Albo's economic report card: Must try harder on energy transition

Can Anthony Albanese’s government walk and chew gum at the same time? Should be able to, provided it stops trying to work both sides of the street.

As I wrote on Wednesday, the most urgent economic and political issue facing the government is the cost-of-living crisis.

But let’s get real. Everyone may be up in arms about the cost of living, but fixing it is standard stuff for the managers of the economy. We can be sure it will be fixed soon enough.

As we know from our own lives, we often let the urgent take priority over the more important, and that’s what this government has been doing.

What could be more important than easing my cost-of-living pain? All the different kinds of pain – the heatwaves, droughts, bushfires, floods and cyclones – that are coming our way unless the world does what’s needed to stop further global warming.

A big achievement at last year’s federal election was to get rid of a government of closet climate-change deniers only pretending to want to do something, and replace it with a government that did accept the scientists’ advice and did want to act on it.

But although Climate Change and Energy Minister Chris Bowen has been busy setting up the frameworks for reducing greenhouse gas emissions – fixing the “safeguard mechanism”, producing a hydrogen strategy and developing a critical minerals strategy, and, last month, announcing a scheme to underwrite the risk of investing in new renewable energy generation and storage – few new projects have begun or are in the offing.

That’s the trouble: actual progress is happening too slowly. Albanese’s game plan for this term seems to be softly, softly catchee monkey. Make sure you don’t offend any powerful interests, get comfortably re-elected and then think about getting tough.

There’s not enough sense of urgency. The longer it takes us to make the transition to renewable energy the more pain we’ll suffer in the process.

The Grattan Institute’s energy and climate change expert, Tony Wood, wants us to realise that this transition will be harder than anything we’ve had to achieve outside of wartime.

“We must manage the decline of the fossil fuel extractive sectors, transform every aspect of our energy and transport sectors, re-industrialise much of manufacturing, and find solutions to difficult problems in agriculture,” Wood says.

Note that the challenge comes in two parts. First, make the domestic shift from fossil fuels to renewables. Second – since the world will soon enough no longer want to buy our massive exports of coal and gas – find something else we can sell abroad.

Get it? If we don’t want to become a lot poorer, we’ve got to get weaving. Labor does get that to secure our future we must seize this limited-time opportunity to turn Australia into a renewable energy superpower.

Treasurer Jim Chalmers will tell you the government has already invested about $3 billion in the superpower project. But, again, we’re being too slow in getting on with it.

Nothing Australia can do by itself will halt climate change. That will take concerted, decisive action by all the big carbon-emitting nations. That will happen eventually, even if happens too late to prevent a lot more warming.

So, if we don’t mind being lasting losers from the eventual transition – the country that used to make a good living as an energy exporter – we can stay as laggards, waiting for America, China and Europe to do the heavy lifting.

If we want to stay winners, however, we have to get ahead of the others. We have to get to net-zero emissions before everyone else. We have to build a renewables industry so big it can meet our domestic needs, with at least as much energy to spare for export to countries less well-placed than us.

Most of our exported renewable energy would be “embodied” in green steel, green aluminium and other resources. This would be all to the good, allowing us to set up new manufacturing industries to further process our resources before selling them.

To achieve this unprecedented transformation will involve the government leading the way, funding research on how basic science can be commercialised, funding pilot projects, and reducing the risks for investors in renewables and storage.

This is challenging stuff for conventionally trained economists. They’re used to telling governments to let private firms pursue our “comparative advantage” by exploiting the nation’s “natural endowment”. They tell politicians never to try to “pick winners”.

But these are unprecedented times. Global warming has just torn up our comparative advantage in mining, rendering our natural endowment of huge remaining stocks of fossil fuels of little future value.

As Professor Ross Garnaut was the first to point out, however, in the new world where renewable energy is king, part of our natural endowment we formerly thought to be of little value is now our comparative advantage: relative to other countries, we have abundant supplies of sun and wind.

But waiting for private enterprise to turn our industrial structure on its head without government leadership is delusional. And, as we ought to have learnt by now, if you dissuade governments from picking winners, they end up backing losers: helping firms and workers who did well in the old world try to stop the clock.

That’s what’s wrong with the government’s softly, softly, all-things-to-all-persons approach to climate change. It’s working both sides of the street, taking an each-way bet: encouraging the move to renewables while retaining fossil fuel subsidies and allowing investment in new coal mines and gas projects.

It says a lot about the discombobulation of conventional economists that none of them beat the Australia Institute’s Dr Richard Denniss to pointing out the obvious: taking an each-way bet flies in the face of opportunity cost.

Allowing the established players to continue investing in fossil fuels deters them from investing in renewables. It also allows them to bid scarce skilled labour away from renewables and from rejigging the electricity grid. Sorry, the government must try harder.

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Climate change will hurt, but we can still be the Lucky Country

What are we in for with climate change? How will it change the environment, the way we live and the way we earn our living? Is it all bad news for the economy, or is there some upside? And, by the way, how much is it costing us as taxpayers?

The previous federal government didn’t want to think about these questions, much less talk about them. You could read the budget papers each year and hardly find a mention.

But all that’s changed with the change of government. So, no surprise that last week’s budget has a lot in it about climate change.

In various parts of the budget papers, the Albanese government acknowledges that, with the globe already having warmed by an average of 1.1 degrees above pre-industrial levels, global warming will continue changing our weather (short-term changes) and climate (longer-term patterns) for the rest of this century.

It will endanger more species and reduce biodiversity. It will adversely affect human health, with more days of extreme heat leading to more deaths of old people.

The productivity of labour and the number of hours worked are expected to decline as temperatures increase, particularly for people who work outdoors in agriculture, construction and some manufacturing.

Treasury expects farming yields to decline, and I expect that, over time, the production of different crops and the grazing of animals will migrate to the parts of Australia where the climate is less unsuitable.

Speaking of migration, you’d expect our population to grow faster where it’s relatively cooler, with fewer people wanting to live where it’s even hotter than it is today.

And that’s before you get to people – refugees, even – moving between countries in response to rising sea levels. Starting, in our case, with people from the islands of the South Pacific.

Treasury says the increased frequency and severity of natural disasters will also lead to reductions in the production of goods and services through disruptions to economic activity, and to the destruction of private property and road, bridge and rail infrastructure.

It shows that the value of insurance claims has steadily increased over the past decade, with temporary peaks caused by the floods in Queensland and NSW in March 2013, Cyclone Debbie and Sydney hailstorms in March 2017, then bushfires and hailstorms in NSW and the ACT in the last quarter of 2019 and the first quarter of 2020.

So far, the greatest insurance claims – $6 billion-worth – were from the floods in south-east Queensland and NSW in the March quarter last year. Then there were (less costly) floods in NSW, Victoria and Tasmania late last year.

Treasury says our economy will be reshaped by both the physical impacts of climate change and by the efforts of the more than 150 countries that have now signed up to the target of net-zero emissions by 2050. What they do will affect us, plus what we ourselves do.

Australia is one of world’s biggest exporters of fossil fuels, so we can expect our exports of coal and gas to decline steadily over the next decade or two, as our overseas customers reduce their own greenhouse gas emissions from burning the dirty fuel they bought from us.

Of course, not all of them will have their own plentiful sources of renewable energy. They’ll have to import it from somewhere, just as they’ve had to import our fossil fuels.

Which gives us an opening. As our great apostle of smart climate change, economics Professor Ross Garnaut, was first to realise, Australia’s huge expanse, full of sun and wind, means we’ll be able to produce far more renewable energy than we need for our own use. And do it cheaply.

Gosh, what good luck we’ve got. Turns out the move to renewables will give us a “comparative advantage” in international trade we didn’t know we had. All we’ve got to do is play our cards right and get in quick before other, less well-endowed countries sign up our potential customers.

The former government wasn’t interested but, as the budget papers make clear, the Albanese government is. The “net-zero transformation”, which represents one of the most significant shifts in the industrial structure of the economy since the Industrial Revolution, “holds major opportunities for Australia, given our endowment of renewable energy sources and our large reserves of many critical minerals,” the papers say.

There is a problem, however. As yet, there isn’t an economic way to ship raw clean electricity and green hydrogen across the sea to other countries.

But this could be a good thing. We can “embed” our renewable energy in our mineral exports by further processing our iron ore into green steel, and our bauxite into green aluminium, before we export them.

Whereas in the old, fossil fuel world the further processing of our minerals before export wasn’t “economic” (profitable) – in the renewables world it could well be economic.

