑of‑living pressures that could erode public support for climate policy.5
Politics, stakeholder tensions and the path ahead
The politics of Australia’s 2026 climate decisions are shaped by the uneven geography of both emissions and opportunity, with coal and gas regions, industrial belts and farm communities confronting more immediate disruption than inner‑city areas that stand to gain from service‑sector growth and green‑tech headquarters.6
Stakeholder tensions centre on the pace of coal closures, the siting of new transmission and renewable projects, and the extent to which new industries such as green hydrogen or critical minerals processing will genuinely replace jobs and revenue streams in existing export sectors rather than clustering in separate regions or relying on temporary construction workforces.6
Climate scientists point to the latest State of the Climate findings, which show continued warming, more frequent extreme heat and increasing drought risk across large parts of southern and eastern Australia, as evidence that delay increases both physical and economic risks, including to key export industries such as agriculture and tourism.1
Economists, meanwhile, focus on sequencing and policy design, arguing that credible long‑term signals – such as legislated targets supported by detailed sectoral pathways, robust emissions reporting and transparent progress reviews – can anchor expectations and reduce financing costs even when near‑term politics are contested.5
Industry leaders stress that global markets are moving quickly, with major trading partners tightening carbon border measures, renewable targets and clean‑technology support, which means that investors now factor climate policy stability into decisions about where to locate plants, research hubs and supply chains.3
For policymakers, the task in 2026 is less about announcing new headline targets and more about filling in the institutional detail – from grid rules and planning laws to skills strategies and regional transition authorities – that can translate ambition into predictable, bankable projects and credible, measurable emissions reductions.6
Forward‑looking implications for policy and prosperity
The evidence from Australian and international modelling suggests that a well‑managed transition can support sustained economic growth, particularly if governments align climate policy with broader productivity agendas such as lifting skills, improving infrastructure and accelerating digitalisation across sectors.5
In practice, this means that 2026 policies should focus on removing structural bottlenecks – for example by accelerating grid upgrades, streamlining planning, and investing in targeted training programs – rather than seeking to micro‑manage individual technologies or shield every existing asset from market change, which would raise long‑term costs and slow innovation.2
Socially, the durability of climate policy will depend on whether workers and communities see credible, funded plans for new jobs, infrastructure and services in regions exposed to transition, as well as fair access to the benefits of cleaner, more efficient homes and transport in cities and towns across the country.6
Politically, governments face a choice between using 2026 to lock in institutions that can outlast electoral cycles – including independent advice, regular progress reviews and stable market frameworks – or continuing to rely on ad hoc deals that resolve immediate conflicts but leave investors, workers and households uncertain about the direction of travel.6
For the economy, the stakes run beyond emissions tally sheets: the shape of this decade’s policy decisions will influence whether Australia emerges as a competitive producer of clean energy, green materials and sustainable food, or remains primarily a supplier of high‑emissions commodities in a decarbonising world.3
The balance between rapid emissions reduction and sustained growth in 2026 will therefore hinge not only on the ambition of targets, but on the credibility, coordination and fairness of the policies that underpin them, and on whether they can command enough public trust to endure the political cycles ahead.6
References
- Climate Change Authority – Sector Pathways Review.1
- AEMO and Clean Energy Council – 2024 Integrated System Plan overview and Clean Energy Australia 2024.2
- Grattan Institute and National Hydrogen Strategy – Green metals: Delivering Australia’s opportunity and Australia’s hydrogen dream remains alive.3
- ABARES and Climate Change Authority – Snapshot of Australian Agriculture 2025 and Australian agriculture emission projections to 2050.4
- Australian Treasury, Productivity Commission and RBA – Australia’s Net Zero Transformation – modelling framework, Growth mindset: How to fix our productivity problem, and RDP 2024-09: The Clean Energy Transition and the Cost of Job Displacement.5
- CSIRO/Bureau of Meteorology and OECD – State of the Climate 2024 and Achieving the Transition to Net Zero in Australia.6
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