Australia’s path to enduring prosperity is through accelerated economy-wide electrification and decarbonisation. The Productivity Commission’s 2022-23 Trade and Assistance Review released this week risks undermining this at a critical juncture.
The Productivity Commision (PC) notes that over 2023, 1,800 trade distorting industry policy measures were implemented globally.
So at a time that global trade is fracturing, led by the $US1 trillion US Inflation Reduction Act, public intervention across other major economies and increased US tariffs against imports from China, its warnings in this latest report against Australia implementing an industry policy of our own seem at best naive.
Fundamentally, it fails to adequately acknowledge the realpolitik that public capital support of Australia’s reindustrialisation is pivotal. Targeted industry policy will enable us to compete globally, as it incentivises our shift from a dig-and-ship petrostate to value-adding our world’s-best reserves of critical minerals and strategic metals like lithium and iron ore, using our superabundant ultra-low-cost renewables.
Our future-facing comparative trade advantage lies at this nexus, and we have a once-in-a-hundred year opportunity to leverage it.
The timing of the PC report could not be worse. The Commission’s caution against “protectionism” for new industries gives fuel to the spoilers in the LNP looking to derail our necessary pivot away from our zero-value-add, coal and gas-centred legacy economy.
Condemnations of support for zero- and low-emissions industry are ironic given the PC fails yet again to focus on the $11 billion annually of taxpayer dollars still freely flowing to prop up the fossil fuel cartels via subsidies, tax breaks and rebates, as they impose their negative externalities onto us in the form of climate catastrophe.
Fossil fuels are entering decline globally, carbon border adjustment mechanisms (CBAM) that penalise carbon intensive exports are building, and the world, now on a trajectory to net zero, is hungry for our transition resources.
We are uniquely placed to “embody decarbonisation” in these by processing them onshore pre-export using firmed sun and wind, accelerating the world’s energy transition. Extending our natural mining and renewables comparative advantages means we can reposition our economy as a zero-emissions trade and investment leader.
For now, there is no carbon price signal in Asian trade to mobilise private capital for investments in embodied decarbonisation capacity. Australia needs to invest at speed, because by the time this arises we will have missed the opportunity. Public capital stimulus is absolutely key in Climate Energy Finance’s view.
Thankfully we now have a federal government whose hallmark is a nation-building plan designed to do just that, the new Future Made in Australia (FMIA) Act and its associated initiatives, which include strategic national public-interest investment in both industry development and energy system transition – critical as the climate crisis escalates.
The Commission’s report makes no mention of the mounting economic costs of the latter. This is a bizarre and glaring omission from an authority mandated to help set our economic course, and one that casts into doubt the rest of its proclamations.
The Commission under-appreciates the impacts for Australia of a profound global geopolitical shift already well underway. There is unprecedented government intervention by the US, the EU, Canada, South Korea, Japan and a growing list of other economies to reposition themselves into the accelerating global energy transition, rebuild manufacturing onshore, and secure cleantech supply chains against China’s decade-long headstart.
All of these nations have put energy security and supply chain sovereignty at the centre of their national security and economic prosperity objectives, and determined that state intervention is necessary.
The US Inflation Reduction Act is the largest injection of public capital in the nation’s history. Its massive all carrot, no stick subsidy programs are turbocharging reindustrialisation, decarbonisation and cleantech in the US – from battery manufacturing to solar and wind. The European Union’s Net Zero Industry Act, India’s Production Linked Incentives, Japan’s GX Roadmap and Canada’s landmark clean energy tax credits are all direct responses to the IRA and China’s dominance.
The Australian Energy Market Operator’s Integrated System Plan models a sixfold increase in Australian renewable energy installs by 2050. China did that in just the first six months of 2024. The scale and momentum of China’s strategic pivot towards zero-emissions industries of the future is hard to comprehend. China is by far our #1 trade partner. It is moving and we must respond or be left behind.
Business as usual is not the status quo. It is a recipe for Australia’s structural economic decline.
The Commission misses the crucial point that green energy statecraft is critical to signal policy confidence and commitment, derisk investment, and catalyse an inflow of domestic and foreign capital into Australia, as competing “behind-the-border” state investments gather pace and we jostle on the world stage for decarbonisation capital.