Get it? We could give our declining manufacturing industry a whole new lease on life. What’s more, it would make economic sense to do the further processing out in the regions, close to the solar and wind farms generating the clean electricity.

Implementing such a transformation would require huge capital investment and risk-taking, the early part of which would have to come from the government.

So, yes, climate change – both the bad bits and the good bits – will come at a great cost to the budget, and thus to taxpayers.

The budget papers reveal the Albanese government planning to spend an extra $25 billion on new climate-related programs over several years in its first budget last October, and now a further $5 billion in last week’s budget. Don’t think that will be the last of it.

So, get ready to hand over more in taxes as the government seeks both to ameliorate the costs of climate change and turn the world’s energy transformation to our advantage.

At least now we’ve got a government willing to get off its backside.

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Climate choice: cling to past glories or strive for prosperous future

The big question facing our political leaders is: are we content to allow climate change to turn us from winners into losers, or do we have the courage and foresight to transform our mining, energy and manufacturing industries into clean energy winners?

For most rich countries, playing their part in limiting global climate change is simply about switching from fossil fuels to renewable energy. For us, however, there’s a double challenge: as one of the world’s biggest exporters of fossil fuels, what do we do for an encore?

When it comes to deciding how we can earn a decent living, economists are always telling politicians to pursue our “comparative advantage” – concentrate on doing what we’re better at than other people, and they want to buy from us; then use the proceeds to buy from them what they’re better at than we are.

Turns out our “natural endowment” makes us better at farming and mining. Climate change will be bad for farming (not that the world will stop wanting to eat), and the only future for fossil fuel exports is down and out. It may take a decade or two to reach zero, but there’ll be no growth from now on.

Most economists have little to say about what you do when your natural endowment becomes a stranded asset and our comparative advantage evaporates. Except for Professor Ross Garnaut, who was the first to realise that nature has also endowed us with a bigger share of sun and wind.

If we tried hard enough and were quick enough, we could not only produce all the renewable energy we need for our own use, but find ways to export it to less well-endowed countries, probably embodied in green steel and aluminium.

This, of course, involves innovation and risks. We’re talking about technological advances that haven’t yet been shown to work, let alone commercialised. Doing things that have never been done before.

When it comes to technology, Australia is used to following the leader, not being the leader. Until now, this has been sensible for a smaller economy like ours. But we’re facing the impending loss of our biggest export earner. If we can’t find something just as big to sell, we’ll see our standard of living rapidly declining.

The threat we face isn’t quite existential. We’ll still be alive, just a lot poorer – and kicking ourselves for not seeing it coming and doing something about it.

The solution’s in two parts. First, the federal government must make clear to the coal and gas industries, the premiers, the mining unions and the affected regions that there’ll be no further support or encouragement for anyone pretending they haven’t seen the writing on the wall. Anyone trying to stop the clock and keep living in the past.

There’ll be plenty of support and encouragement, but only for those industries, workers and regions needing help to move from the old world to the new. As part of this, the government must do what now even the UN secretary-general says every country must do: end subsidies of fossil fuels and use the money to assist the move to renewables and green production.

Help coal miners relocate or retrain – whatever. Promise that, wherever it made sense, the new renewable and green industries would be set up near the old mines.

Ideally, the policy of ending the old and moving to the new should be bipartisan. No opposition should take the low road of courting the votes of those preferring to keep their head in the sand.

But if that’s too much to ask of a two-party duopoly, Anthony Albanese and the Labor premiers should take their lives in their hands and overcome their life-long fear of what the other side will say when you put the national interest first.

Second, pick winners. Econocrats spend their lives telling governments not to do that – not to subsidise new industries you hope will become profitable.

Trouble is, politicians being politicians, you can be sure they’ll be putting taxpayers’ money on some horse in the race. And if they’re not trying to pick winners, they’ll be doing what they’re doing now: backing losers. Which would you prefer?

More importantly, it’s a neoliberal delusion that new industries just spring up as profit-seeking entrepreneurs seek new ways to make their fortunes. Doing something never done before is high risk. The chance of failure is high. Banks won’t lend to you.

We don’t stand a chance of becoming a green superpower without a lot of government underwriting with, inevitably, some big losses. But I can think of many worse ways of wasting taxpayers’ money.

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Labor is just pretending to be tough on climate change

Labor talks the talk, but doesn’t walk the walk. Last week’s “final warning” from the Intergovernmental Panel on Climate Change – and the Albanese government’s refusal to be moved by it – should be a game-changer in our assessment of Labor’s willingness to do what must be done.

The IPCC’s message – driven home by UN Secretary-General Antonio Guterres – was that we’re almost out of time to avoid much of the worst climate change. Whatever plans we had to reduce greenhouse gas emissions, we must step them up, and speed them up.

Regarding last year’s federal election, the message is that Labor’s plan is complacent and compromised, and the Greens and teals were right to demand much tougher, faster action.

But not only did Climate Change Minister Chris Bowen show no sign of getting the UN’s message, he announced his refusal to negotiate with the Greens to make improvements to his “safeguard mechanism” legislation.

You need to know that Albanese Labor hates the Greens more than it hates the Liberals. Bowen could have decided to use the need to win the Greens’ support for his bill in the Senate as cover for making the bill stronger than Labor promised in the election campaign.

Instead, he decided to put the interests of our grandchildren second to this fabulous chance to “wedge” the Greens. They could either vote for Labor’s bill as is, or they could join the Coalition in voting it down – just as they did when they voted down Kevin Rudd’s carbon pollution reduction scheme in 2009.

This would leave the government with no means of achieving its target of reducing emissions by 43 per cent by 2030. And, Bowen bellowed in the House, that would be all the Greens’ fault. (It doesn’t seem to have occurred to Bowen and his boss that if they go to the 2025 election having done nothing to fight climate change, blaming it all on the Greens won’t be a good enough excuse.)

But last week showed that the problem with Labor isn’t just its political cynicism and game-playing. Until last week, it was possible to see the Greens’ demand that no new coal and gas projects be approved as the kind of over the top zealotry you’d expect from those crazies. And, as it happens, the teals.

This is what Guterres said last week in welcoming the IPCC’s final warning. “The climate time-bomb is ticking.” We do have time to defuse it, “but it will take a quantum leap in climate action”.

We must “massively fast-track climate efforts by every country and every sector and on every timeframe”.

He was proposing an “acceleration agenda” with, specifically, “no new coal and the phasing out of [existing] coal by 2030 in [the rich] countries and 2040 in all other countries. Ending all international public and private funding of coal” and “ceasing all licensing or funding of new oil and gas”, as already proposed by the International Energy Agency and “stopping any expansion of existing oil and gas reserves. Shifting subsidies from fossil fuels to a just energy transition”.

That’s not some crazy greenie, that’s the UN secretary-general.

Yet, the very same week, Bowen had the temerity to claim that stopping new projects would be “irresponsible”. That’s now the opposite of the truth.

It’s not by chance that Bowen is the Minister for Climate Change and Energy. It’s not just the Coalition that’s in bed with the fossil fuel industry; Labor is too. Labor just does a better job of covering it up.

Federal Labor will not commit to stopping the proposed 116 new coal and gas projects. When Albanese went to India recently, he took fossil fuel people with him, so they could sell more coal.

The many state Labor governments are committed to approving new projects. That’s another thing that happened last week: on election night in NSW, the new state Labor minister made it clear the Minns government would not be stopping new projects.

Labor wants to be in bed both with those who want real action on climate change and the fossil fuel industries. Someone famous once said, “No one can serve two masters”. One of his saintly followers once prayed, “Lord, make me pure – but not yet”. That’s Labor.

Which brings us to the safeguard mechanism Labor is refusing to improve. Bowen has conned some conservation groups into supporting his plan because, though it’s not perfect, “something is better than nothing” and “it’s a start: get it passed, and seek to improve it later”.

Come in, sucker. What last week shows is that there isn’t time to improve it later. Labor has tried to wedge the Coalition by building its reduction scheme on the base of Tony Abbott’s safeguard mechanism, which was largely for show and did nothing to reduce emissions.

But if Labor is taking over an ineffective scheme from the secret climate change deniers, now’s the time to make it effective, not later. The fact is, the safeguard mechanism is riddled with loopholes.

The first loophole is our fossil fuel exports. Under the UN’s rules, a country is responsible for the emissions that occur on its own territory. Bowen’s renovations would, in theory, reduce the local emissions of our biggest polluting industries. It would also reduce the local emissions from any big new coal and gas export projects.

