This second instalment of a two-part series explains how Australia can create a thriving economy based on green energy and manufacturing, while helping the world shift to renewables. By Saul Griffith.
How to build a green economic boom
Australia should be a major global player in an abundant zero-emissions future. The question is no longer can we, but rather will we have the courage and commitment to lean into this clean energy transition and succeed?
In the last annual budget the Australian government conceded $2 billion to hydrogen projects, yet only $1.3 billion to household electrification. We need to think bigger and more broadly. The Rewiring the Nation program’s $20 billion for transmission infrastructure should spend similar amounts on the local distribution grids and the machines connected to them.
The complex safeguard mechanism will only slowly change old industries and seems unlikely to manifest the necessary new ones. The funding for early-stage innovation isn’t nearly enough, nor is there enough capital going to pilot deployments of the technologies we need. We aren’t training enough engineers and nor are we training the much larger number of tradies and technicians we will need.
Climate activists are asking for governments to declare a climate emergency and to use the powers available to governments in times of war. The signs of emergency are obvious. We need to declare war on carbon dioxide and ramp up the industries that will win it.
The capacity of these emergency powers is demonstrated by their use in the United States between 1942 and 1945, which decided the fate of World War II. Under the management of the War Production Board, the US government out-manufactured the rest of the world in the race for armaments. It invested US$183 billion, the equivalent of US$4 trillion today, to produce the aircraft, ships, ammunition, tanks and jeeps, radios and other supplies that constituted the “arsenal of democracy”. The WPB estimated in a 1945 review that the labour force increased by 18 per cent, manufacturing employment by 63 per cent, GDP by 52 per cent and consumer spending rose by 58 per cent – during a war.
And to serve this manufacturing miracle, the US in the same five-year period nearly doubled electricity generation, and production of critical metals soared, with magnesium output rising 3358 per cent, aluminium 429 per cent, steel 90 per cent and copper 75 per cent.
The generation that pulled off this feat is known as the Greatest Generation. When Donald Trump says “Make America Great Again”, the America he is referring to is the boom period in the two postwar decades when the country was cashing in on this manufacturing capacity, by redirecting it to consumer goods.
The office of New York Senator Chuck Schumer asked me early in the modelling phase of the US Inflation Reduction Act how much it would cost to halve emissions by 2030. Our napkin estimate was US$4 trillion, roughly the same as the arsenal of democracy, only that was spent twice as fast. This implies the real pace at which we need to be investing in our climate solutions is about 20 times that envisaged in the IRA. Fortunately, the IRA multiplied private capital at close to this rate, which is why it might come close to delivering the targeted emissions reduction. Its success will now be determined not by policy, but by policy implementation, which is much harder.
Manufacturing was not the focus of the IRA, and it absolutely should be a bigger part of Australia’s response, for at least two reasons. This country needs more new manufacturing to offset the fossil exports that will dry up, and we could easily become a foundry for the world. Contrary to the conservative narrative that what we do doesn’t matter, we are critical to global success in tackling climate change. Ross Garnaut’s Superpower Institute estimates we could provide enough materials and energy to eliminate 8 per cent of global emissions.
In this new war against global heating, the materiel are different, but no less well-defined: wind turbines, solar cells, batteries, electric vehicles, inverters and power electronics, transmission and distribution equipment, heat pumps and electric appliances. Again, this will require metals – steel, aluminium, copper, nickel, tin, lithium and silicon – as well as rare earths and even uranium.
In the global supply chain of this race to zero, what should Australia supply and manufacture? What are the wise investments that will ensure future prosperity and how can Australia make the most of them? Even more important questions concern the government’s role. Should it invest in these industries itself, or create the market conditions that would get private capital to invest? What non-fiscal mechanisms can be deployed, such as tariffs, regulations and credits?
With only a fifth of Australia’s population, Norway used decades of natural gas industry royalties to build the world’s largest sovereign wealth fund – it owns 1.5 per cent of global equity markets – sufficient to largely pay for its electric energy transition. We instead gave subsidies to the gas industry and squandered the opportunity to build publicly owned Australian wealth that we could be using now to decarbonise.
We can do better this time. Australia is a top producer of eight critical minerals along with iron, nickel, lithium – we ship 60 per cent of the world’s lithium and have all of the metals. We are the second-leading producer of bauxite (aluminium), cobalt and copper, rank sixth in rare earths and seventh in graphite. The more we look for these critical minerals, the more we find.
The ultimate question is whether we are prepared to wind down our coal and gas exports elegantly or whether we wish to hypocritically perpetuate this carbon business while trying to also capitalise on this big green opportunity.
The competition is fierce. China already produces 80-90 per cent of the world’s batteries and solar modules and is expected to produce 4000 gigawatt hours’ worth of batteries a year by 2030. That is a 60 kilowatt-hour battery pack for every car – 68 million of them – produced globally every year. That is ambition commensurate with the climate problem, but China’s ambition is focused more on economic and manufacturing dominance than on climate success. Don’t underestimate that China has a 20-year head start in almost every industry.
