Capital for kilowatts: The (non)-inflationary impacts of the green transition is a report from the Centre for Policy Development’s Sustainable Economy Program, authored by program director Toby Phillips and former Reserve Bank deputy governor Guy Debelle.
The paper unpicks concerns around whether large-scale investment in renewable energy systems, required to meet Australia’s emissions targets, are likely to have an impact on inflation. It finds that this investment is not only unlikely to be inflationary, it is likely to produce more economic stability than replacing existing coal and gas generation, and will ensure steady supply without input price volatility.
Capital for kilowatts suggests that investments in renewable energy can unshackle the economy from volatile fossil fuel prices, replace ageing infrastructure and avoid major inflationary effects.
The paper argues that the energy transition is not only vital to reduce emissions and ensure a more stable climate and planet, but can be achieved without significant pressure on inflation.
Australia faces a critical juncture, requiring significant investments in both electricity infrastructure and export industries while pursuing goals of increasing renewable energy to 82% of the grid and establishing itself as a “green export superpower”.
Australia’s electricity infrastructure, much of which was constructed roughly three decades ago, drove significant productivity gains and economic growth. However, as this infrastructure nears the end of its operational life, the nation must make a decision about how to replace it.
Approximately 12 GW of coal and gas power will be retired by 2030, followed by 38 GW by 2050. In addition to replacing this retiring capacity, Australia’s electricity grid must also meet the demands of a growing population and economy, providing a natural impetus for decarbonisation.
Estimates suggest a green transition could cost $625 billion, which is where the main concerns about inflationary impacts are directed. But these concerns fail to acknowledge that it would cost around $400 billion to replace existing fossil fuel generation like-for-like.
The inflationary impacts of green investment compared to fossil fuel investment are largely directed at the additional expenditure of $225 billion. However, from a macroeconomic perspective, this is modest, with the inflationary effects spread over several decades being relatively small.
Beyond finding that significant investments required for the green transition are unlikely to significantly impact inflation, there are a number of reasons why this approach should be preferred over continuing to rely on fossil fuel power generation.
It will reduce emissions and ensure a more stable climate and planet
For Australia, and the global community, to reach its emissions targets and avoid worsening climate change impacts, it is imperative to transition to more sustainable methods of power generation, transmission and distribution.
It will make our economy more resilient
As global demand for fossil fuels decreases, Australia urgently needs to create new export industries. If it doesn’t, export revenue will drop sharply, which would set off a harmful cycle: lower export earnings would weaken our currency, leading to higher inflation.
It will avoid inflationary risks
As Australia progresses with retiring ageing coal and gas generation facilities, there is a significant inflationary risk that will come with reduced power supply. 12 GW worth of coal and gas generation is planned to be retired by 2030, and concerningly there is only 10 GW of “committed” projects due to come online between now and then.
It will protect against price volatility
Decarbonising the electricity system will reduce exposure to one of the biggest sources of price volatility: large rises in fossil fuel prices, as seen most recently following the Russian invasion of Ukraine. Once renewable generation is built there is no ongoing need to buy fuel at prices set by global commodity markets.