But it would permit other countries to maintain or increase their emissions from fossil fuels they bought from us. The UN will blame them for those emissions, not us. Great loophole, eh?

Trouble is, greenhouse gas is a global problem, not a local one. And we’re one of the biggest exporters of fossil fuels in the world. We export far more future emissions than we emit ourselves. So, what we do at home doesn’t add to climate change nearly as much as what others do with the coal and gas we sell them.

Bowen’s version of Abbott’s safeguard mechanism has a second major loophole. The big polluters must either progressively reduce their emissions according to the government’s phase-down, or buy the equivalent carbon credit offsets from someone else – often a farmer who’s planted more trees.

First problem is that there’ll be no limit to the extent that a polluter can resort to carbon credits. So it’s possible they’ll continue pumping out greenhouse gases, and mainly just buy credits from elsewhere.

This could lead to far more reliance on credits than the UN agreements envisaged. Credits were supposed to be used mainly by industries, such as cement and steelmaking, that find reducing emissions exceptionally difficult.

The other problem is that a lot of the carbon credit offsets are dodgy – they’re not like for like as a substitute for genuine emission reductions.

These were the main loopholes in Bowen’s rejigged safeguards mechanism that the Greens, the teals and Senator David Pocock were hoping to see improved by negotiations with Labor.

They make it debatable whether, in this case, something is better than nothing. One advantage of voting down Bowen’s bill would be to stop Labor pretending it had done something meaningful about climate change while actually prolonging the future of our fossil fuel industries.

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Labor's new plan to reduce our emissions is riddled with loopholes

While I was on holiday, I noticed a tweet that left me in no doubt about the subject of my first column back. It said: “I genuinely think the next generation will not forgive us for what we have done to them and the world they will have to live in.”

I, too, fear they won’t. I don’t know whether our political leaders ever think such thoughts, but it fills me with dread. Maybe the pollies think what I reluctantly think: With any luck, I’ll be dead before the next generation realises the full extent of the hell our selfish short-sightedness has left them in.

But the climate seems to be deteriorating so rapidly I’m not sure I’ll get off that easily. I love my five grandkids, but I’m not looking forward to the day they’re old enough to quiz me on “what I did in the war”. What was I saying and doing while our leaders were going for decades kicking the problem down the road as the easiest way to get re-elected?

“Well, I was very busy writing about the shocking cost of living – oh, and rising interest rates.” Really? Is that the best excuse you can offer, Grandad?

We elected a bloke called Albo who promised to try a lot harder than his predecessors to reduce our emissions of greenhouse gases. He said he’d cut them by 43 per cent by 2030. He was quick to put that target into law, and his people worked through the Christmas holidays to outline the “safeguard mechanism” he’d use as his main measure to achieve the reduction.

While the rest of us were at the beach, Climate Change Minister Chris Bowen announced a few weeks ago that Australia’s 215 biggest industrial polluters – running coal mines, gas plants, smelters and steelworks – will have their emissions capped, with the caps lowered progressively by 30 per cent come 2030.

Businesses whose emissions exceed their cap will face heavy fines. To the extent they can’t use cleaner production processes to reduce their emissions, they’ll be allowed to buy “carbon credits” from other heavy polluters who’ve been able to reduce their emissions by more than required, or from farmers who’ve planted more trees.

Trouble is, it wasn’t long before the experts started pointing to all the holes in the scheme. For a start, the combined emissions of these biggest polluters account for only 28 per cent of Australia’s total emissions.

For another thing, the notion that, as well as reducing the carbon we’re adding to the atmosphere, we should find ways to remove some of the carbon that’s already there is a good one in principle, but riddled with practical problems.

Whereas the carbon we emit may stay in the atmosphere for 100 years or more, the carbon sequestered by a new tree will start returning to the atmosphere as soon as it dies or is cut down. It’s hard to measure the amount of carbon that tree-growing and other agricultural activities remove, which makes such schemes particularly easy to rort.

In his recent report into expert criticism of our carbon credits scheme, Professor Ian Chubb sat on the fence. While judging the scheme to be “well designed”, he identified various dubious practices that should be outlawed. And he stressed that big polluters must not rely on buying carbon credits to the extent that they’re able to avoid reducing their emissions in absolute terms.

A further weakness in the government’s scheme comes from its refusal to prohibit any new coal mines and gas plants, despite the International Energy Agency and other international agencies saying the world won’t have any chance of avoiding dangerous climate change if it’s relying on new gas or coal projects.

So, the scheme involves leaning on our existing 215 biggest polluters to reduce their emissions by 30 per cent, while allowing a bunch of new big emitters to set up, provided they then start cutting those emissions back.

Really? This is how we’re going to cut our total emissions by 2030? Seriously?

Last year a reader rebuked me for failing to make it clear that nothing Australia does to reduce its own emissions can, by itself, have any effect on our climate. Why not? Because climate is global, and we’re not big enough to have a significant effect on total world emissions.

The best we can do is set a good example, then pressure the bigger boys to do likewise. So far, we’ve been setting them a bad example.

It’s the global scale of the problem that makes our efforts actually to increase our exports of coal and gas so irresponsible – and, to our offspring, unforgivable. We’re the world’s third-largest exporter of fossil fuels, after Saudi Arabia and Russia.

Australia’s emissions within our borders are dwarfed by the emissions from the coal and gas we export. But never mind about that. Let’s just extract a few more shekels before the balloon goes up.

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RBA warning: our supply-side problems have only just begun

In one of his last speeches for the year, Reserve Bank governor Dr Philip Lowe has issued a sobering warning. Even when we’ve got on top of the present inflation outbreak, the disruptions to supply we’ve struggled with this year are likely to be a recurring problem in the years ahead.

Economists think of the economy as having two sides. The supply side refers to our production of goods and services, whereas the demand side refers to our spending on those goods and services, partly for investment in new production capacity, but mainly for consumption by households.

Lowe notes that, until inflation raised its ugly head, the world had enjoyed about three decades in which there were few major “shocks” (sudden big disruptions) to the continuing production and supply of goods and services.

When something happens that disrupts supply, so that it can’t keep up with demand, prices jump – as we’ve seen this year with disruptions caused by the pandemic and its lockdowns, and with Russia’s attack on Ukraine.

What changes occurred over the three decades were mainly favourable: they involved increased supply of manufactured goods, in particular, which put gentle downward pressure on prices.

This made life easier for the world’s central banks. With the supply side behaving itself, they were able to keep their economies growing fairly steadily by using interest rates to manage demand. Put rates up to restrain spending and inflation; put rates down to encourage spending and employment.

The central banks were looking good because the one tool they have for influencing the economy – interest rates – was good for managing demand. Trouble is – and as we saw this year – managing demand is the only thing central banks and their interest rates can do.

When prices jump because of disruptions to supply, there’s nothing they can do to fix those disruptions and get supply back to keeping up with demand. All they can do is strangle demand until prices come down.

So, what’s got Lowe worried is his realisation that a lot of the problems headed our way will be shocks to supply.

“Looking forward, the supply side looks more challenging than it has been for many years” and is likely to have a bigger effect on inflation, making it jump more often.

Lowe sees four factors leading to more supply shocks. The first is “the reversal of globalisation”.

Over recent decades, international trade increased significantly relative to the size of the global economy, he says.

Production became increasingly integrated across borders, and this lowered costs and made supply very flexible. Australia was among the major beneficiaries of this.

Now, however, international trade is no longer growing faster than the global economy. “Trading blocs are emerging and there is a step back from closer integration,” he says. “Unfortunately, today barriers to trade and investment are more likely to be increased than removed.”

This will inevitably affect both the rise in standards of living and the prices of goods and services in global markets.

The second factor affecting the supply side is demographics. Until relatively recently, the working-age population of the advanced economies was steadily increasing. This was also true for China and Eastern Europe – both of which were being integrated into the global economy.

And the participation of women in the paid labour force was also rising rapidly. “The result was a substantial increase in the number of workers engaged in the global economy, and advances in technology made it easier to tap into this global labour force,” Lowe says.

So, there was a great increase in global supply. But this trend has turned and the working-age population is now declining, with the decline projected to accelerate. The proportion of the population who are either too young or too old to work is rising, meaning the supply of workers available to meet the demand for goods and services has diminished.

The third factor affecting the supply side is climate change. Over the past 20 years, the number of major floods across the world has doubled and the frequency of heatwaves and droughts has also increased.