Manufacturing batteries or solar cells might seem a great business right now, but Australia won’t beat China’s price, even if we can beat the quality – and that is questionable in an increasingly automated world. The principle reason to manufacture domestically would be for geopolitical security, just as we keep oil and gas reserves in case of emergency.
Australia can manufacture anything and has great ambition. As a nation we used to invest in the human resource to build great industries. My grandfather helped build Australian road infrastructure, having risen from the mailroom to become secretary of the Department of Main Roads. My father’s education in textiles was paid for by the government and he helped build our textile manufacturing industry. My undergraduate degree in metallurgical engineering at UNSW was paid for by BHP and Alcoa – an investment in the future of Australian metals. The caution is that within my father’s lifetime, Australia started and then largely shut down textile manufacturing. In my lifetime a lot of our metal manufacturing capacity has wound down – I moved to the US for opportunities. What industries are we, should we be, encouraging our children to work in today?
The production of what amounts to manufactured commodities – cars, batteries, solar modules – is extremely competitive. Automation makes everything cheaper, but it means fewer jobs associated with manufacturing. The hard reality is that a robot operating in China still costs less to operate than a robot in Australia or North America. If economic rationalists decide which of the critical materiel of the war on climate are manufactured in Australia, it will be a small opportunity. We have to decide the kind of nation we are building, in a world that is boiling. If Australia wants the economic and geopolitical and security benefits of manufacturing batteries and solar cells domestically, we have to pay a “social premium” in our climate policy. As Richard Denniss at The Australia Institute has often said, Australia is a rich country and while we cannot do everything we want, we can do anything we want.
I am not dour on our advanced manufacturing opportunities. Very large and heavy things need to be manufactured close to where they are deployed, and for this reason we probably have a role in manufacturing at least components of our giant renewable energy systems – the mounting infrastructure of solar, for example, the towers and even the blades that make up two-thirds of the weight of a wind turbine.
But just as the future needs mass market manufacturing such as solar, wind, batteries and electric vehicles, it also needs electric everything else.
Outside of ore-processing, these niches are more likely where our big, profitable manufacturing future is, and indeed where our small and medium enterprises thrive today. Electric ferries, aircraft, farm and mining equipment. Electric jetskis, barbecues and tools. Electric dairies and food processing. Electric road trains, trams and buses. We should think beyond the mass market products of the clean energy revolution and focus on where we have a domestic market of some scale, a natural advantage and could therefore steal a lead on competitors, with the right supports in place.
Even talking about protectionism will offend many, but markets are never entirely free – never have been and never will be. The idea Australia will build the lowest-cost and most-efficient future is a myth. Some industries we will locate less optimally because the people or infrastructure is already somewhere else and is difficult to move. We will probably build some wind capacity offshore – which is more expensive than on land – because it is out of sight and creates lots of jobs in critical port towns such as Newcastle and Port Kembla. Every country will be looking for advantage, every country will be protecting its interests. We must play the game intelligently, and the answers are not obvious.
What kind of protectionism would be effective? There’s the option of a carbon tariff, such as the European Union’s carbon border adjustment mechanism. While we may well have to follow suit, CBAM will probably be only a temporary fix. Moreover, the advantage of a CBAM goes to the economies that decarbonise first, and we aren’t winning that race yet. Another form of tariff is a local content requirement whereby Australia could mandate a certain amount of domestically produced content in any given thing, such as steel in wind turbine towers or aluminium in transmission lines. Again, if we can make that thing cheaper than anyone else, that requirement wouldn’t be necessary, and if we impose one, that thing will cost more.
We could use regulations to protect our industries, such as the US has done with fuel economy and emissions standards to help protect its car industry. Japan protected a large part of its auto industry with a regulatory class called the kei car. These tiny, efficient vehicles are perfect city cars and an antidote to the growing waistlines of American vehicles. Do we have the courage to design an Australia-specific regulatory class?
We could regulate refrigerants in heat pumps, which cause about 6 per cent of global emissions. There are low-emissions alternatives, such as propane and supercritical CO2, and a world-leading regulatory structure could create a tidy market in zero-emissions home and water heating.
Taxes are another avenue for protectionism, whether via a carbon tax – which would be to Australia’s advantage if we decarbonise first – or tax incentives such as those in the IRA, which encourage making the things we need. Production-based incentives are among the least corrupting options – those in the US focused on green electricity mean the government expense is incurred only if and when a company connects zero-emissions electricity to the grid. The incentive is agnostic on which technology and entails a low risk of showing political favouritism – indeed, most of this money is going to Republican states under a Democrat government. Tax incentives for green production of iron, steel, lithium, alumina, aluminium and ammonia would be good options for Australian manufacturing. They could phase out after a 10-year horizon, much as solar STC credits are now being phased out.
