How Australia’s industrial sector can flourish in a net-zero world

With the new Albanese government committing to cut carbon emissions by 43% by 2030, along with pressure from newly elected independents and Greens MPs, there’s a sense of hope that that environmental policy will progress beyond the years of the climate wars. 

But how can Australia get through the mire of years of climate inaction and confusion, to meet net-zero targets while maintaining employment in industry and our mining reliant economy. Alison Reeve, Deputy Program Director, and Esther Suckling, Graduate Associate, discuss with Kat Clay, how they charted a path in their new report The next industrial revolution.

Transcript

Kat Clay: With the new Albanese government committing to cut carbon emissions by 43 percent by 2030, along with pressure from newly elected independents and Greens MPs, there’s a sense of hope that environmental policy will progress beyond the years of the climate wars. But how can Australia get through the mire of years of climate inaction and confusion?

To meet net zero targets while maintaining employment in industry and our mining reliant economy. It’s a complex problem, but our energy and climate change team have charted a path in the new report titled the next industrial revolution. I’m Kat Clay and with me are Alison Reeve, deputy program director and Esther Suckling, graduate associate, who are all authors of the new report.

First, let’s set the scene. How valuable is the mining and manufacturing sector to the Australian economy? And how much does it contribute to greenhouse gas emissions?

Esther Suckling: The mining and manufacturing sector is hugely important for the Australian economy. It contributes around 76 billion a year. It employs around 1.1 million people, but on the other side of things, it contributes 30 percent to our national emissions each year. So that’s where we’re coming from. And if we’re going to strive towards net zero in the coming decades, that has to change. There has to be structural changes to the way industry and mining works to drive down that big proportion of emissions.

What we see, which is what we touch on in our report. Cat is that when we try and envision an industrial sector in the future in a low emissions economy around three groups of industrial products fall out. So, the first group are industrial commodities which are the fossil fuels. So, we’ve got coal, oil and gas.

And this group is essentially incompatible with the net zero economy. To different degrees, we’re going to see decline of demand for those fossil fuels over the next few decades. The second group we’ve got are commodities that we don’t currently produce in high quantities, but we’re going to need to. So, something that’s talked a lot about in this area is critical minerals.

Can hear Elon Musk talking about lithium whenever you log into Twitter, these minerals are going to underpin technologies like batteries and electric vehicles, and we currently don’t mind them at scale. So that’s a second. group that’s going to fall out in this shift to a low, low emissions industry. And the third group will be commodities, which we already produce like steel and cement and ammonia, which we have to produce clean.

And that’s going to require big changes to the facilities which produce these commodities. New technologies and a lot of investment. So that kind of sets the scene of where we are today and where we’re going in the industrial sector.

Kat Clay: So, Alison, I mean, your report is about needing an industry policy.

What does this mean?

Alison Reeve: Let’s start with what industry policy is not. So, in the 1950s and 60s, industry policy was about putting in place tariff barriers so that you protected your domestic manufacturing from overseas competition. In the 80s and 90s, Australia got rid of most of that. And we moved to a very hands-off form of industry policy, which was about government sort of investing in the things that Underpin productivity for lots of different businesses.

So that’s things like, skills, education, R& D, digital transition, and so on and so forth. And all that stuff is really valuable. But the thing is that now we’ve given ourselves this deadline of 2050 and wanting to be at net zero. That approach to policy is not going to be enough. To get us to that deadline in time, the new approach that we need to do requires the government to be a lot more active, to work a lot more with business and to think about how to leverage the investment that we’re going to need to bring about that economic transformation that Esa was talking about.

Again, you can kind of divide this up into three. You’re going to need incentives that pull through new technology and help to share risk with early movers. And we’ve already got a lot of that. You’re going to need regulation that pushes the laggards to keep up with progress, and that’s kind of where we’re missing things at the moment.