This will keep getting worse.These extreme weather events disrupt production and so affect prices – as we know all too well in Australia. But as well as lifting fruit and vegetable prices (and meat prices after droughts break and herd rebuilding begins), extreme weather can disrupt mining production and transport and distribution.

The fourth factor affecting the supply side is related: the transition from fossil fuels to renewables. This involves junking our investment in coal mines, gas plants and power stations, and new investment in solar farms, wind farms, batteries and rooftop solar, as well as extensively rejigging the electricity network.

It’s not just that the required new capital investment will be huge, but that the transition from the old system to the new won’t happen without disruptions.

So, energy prices will be higher (to pay for the new capital investment) and more volatile when fossil-fuel supply stops before renewables supply is ready to fill the gap.

Lowe foresees the inflation rate becoming more unstable through two channels. First, shocks to supply that cause large and rapid changes in prices.

Second, the global supply curve becoming less “elastic” (less able to respond to increases in demand by quickly increasing supply) than it has been in the past decade.

Lowe says bravely that none of these developments would undermine the central banks’ ability to achieve their inflation target “on average” - that is, over a few years – though they would make the bankers’ job more complicated.

Well, maybe. As he reminds us, adverse supply shocks can have conflicting effects, increasing inflation while reducing output and employment. The Reserve can’t increase interest rates and reduce them at the same time.

As Lowe further observes, supply shocks “also have implications for other areas of economic policy”. Yes, competition policy, for instance.

My conclusion is that managing the economy can no longer be left largely to the central bankers.

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The climate-change changes the politicians don't want to talk about

It’s strange to think that both sides of politics are leading us to a policy-free federal election campaign at a time when we have so many problems we should be debating. Not that the parties won’t have policies written on a bit of paper somewhere, but that they don’t want to talk about them.

Why not? Because any policy you propose can be used by your opponent to spread scare stories about your intentions. Last time, for instance, Scott Morrison used Labor’s support for electric vehicles to claim it was out to destroy the weekend.

This time, one issue neither side wants to dwell on is climate change. We have – at long last – reached bipartisan agreement on getting carbon emissions down to net zero by 2050. And on the question of how far we should have got by 2030 (yes got, not gotten; you may have reverted to English as it was spoken when the Pilgrim Fathers left England in 1620, but I haven’t), the parties are offering a genuine choice between ambitious and unambitious.

But neither side wants to talk about how we’ll get to net zero. Which leaves us in debt to a top energy expert, Tony Wood, of the independent think tank the Grattan Institute, who does want to talk about it.

Wood and his team flesh out something we know: that the main strategy is to get as much as possible of the energy we need from electricity.

“Households and business will rely on low- or zero-emissions electricity more than ever as it replaces their current use of petrol and diesel for transport and gas for cooking and heating,” he says.

Thanks to the move to renewables, emissions from the electricity sector have fallen consistently over the past five years and are expected to fall much further over this decade. But, on present policies, emissions from all other sectors – including transport, industry and agriculture – are expected to stay much the same.

To achieve net zero by 2050, demand for electricity is likely to double, at least. That means installing a lot more wind and solar (including rooftop) to meet this increased demand and to replace existing coal and gas-fired power stations as they’re retired.

As the anti-renewables crowd continually reminds us, this requires much ingenuity, effort and expense to ensure a reliable supply of power across the national electricity grid, despite the ups and downs of demand and the vagaries of wind and sun.

But it also involves a lot of investment in changing the transmission grid from one that largely moved high-voltage electricity from a handful of big power stations in the country to the big cities, to one that joins up a multitude of small commercial and household sources of solar and wind power. An increasing proportion of homes will be putting power into the grid sometimes and taking it out other times.

The Morrison government is insisting on a large and continuing role for natural gas in the electricity system. Wood is far from convinced. “The large-scale use of gas as a ‘transition fuel’ – supplying ‘base-load power’ with lower emissions than coal – does not stack up economically or environmentally,” he says.

Nearly 80 per cent of Australia’s hugely increased gas production is exported as liquefied natural gas. It’s sold at the world price, meaning “the good old days of low-priced east-coast gas are gone, making gas an increasingly expensive energy source”.

At present, gas provides about a quarter of Australia’s local energy consumption and contributes close to 20 per cent of our emissions. And whereas electricity prices have been falling, gas prices have been rising.

Gas has been declining as a share of Australia’s power supply since 2014, and this is likely to continue. “Gas will play an important backstop role in power generation when the sun isn’t shining and the wind isn’t blowing – but this role will not require large volumes of gas.”

In the home, people value being able to choose between gas and electricity for cooking and heating, but this can’t continue. They’ll save money and reduce emissions when all new houses are all-electric.

“The uncomfortable truth is that natural gas is most likely in decline in Australia, and achieving the net-zero target requires that to happen … Attempts to hold back the tide through direct market interventions, such as contemplated in [Morrison’s] National Gas Infrastructure Plan, will probably require ongoing subsidies at great expense to taxpayers.”

As for cars and other light vehicles, achieving net zero by 2050 requires all new cars to be electric or hydrogen-powered by 2035. That’s because, on average, our cars stay on the road for more than 15 years. The alternative is “costly and inefficient measures to scrap large numbers of cars in the 2030s and ’40s.”

To achieve the 2035 target, we need to do what almost every other rich country does. We need to do what the car manufacturers have asked for: set mandatory emissions standards. But neither major party is willing.

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Praying for costless climate change: Lord, send down a miracle

Picture Scott Morrison kneeling by his bed, hands together, eyes closed, asking God to send him another miracle. Or maybe just giving Santa a list of all the things he’d like for Christmas.

Five things, actually. First, technology not taxes. That is, a sudden, unforced flowering of new technology that allows us to go on selling our fossil fuel to the world while – at negligible cost – the technology eliminates all our net emissions of carbon dioxide and other greenhouse gases.

Second, we reach net zero emissions by 2050 with “expanded choices, not mandates”. That is, no one should be forced to do anything. They’ll just choose to implement the new technology because it’s so wonderful.

Third, somebody somehow will “drive down the cost of a range of new energy technologies”. That is, reduce the cost of doing things without emissions so that it’s lower than the cost of doing things by, say, burning coking coal or burping methane. This, however, won’t destroy any jobs.

Fourth, we keep energy prices down with affordable and reliable power. That is, the solar and wind energy that we disparaged for many years is now cheaper than the coal-and-gas-fired power that we’re still trying to prop up, so you can thank us when electricity prices fall.

Fifth, we are accountable for progress. That is, just because we won’t show you our modelling, or tell you how much the deal with the Nationals will cost or what it’s going on, doesn’t mean we won’t tell you after the media’s lost interest.

We’re assured that Australia’s Long-term Emissions Reduction Plan will “achieve net zero emissions by 2050 in a practical, responsible way that will take advantage of new economic opportunities while continuing to serve our traditional export markets.

“This plan does not rely on taxes and it will not put industries, regions or jobs at risk. No Australian jobs will be lost as a result of the Commonwealth Government’s actions or policies under the Plan.”

As Energy Minister Angus Taylor summarised it, the plan “won’t impose new costs on households, businesses or regions.” Morrison says it will not “shut down coal and gas production”.

Other countries are pondering long and hard about how on earth they’re going to get to net zero. Until this week we had no idea either. Now, however, we have a plan that tells us how it can and will be done – at no perceptible cost to anyone or anything.

And if that isn’t hard enough to swallow, try this: the plan doesn’t involve announcing any new policy. So what’s changed since Monday? What’s different? What’s new is that Morrison now has modelling that says we’ll get to net zero with a bit to spare – without the need for any more changes.

The boffins added up the numbers and – surprise, surprise – we’re already on track to net zero. Is ScoMo lucky or what? The Americans, the Europeans, the Chinese, they’re all still struggling with it, but we’ve got it figured.

Funny thing is, it has the feel of Amateur Hour. Who wrote the report? The experts in the Energy Department? No, it was written by management consultants – McKinsey, and has all the colourful diagrams and big type and blank pages you expect from management consultants.

I hadn’t heard that McKinsey was expert on energy or climate science or technological innovation, but maybe I’m wrong.

So who did the modelling? Well, not Treasury – what would they know about modelling? We’ve been given the impression the modelling was done by McKinsey, but my guess is they contracted it out to some outfit that actually knows about modelling.

But management consultants and modellers do share a common temptation: to find out what bottom line the client’s after, and work back from that – a thought that came to me when I saw all the nice round figures in McKinsey’s lovely chart showing how net emissions in 2005 will be reduced to zero by 2050.

