Why Australia needs a 21st Century industry policy

Australia has followed an unusual two-track path – a world leader in extracting and exporting mineral resources to a growing Asia, and a shift from traditional manufacturing towards services. Despite being the source of major technology developments in areas like solar, necessity didn’t drive high-technology commercialisation. And our high wages mean we are uncompetitive for other manufacturing activities.

The global response to climate change means big changes are coming. Whether we like it or not, the world is moving away from wanting our coal and gas. There will be a big impact on our export revenue.

The world will continue to want steel and aluminium, just greener versions. Demand for renewable hydrogen and ammonia is likely to grow rapidly. And an electrified world will want huge amounts of the critical energy minerals such as lithium and cobalt, of which Australia has a significant share.

Exporting renewable energy is one thing. Using that renewable energy to support the extraction and processing of these minerals is the vision splendid.

The key to unlocking this potential is the link between hard-nosed economic analysis of supply chains, and a cooperative partnership between government and industry.

Bauxite refining and aluminium smelting are looking to firmed renewables to move towards net zero, while renewable hydrogen holds the key to green steel and green ammonia. An earlier Grattan report, Start with steel, showed how fundamental economics would justify mid-chain manufacturing in Australia and could deliver thousands of new jobs.

Australia may have the opportunity to move up the supply chain that begins with mining of critical energy minerals. The energy intensity varies for each of these minerals, as does Australia’s comparative advantage.

To deliver a real competitive advantage from this opportunity and meet our long-term emissions reduction targets, Australia’s industrial sector must be transformed in fewer than three decades. The market created by an economy-wide carbon price would not be enough to enact the transformation at the required scale and pace. A 21st century industry policy is required.

In some quarters, such an activist policy is resisted. Yet there are sound economic policy reasons for its adoption.

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.

We do not have a shortage of policies and mechanisms that support industry. They just don’t hang together. We need an overarching policy framework with consistent targeted policies linked to clear goals, developed and executed in a sustained collaboration with industry.

The starting point should be a clear medium-term emissions reduction goal for the industrial sector, linked to the economy-wide target of 43 per cent below 2005 levels by 2030. The government’s commitment to revamp the Safeguard Mechanism in this direction can drive emissions reduction in existing facilities and avoid emissions lock-in with new and refurbished facilities.

Support for early-stage technology development, via agencies such as the Australian Renewable Energy Agency (ARENA), should continue. The critical next step is to move from laboratory and demonstration scale to commercialisation. Government can de-risk this stage through agencies such as the Clean Energy Finance Corporation (CEFC) that can finance big-bet, first-of-a-kind industrial flagship projects. An example might be an Australian green steel plant.

Even with major technology advances, a green premium is likely to remain for most products. This premium must be weighed against the cost of climate change itself. State governments should support demand for green commodities through embodied carbon-intensity standards for building and construction. The NSW Government is considering such an approach for residential buildings.

Finally, the recognised risks of strong industry policy must be addressed. To avoid picking losers, programs should support a portfolio of investments and rigorously turn off the funding when failure emerges. To avoid being captured by well-resourced vested interests requires a strong governance structure in which governments set the criteria and funding is allocated by agencies acting independently of politicians.

It is no overstatement to see this as a once-in-a-century opportunity for Australia. It’s important enough to justify a once-in-a-century industry policy.