And then you also need to have markets to link those two things together so that as much as possible, the government is only getting involved in this transition in places where the market is not going to deliver. One of the things we realized when we were doing this report is that actually a lot of the building blocks that you need for industry policy are there.

They just need to be pointed in the right direction and made to work together. So, one of those is about the regulation that can push laggards in the sector to improve their emissions performance. And the piece that is already there is called the safeguard mechanism. It’s a policy that the previous government brought in, in 20 13.

And we actually did a report last year where we talked in quite a bit of detail about the safeguard mechanism. That was one of the Towards Net Zero series of reports that we did last year, which, looked at the economy sector by sector and came up with things that you could do to put that sector on a pathway towards net zero.

One of the things that we said in that report was that you should take the safeguard mechanism, which already imposes a cap on individual facilities and that you should make those caps decline over time. The incoming Albanese government has said that they want to do that. That will be one thing that can push facilities who haven’t been making much of an effort on their emissions to improve their performance.

One of the things we’ve also said in this report though, is that it would be helpful to put a transformation fund, some financing next to that policy. It’s not always going to be the case that the technology is completely de risked when major investment decisions come about for these facilities.

Kat Clay: Yeah. And you talk about that quite a bit in the report, this idea of risk for facilities, because a lot of these industrial facilities have a long lifespan. And so, if they’re making choices now to keep up with non-renewable sources of energy or things that are. Emissions heavy, they’re sometimes not willing to take on that risk to take on a technology that’s maybe less tested in the market than the stuff that they already know.

Esther, did you have anything to add to this? Yeah,

Esther Suckling: that’s the perfect segue, Kat. Seems like it was planned, but it wasn’t. So, Alison’s talked a little bit about how do we push those people who are lagging with their emissions in industry and the flip side of that, the pull side is technology, exactly as you just said.

So, we want different facilities across the country to adopt these new technologies and that looks different for every industrial facility. So, the technology that will. Decrease emissions for a steel mill is totally different to what you’ll need in an iron ore mine because it’s different industrial products and it’s just different configurations of facilities.

Technology becomes really important for these facilities and as you just said, a lot of that technology, it’s still being developed, it’s still being made commercially viable. So, an example that we talk about in our report is the Blue Scope steel mill in Port Kemba. where they’re coming to the end of the lifespan of their blast furnace, which has been around for, I think, 20 years or so.

And they have come up to this decision of whether or not they reline that blast furnace, which is quite emissions intensive, or whether they shift. And this requires quite a lot of reconfiguration. It’s very costly. It also produces often a slightly different grade of steel if they switch to another form of a steel mill, which is an electric arc furnace.

And because the technology hasn’t quite developed to a commercially viable point, this company Blue Scope, they’ve chosen to go ahead with a 1 billion reline of their current blast furnace in the next sort of five years. So that’s a really good example of how We need this technology to be in place to drive these emissions reductions.

But as you said, companies on their own don’t have much of an incentive to be the first mover. And that’s where different policies can come in place. For example, funding to facilities or grants. Which allow the government to share in the risk with a big industrial facility of, for example, transitioning to an electric arc furnace from a blast furnace.

Alison Reeve: The federal government has actually, over the last sort of 10 to 15 years, invested huge amounts into new technology and commercialization. And some of that has actually been really successful in moving technology forward. So, we are not saying that they should stop doing that. We’re saying they absolutely need to keep doing that.

But we do need to get a little bit more focus on it. So rather than letting a thousand flowers bloom and investing in everything that looks like it might work out, there is a need to start to get targeted towards the areas where we’ve got a natural endowment that we can build on and therefore could have a strategic advantage and also things like the Blue Scope furnace, where we’re never going to stop wanting steel.

And so, we really need to. Transition the way that we make steel so that we can keep using steel. So, I mean, the complexity with technology.

Kat Clay: here, it sounds a lot like picking winners. Is there a risk that the government chooses the wrong projects to provide funding for and blows a lot of money on this?

