Time for Australia to take a big leap towards a decarbonised economy
10 Oct 2022|

In New York during United Nations climate week, Energy and Climate Change Minister Chris Bowen described the ‘enormous’ task Australia faced in moving industry towards decarbonisation. The new government’s proposed National Reconstruction Fund (NRF) is intended to push industry towards decarbonisation, strategic autonomy and resilience. The hard task will be to shift the economy from its heavy reliance on ideas and technologies from overseas, to building local capacity in industries of the future. While that might challenge some who suggest the fund is ‘picking winners’, in many respects it is the harbinger of an emerging global industrial policy paradigm.

Industrial policy has returned to the spotlight internationally as advanced economies respond to successive crises from Covid-19, climate change and autocratic belligerence. With large-scale economic support packages in key technological areas—particularly semiconductors—grabbing headlines, Australia will find it tough to compete globally given its thin industrial structure.

The contours of Australia’s next forays into industry policy are not yet fixed in place. The proposed $15 billion NRF may help push Australian capital and government towards more ‘risky’ endeavours. However, treading the line between ‘buy Australian’ and building sovereign capability will hit a wall somewhere between the nation’s natural endowments and the lack of a history of assertive policy addressing industrial reconstruction.

A cavalcade of global issues has driven increased calls for a more diverse Australian industrial base and expanding niche capabilities. To get a sense of the challenges, Canberra is conducting reviews into areas including defence, critical technologies, the technology workforce and climate security risks. The danger here is that new ministers will be served up lists of current programs rather than ambitious plans for what should happen next. Some departments are used to thinking in terms of electoral cycles and are ill-equipped to articulate plans in the medium-term, let alone the longer term.

The government needs to move quickly from review stage to ambitious action. Globally, revived industrial policy objectives have been framed in terms of economic resilience, strategic autonomy and decarbonisation. In industry policy work, these are sometimes referred to as mission-based policy. The normal measure of success isn’t just increased economic growth in and for itself, but that growth balances national security risks and carbon concerns.

Addressing these challenges is much more difficult for Australia given our thin industrial structure. If increased economic diversification is an aim of the current government, then this will entail pioneering a different risk profile for government-directed investment. It will mean practically managing new economic risks that didn’t previously exist.

Australia’s economy lacks both diversification and sophistication. The lack of diversification in products isn’t necessarily a bad thing when economic strength is measured in terms of total GDP—where Australia is currently ranked 13th.

However, economists explain: ‘countries tend to converge to the level of income dictated by the complexity of their productive structures, indicating that development efforts should focus on generating the conditions that would allow complexity to emerge in order to generate sustained growth and prosperity.’

Australia’s dependence on China for up to 40% of exports and 20% of imports means there’s been a reluctance to engage with the comprehensive industry policy reform needed to ensure that the country can weather the rising tide of geopolitical risks.

The government presumably has these issues in mind with the NRF intended to unlock a further $30 billion in private finance. The fund aims to drive investments across key sectors including resources, manufacturing, agriculture and forestry, transport, medical science and green energy.

It’s likely that the governance structure of the NRF will be similar to that of the Clean Energy Finance Corporation. In this, the government is falling into line with best international practice for innovation policy.

There is, for example, only weak international evidence on the effectiveness of targeted grants—the favoured approach of the previous government to modernise manufacturing—which is now the subject of another extensive review.

Financial instruments such as loans, guarantees and public venture capital, alongside demand-side instruments such as carbon pricing) are more effective at building the innovation ecosystem. But each of these instruments carries political risks as Australia witnessed with the ill-fated Carbon Pollution Reduction Scheme under the previous Labor government.

Some might claim that the reconstruction fund will crowd out private investment, but we’re witnessing a paradigm shift in the way governments and industry collaborate.

The Productivity Commission has released a report promoting passive diffusion of innovation across the economy. In the context of the large-scale economic support packages now taking shape globally with heightened investments in key areas, the report looks like a policy formulation from a starkly different era.

Governments are enhancing investments in semiconductors and forming new public-investment vehicles to fund the technology ecosystem in Europe, the United Kingdom and Japan.

In terms of decarbonisation, global investment is driving green energy technology and infrastructure.

Renewable energy infrastructure projects dominate global private investment funding in the sector, increasing from 21% in 2010 to 47% in 2020 according to data from the G20’s Global Infrastructure Hub. To date, these projects have been concentrated in Western Europe and North America. The market really is untapped in Asia, and the race is on to ensure that Australian finance and infrastructure capabilities jump on this bandwagon. The ‘Build Back Better World’ partnership and ‘Blue Dot Network’ are designed to ensure that various Indo-Pacific countries are brought into the mix.

In Australia, strategic investments have seen renewables grow from 17% to nearly 33% of all electricity generation over the last six years, including more than 12% from solar.

Projects such as Sun Cable’s Australia-Asia PowerLink are intended to instigate a new energy export market. However, key parts of the photovoltaic value chain also need to be developed if the true value of export of solar energy is to be realised.

Few countries have the resources to be competitive in all technologies that might be critical to their national interest. Aligning overall ambitions alongside the structural interdependencies that have emerged with China is difficult. But there has never been a more important time for Australia to take calculated big leaps forward.