How Australia can be a clean-energy industrial success

Meeting global and domestic emission reduction targets will impose transformative change on Australia’s heavy manufacturing and mining sectors – change for which we are ill-prepared. However, we have an opportunity, based on our comparative advantage in the competitive renewable energy sector, to add value to globally significant mineral resources, and support employment in the regions where carbon-intensive industries will decline.

A strategic partnership between government and industry would help deliver this opportunity.

Australia and many other countries have committed to emission reduction targets of net zero. Meeting our target will affect every corner of our economy, most profoundly the heavy industry and mining sectors. Many European countries reduced their emissions by de-industrialising and outsourcing their emissions to China. Australia can follow a different path.

The success of this industrial revolution will demand clear focus. Activities such as coal mining in its current form will be essentially incompatible with a net zero economy. Thermal coal will decline as renewable generation grows. The demand for metallurgical coal will fall as new green steel technologies become commercially viable – a prime example of a group of current activities that will be transformed by developing technologies, mostly known but presently expensive.

Then there are activities that are small today but where Australia will have comparative advantages. These include the production and use of hydrogen and the low-emission extraction and processing of energy minerals critical to an electrified future such as lithium, cobalt and manganese, where Australia has a material share of the known global resources.

The scale and pace of the transformation demands an approach to industry policy seldom embraced by Australian governments. However, there are sound economic policy reasons for this industrial revolution.

Sustained collaboration needed

First, markets alone do not generally provide adequate incentives for research, development and piloting of early-stage technologies. Second, many low-emission technologies are particularly risky because the long-term carbon risk is driven by decisions of governments. And third, market forces are not good at driving investment in long-term structural transformations at high speed. Together, these factors plead for a sustained collaboration between the public and private sectors.

Australia’s current approach is fragmented. There are hundreds of capital grant programs that allocate funds with more of an eye to buying votes than building economic prosperity. There is little by way of strategic focus, funding seldom matches the rhetorical objectives, and there is a disconnect between energy policy, industry policy and regional policy.

We need an overarching strategy: a framework of targeted policies linked to clear goals over an extended period, developed and executed in sustained collaboration with industry.

This is a new approach for Australia built on strategic economic advantage, not wishful thinking. The walls of high tariffs and protectionism must not be rebuilt.

Most elements of a successful 21st century industry policy – the individual policy tools and critical technologies – already exist.

The federal government should use the existing safeguard mechanism to reduce emissions from Australia’s largest emitters to net zero by 2050, by reducing baselines, setting stringent benchmarks for new facilities and establishing an industrial transformation future fund. In parallel, the government should phase out assistance that encourages additional fossil fuel use.

Alongside the announced National Reconstruction Fund, existing agencies such as the Clean Energy Finance Corporation and the Northern Australia Infrastructure Fund should give priority to export-oriented industries that play to Australia’s comparative advantages in a net zero economy. Funding should include loans, guarantees and equity.

Equally important, the federal government should work with state and local governments to fund regional transition authorities for areas most affected by the great energy transition.

We can avoid the traps of bad industry policy such as governments picking winners or capture by vested interests. The way to avoid the first trap is to build a portfolio of potential winners, complemented by a rigorous process to abandon emerging losers. The second requires a robust governance structure independent of government but underpinned by governments’ strategic policy choices.

The new federal government has a once-in-a-century opportunity. Despite the very real challenges, the opportunity should be taken; the downside is too ugly to be contemplated, and the upside too great to be missed.