Reductions to date – 20 per cent (mainly from once-off land clearing restrictions in Queensland and NSW, which occurred before the 2005 starting point and the 2030 target were chosen). Next, reductions projected to arise from the government’s technology investment road map - say, 40 per cent.

Then reductions from “global technology trends” - say, 15 per cent. Reductions from “international and domestic offsets” – 10 to 20 per cent, but make it 10 per cent. Next, reductions from “further technology breakthroughs” - say, another 15 per cent.

Okay, you can stop there. We’ve made it to a neat 100 per cent. (I think I’m starting to see why Morrison isn’t keen to let the experts see the modelling.)

In a new paper from the Australia Institute, Bending the Curve, Dr Richard Denniss and colleagues assess the plausibility of the Morrison government’s belief that the course of our economy can be significantly altered without changes in policy, without the introduction of taxes and without new regulation or even legislated targets.

The authors say the plan “is based on the assumption that it is not just possible to forecast which technologies will be developed in the decades ahead, and the cost of deploying those technologies, but that such development is inevitable.

“In reality, as those who have pursued ‘carbon capture and storage’ in Australia for the last 30 years have clearly shown, it is not just possible that new technologies might be more expensive than expected, it is possible that they will fail completely to eventuate.”

The plan is just the latest iteration of “techno optimism,” albeit at the more optimistic end of the spectrum, they say.

“White it is inevitable that the cost of some existing technologies will fall rapidly, and that some new technologies will be developed, there is nothing inevitable about the timing of such improvements,” they conclude.

Morrison says his plan involves delivering net zero “the Australian way”. That bit I believe. This is the “no worries – she’ll be right, mate” way of doing it.

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We should stop backing losers in the Climate Change Cup

The big question for Scott Morrison and his colleagues is whether they want to be a backward-looking or forward-looking government.

Do they want to enshrine Australia as the last giant of the disappearing world of fossil fuels, and pay the price of declining relevance to the changing needs of our trading partners, with all the loss of jobs and growth that would entail?

Or do they have the courage to seize this opportunity to transform Australia into a giant in the production and export of renewable energy and energy-intensive manufactures, with all the new jobs and growth that would bring?

In recent weeks, the main customers for our energy exports – China, Japan and South Korea – have done something we’ve so far refused to do: set a date for their achievement of "carbon neutrality". Zero net emissions of greenhouse gases.

Faced with this, and the free advice from fellow conservative Boris Johnson that he should get with the program, Morrison has defiantly declared that Australia would make its own "sovereign decisions".

This is infantile behaviour from someone wanting to be a leader, like the wilful child who shouts, "You’re not the boss of me!"

It goes without saying that Australia will make its own decisions in its own interests. No other country has the ability or desire to force its will on us. But nor can we force our will on them. They will go the way they consider to be in their best interests, and it's clear most are deciding to get out of using fossil fuels.

We remain free to change our export offering to meet our trading partners’ changing needs, or to tell them all to get stuffed because producing coal and gas is what we’ve always done and intend to keep on doing. Our sovereignty is not under threat. No one can stop us making ourselves poorer.

A report issued on Monday by Pradeep Philip, head of Deloitte Access Economics, called A New Choice attempts to put figures on the choices we face in responding – or failing to respond – to global warming. I’m not a great believer in modelling results, but the report does much to illuminate our possible futures.

In last year’s election, Morrison made much of Bill Shorten’s failure to produce modelling of the cost to the economy of his plan to reduce emissions in 2030 by much more than the Coalition promised to do in the Paris Agreement.

Had he been sufficiently dishonest, Shorten could easily have paid some economic consultancy to fudge up modelling purporting to show the cost would be minor, but for some reason he didn’t. However, Morrison didn’t resist the temptation to quote the results of someone who, over decades of modelling the cost of taking action to reduce emissions, had never failed to find they would be huge.

It’s true that the decline of our fossil fuel industries will involve much expensive disruption to those businesses and the lives of their workers, as they seek out new industries in which to invest their capital and find employment.

But what’s a lot more obvious today than it was even last year is that this cost will be incurred whether it happens as a result of government policy, or because the decline in other countries’ demand for our fossil fuel exports leaves us with what financiers call "stranded assets" – mines and other facilities that used to turn a profit, but now don’t.

Last year it was possible for the cynical and selfish to ask why we should get serious about climate change when no one else was. Today the question is reversed: how can we fail to act when everyone else is?

One of Morrison’s great skills as a politician is his ability to draw our attention away from some elephant he doesn’t want us to notice. In the election he got us to focus on the cost of acting to reduce our emissions. The bigger question we should have been asking is, what’s the cost to the economy if we and the others don’t act to stop future global warming?

Whatever number some modeller puts on that cost, our "black summer" should have left us needing little convincing that climate change is already happening and already imposing great destruction, pain and cost on us. Nor is it hard to believe the costs won’t be limited to drought, heatwaves and bushfires, and will get a lot worse unless we stop adding to the greenhouse gas already in the atmosphere.

On a more positive note, Deloitte adds its support to those experts – including Professor Ross Garnaut and the Grattan Institute’s Tony Wood – finding that "in a global economy where emissions-intensive energy is replaced by energy from renewables, Australia can be a global source of secure and reliable renewable power. Countries such as Japan, South Korea and Germany have already come to Australia asking for us to export renewable hydrogen for their own domestic energy consumption."

We have a "once-in-a-lifetime opportunity to simultaneously boost economic growth, create sustainable jobs [and] build more resilient and cleaner energy systems".

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Despite neglect, we're muddling towards low-carbon electricity

To coin a phrase, Australia’s governments are making heavy weather of their efforts to give us an electricity system that’s secure, reliable and affordable – with declining carbon emissions. Progress is slow in every respect bar one: the move to renewable energy is showing “remarkable growth”.

That’s clear from this week’s annual Health of the National Electricity Market report, by the Energy Security Board of the Council of Australian Governments. The peak security board is composed of the heads of the three government agencies that share the running of the national electricity market, plus an independent chair, Dr Kerry Schott, an economist.

If it all sounds a bit bureaucratic, it is. The national market (which covers all states bar Western Australia and the Northern Territory) is a “market” created by government and managed by bureaucrats. You have to give six months’ notice of your intention to blow your nose. Schott’s energy board – a further layer of bureaucracy – was set up partly to get the three lower outfits to work together more co-operatively.

Having been written by bureaucrats, the report (littered with industry jargon) is too polite to remind us why the industry’s having so much trouble getting its act together: the federal Coalition government’s inability to tell the many businesses exactly how they'll be required to reduce their emissions as part of the government’s commitment under the Paris agreement.

Without that degree of certainty – ideally, a plan both sides of politics are committed to – businesses are reluctant to invest. The Turnbull government had such a plan – the national energy guarantee – but its minority of climate-change deniers refused to accept it. The plan was abandoned and, pretty soon, so was Malcolm Turnbull.

Of the three key objectives – security, reliability and affordability – the report rates the status of the first two as “critical” (bureaucratspeak for “a real worry”) and only the last as “moderate-critical” (“not as bad as it was”).

To be fair, coal-fired power and renewable energy are so different in their nature that moving the power system from one to the other – and don’t doubt that this is what’s already happening – was always going to be a tricky business. That, of course, is why decent politicians would be doing all they could to minimise the uncertainty.

“Security” is now “the issue of most concern” to the board. It means maintaining a consistent flow of power at the right frequency and voltage. Failure to do so can seriously damage the system and cause significant interruptions to power supply – that is, days or months, not hours.

The problem is caused by the increasing role of “variable renewable energy resources” (aka wind farms and solar farms) and “distributed energy resources” (aka rooftop solar panels and maybe batteries).

“Reliability” – that is, the avoidance of much shorter blackouts – is now a bigger worry than it was. It has improved since last year, but the balance between demand and supply is still very tight during the summer peak demand in Victoria, NSW and South Australia.

“The increased severity of weather events, especially over summer, coincides with an ageing, and hence less dependable, coal generator fleet,” the report says.

When we come to affordability, it has “improved slightly over the year for retail customers”. Considering that retail prices leapt by 80 per cent between June 2004 and June last year, I suppose you have to regard that as progress.

Why did prices go so high? Well, not for the reason Scott Morrison keeps diverting our attention to: Labor’s evil tax on carbon, which Tony Abbott soon abolished. No, the report explains that the years of soaring prices were “largely driven by overbuilt [transmission] networks in Queensland and NSW, rising wholesale fuel costs, retail market [profit-motivated] inefficiencies and the cost of a range of renewables subsidies”.