Esther Suckling: So that’s a really common criticism of industry policy, especially amongst people who would.

Prefer to leave the market to sort things out. and as Alison’s talked about in the very limited time we have, that’s not an option. And that’s what this report is based on the premise of it is a risk that you run picking winners in a way where it’s not, you, you’re not allocating funding in a smart way, and you end up wasting money.

And there’s. Two kind of ways you can think about managing this process better. You can think about it like a portfolio. So, when you go into the stock market, the first advice your grandpa or financial advisor will give you is to diversify your portfolio and to choose maybe some high risk. and over time you expect that some of the bets will pay off and some won’t, but the net effect should be positive.

And that’s kind of how you can think about government support for individual facilities through grants. There should never be all the emphasis on one facility because in that case, then yes, if the facility fails, you’ve wasted a lot of public money. But if the government takes a portfolio approach and does support a range of different facilities, it’s most likely that some will fail.

Some will succeed. But as I said before, you kind of in the long run, see. positive returns. And the second thing to keep in mind that we mentioned in our report is that the government has to be really harsh about knowing when to pull the plug. So, if they’ve invested X million dollars into say an alumina refinery and that refinery just isn’t making a profit over five, 10 years, whatever the agreed period of time is, then there should be no continual funding for that facility.

Kat Clay: It’s kind of like the sunk cost idea. I was just thinking it’s the sunk cost fallacy and I think I apply this in my own life sometimes but maybe in a minor scale, that idea that just because you put money into something doesn’t mean you need to continue doing it and sometimes it’s good to know when to stop and say, I get it okay. That’s enough.

Alison Reeve: The opposite side of, thinking about picking winners is that sometimes actually you do get a winner. What we’ve been seeing over the last 10 years is governments starting to use lots of different ways to support companies, which allows them to then sometimes share in the upside with things that are successful.

So, moving from doing grants where pretty much you give someone some money and well, if it doesn’t work out, you never get the money back to things like recoupable grants, where it’s, you give someone a. A grant, and then if that project works out, you get part of that money back over time. You can move into loans, you can have equity positions, you can have underwriting and so on.

The Australian government in particular, but some of the state governments too, have started to get a lot more comfortable with doing things like that. And the good thing about that is it means that we do share in the upside when our portfolio starts to, to really make returns.

Kat Clay: And I think about how Australia does have a long history of technological innovation, and it’s something we ought to be fostering here.

Now, Alison, one of the biggest questions that comes up repeatedly in pursuit of net zero industry is the concern for the loss of jobs, especially in Queensland and the greater Hunter, what lessons can we learn from the BHP steelworks shut down in Newcastle and the

Alison Reeve: Latrobe Valley? When you map where all these industrial facilities are, it’s actually surprising how few of them are in major cities.

They’re mostly in regional areas and that means the impacts of the transition can be felt in regional areas as well. The other thing though is that this is not the first time that Australia has gone through major regional transitions and the Newcastle one that you mentioned is a really good example.

So, from sort of the seventies through to the late eighties, the BHP Steelworks, which had been a huge employer in Newcastle, in New South Wales, Started to gradually contract because it was having to compete with steel prices from Asia. At the end of the 1980s, BHP basically announced that they were going to close it down at the end of the next decade.

What happened is that BHP, the unions, the New South Wales government, and the federal government all got together and said, we can’t just pull the plug on this industry in this town and put steel prices down. Thousands of people out of work all at once because it will devastate the regional economy. And so, what they did was they formed a transition organization and started to plan for how they would diversify the economy of that region during the lead up to the closure.

One of the things that was really interesting about that was. There are a lot of ideas floating around that came in sort of top down, you know, from bureaucrats in the federal government or the state government. The ones that ended up actually working out tended to come from the local community themselves.

I think that’s a really incredibly important lesson is that people who live in the regions know their region and they know what will work. The other thing is that Newcastle had, a number of things that kind of helped it. To move away from steel into other things. It had a port, for example, it had a really good vocational education system.

