If you’ve ever been tempted by the thought that Australia forging our future by becoming a global “superpower” is a nice idea but probably not a realistic one, I have big news. New evidence shows it’s the smart way to fund our future.
Last week, while we were engaged in a stupid argument over whether the Future Fund should continue growing forever and earning top dollar by being invested in other countries’ futures rather than our own, few people noticed a report much more germane to our future.
The Superpower Institute – set up by the man who first had the idea, Professor Ross Garnaut, with former competition watchdog Rod Sims – put its money where its mouth was and produced hard evidence that the idea could work.
It employed Dr Reuben Finighan to test and extend Garnaut’s argument with a detailed analysis of the future energy supply and demand in five potential importing countries, which together account for more than half of annual global greenhouse gas emissions: China, Japan, South Korea, India and Germany.
Finighan’s report, The New Energy Trade, provides world-first analysis of likely international trade in clean energy and finds Australia could contribute up to 10 per cent of the world’s emissions reductions while generating six to eight times larger revenues than those typical from our fossil fuel exports.
He demonstrates that, though Australia’s present comparative advantage in producing fossil fuels – coal and natural gas – for export will lose its value as the world moves to net zero carbon emissions, it can be replaced by a new and much more valuable comparative advantage in exporting energy-intensive iron and steel, aluminium and urea, plus green fuels for shipping, aviation and road freight, with our renewable energy from solar and wind embedded in them.
Unusually, Finighan’s focus is on the role that international trade will need to play in helping the world reach net zero emissions at minimum cost to the economy. He reminds us that the world’s present high standard of living could not have been achieved without the use of fossil fuels, which required extensive trade between the countries that didn’t have enough oil, coal and gas of their own, and those countries that had far more than they needed for their own use.
Our participation in this trade, of course, explains much of our success in becoming a rich country. It will be the same story in the net-zero world, with much trade in renewable energy between those countries that can’t produce enough of their own at reasonable cost, and those countries with abundant ability to produce solar and wind power at low cost.
Again, we have the potential to be a low-cost producer of renewable energy, exporting most of it to the world and earning a good living from it. Finighan says countries with the most abundant and thus cheapest renewable energy available for export are those whose solar and wind resources are more intense, less seasonal and that have abundant land relative to the size of their population and economy.
Those few countries include us. Garnaut says we’re the country with by far the largest capacity to export to the densely populated, highly developed countries of the northern hemisphere. Finighan finds we can produce “essentially limitless low-cost green electricity”.
The required solar and wind farms would occupy about 0.6 per cent of our land mass. Include the space between the wind turbines and that rises to a shocking 1.1 per cent.
To put this in the sign language of economists, on a diagram plotting what would happen to our cost of supply as (world) demand increased, the curve would start very low and stay relatively flat.
But, Finighan points out, there’s one big difference between the old trade in dirty energy and the new trade in clean energy. Whereas fossil fuels are cheap to transport, shipping clean energy is prohibitively expensive.
Remember that a key strategy in the global move to net-zero is to produce electricity only from renewable sources, then use it to replace as many uses of fossil fuels as possible, including gas in households and industry, and petrol in cars.
You can’t export electricity, but transforming it into hydrogen or ammonia requires huge amounts of electricity, thus involving much loss of energy and increased cost. So it’s cheaper to use locally made electricity to produce energy-intensive products such as iron, aluminium, urea and so forth locally, before exporting them.
That is, the world trade in clean energy will mainly involve that energy being embedded in “green” products. This means, for the first time ever, making certain classes of manufacturing part of our comparative advantage.
Finighan finds that, by ignoring the role trade will play in the process of decarbonisation, and thus the need for countries with limited capacity to produce their own renewables to import them in embedded form, earlier studies, including those by the International Energy Agency, have underestimated how much more electricity production the world will need.
In examining the likely energy needs of the five large economies – four in Asia and one in Europe – he projects large shortfalls in their local supply of electricity. By mid-century, Japan, South Korea and Germany will have shortfalls of between 37 and 66 per cent. Because of their later targets for reaching net-zero, China’s greatest shortfall won’t occur until 2060, and India’s until 2070.
These calculations take full account of the role of nuclear energy. It’s one of the most expensive means of generating clean energy. Unlike renewable technology, it’s become much more costly over time, not only in the rich economies but also in those such as India.
Nuclear will play a minor role even in countries where heavy government subsidies render it competitive, such as China. Even if China triples its recent rate of building nuclear, it may contribute only 7 per cent of electricity supply by 2060.
In those shortfalls, of course, lies a massive potential market for Australia’s exports of green manufactures. So, to mix metaphors, the dream of us becoming a superpower turns out to have legs. All the Labor government and the Coalition opposition have to do now is extract the digit.