Of the many challenges facing modern economies in the long aftermath of the global financial crisis, one of the more daunting is that of delivering sustained economic growth within increasingly binding carbon constraints. Decoupling economic growth from carbon emissions is the ‘holy grail’ that citizens increasingly demand, and which political leaders around the world are actively pursuing.
Few economies are as potentially well-positioned as Australia to deliver this elusive nexus. Through a combination of good management and good luck, we came through the financial crisis better than almost any other developed economy.
While economic growth has slowed, political instability has increased. And although the appetite for and capacity to implement economic reforms appears to have diminished, we have a firm foundation for delivering a strong economic future for Australia.
Achieving sustained growth in a carbon-constrained world will require us to sever the link between economic growth and carbon emissions, which has been an almost immutable feature of our economic development. Like most industrialised economies, Australia’s carbon emissions have been dominated by the electricity sector, which has traditionally been reliant on our vast coal (and more recently gas) reserves.
The energy sector continues to operate in an environment of great uncertainty and change. Both climate and energy policy have been riddled with holes after being caught in the political crossfire. There has been a major disconnect between the two.
Carbon pricing schemes are favoured by most economists as the most efficient way of reducing carbon pollution. The Rudd and Gillard governments championed both emissions trading and a carbon tax as climate policy solutions, but complexity turned out to be the Achilles heel of both. Neither of those governments, nor the supporters of those policies, were able to ‘sell’ them to the public.
Instead it was Tony Abbott’s simple pitch of a ‘great big new tax’ which cut through, ultimately damning the Gillard Government’s signature climate reform to the dustbin of history.
The carbon price is survived by an effective yet bruised package of policies including the Renewable Energy Target, the Australian Renewable Energy Agency and the Clean Energy Finance Corporation. With five prime ministers in five years, Australia’s climate and energy policies are in need of some major TLC. And the early signs are positive, with a new Prime Minister and Energy Minister, as well as a reinvigorated Environment Minister, who all see the merits and opportunity in this decoupling process.
The UN climate negotiations in Paris at the end of the year are approaching quickly, and the Australian Government recently set a new target of cutting our emissions by 26-28 per cent by 2030. About a third of our emissions are produced by the electricity sector alone, but how the energy sector will help to meet our emissions reduction goals is still hazy. Certainly, retiring more of our oldest and dirtiest coal-fired power stations would be a good start.
With massive breakthroughs in the cost and performance of clean energy, most parts of the energy industry now accept that we are moving towards cleaner ways of generating and using electricity and, simultaneously, to a world in which consumers have more power than ever before. Two of our largest energy companies, AGL and Origin Energy, have committed to retiring their coal-fired power plants over the long term.
All credible projections point to an ongoing decline in the cost of renewable energy such as wind and solar power, as it delivers over $40 billion worth of investment and another 15,000 jobs by 2020, and much more beyond that. Our economic growth can continue to be underpinned by low-cost energy as it has in the past: it’s just that an increasing proportion of that energy will be from renewable energy and energy efficiency.
If we get this right, there is a massive economic opportunity for Australia, given our competitive advantage in renewable energy. Our economic growth and our emissions will continue to decouple: we can grow our economy while reducing our emissions. It’s the holy grail that is entirely within Australia’s reach.
Saul Eslake is an economist and Kane Thornton is the chief executive of the Clean Energy Council.