It had a university. It had good rail links to, further up the Huntsville Valley and then also down to Sydney. So, all of that stuff that was there. That in some cases had been built for the steel industry, could be used for other things as well. So that’s kind of the other lesson is to kind of look for what your endowments are that will remain when industry changes or closes down.

Esther Suckling: Newcastle, as Alison’s just talked about as an example of a transition. We also saw that happen in the Latrobe Valley in Gippsland. So, in 2017, Hazelwood, which is Victoria’s biggest power coal fired power station at the time, announced that they would be closing. And this came as a huge shock. There was only five months’ notice, and essentially it meant that the whole region had to think about how they were going to transition and diversify into new industries and economic activities.

And in this case. It’s sort of highlighting a similar point to what Alison has made. The solutions came from the people who lived and worked in that area. They knew where to take the transition. So, the Victorian government provided some funding and set up the Latrobe Valley Authority, which was sort of made up of different people in industry, community groups from the region.

and that. Authority put in place a number of different policies, including worker transfer schemes and an economic growth zone, which was where businesses, which were providing jobs for ex Hazelwood employees, moving into this area of the Latrobe Valley could kind of get these exemptions from taxes and.

Again, we kind of see that idea that it has to come from the people who live and work in this area. And the second thing is that transition takes time. So, in the Latrobe Valley, the authority have said that it will take at least 10 years from when Hazelwood closed down to fully transition the economy.

And we’re still seeing a lot of shifts. Right now, there’s an investigation into offshore wind as an opportunity for the Latrobe Valley. So, it’s a very dynamic process and it happens over the course of many years, and this has really significant implications for the regions of Australia which are going to be hit really hard by industrial transformation and that’s Namely the Mackay region up in Queensland and the Hunter Valley region in New South Wales.

This is where Australia’s coal mines are, and they’re densely concentrated in those two regions. So, as we see demand for coal fall as I mentioned earlier on in the podcast, those regions are going to grapple with the same questions that Alison was talking about in Newcastle and that we saw in the Latrobe Valley.

To kind of summarize there, it’s about the solutions coming from the people and it’s about taking the right amount of time and getting started early. On these transitions, which ideally means now for those two areas that I just highlighted.

Kat Clay: And I think one of the things in the report that you highlight is that people in these areas know this is coming.

They understand that this is coming. They know the reality is better than anyone else. The question for you, and I think you’ve answered a little bit of that, is How do you recommend governments work with communities to address this? And you’ve mentioned the authority, but maybe you could elaborate a bit more on what else they can do.

Alison Reeve: You’re exactly right that people who live in these regions are just asking to have a plan because they want to be able to plan their lives. They need to know how to make decisions in their own lives. You know, do I refinance my mortgage? Do I take out a car loan? Those sorts of things. And they just want to have a little bit of a sense of that there’s a plan for the region and how that they can then.

figure out how that fits in with what they want to do with their lives. So, what we’re recommending in the report is that the government should really be a facilitator of that process, not necessarily a leader. So, we think the New South Wales and the Queensland governments should establish regional transitional authorities for those two regions that we already know about and that other state governments probably need to stand ready to do that.

If other regions start to feel. protracted effects later in the future. What those authorities would do is work very closely with the community, first of all, to understand what the strengths and the weaknesses of each region is. So, if you look at indicators for those regions, you can see they’re quite different, but some of them have.

Some really interesting strengths. Some of them have a good percentage of younger workers, for example, some of them have good infrastructure links to other parts of the country. So, you really need to understand what your strengths and weaknesses are, what your other options are for diversifying your economy, and then figure out, okay, what do we as the people who live in the region?

Want to do with those and what do we want to build and what are we going to need and ask from government to do that versus what can we do ourselves? The other thing that’s important for regional transitions authorities to look at is not just what governments should be doing, but also what they want to encourage the private sector to do and how the private sector might be best encouraged to do that.

