In a recent article in the Australian Financial Review, eminent energy economist Professor Frank Jotzo called for Australia to “stay cool, calm and collected” on the Australian Renewable Industry Package (ARIP). ARIP is a $100 billion, ten-year green energy transition package proposed by a coalition of groups including the Climate Energy Finance, the Smart Energy Council, and the Australian Council of Trade Unions. This was no knee-jerk or panicked effort, but a considered view on a proportionate Australian response to the US Inflation Reduction Act (IRA) – a $520 billion bipartisan bid to secure US dominance in the high-wage, high-tech green industries of the future.
The IRA is now sucking a good deal of green energy investment away from Australia, requiring some kind of policy response from Canberra – but what kind?
Jotzo agrees that Australia needs a more ambitious green energy push, but he argues that we must avoid rushing into a “subsidy race” with the United States, lest the costs of Australian efforts outweigh the benefits. Instead, Australians should have faith in our comparative advantages as a green energy exporter and be wary of US-style “green industry policy” – especially as Australians face other pressing challenges that are equally if not more worthy of government support.
Jotzo makes excellent arguments, many of which we agree with. On at least five key points, however, we take a fundamentally different view.
First, instead of “an international subsidy race” as Jotzo frames it, what is currently unfolding –from the US to Europe to Northeast Asia and beyond – is an “international investment race”. Governments are mobilising public resources to induce massive investments in job-creating, productivity-enhancing green energy projects. Long-term, these projects will likely have major economic benefits, while supporting goals ranging from energy security to decarbonisation. A “subsidy race” is an inaccurate descriptor of the diverse and sophisticated range of government activities taking place overseas.
Second, we disagree with the claim that Australia has a “stable investment climate” that will attract sufficient foreign investment in green energy projects without more government support. As the Business Council of Australia has pointed out, Australia is presently experiencing one of the worst investment droughts in history. This is not just because Washington’s IRA is drawing money away. It’s instead a cost of Australia’s woefully inadequate and constant flip-flopping policies on climate and energy. A $100 billion package is really just Australia making up for lost ground – South Korea committed around $297 billion to green and digital economy projects as part of its “Korean New Deal 2.0” back in 2021.
Third, Jotzo is right that “Australia has perfect fundamentals … to produce zero-emissions fuels and commodities at large scale for global markets”. But “fundamentals” such as land, sunshine, and wind won’t automatically translate to export capabilities and market position and power unless paired with significant state-led investment and strategic activism. This is where those economists who advocate for a reliance on “comparative advantage” and limited government intervention in all circumstances part ways with those who take into account political context. It is widely known that in our hyper-competitive regional neighbours Japan and South Korea, governments (and economists) have long shunned the idea of “comparative advantage”, focusing instead on “competitive advantage” – national strengths that can be created and nurtured with strategic government support, as detailed in a new book.
The East Asian experience brings us to our fourth point of disagreement with Jotzo: the idea that the Australian government should not direct taxpayer funds towards promoting export-oriented industries because this would “benefit mostly consumers in other countries”. In a relatively small economy such as Australia’s, national prosperity is fundamentally linked to export capabilities – something that Japan and Korea (and China albeit with a huge domestic market too) understand very well. These countries have geared their entire economies around exports and their nations have grown rich as a result.
Fourth, it’s wrong to characterise this debate as about whether Australia should have an “industry policy” to match Americas. As we have argued elsewhere, the United States (and its East Asian competitors) is not engaged in plain old “industry policy”. It is engaged in a much longer-term, more strategic game of “green energy statecraft”. Such statecraft involves bold government initiatives to build, grow and dominate the high-technology markets essential to the green transition, and to fend off or outflank rival powers, be they economic, geo-strategic or both. As such, statecraft is a highly strategic disciplined affair, with a focus squarely on achieving measurable economic and security outcomes. Green energy statecraft is a concept (and art) that Australian energy and economic policymakers must become familiar with if we are to effectively navigate the rapidly changing global geostrategic context.
Finally, what cause could be more important than the economic, energy, and environmental security of the nation and the future of the planet? So, tax expenditures and the directing of government investment capital of around $100 billion is hardly too much to spend on the green energy shift. Equally important is the multiplier effect, so successfully used in the IRA, which would draw in local and international investments of around $400–500 billion, with a significant impact on the future of Australia’s regional economies over decades.
None of this amounts to a call for adopting a policy program identical to America’s IRA. But Australia has the chance to learn from the limitations of America’s plan and to focus its efforts on suitable niches in the renewable energy value chains to develop its industries and technologies. There is no excuse to delay.