Fiona Armstrong & Laura Eadie | Innovating For A Prosperous and Secure Future

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Australia's Green Economic Potential

When it comes to innovation policy, the Gillard government relies heavily on hot air to hide their lightweight commitment to Australia’s long-term future. Back in February, the Prime Minister painted a vision for “a high tech, high skill, clean energy economy that is self-sustaining beyond our reliance on mineral exports”. Yet the 2011-12 federal budget is light on detail about achieving this.

Given the rapid pace of clean-technology development in Europe and Asia and the pressure of the high dollar on manufacturers, developing a coherent set of policies to stimulate low emissions technology is an essential risk management tool for any government hoping to last beyond the next election, let alone beyond the current mining boom.

If Wayne Swan was serious about balancing Australia’s long-run budget, he would have cut more than $1 billion from the Fringe Benefits Tax for cars. He would have claimed back the $2 billion in diesel tax concessions we shell out to mining companies every year and put it to better use funding clean-tech innovation. Who could argue with that as a “no-regrets” way to fund the innovation commitment Ross Garnaut says we need to transition to a low-emissions economy?.

Stuck in a holding pattern

Instead, Gillard’s first budget leaves Australia in the same holding pattern as under Rudd and Howard. While the government pretends a carbon price will be enough to drive investment in renewable energy, crucial innovation policies remain an under-funded jumble of grants and rebates which don’t align with each other and often place restrictive criteria on applicants, leading to under spending and under performance.

Neither a carbon price nor our only workable emissions reduction policy – the renewable energy target – will meet our manifestly inadequate 2020 target of a 5% reduction, let alone our 2050 target of a 60% reduction.

We urgently need serious policies to scale up alternative base-load renewable energy technologies, such as wave, geothermal and concentrating solar thermal. Yet at a tiny $108.7 million over 14 years, the commitments in the federal budget for venture capital for development and commercialisation of renewable technologies are laughably low. There is little thought to what will drive innovation in clean energy beyond the much mauled Solar Flagships program which has had its energy storage options knocked out, its funding cut, then restored, and now deferred for two years.

Reducing our emissions is not just a moral responsibility – Australia faces a significant risk of being left behind in the development of renewable technology globally. Investment in new renewable energy capacity first exceeded fossil fuels in 2008, and maintained this lead in 2009. In 2010, investment in wind, solar, biofuels and other renewable by G-20 countries surged 30 per cent to almost US$200 billion [PDF]. Despite current high upfront costs, a 2011 report from the Melbourne Energy Institute [PDF] demonstrates substantial cost reductions in base-load renewable energy technologies are possible, assuming specific policies are in place to support their roll out. Countries with a head start in these markets are likely to benefit from their rapid growth rates and generation of skilled jobs.

Building on existing comparative advantages, such as our abundant sunshine, is an important way to secure our place in the global green economy. But establishing new industries requires a coherent set of policies for innovation and commercialisation. We need to level the playing field for renewable energy, to commercialise strategically and start to innovate clean, not dirty.

Level the playing field

Australia’s current energy policies tilt the playing field in favour of carbon intensive coal, gas and petroleum fuels. In 2010-11, an estimated $12 billion per year in subsidies and tax concessions went to these fuels. Levelling the playing field for renewable energy is essential to ensuring low-emissions innovation and commercialisation policies are effective.

For example, the diesel rebate applied under the Fuel Tax Credits program currently provides almost $2 billion/year to mining companies as credits to subsidise the use of diesel for off grid electricity generation and use in heavy vehicles. So while most of us pay a levy of 38c per litre for diesel, mining companies get this back as tax credits.

Cutting this subsidy alone would fund Ross Garnaut’s recent call for a doubling of investment in clean-technology innovation and commercialisation. Removal of this impost on taxpayers would also encourage mining companies to shift from this very high emissions and costly alternative to clean renewable energy.

Commercialise strategically

To compete in a globalised market for clean technology, Australia needs to develop unique combinations of skills and industries. This requires a strategic approach to investing in technology commercialisation – one that builds on our natural comparative advantages without picking winners or losers.

Remote power generation for mines and communities not connected to the electricity grid is a potential area for such investment. Around ten per cent of Australia’s installed power generation is currently off-grid [PDF], and this is set to expand due to the mining boom [PDF].

The current use of diesel for much off grid power generation in remote Australia is absurdly expensive. Existing alternative renewable technologies are already cost competitive in the long run, but suffer from high upfront costs. As an example [PDF], solar thermal with storage costs an estimated $270 per MWhr compared to $350 per MWhr for diesel at some sites. While the applications are not universal, there are substantial opportunities in many remote locations, such as the Midwest minerals province in WA.

Policies to achieve this might include grants for site specific feasibility studies and loan guarantees. By providing information and reducing risk, government can help address the difficulty faced in financing projects using new technologies, and increase investor confidence and the willingness of banks to lend.

Innovate clean, not dirty

Building competitive industries also requires investment at the beginning of the innovation chain. There are strong arguments for weighting government expenditure at the early stages of the research and development continuum toward renewable energy technologies, rather than betting on clean coal or carbon capture and storage.

As fuel costs and carbon prices inevitably rise, existing industries will fund innovation in fossil fuels to improve their efficiency, and potentially reduce their carbon emissions. Clearly, there are fewer vested interests willing to significantly invest in new renewable energy technologies.

As Garnaut says, public support for research, development and commercialisation of low-emissions technologies is one way of cutting the cost of reducing our emissions. At another level, it is our contribution to a global effort.

In light of the current political instability around our domestic carbon policy, Australia needs a better strategy to adapt to the rapidly changing global economy. We can do this by developing an innovation policy that builds on our comparative advantages, using the wealth generated by our natural resources to build new industries and provide for our own clean energy future.

Otherwise Australia risks remaining stuck in a holding pattern – while other countries ride the wave of clean-tech investment into the global green economy.

Fiona Armstrong is a Fellow at the Centre for Policy Development. Laura Eadie is the CPD’s Sustainable Economy Program Director.

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