Because this whole problem can’t be carried by government. It needs to be carried by private investment as well, particularly if we’re going to create sustainable regional economies in these regions.

Esther Suckling: And then just to add on to that, we know that there’s a lot of momentum in the private sector to move towards net zero.

So, we did some analysis and found that 70 percent of industrial facilities. Already have net zero by 2050 targets. And a lot of those also have interim targets. So, you know, we’re coming from a place where sort of in the last five years or so, there’s been kind of a big swing in shift in direction amongst these different companies that own our big mining manufacturing facilities.

And so, yeah, it’s, it’s not about creating that support out of nothing. It’s just about. Harnessing it where it exists.

Alison Reeve: One of the questions that obviously comes up is how, how a government’s going to pay for this, for this regional transition. What we’ve said in the report is that those two state governments, New South Isles and Queensland, are getting quite a bit of money from coal royalties, and they will continue to do so for as long as coal mining lasts.

And in particular, at the moment, they’re getting a bit of a bonus because of the high export coal prices caused by the war between Russia and Ukraine. What we’ve said in the report is that. They should start directing those royalties, particularly the extra royalties that they’re getting towards helping those regions to transition, because that is a source of money that’s generated by those regions.

And it only seems fair that it comes back to those regions to help them to diversify their economies.

Kat Clay: Well, you heard it here first. Coal royalties. I’d never knew that there was such a thing, but. Oh, so should we explain what, what a royalty is? Well, I know what a royalty is. I just think about it in terms of a musician checks.

Alison Reeve: It’s exactly the same thing. It’s that royalties are there because minerals belong to all of us. But particular companies get to exploit them and mine them. And so what we do is you say, well, you have to give a small percentage of your profit to the state government in order to recognize that in some ways you just got lucky because you found the bit of coal and started mining it before anyone else did.

Kat Clay: I mean, the question is, are the coal royalties being used for

Alison Reeve: anything else at the moment, or are they just sitting in the coffers? It varies from state to state. So, the Queensland coal royalties just go into consolidated revenue and then they get spent on other things, at the moment. So that might be hospitals, schools, nurses, policemen, whatever, state governments want to spend them on.

So obviously for someone like the Queensland government, they’d need to think about how they transitioned that over time, but they do have. A really, they’re at a really advantageous point at the moment because of those bonus royalties. So, if they started with the bonus royalties that they’re getting at the moment, they could maintain their other spending for a little while longer while they figure out how to deal with it.

The New South Wales government has been, has been really interesting in how they’ve dealt with their coal royalties. They actually put them into a separate fund that then gets invested and they make a return on that investment. Part of that investment at the moment goes to paying down debt and some of it goes towards projects in the regions themselves.

So really, they would only have to make a couple of little tweaks about how they spend the money that they get from royalties and also the income that they get from reinvesting those royalties. The reason that New South Wales did that was. Because it kind of recognizes that when you get a mining boom, it is often just the people who happen to be alive at the time of the boom, who benefit from it.

Whereas if you take the royalties and you invest them into a fund and you get a return from that over a longer period, you can smooth out the benefits and you can make sure that it’s not just, you know, those of us who are old enough to drive a car through a shiny new tunnel at the time that we had the mining royalties.

But also, that future generations can also get a benefit from that.

Kat Clay: Well, I like that suggestion a lot, that future generations can really benefit from these coal royalties, and it can support the regions in this. What can be a tumultuous time of transition? Thank you so much, Alison and Esther for the insights into energy policy, which is no doubt going through a lot of change at the moment, and if you’d like to read their report on industry policy, the new industrial revolution, it is It is available for free on our website at grattan.edu.au. If you’d like to talk to us more about this report or any of our research, you can talk to us on Twitter at grattaninst and on all other social medias at grattaninstitute. Like I always say, please take care and thanks so much for listening.