Restoring Australia’s prosperity by becoming a superpower

Feb 17, 2024
Wad of Australian fifty dollar notes tied in a knot on an Australian flag.

The debate about climate change is far too often in denial. It needs to change to focus on the positives of how Australia can become a Superpower based on green energy and products that rely on green energy.

As in many other developed economies, over the last decade, or more, Australia’s economic growth has stagnated. Real wages were 1 per cent lower in June 2022 than they were a decade earlier. And after the Albanese Government was elected, real wages fell by another 1.7 per cent over the next five quarters ending in September 2023.

As Professor Ross Garnaut, a leading economic adviser to the Hawke Government, pointed out in a speech last Wednesday such a fall in real wages has never happened before. But as Garnaut and his colleague at the Superpower Institute, Rod Sims (the former Chair of the ACCC) point out the solution is at hand.

With the world now transitioning to net zero carbon emissions, Garnaut argues that Australia has the opportunity “to be the renewable energy Superpower of the zero-carbon world economy.” This is because “Other countries do not share our natural endowments of wind and solar energy resources, land to deploy them, as well as land to grow the biomass sustainability as an alternative to petroleum and coal for chemical manufacture.”

Thus, Garnaut and Sims’ main message is “that export of zero-carbon goods can underpin a long period of high investment, rising productivity, full employment and rising incomes in Australia.” Indeed, according to Garnaut: “Australia’s advantages in the emerging zero-carbon world economy are so large that they define the most credible path to restoration of growth in Australia’s living standards.”

Green hydrogen and ammonia will be important, but the processing here in Australia will be the most important, with iron a long way in front, along with aluminium and the processing of critical minerals including silicon, lithium, nickel copper, cobalt, and others.

Garnaut and Sims go on to say that:

“Australia’s advantages relative to the rest of the world are so significant that their large-scale utilisation would materially improve the prospects of achieving the world’s climate objectives. In addition to our just over 1% of world emissions now occurring in Australia, we could remove around another 6-9% of global emissions that other countries will find very difficult to abate by making, for example, green iron, green aluminium, green transport fuels, green urea and green silicon in Australia. By turning our iron ore into green metal Australia would reduce world emissions by around 3%; more than double the contribution to world emission reduction from decarbonising Australia.”


What policies are needed to realise these opportunities?

Garnaut and Sims make 15 recommendations to support the realisation of Australia’s potential as a Superpower. Many are not or at least should not be controversial. However, two critical recommendations that deserve further comment relate to the proposed:

1, revision to the Albanese Government’s capacity investment scheme, and

2, introduction of a carbon price that reflects the damage that carbon inflicts on us all, and how the proceeds of that extra revenue could then be used.

Revision of the capacity investment scheme (CIS)

The Government’s proposed capacity investment scheme (CIS) is intended to underwrite all future private investment in renewable energy, thus reducing the risks for private investors.

The details of the CIS are still being determined, but it seems likely that it will be based on an auction to lure investors. Garnaut and Sims fear that this minimum generation price will cost the budget huge amounts post 2030 when wholesale electricity prices fall. They also fear that the CIS will drift into inefficient central planning.

Up to 2030, however, the risks to the Budget are not that high because the Renewable Energy Target (RET), introduced by the Coalition government, requires large-scale energy users to acquire a fixed proportion of their electricity from renewable sources, while the RET also provides a financial incentive for individuals and small businesses to install their own renewable energy systems.

But the RET is programmed to expire in 2030. The Government is still considering the rules to be applied to its replacement – the CIS – but Garnaut and Sims fear that because governments are likely to underwrite almost all renewable generation investments, auctions are likely to draw officials into determining which projects should be built, including their location, technology, or timing of investments. In Garnaut’s opinion, this “would place the CIS on a slippery slope to failure.”

Instead, rather than conducting auctions, Garnaut and Sims propose that the Commonwealth underwrite 80 per cent of the costs incurred after financial close for any project that is in the right business (renewable energy or storage) and which meets simple and low hurdles on credibility.

Thus, the Commonwealth would make a payment equal to the shortfall in any year of net cashflow against an annual guarantee of revenue. The investor would specify the length of the underwriting contract up to a maximum of 15 or 20 years. After the accumulated value of net cashflow becomes positive, no more payments would be made, and the project would pay, say, 40 per cent of net cash flow to the Commonwealth for the remainder of the underwriting period.

A carbon solutions levy (CSL)

Garnaut and Sims consider that a range of measures are needed to turn Australia into the Superpower exporting green energy and green materials to the rest of the world, including a Superpower Investment Innovation Scheme to reward first movers for the learnings that followers can benefit from but which the early movers cannot, and the need for more spending on transmission away from the current east coast grid.

To meet these spending needs and the likely cost of the CIS Garnaut and Sims therefore propose a Carbon Solutions Levy (CSL) be introduced in 2030-31. As Sims puts it, “Basic economics means you must price the damage that fossil carbon imposes on us all.” In effect, “we can deal with climate change through a market mechanism, or by numerous specific interventions that will achieve the same goal but at a higher cost.”

In addition, if this CSL were equivalent to the European carbon price this would secure access of our zero-carbon goods into the main international markets. Otherwise without tariff-free access to these international markets we cannot hope to realise our potential as a Superpower.

Garnaut and Sims estimate that the CSL will raise well over $100 bn or about 4 per cent of GDP in the first year. Although this sum will decline slowly over time, it will fund the CIS liability, support the required transmission and storage of renewable energy and the innovation required to build Australia as a green Superpower, while still leaving money over to help the most needy.

The politics

Australia has an unfortunate history of debating climate change over the last twenty years or so. Sims acknowledges that some of their proposed “policies will seem controversial to some, and may be rejected immediately.”

Sims’ answer is that “today is the beginning of the debate, not the end.” He points to how the debate over tariff reform took time, but eventually succeeded.

Personally, I am a bit more optimistic.

The opponents to taking action to limit climate change have focussed almost exclusively on the alleged costs and therefore damage to living standards. But Garnaut and Sims are showing how the debate can and should be restructured. In fact, shifting to renewable energy will provide Australia with a once-in-a-century opportunity to grow the economy and dramatically lift living standards.

Instead, of allowing Dutton’s negativism to continue to dominate the debate, the Government must therefore get on the front foot and seize the initiative. Right now, the Government can dramatically change the political debate by talking about the “once-in-a- century” opportunities that are available to Australia by becoming a Superpower.

Then if the Coalition continues to be stuck in the past and whinging about the end of the weekend with no utes, the Government’s message will not only be much sounder and supported by evidence, it will give people the hope that they are all seeking.

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