Toby Phillips: Global climate action will reshape Australia’s trade

Published in The Australian Financial Review, 09 February 2021

Last week at the National Press Club, the Prime Minister said Australia would “reach net zero emissions as soon as possible, and preferably by 2050”. Those final words are key, and represent a shifting tone more in line with our global partners. Just two weeks ago, US President Biden signed an executive order aiming for net-zero by mid-century. Before Christmas, it was Hong Kong. A couple of months before that, Japan and China.

They say a week is a long time in politics, but where will we be in a decade? What about three decades? National discussions about climate change rightly focus on the choices of Australian governments, businesses, and people. But just as important are the global forces shaping Australia’s place in the world.

Global climate action is reshaping Australia’s trade outlook.

The numbers are stark. Looking at Australia’s top 20 trade partners, over 80 per cent of our exports are to countries that have pledged net-zero emissions by the middle of the century (China, South Korea, the UK, the EU, and several more). And Australia’s export mix is highly concentrated in carbon-intensive commodities: 70 per cent of what we sell to those countries is fossil fuels, minerals or metals.

Australia currently has one of the most stable and globally competitive economies because of our natural resources. But as major global partners decarbonise, the commodities that got Australia here today will not get us where we need to go next. Just last year, we saw how exposed Australian industry is to small changes in demand from giant importers like China: leading to lost billions in both agricultural and fossil fuel exports.

History is full of examples where the tides turn on a commodity-dependent economy. In the early 1900s, Chile was one of the richest countries in the world. Its saltpetre mining industry produced two-thirds of the world’s fertilisers. At its peak in 1920, this export industry employed 60,000 Chileans. But this high point coincided with the commercialisation of the Haber process for synthesising ammonia in the lab.

By the 1930s, Chile’s nitrate exports were a tiny fraction of their peak, the mines only employed 10,000 people, and Chile had slipped out of the top 20 largest global economies. The industry continued for some decades, eking out a living on what remained of global demand for natural nitrates. Meanwhile, the factories of Europe prospered by providing the world with cheap, synthetic fertilisers.

Like Chile, Australia will be forced to come to terms with lower global demand for some key exports. But like Europe, Australia can be at the forefront of the new technological revolution. There are two big industrial opportunities in a post-carbon era: renewable energy and carbon-efficient industry.

Ammonia is once again at the centre of an economic transition. The same Haber process that made saltpetre redundant in the 1920s can be used to convert hydrogen gas into ammonia for storage and transportation, at least partially solving the intermittency problem of renewables. Australia has some major investments here, but the world still lacks global standards and infrastructure for trading hydrogen. Apart from investing in production, Australia needs to help ensure the whole chain – from production, storage, transport and end-use – is viable and globally standardised.

While some commodities may go out of fashion – like coal – other commodities like iron, lithium and aluminium will be in demand for the foreseeable future. But Australian exporters cannot rest on their laurels. In the past week, the European Union voted to progress import taxes on carbon-intensive goods, and BMW signed a deal worth hundreds of millions of dollars with the United Arab Emirates for green aluminium. Australia can remain globally competitive by having the least carbon-intensive industries in the world.

Many heavy industries in Australia are already highly efficient, so the biggest wins come from decarbonising the grid they run on. Beyond that, investments in R&D can push out the efficiency frontier. In aluminium smelting, new technologies could eliminate the use of carbon anodes; in steel making Australia could pioneer alternatives to metallurgical coal, such as bio-coke or direct chemical reduction.

Some MPs are proposing that any national decarbonisation plan include exemptions and carve-outs for specific sectors, such as steel or agriculture. This is a mistake: these are exactly the sectors that need to be pushed (and supported) to decarbonise. Otherwise Australia’s attempts to move up the value chain will be stymied by solar-powered smelting in Dubai or Brussels’ farm-to-fork strategy for sustainable agriculture imports.

Despite the opportunities, none of this is a given. The Commonwealth’s technology investment road map is helping to fill some of these gaps, but it is modest compared to the plans of our trade partners. Australia needs more investment and, crucially, more national co-ordination to meet the challenge.

The prime minister doesn’t want to commit to a net-zero timeline because it would be “just a bit of paper.” Actions do speak louder than words, but the words will matter too, especially ahead of G7, G20 and COP26 meetings this year where the rest of the world is co-ordinating on climate action and trade.

By 2050 we will be living in a hotter world, that’s guaranteed. We will also have the benefit of hindsight. Let’s hope we look back on an adroit shift to a post-carbon global economy. If Australia’s approach is too timid, we will look back and wonder why we sat holding the bag as the rest of the world moved on.