Why did affordability (that is, not price per unit of power, but the size of people’s bills) improve slightly last financial year? Mainly because the average amount of energy from the grid fell as people moved to rooftop solar and also used electricity more efficiently – say, by buying appliances with better ratings.

Now the good news: over the three years to 2021-22, prices are expected to fall by 7 per cent, mainly because wholesale prices will fall as more power comes from renewables generation, which is very cheap. Really? That much, eh?

So don’t imagine retail prices will ever fall back to anything like what they were. And even as more and more of our power comes from renewables, there’ll be a lot of new cost coming from the rejig of the transmission network needed to connect to the different locations of the renewables’ generators.

By June last year, the proportion of the national market’s electricity generated by wind and solar had reached 16 per cent. It’s expected to reach 27 per cent by 2022, and be above 40 per cent in 2030.

There is huge variance between the states on their rate of transition. With its hydro and wind, Tasmania is close to 100 per cent renewables. South Australia is up at 53 per cent, leaving the rest of us between 10 and 20 per cent.

Contrary to Morrison’s claim that we’re a “world leader” in renewables investment, the report says we’re in the same class as Ireland, California, Germany, Spain and Portugal.

All that’s before you take account of rooftop solar. The report says it’s our high prevalence of rooftop that’s uniquely Australian. It’s now equivalent to 5 per cent on top of the national market’s total generation, and expected to be 10 per cent by 2030.

So don’t let anyone tell you we’re not getting on with the shift to renewables. But, by the same token, don’t imagine we’re doing anything like enough. We need to get to carbon-free electricity long before 2050, not just to do our bit in limiting global warming but because, as the report confirms, Australia has a “global comparative advantage in renewable energy”. We’d be mugs not to exploit it.

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We could be among the world's climate change winners

In the dim distant past, politicians got themselves elected by showing us a Vision of Australia’s future that was brighter and more alluring than their opponent’s.

These days the pollies prefer a more negative approach, pointing to the daunting problems we face and warning that, in such uncertain times, switching to the other guy would be far too risky.

We’ve gone from “I’m much better than him” to “if you think I’m bad, he’d be worse”. Maybe they simply lack any vision of the future beyond advancing their own careers.

Management-types tell us we should conduct “SWOT analysis” – considering our strengths and weaknesses, opportunities and threats. But we’ve become mesmerised by the threats and incapable of seeing the opportunities. Such a pessimistic mindset is crippling us when we could be going from strength to strength.

Take climate change. It, of course, is a threat – to our climate, and hence to our comfort and our economy – but think a bit more about it and you realise that, for a country like ours, it’s also a new gravy train we could be climbing aboard.

The stumbling block is that responding to climate change requires change – and no one likes change, especially those who earn their living from the present way of doing things.

So, what more natural reaction than to resist change? Economists are always warning politicians not to try “picking winners”. In reality, they’re far more likely to resist change by spending lots of money trying to prop up losers.

Start by denying that change is necessary. Global warming isn’t happening, it’s just a conspiracy by scientists angling for more research funds.

Nothing new about heatwaves, bushfires, droughts, floods and cyclones – they’ve always existed. They’re becoming bigger and more frequent? Just your imagination.

What you’re not imagining is the ever-higher cost of electricity. But that’s just because those ideologues imposed a carbon tax and are making us subsidise renewable energy. Get rid of the taxes and subsidies and the cost falls back to what it was.

And those terrible wind turbines. They’re unnatural and unsightly, they kill rare birds and their noise endangers farmers’ health.

Renewable energy is unreliable because it depends on the wind blowing or the sun shining. You need coal for steady supply. With the greater reliance on renewables, where do you think the blackouts are coming from?

And renewable energy is so expensive. Coal-fired electricity is much cheaper. Plus, we’ve got all our chips stacked on coal. We’re world experts at open-cut coal mining. Our coal is much higher quality than most other countries'.

Coal provides jobs for 30,000 workers. There are towns desperate for jobs who’d just love another coal mine. And, of course, we’ve still got huge reserves of the stuff that’s of no value if it stays in the ground.

Some of these claims have always been untrue, some are no longer true and some are less true than they were.

Just this week, for instance, a report from the independent Grattan Institute has debunked the claim that “outages” are being caused by renewables, saying more than 97 per cent of outage hours can be traced to problems with the local poles and wires that transport power to businesses and homes.

While it’s true that power from existing coal-fired generators is dirt cheap, many of these are old and close to the end of their useful lives. They’re not being replaced by new coal generators because there’s too much risk that the demand for coal-fired power will dry up before the generators have returned the money invested in them.

The latest report from the CSIRO says the lowest-cost power from a newly built facility is now produced by solar and wind.

The cost of solar, battery storage and, to a lesser extent, wind power, has fallen dramatically over this decade, partly because of advances in technology but mainly because of economies of scale as China and many other countries jump on the bandwagon. These falls are likely to continue.

This has gone so far that the old arguments about the need for a price on carbon and subsidies for renewables are being overtaken by events.

Installation of renewable generation is proceeding apace, with all renewables’ share of generation in the national electricity market jumping from 16 per cent to 21 per cent, just over the year to December, according to Green Energy Markets.

So, as the economist Professor Frank Jotzo, of the Australian National University, has said, coal is on the way out. The only question is how soon it happens.

According to our present way of looking at it, this is disastrous news. But not if we see it as more an opportunity than a threat.

Professor Ross Garnaut, of the University of Melbourne, has said that “nowhere in the developed world are solar and wind resources together so abundant as in the west-facing coasts and peninsulas of southern Australia.

“Play our cards right, and Australia’s exceptionally rich endowment per person in renewable energy resources makes us a low-cost location for energy supply in a low-carbon world economy.

“That would make us the economically rational location within the developed world of a high proportion of energy-intensive processing and manufacturing activity.”

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Too many stuff-ups about to put economic reform into reverse

I have bad news and worse for advocates of micro-economic reform. First, the jig is up. There'll be few if any further major reforms. Second, the backlash against mounting wreckage from failed reforms is about to begin.

Since the reform push has degenerated into little more than business rent-seeking – let's cut tax on business and increase it on consumers; let's push the legislated balance of power in industrial relations further in favour of employers – it's neither surprising nor regrettable that voters have called a halt.

Micro reform has lost all credibility with voters. Most oppose company tax cuts for big business, cuts in penalty rates and a freeze on the minimum wage. Neither side of politics will pursue these "reforms" with any enthusiasm.

Economic rationalists will blame all this on irrational populism, but if they were more honest with themselves they'd admit the economic case for bizonomic​ reforms – what's good for business must be good for the economy – is debatable and often unconvincing.

And who could blame the public for holding economists accountable for all the stuff-ups committed in the name of reform over the years: the implosion of the deregulated wool price scheme, the wasteful public-private partnerships, the dubious effectiveness of the Job Network, the disastrous admission of for-profit providers of childcare.

The dodgy education businesses selling access to permanent residence to foreign students, the "contestable" pink batts scheme, the failure of encouraging competition between government and private schools, the huge rip-offs of students and taxpayers arising from federal and state efforts to make vocational education and training "contestable", the privatisation of airports and ports with their monopolies intact.

Economic rationalists are so heavily into confirmation bias they've managed not to notice this record of disasters, but they'll be hard pressed not to see the next one, when for-profit providers rip off the disabled in the name of making the National Disability Insurance Scheme "contestable".

Last week the former high priest of micro reform (and Productivity Commission boss) Gary Banks attacked a politician for daring to blame the failures of energy policy on the private sector's lack of enterprise.

Leaving aside his one-eyed criticism of government subsidies for renewable energy (while just happening not to notice the implicit subsidy of fossil-fuel generators arising from the absence of a price on carbon), Banks was right.

The blame must go to the econocrats who designed the national electricity market and the politicians who took their advice.

That we've gone from about the cheapest to about the dearest electricity – and that without a price on carbon – can be blamed on the malfunctioning of micro reform.

The "market" is the utterly artificial creation of government, run by several government agencies with a 6000-page rule book, responsible to a committee of nine governments.

The reformers' wholesale electricity market seemed to be working well, but now lacks the flexibility to cope with energy emergencies. The price regulation of largely privatised natural monopoly network operators was gamed for years before the regulators woke up, and price competition between electricity retailers is weak and margins high.