Another form of protectionism would serve our national security, in a world where China controls 90 per cent of supply chains. In the event of global conflict or catastrophe, will we have enough domestic manufacturing capacity to ride out the trouble? The lack of a domestic supply chain served us poorly in the pandemic. This is reason enough to be a little self-sufficient in critically important areas.
The scale of the opportunity is staggering. Australia’s domestic economy needs about 900 billion kWh of electricity in a year to go zero-emissions. This is a constant supply of about 100GW. Producing green steel will take 3500-5000 kWh per ton. Half of this energy will likely be in the form of green hydrogen required for ore reduction, though all-electric reduction processes are in development.
Australia exports about 900 million tons of iron ore and pellets, which contain about 500 million tons of iron after processing. If all of that iron was processed here we would need 2-2.5 trillion kWh of electricity – two to three times our domestic production. This country exports 40 million tons of bauxite and 16 metric tons of alumina. The roughly 16 million tonnes of aluminium within represents about 60,000 kWh per ton to be processed. Another 900 billion kWh would be needed to process all of our bauxite to metal. Australia could make all of the world’s ammonia for fertiliser, which would require double our domestic energy needs. Without even considering copper and lithium and nickel, Australia could easily use five to six times our domestic energy consumption of sunshine and wind in exports of just steel, aluminium and ammonia.
What all this means is the future isn’t that different from today. We currently export three or four times the energy we use domestically. Only in the future, we’ll export shiny metals, not dull black rocks and natural gas.https://www.youtube.com/watch?v=FvQn2Ua1nA8&ab_channel=TheSaturdayPaper
Which brings us to abundance. Australia can only do this with an abundance mindset, and with renewables, abundance begets abundance. I have been working with Elona Rey-Costa, a graduate student at UNSW Sydney who is modelling out an over-abundance of electricity as a critical strategy to low-cost and high-reliability electricity. Having much more electricity than you need and renewables distributed everywhere means even when the clouds cover the sun and there is no wind in any given location, supply is still more than meeting demand.
Rey-Costa’s initial numbers suggest having triple or quadruple the capacity required counterintuitively lowers the total cost of electricity and amounts to 100 per cent reliability. The implication is a lot of the time there will be more electricity available than is needed. This already happens in the sunniest periods of the day, where the price of wholesale electricity drops below zero. If we plug our cars in at those times, they will be cheaper to run. If smelters and industries are run at these times, they will have a huge advantage over the rest of the world, with effectively zero marginal cost energy inputs.
This is necessary because the energy cost of heat from coal is less than one cent per kWh, and for gas it’s less than two cents, which is why they are so cheap to use to make industrial heat. Renewables aren’t that cheap yet – they might get close, but this excess will still be necessary to ensure the cost of steel goes down. In the messy middle of getting our economy from fossil-fuelled to zero-emissions, these new processes will be playing out in international markets that demand the cost of steel doesn’t rise. These metals as exports alone would be worth more than $1 trillion a year, dwarfing Australia’s current fossil exports.
Because export industries likely will far exceed our domestic energy requirements in the far future, Australian households will benefit from the spillover of their enormous electricity production and demand. In the short term, for at least the next decade it will be the other way around, and the nation will rely on households and communities to generate as much clean electricity as possible to free up the green electricity for growing industries. The short-term gain is lower household energy bills, and long term brings a strategic advantage for the nation’s industries, which will lower household energy bills further.
So the future will be a lot like the past, as most of the energy transition is a metals and mining play for Australia. Huge amounts of international capital will pile in. We can make this easier with broad governance and regulatory reform of electricity markets and the related legal regimes: planning, skills, technical standards, trade. This will only be possible with a prolific renewable electricity strategy that is even bigger than Rewiring the Nation.
Australia should seek to profit from all these exports, such that all the money doesn’t disappear to BlackRock and other global funds that are eyeing this country as a source of great profit, precisely because it has all the things the world needs. Australian public and private investment should maximise the returns to this country at the same time as helping the world make a last-minute escape from climate disaster. We can and must win this war.
This is part two of a two-part series.
Read part one: “Lessons from the US energy transition”.
This article was first published in the print edition of The Saturday Paper on September 16, 2023 as "How to build a green economic boom".
For almost a decade, The Saturday Paper has published Australia’s leading writers and thinkers. We have pursued stories that are ignored elsewhere, covering them with sensitivity and depth. We have done this on refugee policy, on government integrity, on robo-debt, on aged care, on climate change, on the pandemic.
All our journalism is fiercely independent. It relies on the support of readers. By subscribing to The Saturday Paper, you are ensuring that we can continue to produce essential, issue-defining coverage, to dig out stories that take time, to doggedly hold to account politicians and the political class.
There are very few titles that have the freedom and the space to produce journalism like this. In a country with a concentration of media ownership unlike anything else in the world, it is vitally important. Your subscription helps make it possible.
Select your digital subscription
Letters & Editorial