Paying for A Future Made in Australia

Australians want a bold vision for their future economic prosperity. They want not just to create new opportunities but to align them with our values and international commitments, not the least of which is the clean energy transition. Critical minerals should be central to this vision, and dig-and-ship is no longer the answer. The government’s 2024–25 budget outlines the vision and commits new funding to it, but more is needed to address commercial, technological and economic fundamentals.

More will need to be done, and we’ll have to pay for it. The government should invest more broadly in the sector via small loans at the early stages of project development. Demand-side investments are also needed. One option is to pay for it by improving taxation of the oil and gas sector.

The budget is bullish on critical minerals, squarely locating them in the $22.7 billion Future Made in Australia program. The nation’s mineral sector will feature significant upstream and downstream mineral production and even end-use manufacturing: $836 million to the Solar Sunshot program and $549 million for battery manufacturing through to the early 2030s.

In that vision, Australia’s extractive sector is more complex, the sector dovetails into advanced domestic manufacturing, and our economy is better integrated with those of our Indo-Pacific partners. Australia would capture greater value from our natural resources, play a bigger role in the international clean energy transition and have a greener domestic economy.

The government is taking steps in the right direction—even if it’s uncertain whether Australia’s end-use manufacturing is viable—but we need to do more and to pay for it, particularly where we aim to compete against immense international industrial policies, such as the United States’ US$369 billion Inflation Reduction Act.

Central to the government’s critical minerals measures is the Critical Minerals Production Tax Incentive, a 10 percent tax credit on processing and refining beginning in 2027. It will cost the government an estimated $7.0 billion over the next decade (and potentially $16 billion by 2040–41).

In any regular market, that incentive should create strong outcomes for some existing projects in lithium, nickel and rare earths that already integrate processing capacity. It should also attract greater capital investment and incentivise integrated domestic processing for future projects. And those projects are vital for the clean energy transition. For example, 90 percent of lithium demand in 2040 will be driven by clean energy technologies.

But this is a manipulated market. Subsidies alone won’t overcome the challenges facing the sector, and industry alone can’t overcome state-backed market manipulation.

In 2023–24, the government committed significant investments into major critical minerals projects ($400 million in loans to Alpha HPA; $840 million in loans and grants to the Arafura Nolans project) and conditionally approved $185 million in loans for Renascor’s Siviour graphite project (although that may be revised).

Those are huge loans, and we can expect only a few more in the near term. The budget indicates that the government’s critical minerals investment agencies—the Critical Minerals Facility, the Northern Australia Infrastructure Facility and Export Finance Australia—are approaching their limits.

In a capital-intensive sector, the government has committed more than $1.2 billion to a small number of projects, but massive loans alone can’t build this sector and quickly diversify supply chains.

The government will need to invest more broadly through smaller loans at the earlier stages of project development. Those projects are riskier but could more quickly attract private capital. That would also link to other government initiatives, including $566 million in exploration funding and $182.7 million (over eight years) to speed up regulatory approvals.

On the demand side, we need to continue to invest in Australian end-user solar or battery industries (and research and development) and expand Australia’s integration into existing markets in the United States, Japan, South Korea and Taiwan. Notably, this budget commits $5.8 million to a critical minerals trade-enhancement initiative run by the Department of Industry Science and Resources and the Department of Foreign Affairs and Trade.

Areas where government can commit to critical minerals investments in coming years are plentiful, but funding is not. To properly fund the Future Made in Australia policy, we must find a new source of serious revenue, and improving taxation of the oil and gas sector may be the best option.

As argued by the Australia Institute, Australia’s petroleum resource rent tax (PRRT) is lacking compared with international standards. Many liquefied natural gas projects expect never to pay the tax. There is a counterargument here that the second-order impacts of LNG projects, including direct jobs and broader industry activity, compensate. But, at a time when we need to create resilient supply chains and invest in our future economic prosperity, someone must pay the bill.

Australia’s LNG exports generated $92.8 billion in revenue in 2023, up from previous years. However, the government expects to collect less PRRT this year than in previous or future years. Our LNG production tripled from 53 billion cubic metres in 2010 to 154 billion cubic metres in 2022, but we aren’t seeing commensurate economic or government revenue impacts. Other leading global LNG supplier nations, such as Qatar, collect far more from their oil and gas sectors.

Until recently, Australia has been an attractive destination for LNG investment, and we’re near to major customers—Japan, China, South Korea and Taiwan. The government’s new Future Gas Strategy, which commits Australia to LNG through to 2050 and aims to reduce regulatory approval lag time, as well as the forthcoming revision of the National Hydrogen Strategy, are strong political signals that will counter growing concern about our regulatory environment.

The government’s vision for critical minerals and a Future Made in Australia boldly attempts to move Australia’s economy forward amid slowing global growth and recent domestic economic stagnation. Future budgets will need to build on that investment and identify new income sources to do so.