Economists: Australia Shouldn’t Mimic US Act for Net Zero Transition

Leading economists in Australia are advising Prime Minister Anthony Albanese against replicating US President Joe Biden’s large-scale approach to clean energy.

Biden’s Inflation Reduction Act, deemed the largest climate investment in US history, channels nearly US$400 billion (A$605 billion) into clean energy through tax breaks, grants and loan guarantees. Its aim is to halve US emissions by 2035.

In the run-up to this year’s May budget, Albanese stated his intention for Australia to be a partner in the energy transition, not merely an observer. He didn’t plan to mirror US spending but to match its impact.

Not dollar-for-dollar, not toe-to-toe

In a commissioned survey by the Economic Society of Australia and The Conversation, the majority of Australia’s renowned economists opposed special support for projects driving the energy transition. Instead, they favoured grants to innovative firms across all sectors.

The 44 participating economists, recognised by their peers as leading experts in fields such as economic modelling and budget policy, largely voted for supporting innovation across the economy. Only four advocated borrowing the US approach.

Economic modeller Warwick McKibbin and energy specialist Frank Jotzo highlighted labour market and tax reforms as ideal ways to foster new firms, and emphasised the necessity for government support to deliver national returns rather than merely bolster company profits.

Ex-chief economist of the federal Department of Industry, Mark Cully, advised against competing directly with the United States, the European Union or South Korea in manufacturing such items as batteries.

Supply the US revolution, don’t copy it

Cully suggested Australia could supply the resources needed by these countries to develop green industries and also benefit from their output. He, however, expressed concern over the declining Australian investment in research and development over the past decade, risking productivity. He recommended funding research and development across the economy and avoiding “picking winners”.

Janine Dixon, an economic modeller, advised ensuring public gains from public investments instead of private companies, ahead of the announcement of A$840 million in government loans to support a rare earths mine backed by Australia’s wealthiest person, Gina Rinehart.

Economist Saul Eslake warned against corporate rent-seeking, attributing it to Australia’s slide from being among the richest countries at federation to around 26th by the early 1990s.

John Quiggin, who backed loans for firms supplying US projects, argued that even though less than optimal, government support for manufacturing was inevitable and better than building AUKUS submarines.

Impose conditions

Many surveyed economists advocated for a carbon tax as the most effective means of emission reduction and lamented the strategy of “picking winners”. Stefanie Schurer, Nicki Hutley, Lisa Magnani and others suggested a well-designed grants scheme could stimulate investment if it ensured value for money, adding that such support should be temporary and conditional.