This latest intervention from our economic umpire is unhelpful in this context, undermining policy clarity and investor certainty as other economies go all-in.
The PC report says that since there are “alternatives to industry policy, it is important that the goals of each policy be well articulated and subject to rigorous, publicly available cost-benefit analysis” and that there are “off ramps” for industry support. Well, yes. They write as if Treasurer Jim Chalmers and the Albanese government have abdicated their responsibility on this, which is not the case.
Chalmers has said that “where markets are nascent or don’t yet exist, there can be a case for targeted, temporary support to crowd in private investment, especially in industries that meet strict criteria”.
These criteria, clearly set out by the government, specify that the industry must be one in which Australia can compete and be more productive; and which contributes to an orderly path to net-zero; builds the skills capabilities, especially in the regions; improves Australia’s national security and economic resilience; and recognises the key role of the private sector as it delivers genuine value for money for the government.
Value-adding processing of our critical minerals and strategic metals onshore fits the above bill. We are the world’s leading lithium exporter, but when we ship it off in rock form, we relinquish our opportunity to derive the economic benefits of transforming it onshore.
We are number one in iron ore, and have a golden opportunity to build a globally dominant domestic green iron export industry, by scaling firmed renewables and transmission infrastructure to power refining onshore – if we act now.
If there were ever a case for industry support this is it. CEF recommends a $10bn Green Iron Production Tax Incentive and a $20bn Future Fund value-added resources mandate to catalyse Australia’s opportunity to leverage our historic global dominance in iron ore export into leadership in the decarbonised iron and steelmaking industry. This has the potential to double our iron exports to $250bn annually, rather than see iron ore exports progressively halve in value due to our lower grade product.
Where the Commission comments negatively that CBAMs could act as “a form of trade protection”, we see a price on carbon emissions in global or Asian trade as an opportunity – exactly the price signal that Australian resources majors need to commercially incentivise the shift to green iron, green aluminium and lithium hydroxide, as well as value-adding of other Australian critical minerals and strategic metals.
In our view, Australia should now strongly advocate for an Asian CBAM, complemented by ambitious strategic national-interest industry support to our renewables-processed resources exports, enabling us to capture the resulting green premium.
There is real potential for Australia to take a position higher up the value chain in cleantech sectors such as battery components and solar technology too, as the Albanese government has done with its $1bn Solar Sunshot investment.
This is modelling how we might transition a fossil fuel heartland like the Hunter, playing to Australia’s strength as the innovator of the most efficient solar panels on earth, while creating jobs, securing sovereign supply chain manufacturing capabilities, partnering with Chinese solar world leaders and supplying 10-20% of the Australian solar panel market.
Targetted industry policy also enables us to enhance our strong trade and diplomatic relationship with key allies, including in the Asian region, to build strategic partnerships, co-investing on refining, manufacturing and cleantech. This should be conditional on national interest objectives.
We recommend that the government mandate resource value-adding pre-export, as Indonesia has done, stipulating that foreign interests’ access to our minerals and metals is contingent on investment into onshore refining, processing and manufacture, with priority access for renewables-powered value-adding.
Now is exactly the time for bold reform and an ambitious domestic response to our trade partners’ and competitors’ massive public subsidy programs, at a scale commensurate with Australia’s opportunity.
This should include an Overriding Public Interest provision to accelerate evaluation and approval of of zero-emissions projects of national significance.
We continue to call for another $100bn of strategic national interest public capital over the coming decade to crowd-in upwards of $300-400bn of private investment needed to reindustrialise Australia’s economy, refocus our mining sector, and massively build out renewables, transmission and storage. This will permanently reduce the energy costs driving our cost of living crisis by ending reliance on expensive fossil fuels.
We can play a globally significant role in the accelerating energy and economic transformation that defines our era, and derive enduring benefits from an investment, employment and trade boom. We cannot afford a flat-footed, misdirected policy approach that fails to grasp the core responsibility of government as a key enabler of this new vision.
Tim Buckley and Annemarie Jonson are from Climate Energy Finance