Historically, economic rationalists under-rate market failure, but are highly conscious of "government failure" – where government intervention intended to correct market failures ends up making things worse.

This is the rationale for micro reform. Governments have mixed objectives, with little motivation to keep things efficient. Much better to leave it to the private sector, driven by the profit motive to put efficiency above all else.

Really? Economic rationalists and econocrats are naive, partly because many of them have never actually worked for the private sector, and are shocked to discover how powerful is the profit motive in motivating business people to game the system, look for loopholes and, far too often, simply break the law.

Private businesses are always overbidding for privatised businesses and underbidding for contracts to provide government services. Governments think this is terrific, until the businesses wake up to their error and try to extract some profit by overcharging or cutting quality, exploiting the incomplete contracts they signed.

Much of this is bureaucratic incompetence, but it's also conservative governments seeing privatisation and out-sourcing in partisan rather than efficiency terms: it's about moving economic assets and activities from the "them" column to the "us" column, so more businesses are beholden to your party and happy to donate.

Turns out the push to reduce "government failure" has produced reverse government failure. We start out trying to stop government intervention to correct market failure that's making things worse, but end up making them worse than they already were.

Then we wonder why the punters want no more "reform".

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Our new comparative advantage: renewables

The old joke says the questions in economics exams don't change from year to year, but the answers do. Welcome to the economics of energy and climate change, which has changed a lot without many people noticing - including Malcolm Turnbull and his climate-change denying mates.

They've missed that the economics has shifted decisively in favour of renewable energy, as Professor Ross Garnaut​, of the University of Melbourne, pointed out at an energy summit in Adelaide last October.

Garnaut is chairman of Zen Energy, a supplier of solar and battery storage systems. But there aren't many economists who know more about the energy industry and climate change than Garnaut, who's conducted two federal inquiries into the subject.

He says that, since his second review in 2011, there have been four big changes in the cost of renewable energy relative to the cost of energy from coal or gas.

First, the cost of renewable energy generation and energy storage equipment has fallen "massively".

The modelling conducted for his inquiry assumed the cost of photovoltaic solar generation would fall by a few per cent a year. In practice, costs have fallen by about five-sixths since that assumption was made.

"Similarly large reductions have occurred in the cost of lithium ion batteries and related systems for storing energy," he says.

There have been less dramatic but substantial reductions in costs of equipment for electricity from wind and other renewables.

The cost reductions come from economies of scale in the hugely increased production by China and others, plus savings through "learning by doing". Advances in technology will keep prices falling after scale economies have been exhausted.

Second, there have been "transformational improvements" in battery storage technology, used at the level of the electricity grid, to ensure balance between supply and demand despite renewables generators' "intermittency​" (inability to operate when the sun's not shining or the wind's not blowing).

Third, there's been a dramatic reduction in the cost of borrowing the money needed to cover the capital cost of generation equipment.

Real interest rates on 10-year bonds are below or near zero in all developed countries, including Australia.

"These exceptionally low costs of capital are driven by fundamental changes in underlying economic conditions and are with us for a long time," Garnaut says.

Low interest rates reduce the cost of producing, storing and transporting renewable energy more than they reduce the cost of fossil-fuel energy because renewable costs are overwhelmingly capital (sun and wind cost nothing), whereas fossil fuel costs are mainly recurrent (digging more coal out of the ground).

Fourth, there's been a dramatic increase in the cost of gas - and thus gas-fired electricity.

Ten years ago Australia had the developed world's cheapest natural gas - about a third of prices in the US. Today, our prices are about three times higher than in the US.

Why? Because the development of a liquid natural gas export industry in Queensland has raised the gas prices paid in eastern Australia to "export parity" level - the much higher price producers could get by selling their gas to Japan or China (less the cost of liquefaction and freight).

It's worse than that. Because foreign investors were allowed to install far too much capacity for LNG exports - meaning none of them is likely to recover their cost of capital - they've been so desperate for throughput they've sometimes bid gas prices well above export parity.

Apart from making gas-fired power more expensive relative to renewables, this has implications for how we handle the transition from "base-load" coal-fired power (once you turn a generator on, it runs continuously) to intermittent solar and wind production.

It had been assumed that gas-fired power would bridge the gap because it was cheap, far less emissions-intensive than coal, and able to be turned on and off quickly and easily to counter the intermittency of renewables.

Now, however, without successive federal governments quite realising what they'd done, gas has been largely priced out of the electricity market, with various not-very-old gas-fired power stations close to being stranded assets.

What now? We thank our lucky stars the cost of energy storage is coming down and we get serious about storage - both local and at grid level - using batteries and such things as "pumped hydro storage" (when electricity production exceeds immediate needs, you use it to pump water up to a dam then, when production is inadequate, you let the water flow down through a hydro turbine to a lower dam).

In other words, the solution is to get innovative and agile. Who was it who said that?

Turnbull's party seem to be pro coal and anti renewables partly because they know we have a comparative advantage in coal.

We can produce it cheaply and we've still got loads in the ground. The rest of the world is turning away from coal and the environmental damage it does, but let's keep opening big new mines and pumping it out, even though this pushes the prices our existing producers get even lower.

If the banks are reluctant to finance new coal mines at this late stage, prop them up with government subsidies. Join the international moratorium on new mines? That would be unAustralian.

But get this: Garnaut says we also have a comparative advantage in the new world of renewables.

"Nowhere in the developed world are solar and wind resources together so abundant as in the west-facing coasts and peninsulas of southern Australia. South Australian resources are particularly rich...

"Play our cards right, and Australia's exceptionally rich endowment per person in renewable energy resources makes us a low-cost location for energy supply in a low-carbon world economy.

"That would make us the economically rational location within the developed world of a high proportion of energy-intensive processing and manufacturing activity.

"Play our cards right, and Australia is a superpower of the low-carbon world economy."

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Mixed progress on reform of power prices

Do you think you're paying too much for electricity? Would you like to see an end to hefty annual price rises, maybe even a fall in prices that goes beyond the abolition of the carbon tax? Well, be patient. The econocrats are working on it.

It may surprise you that they've been in the process of reforming electricity prices for the best part of 20 years, and they're far from finished. They got part of the power system working well, had a bad slip with another bit, and the jury's still out on a third. But they're working away and are confident of success - eventually.

The national electricity market - covering all of Australia bar Western Australia and the Northern Territory - is actually a creation of our econocrats, their grand experiment in market competition.

Before this, we had separate, state-owned monopolies that charged us pretty much what they wanted to charge, particularly because our demand for power kept growing every year. The reformers' bright idea was to link up all the eastern and southern states and turn them into a market by making all the individual power stations compete to feed electricity into the national grid at the lowest prices possible.

Buying the power at the other end of the grid would be various electricity retailers, which would deal directly with households and business users. These, too, would be required to compete with each other to win our business, since we'd be free to buy our power from whichever retailer we chose.

Linking the power stations in the wholesale market with the retailers supplying power to you and me would be the high-voltage transmission and lower-voltage distribution network (the "poles and wires", as pollies keep calling it).

Since it would never be economic to build rival networks, this would have to stay as a monopoly. And being a monopoly, whether it was sold off or remained government-owned, the prices it charged the retailers - and they passed on to us - would need to be closely regulated to prevent rip-offs.

The reform of the first part of the system has worked really well. Competition between the electricity generators has been cut-throat, prices haven't changed much over the years and no power stations are making excessive profits.

But the cost of generating the electricity makes up only about 30 per cent of the retail prices we pay. The big problem has been that faulty rules have prompted the regulators of the network operators' charges to grant them excessive increases, to the point where "network charges" now explain about half of retail power prices.

It's five years of these big increases, much more than the carbon tax or the renewable energy target, that have caused retail prices to grow so fast. A big part of the problem is that, about four years ago, the demand for electricity, which had been growing every year for a century, stopped growing and started falling.
It fell mainly because of new laws requiring appliances to be more efficient in their use of power and because all the fuss Tony Abbott was making about the price of electricity prompted us to be more price-conscious and look for ways to reduce our usage.

The network operators began investing heavily to improve the capacity of the network to meet the ever-higher peak demand for power on hot summer afternoons when a growing number of us had airconditioners going full blast.

One small problem: the fall in annual demand for electricity meant the brief seasonal peak had stopped rising. For several years the industry refused to believe the downturn in demand from the network was more than a blip.

So we've expanded the capacity of the network beyond what we're likely to need for some time. But you and I are paying extra for this expansion and will continue paying until it's paid off.

