Intergenerational Report plots fossil fuel decline, rise of electrification, as climate impacts mount

The government’s Intergenerational Report estimates Australia’s coal and gas output could both shrink about 70% by 2050 provided partners cut greenhouse gas emissions in line with the higher end of the Paris climate accord. Impacts of climate change, though, remain highly uncertain.

The 2026 iteration of the triennial report, released on Monday, argues that while Australia’s economy and per-capital incomes will continue to increase in the coming four decades, the pace will be slower than the past 40 years.

“The energy transition is becoming more important and urgent,” the report’s executive summary states, listing the challenge among Australia’s “five most consequential transformations”. The other four are artificial intelligence, geopolitical fragmentation, an aging population and an economic base evolving towards services.

One reason for the urgency is that demand for Australia’s fossil fuel export commodities “will likely plateau and then decline due to the global shift away from fossil-based energy sources”, the report states.

Based on [International Energy Agency] scenarios, Australian coal production is projected to decline by 71% by 2050 [and] liquified natural gas (LNG) production is projected to decline by 68% to 2050,” it said, with Treasury estimates based on trading partners taking climate action.

As with the 2023 IGR, released three years ago by the Albanese government, a global energy transition could present “a significant economic opportunity for Australian industry”. The edge would come given “many prospective pathways for decarbonising industrial processes [rely] on an abundance of renewable electricity”, this year’s report states.

“This [opportunity] includes nascent green commodities such as green iron and green ammonia,” it said. “Treasury’s scenario modelling for the government’s Net Zero Plan projected the value of green exports to reach over $100 billion per year by 2050 under the baseline scenario.”

“The 2026 intergenerational report showcases why getting the energy transition and economic transformation right today is critical for securing the economic prosperity and stability of future generations,” said Matt Pollard, head of research at Climate Energy Finance.

“Failure to implement intergenerational policies that kickstart clean industries of the future for Australia, while Asian economies and our key trading partners are rapidly electrifying and decarbonising their economies, means the opportunity cost to posterity from inaction grows exponentially every year,” Pollard said.

Estimating the impacts of climate change on the economy overall is particularly difficult, not least because forecasting extreme, disruptive weather events are beyond current global models.

For instance, the monster El Nino event, now likely the most extreme in terms of sea-surface temperature anomalies, is likely to bring global temperature spikes over the coming year that are earlier than most models forecast.

The drag on the Australian economy from climate change is already showing up in higher insurance costs.

As the 2026 IGR notes, “[o]ver the next 40 years, increasingly frequent and severe natural disasters will pose a significant economic risk”.

“Impacts include the loss of economic activity, infrastructure damage, and higher insurance costs,” it stated, with impacts varying by location. “For example, one modelled outcome reported by the Insurance Council of Australia estimates only 23% of the 242,000 households living in high flood risk areas have flood insurance.”

The government report said it expects the costs associated with disaster response, recovery and reconstruction “will continue to rise as the severity and frequency of natural disasters increases”.

In the May budget, the federal government cut the share of disaster assistance through its Disaster Recovery Funding Arrangements it provides the states from as much as 65%-75% to a 50/50 split.

“Global action to limit temperature increases will help reduce the impact on the DRFA, with the increase in annual expenditure projected to be about 25 percentage points lower in 2066 under the Paris-aligned scenario, compared to the Exceeding 3 degrees scenario,” the IGR stated.

The IGR notes that Australia’s first national climate risk assessment, released last November, outlined many of the perils the country will face in warming world.

The impact pathways presented in the IGR, however, were “not a comprehensive assessment of the material risks identified” in the NCRA.

Indeed, the IGR analysed just four climate damages: sea-level rise, higher temperatures reducing labour productivity, lower agriculture crop yields, and reduced tourism. That compared with the total of 63 “nationally significant climate risks” and seven climate risks identified in the NCRA itself.

More comprehensive damage estimates, as explored by the Network for Greening the Financial System (NGFS) “showed global GDP could be 5 to 44% lower under 3°C of warming by 2100”, the IGR noted.

As for the transition of fossil fuels, the IGR said Australia’s embrace of clean energy would not only support the competitiveness of Australia’s energy-intensive industries but deliver savings for consumers.

“The energy build-out is occurring fastest among households looking to unlock electrification savings,” the IGR stated.

“Average household energy costs are expected to decline by around 40% from 2030 to 2050 as households electrify, with a solar-powered household that electrifies their home and vehicles reducing costs by around $4,300 a year,” it found.

“Australia is also the third-largest market for utility-scale battery storage in the world, behind China and the United States, and Australia’s installation of batteries is accelerating over time.”

The IGR also linked the geopolitical threats to electrification, reflecting the present impact of the US-Israel war on Iran and resulting disruptions to international trade in fossil gas and fuels.

“More broadly, “[e]lectrification can lower the energy costs faced by households and businesses while reducing exposure to fossil fuel price volatility”, it said.

“Building new energy assets efficiently over the coming decade will be critical to Australia’s lasting competitiveness and orderly decarbonisation,” it said.

Despite the many headwinds, treasurer Jim Chalmers gave an upbeat assessment of Australia’s future.

“Whether it’s our advantages in [artificial intelligence] and clean energy, our universal healthcare and universal superannuation systems that are the envy of the world, our strong institutions, resilient labour market or the progress we’ve made on the Budget – Australia confronts the major transitions underway from a position of relative strength,” Chalmers said in the IGR’s foreword.

“We are better placed, better prepared and have a better plan than most countries to deal with what’s coming at us and what’s ahead of us.”

The Australian economy, the IGR projected, will continue to grow and living standards will improve over the next 40 years. “By 2065–66, the real economy is expected to be more than twice the size and real per capita gross national income to rise by 55%,” it estimated.