Pearls and Irritations

Queensland’s export income, mining royalties and the massive dividends from its state-owned energy enterprises have previously ensured that the State could service a heavy debt load and improve its social service provision without having to sell the bulk of its income-generating public enterprises.

The new challenge for the Palaszczuk government is that traditional exports are facing regulatory pressures as trading partners implement policies to limit the effects of climate change.

Declining demand for coal and coal seam gas, combined with the increasingly likely prospect that agricultural exports will be required to meet toughened environmental and emissions targets of the destination countries are major impediments to the state’s prosperity.

For instance, Queensland’s $25 billion export industry to China fell almost 20 per cent in 2019-20, mostly as a result of geo-political tensions with China, not Covid.

The international pressure to reduce emissions will intensify when Biden replaces Trump. This will inevitably lead to a phasing out of fossil fuels that currently provide 70% of the state’s energy and it will significantly affect the dividends that state-owned energy companies provide to underwrite Queensland’s public debt.

Successive Queensland governments have relied on fossil fuel exports to bolster their budgets and the now ageing coal fired power stations for reliable and abundant energy. The 2019-20 State Treasury predictions suggest that Queensland will require coal-fired power as its major energy source for another 25 years.

These predictions are already being called into question. The combination of Covid-reduced energy use and the increase in renewable energy has resulted in major write-downs on the state-owned Stanwell and CS Energy, which produce almost 70% of the state’s energy and have for many years delivered millions of dollars in dividends to the state’s Treasury. Stanwell’s CEO has suggested that the Covid crisis has created “an early tipping point” (for coal fired generation) and that the wholesale price of electricity is now (at times) less than the average cost of running power generation units.

In its previous term, the government established CleanCo, a publicly owned renewable energy enterprise to take equity in and seed fund renewable projects. While Palaszczuk’s new administration will continue to promote green energy, it will take care not to frighten its central and northern Queensland mining communities. A major challenge will be for the government to limit the damage to jobs and dependent businesses in those regions as the renewables replacement occurs and coal and gas extraction inevitably succumbs to external market forces.

The growth economies of Asia have in the past required the state’s abundant mining and agriculture products. Covid has had a sudden and major impact on tourism and education. In time these may recover but will require considerable stimulus to remain viable in the shorter term.

Geo-political tensions, particularly with the Australia-China relationship, further complicate a recovery dependent on inbound students and tourists. Domestic tourism has softened the Covid effect to some extent but international tourists are a necessary and long-term component of a successful tourism industry. Universities have become even more dependent on overseas students for their financial viability.

Not all regional areas of the state have benefitted from tourism and education. Townsville, Mackay and Rockhampton remain heavily dependent on mining for their prosperity.

Royalties and employment linked to fossil fuel mining, gas extraction operations and energy production from ageing coal fired power stations have been significant for the State’s economic prosperity for many years. These industries are now the most vulnerable as our trading partners in Asia and elsewhere set carbon neutral targets for 2050-60 and look to renewables to achieve this.

In the absence of federal leadership on climate and emissions reduction, state governments are taking up the challenge to set targets for carbon neutrality and shift to renewable energy. In its previous term, the Palaszczuk government set 2030 to meet a renewable energy target of 50% and 2050 as the date to reduce net emissions to zero.

Unfortunately the lack of a national framework and consistency in federal energy policy continues to be a drag on the states’ efforts to move to a low emissions future.

The resulting policy paralysis means there is no national approach providing an effective methodology for achieving a zero net emissions targets or even a target date, unlike our regional and trading partners. Successive federal governments’ intransigence on climate change policy has left the nation wallowing in futile debates about the veracity of climate change while the rest of the world (belatedly including the USA) sets hard targets for emissions reduction and implements policies to this end.

Without a coherent national climate/energy framework, states continue to plan independently for a cleaner future. In the case of Queensland, government owned renewable energy investment enterprises (for example the aforementioned CleanCo) have been established to operate on a commercial basis to invest in and otherwise support developments leading to greater reliance on renewable energy.

However the conflict that has bedevilled the national debate on emissions reduction and the huge challenge this has created for the states in moving swiftly to low emissions energy production remain a major encumbrance for the nation. This was laid bare at a recent Climate and Energy forum hosted by the Australian Financial Review (AFR).

States, including NSW’s Liberal government, have developed comprehensive plans for low emissions energy futures based on what is increasingly evident – that solar, wind and hydro power, combined with increasingly sophisticated battery storage capability, are rapidly becoming much cheaper and increasingly reliable energy sources than traditional and costly fossil fuel plants. The phasing out of fossil fuel energy, including the federal government’s preferred gas, will take place much more quickly than has been anticipated previously.

Caught between a vacillating federal government and state governments that have given up waiting for federal leadership, the private sector energy utilities are also moving to close ageing, polluting generators and replace them with renewable options, albeit in a climate of investment uncertainty. For their trouble, private utilities, like the state government providers, have been, and continue to be, threatened with ad hoc market interventions by the federal government to control prices and/or underwrite new fossil fuel power plants. The result is a chaotic and uncertain energy market where state governments and private operators are faced by inconsistency and uncertainty that pits one against the other resulting in uncoordinated duplication and policy chaos in energy markets across the nation.

In this context, Queensland leaders face the delicate task of embracing the mining communities that remain the source of much of the Queensland’s wealth and employment but are now facing major disruption. Weaning the budget off the dividends from ageing coal-fired power utilities while supporting the transition to renewables and pivoting towards a carbon-neutral future in 2050 will be an even greater challenge for the Palaszczuk government.

Quite apart from China’s aggressive response to discipline Morrison for his Trumpian gestures of criticism, Queensland exporters could also have to deal with the prospect that other nations will place carbon taxes at their borders on emissions-intensive products.

Economist John Quiggin argues that “the next decade will be crucial in determining whether the world makes the energy transition needed to stop catastrophic global warming”. The challenge for the Palaszczuk government is to develop strategies that move the state towards net zero emissions while mitigating the disruption to the traditional sources of income and employment.

The move towards a green economy will challenge the government’s strategic capability and political acumen as it settles into its unusually protracted period in office.

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