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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Blog Comments

“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…”

Historically, Australian Governments, both Federal and State, have overcome the problem of failure of private investment in many forms of “infrastructure” by investing themselves. Roads, railways, bridges, ports, hospitals, schools, gaols, power stations (up to the early 1980s), dams, scientific research, public housing … a whole galaxy of things were built, owned and operated by Governments. In addition to this very large investment activity, Governments regulated extensively.

But since the early/mid 1980s there has been a secular change in way Australian Governments have operated. Governments have withdrawn from what used to be a major – perhaps the major – Government activity; the direct provision of public goods. Instead, Governments have tried to operate through a mix of public/private initiatives, subsidies to private investors and regulatory relaxation. This radical change in what Governments do has affected both Coalition and ALP Governments; only the rhetoric has differed, the trend has been the same in both parties.

The quote above. calling for “serious policies” seems to reflect lack of understanding of this profound underlying change in what Australian Governments do. I think you need to ask yourselves if the search for such “serious policies” is realistic in the current environment. Put the other way around, the only “serious policies” which are likely to work would be Government construction and operation of renewable and low-emission energy sources, coupled with Government regulation of emissions on a National scale. But for the Government to undertake such an activity would fly in the face of that trend which I have described. It would be reversion to an earlier model of Government activity.

I don’t want to sound too negative. Maybe such a reversion to an earlier model of Government activity is possible. Whether possible or not, I think your search for the “serious policies” you seek would be more realistic if you better understood the political/policy environment you are operating in and the powerful and long-term trends (which go way beyond current arguments about AGW) which militate against such policies. Perhaps, for example, instead of lamenting the lack of such policies, something could be done to highlight the trend which I’ve alluded to and start a debate about why it arose and whether it’s a good thing.

Since I posted my first comment, I have read this post by Andrew Dyer at the ABC’s “Drum” site:

Given what I said before, I obviously have no difficulty agreeing with Dyer’s support of the “direct action” aspects of the Govt’s. policy. In fact it’s heartening to see this amount of direct Govt. action at all. It’s also heartening to see Dyer claim a considerable degree of public support for it (“From my own polling on these topics, the community would readily get behind the action-oriented programs if they were directly linked to getting projects executed to reduce emissions”). What a pity the Govt. seems completely unable to get any PR traction for this aspect of its policy.

Thanks Gordon for your thoughtful comments. It’s absolutely true we have seen a significant shift in the way governments behave in terms of infrastructure investment in recent decades. This caused significant problems not just for State Governments who have struggled to provide effective urban infrastructure, but also for the private sector as the lack of Government bonds made balancing investment portfolios difficult. Our Public Service program looks at some of the underlying drivers of this state of affairs – for example our relatively low tax revenues and the persistent “anti-big government” bias across both the left and right of politics. Our Public Service Research Director, James Whelan, has an upcoming report on the State of the Public Service which will be out mid-August.

Some of the interventions we are seeing under this Government, as well as moves by the UK, China and Korea to drive investment in renewables and clean-tech suggest a change in attitudes about the role of governments in addressing climate change. Yet around the world, the challenges associated with urgent emissions reductions and decarbonisation will be beyond what can be achieved by Government action alone. We will need to mobilize significant amounts of private capital. This will require both the use of public finance to nurture new and emerging technologies, as well as clear and consistent policies to provide private finance with enough certainty to make long-term investment commitments to scale up existing technologies.

Dyer raises a range of criticisms in regard to the prospect of emissions reductions being delivered under a carbon price, arguing that it is the direct action policies (ie paying the polluters to stop polluting) that will deliver the biggest cuts. While these are necessary and welcome, it’s important not to underestimate the potential flow on effects that even a modest carbon price might also bring. The Australian community has demonstrated strong appetite for action when small incentives are made available and a signal that the carbon price has arrived and is here to stay may effect more behaviour changes than anticipated. For example, when Howard first introduced the Mandatory Renewable Energy Target (2% by 2010) they didn’t expect that it would be met. However it was met very quickly, because that small incentive helped to drive deployment of large scale renewable energy. In the same way, the uptake of solar PV in response to the federal govt initiative was completely unexpected and led to the program’s early closure as it was too successful. These examples show that a small financial incentive, in the form of price on carbon (report from TCI shows MRET created a $2 per tonne implicit price on carbon), can drive the rollout of renewable energy at a price that is small compared to direct action to achieve emissions reductions.

To me, the important part of direct action isn’t “paying the polluters to stop polluting”, but the creation of new sources of energy through solar farms at Mildura, Chinchilla and Moree, and the sequestration experiment at Henwood Station:

Paying polluters to stop polluting, however, is probably also necessary provided that the money goes to creation of alternative energy sources. I would prefer, obviously, to see the Govt. doing this directly rather than channelling the money through private sector entities which can be relied on to pocket as much of it as they can get away with.

As far as carbon tax /carbon trading is concerned, the Americans (who were always the greatest advocates of these ideas) seem to be going cold:

If the Americans walk away from it, everybody else will too.

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