Federal Budget 2012: Renewables lost in the balance

The Conversation

Not surprisingly, there was little excitement on the environmental policy front from this year’s Federal budget. This partly reflects the extensive environmental policy in the government’s Clean Energy Future Policy (CEFP) and partly their obsession with achieving a surplus in 2012/13.

As I am sure is intended, I get lost in the quagmire of forward estimates, appropriations and the shifting of resources from one portfolio or program to another and cannot gain a quick and reliable understanding of what exactly has happened.

Even the way the government and each portfolio reports the changes to the budget defies logic. For example, each portfolio, such as the Department of Resources, Energy and Tourism or the Department of Climate Change and Energy Efficiency, reports the revised 2011/12 budget, the new 2012/13 budget and the forward estimates. It doesn’t include what was announced in 2011 as forward estimates for 2012/13 so we are unable to see, without great difficulty, what has been delayed and what has been expanded (although they usually promote the latter).

However, what has become clear is that renewable energies have been hit hard. In a report on the ABC today it has been estimated that approximately half a billion dollars has been cut from the industry “over the forward estimates”, that is, after considering the new additions, the delays in spending until future years and straight cuts in spending.

For example, the Solar Flagships program, aimed at demonstrating the feasibility of large scale solar parks, had 650 million dollars cut from the 1.5 billion dollar program over the forward estimates.

Of course, the government claims that these funds will be restored and returned in future years but this can hardly be assured given the uncertainties over future revenues and expenses and the desire to achieve future surpluses. One program, the Renewable Energy Venture Capital Fund, which aims to provide venture capital to encourage the commercialisation of renewable energy technologies had its funding shifted to 2023-2024!

These cuts simply delay the movement of the Australian economy to a sustainable future. The government, like most economists, may be relying on the impending carbon price to lead this charge but the carbon price needs the support of other policies which promote renewable energy. The carbon tax only works as expected in a world of perfect information, zero transaction costs, and perfectly competitive markets which, of course, is not the reality.

Even then, according to the Treasury modelling used to estimate the impact of the CEFP, domestic emissions of carbon remain at roughly today’s level as far out as 2050. While this corresponds to a lower level of emissions than an economy without carbon pricing, reaching the target of 80% below 2000 levels by 2050 requires a huge amount of internationally sourced carbon offsets (foreign abatement).

Incurring a greater budget deficit now and in future years to achieve more domestic abatement and therefore a lower carbon deficit would be more impressive than a budget surplus and exactly why the government is obsessed with a surplus in the uncertain global economic environment is beyond reason (and I am an economist). They have effectively passed the ball of aggregate demand management over to monetary policy (using interest rates to change aggregate demand and stabilise the economy) and this was highlighted in the statement by Treasurer Swan when he suggested that the surplus would allow the Reserve Bank to continue cutting interest rates.

But fiscal policy (government revenue and spending initiatives to change aggregate demand) still has a role to play especially given the commercial bank’s reluctance to pass on interest rate cuts which reduces the effectiveness of monetary policy.

While Australia may be more advanced in their recovery than other advanced economies, the uncertain economic environment and good economic sense suggests that a modest fiscal deficit is still required. Moreover, government spending to boost economic growth could coincide with spending on renewable energy thus achieving economic as well as long-term environmental gains, which has been referred to as Green Keynesianism.

In terms of deficits and surpluses it would be much more impressive if the government announced measures to reduce the carbon deficit of the country than measures to increase the budget surplus.

Neil Perry is a Research Lecturer at the University of Western Sydney

This article was originally published on The Conversation – theconversation.edu.au. Reproduced with permission.