Future Made in Australia: Treasury provides sanity in net zero transition

Future Made in Australia: Treasury provides sanity in net zero transition

Originally published on The Australian

The budget provides $22.7bn for A Future Made in Australia, funding Australia’s transition to net zero. What does the Treasury, as holders of the purse-strings and defenders of market-based economic orthodoxy, think about all this?

In November, the Treasurer outlined an ‘‘ambitious but unique’’ plan putting the economics of the net-zero transition into the context of our strategic environment. Treasury has now provided a more detailed framework.

Treasury hopes to tightly constrain the departures from economic rectitude with the National Interest Framework, which divides projects into two streams – the net-zero transformation stream and the economic resilience and security stream.

Projects in the first stream – renewable hydrogen, green metals and low-carbon liquid fuels – must pass the test of comparative advantage. They must be things that Australia will be good at doing. Ross Garnaut’s ‘‘superpower’’ advocacy makes a compelling, if as-yet unproven, case.

Projects in the second stream – critical minerals and clean energy manufacturing, including battery and solar panel supply chains – are justified on security grounds, unconstrained by any requirement for comparative advantage.

When ‘‘security’’ is used to justify departing from comparative advantage, good governance requires well-based arguments, not assertion. It is not enough to say that there are supply-chain risks: these are ubiquitous in an economy like Australia’s, closely integrated with the global economy. If we fix just one, are we any more secure?

Security arguments ought to pass a commonsense test: what is the opportunity cost of putting scarce resources into this proposal? Could our security requirements be better achieved by an alternative project or measure?

The $1bn budget for solar panels is backed by a detailed report sponsored by the Australian Renewable Energy Agency. This estimates that it would require subsidies of $7.8bn over 10 years to establish viable manufacturing here. Does this sound like a good deal?

The promised security benefit is assured supply, as China currently dominates global manufacture. What’s the issue here? Without supply from China, our existing panels and batteries would continue to operate, and there are alternative supply sources which, if not as cheap as China’s, cannot be matched domestically, given Australia’s small scale in a global manufacturing environment of giga-factories.

With both Europe and the US ready to subsidise domestic production, we would do well to stand back from this pile-in and use the opportunity to import subsidised kit, speeding our zero-transition at least cost.

There is a stronger security argument for assisting critical minerals. China has effectively monopolised global supply of nickel, lithium and rare earths. Although Australia is the main source of lithium ore and Indonesia for nickel, China dominates processing and effectively sets the global price.

Australia is already providing substantial loan support for lithium and rare-earth processing and has announced production tax credits for 31 critical minerals and green hydrogen.

But the key here is foreign investment policy, which has shifted in recent years away from welcoming ‘‘all comers’’. The previous openness allowed China’s capital and processing know-how to dominate our critical minerals sector.

A balance needs to be found which diversifies foreign ownership while leaving a substantial place for China. History warns of the dangers of rigidly exclusionary policies.

Some form of conditionality (such as requiring domestic refining and transfer of technology to domestic owners) would seem the next step. Indonesia’s nickel-promoting policies offend global investment rules (as well as environmental norms) but may show the way forward. Countries should have sovereign control over their resources and how they are processed.

Another argument slips into this debate almost unnoticed: industry policy. The promise is to ‘‘create secure, well-paid jobs and deliver benefits to communities across the country’’. This sounds great, but Australia is operating at over-full employment, with ubiquitous skill shortages. The solar panel proposal acknowledges the challenge of finding enough people to do the required jobs.

The demise of the Australian car industry was painful, but necessary: we don’t have the scale required for this kind of industry. But there remains a sentimental attachment to the kinds of blue-collar jobs that are done in big factories.

Australia’s manufacturing sector is just 5 per cent of GDP for a good reason: our comparative advantage is to be found elsewhere. The basis of our future wealth, productivity and security will be found in continuing to exploit our resources bounty, research and technical development, tourism, education, health, medicine and other services. Meeting our huge infrastructure and accommodation-building needs is both vital and labour-intensive. Manufacturing will be in niche sectors where scale is unimportant.

The net zero transition – and the potential to be a renewable energy superpower – will provide many ‘‘good jobs’’. There is no need for market interventions to second-guess where these jobs will be.

Treasury’s National Interest Framework gives us, for the first time, a policy tool which brings together economics and security arguments.

It will not be enough, in itself, to avoid the many pitfalls of the net zero transition, but it has the potential to identify the weakest proposals.

Areas of expertise: Regional economic integration; Australia's economic relations with East Asia; international financial flows and the global financial architecture; financial sector development in East Asia