The good news is the econocrats have finally woken up to the problem. Actually, they were woken up in 2012 by the fuss Julia Gillard made when she realised Abbott was framing her for price rises she didn't cause.

In 2012 the rules were changed to give the regulators greater power to limit increases in the network charges passed on to retailers. Such changes take far longer than you'd imagine to flow through, but from now on it seems likely the network component of retail electricity bills will stay fairly steady in dollar terms.

The econocrats have proposed a further reform which, when it takes effect, will require the networks to bill retailers according to the time of day and time of year when you and I use electricity. With the spread of "smart meters" - which show the precise times when each household uses its electricity - we'll be charged according to our time of use, with those of us who show restraint during peak periods paying less, and those who don't paying more. This should produce a lasting solution to the (expensive) problem of ever-rising peak demand on hot afternoons.

That leaves the question of the effectiveness of competition between the growing number of electricity retailers, big and small. Here the jury is still out. Much depends on how smart we are in finding the retailer offering the best deal - on which quest I offer some tips in my little online video spiel.

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Modellers bamboozle over cost of renewable energy

There's a lot of public support for the renewable energy target, which requires electricity retailers to get 20 per cent of their power from renewable sources by 2020. But now the country's being run by climate change "sceptics", let's get with the program. Forget the threat of climate change, stop worrying about your grandchildren and focus on what matters most: what this do-gooder scheme is doing to your cost of living.

Although before the election Tony Abbott professed support for the target, since the election he has instituted an expert review of it, headed by businessman Dick Warburton, former chairman of Caltex and prominent "sceptic".

The review commissioned a leading firm of economic consultants, ACIL Allen, to undertake modelling on the future effects of the target.

The preliminary report found that, between 2015 and 2020, the target would increase the average household electricity bill by $54 a year - a tad over $1 a week. This five-year average, however, conceals the estimation that the cost of the scheme will fall as each year passes.

So by 2020 itself, the increase will have reduced to just $7 a year. By the end of another 10 years, in 2030, the scheme is estimated to be actually reducing average household electricity bills by $91 a year, or $1.75 a week.

It's common sense that requiring electricity retailers to buy a certain proportion of their power from more expensive renewable sources - mainly wind power, but also solar - would add to the cost of their power, with the extra cost being passed on to consumers.

So why has ACIL Allen's modelling concluded the target will add to the price of electricity initially, but eventually subtract from it? The short answer is because electricity pricing is a complicated business.

It turns out that adding to the supply of renewable energy available reduces the wholesale price of electricity. This is because the price being paid for energy being put into the national electricity grid by particular generators varies minute by minute according to the balance of supply and demand.

In the middle of the night, when little power is being used, the wholesale price is very low. But on a cold evening - or, more likely these days, a very hot afternoon - the wholesale price can be stratospheric.

The trick to renewable energy is that it tends to be available when the demand for electricity is high. Experience around the world confirms the Australian experience that renewable energy does a great job of reducing spikes in wholesale prices on very hot and very cold days.

Another part of it is that though it costs a lot to build wind and solar generators, once they're built there are few "variable" costs. Wind and sun are free; coal and gas aren't. So the renewable generators offer to supply power to the grid at very low prices and this lowers the prices the coal and gas generators are able to ask for.

But none of this changes the fact that the electricity retailers have to pay for the "renewable energy certificates" that the target scheme requires them to buy. These certificates reduce the capital cost of setting up the wind and solar generators whose operations then reduce the wholesale cost of power.

So it turns out the renewable energy target scheme has the effect of reducing the wholesale cost of electricity while also adding to the costs of the electricity retailers. ACIL Allen's modelling suggests that, for the next five years, the extra retail cost will exceed the saving in wholesale costs, but after that the saving will exceed the extra cost.

See what this means? The case for saying we must get rid of the renewable energy scheme because it's adding too much to the living costs of struggling families has collapsed.

But there's where the story takes a twist. Modelling of the future cost of the renewable energy target, published by an equally prominent firm of economic consultants, Deloitte, comes to opposite conclusions.

Deloitte's modelling accepts that the renewable energy scheme is reducing wholesale costs, and roughly confirms ACIL Allen's finding about the higher cost to household customers until 2020. But whereas ACIL Allen expects the scheme to start reducing household costs after that, Deloitte expects the cost to stay positive until 2030, causing household bills to be between $47 and $65 a year higher than if the scheme was scrapped.

Why have two leading economic consultants reached such opposing conclusions? Perhaps because Deloitte's modelling was commissioned by the Chamber of Commerce and Industry, the Business Council and the Minerals Council.

Deloitte doesn't conceal that its modelling is in reply to ACIL Allen's. Would it surprise you if the fossil fuel industry wanted to see the renewable energy target abolished and was alarmed to know that modelling commissioned by the review had demolished the argument that continuing the target would add to people's electricity bills? Now the review will be able to pick whichever modelling results it prefers.

How did Deloitte reach such different results? By feeding different assumptions into its model. It seems to have assumed the cost of wind farms won't fall over time (which it probably will), whereas the price of gas for gas-fired generators won't rise much (which it already has).

Regrettably, economic modelling has degenerated into a device for bamboozling the public.

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CitySwitch Awards Night, December 3, 2012

No one ever promised moving to a green economy - an economy making minimal use of fossil fuels - would be easy, and so it has proved. Indeed, in recent years the challenge has look dauntingly tough. It’s too easy to leave it to other people - and other countries - to make the first move. It’s too easy to make excuses and even to deny there is a problem. Sometimes I think I’m glad I didn’t do much science at high school, so I’m not tempted to think I can explain to the scientists where they’re getting it all wrong.

Even so, I get the feeling we’re making more progress in recent days - and that we’ve been making more progress than popularly believed. Here in Australia, the breakthrough may have come with the introduction of the carbon tax on July 1 which - as many of us prophesied - wasn’t nearly as catastrophic as the public had been led to expect. The tax had been designed to be as least disruptive as possible, and so it has proved. With any luck, this anticlimax will see a turning of the tide in our resolve to get on with preparing for a green future. I read that the carbon tax is now more popular than Tony Abbott - though that’s not setting the bar very high. (46/44; -31 net approval)

In recent days we’ve seen a number of new authoritative reports - mainly from scientific authorities, but also from no more unexpected body than the World Bank - reminding us the climate change problem hasn’t been wished away. It’s still there and, if anything, getting more pressing. That’s hardly good news, but I get the feeling these reports have been getting more media attention than they would have done a year ago.

Another bit of encouraging news is that, soon after his comfortable re-election, President Obama reaffirmed his view that man-made emissions of greenhouse gases are contributing to global warming, and stated his intent to continue to take action to reduce greenhouse gas emissions. He said: “I am a firm believer that climate change is real, that it is impacted by human behaviour and carbon emissions,” noting that, “we have an obligation to future generations to do something about it.”

It’s true the US Senate has declined to agree to an emissions trading scheme, but though that may be the best way to progress the move to a green economy, it’s not the only way. And the Obama Administration has made great strides in instituting stringent new fuel efficiency standards for cars and light trucks. A related approach is greenhouse gas regulations issued by the US Environmental Protection Agency, which would limit emissions from certain power plants. And we shouldn’t forget that California and several other states are proceeding with trading schemes.

Similarly, many people don’t realise how much progress China is making in the development of renewable energy sources such as wind and, particularly, solar. When Julia Gillard’s recent white paper on the Asian century included projections for the growth in Chinese demand for our coal, Professor Ross Garnaut expressed the view that these seemed far too high because they underestimated the extent to which China would be relying on green energy sources.

And then, of course, there’s the little publicised fact that the Chinese government is proceeding with an emissions trading scheme on a trial basis in various provinces. Knowing the Chinese way of doing things, I won’t be surprised to see this develop into a nation-wide scheme.

The final bit of good news is the way so many of our own businesses are seizing the challenge and the opportunity to become front-runners in the shift to a green economy. This is occurring in various areas of business, but - as we’ve heard - in none more successfully than in the CitySwitch program. It’s great to see building managers and tenants combining with city councils to use energy more efficiently. They say there are no free lunches in the economy, and it’s true many lunches that look free aren’t really, but there are some, and when you can combine doing the right thing by the planet - and by our grandchildren - with saving on energy costs, this surely qualifies. If doing the right thing and saving on costs also brings competitive advantages - including by making more conscientious employees keener to work for such an enlightened employer - then all I can say is: you deserve it. I’m pleased to be here tonight to honour all the participants in the CitySwitch program as well as those receiving awards.

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