Playing a major role in saving the planet could make us rich

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.

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How climate-denier Trump may leave China to save the planet

To a sensible person, the most worrying aspect of the re-election of Donald Trump is his refusal to take climate change seriously. He says it’s a hoax and a scam.

There’s no denying that Trump’s decision to again withdraw America from the 2015 Paris Agreement to reduce greenhouse gas emissions and limit the global average temperature increase to below 2 degrees is a setback.

It could tempt many other countries to give up their own efforts to reduce emissions. If the mighty United States has stopped trying, why should we bother? It could dishearten the rest of us, but I doubt it will.

On the contrary, it could prompt us step up our own efforts – something we needed to do even without the US government’s withdrawal. It will certainly stiffen the resolve of the Chinese, who’ve just been handed the vacant position of moral leadership of the world on climate action.

Which is funny when you remember the Yanks’ bipartisan obsession with stopping China usurping their place as the world’s top dog. Will they really take this lying down?

The more I think about it, the more convinced I become that our shift to clean energy is now unstoppable. For a start, as each day passes, we see more evidence around us that climate change is already upon us, not something that may or may not happen sometime in the future.

Who can forget the footage of Spain’s flooding? All those nice cars washed up in a muddy heap at the end of the street. An entire year’s rainfall in eastern Spain in less than 24 hours, leaving more than 200 people dead.

Our TV news is now dominated by stories of extreme weather events of every kind: cyclones, bushfires, floods, deadly heatwaves and droughts. How long before we see regular footage of houses falling into the sea? Not to worry, it’s all a scam. They fake the photos.

For another thing, the switch to clean energy is well under way in most countries, and it’s too late to stop it. In some developing countries – China, for instance – the move away from dirty fossil fuels, particularly coal, is being propelled by a popular revolt against air pollution.

Elsewhere, it’s being driven by straight economics: the rapidly declining prices of solar panels, wind turbines and electric vehicles. Why would anyone ever build another coal-fired power station?

Anyone who opens a new coal mine is taking a bet that it won’t become a worthless “stranded asset” long before it reaches the end of its useful life. I read that, had it not been for Russia’s attack on Ukraine, the world prices for oil and gas would have begun falling as demand for them declined.

Note, too, that there are limits to a US president’s ability to stop the move to renewables and efforts to reduce emissions. Emissions reduction is mainly a matter for the state governments. Some of them – including huge California – will persevere with their reduction schemes.

President Joe Biden’s dishonestly named Inflation Reduction Act of 2022 actually provides billions of dollars in subsidies for the manufacture of solar panels, wind turbines and batteries in America. Trump plans to abolish it, but a lot of money has already been spent and – whether by accident or design – it’s largely being invested in Republican states and congressional districts. He may not be allowed to cut it off.

And all that’s before we get to China – the great villain and hero of climate change. Although the vast mass of greenhouse gases in our atmosphere was put there by America and the other rich countries burning fossil fuels for the past century or two, when you come to the annual addition to the stock of harmful gases it’s a different story.

Although the Americans still fancy themselves as having the world’s biggest economy (actually, if you measure it more accurately, they’ve already been overtaken by China), and although their emissions per person are still far higher than China’s, they only come second in the comp to add the most to emissions.

Because China’s population is four times the size of America’s, and its economy has been growing much faster than America’s, China accounts for 30 per cent of the world’s annual emissions, compared with America’s 11 per cent. (Then comes India with 8 per cent, and the 27 countries of the European Union with 6 per cent.)

So what China does matters far more than what the US does. And China is big on both sides of the ledger. According to The Economist, its emissions rose by about 6 per cent last year. About half that comes from its power sector, mainly burning coal. Another third comes from factories, particularly steel foundries. Then come emissions from cars and lorries.

But although China is still building new coal-fired power stations, it has installed more renewable power than any other country, and is using big subsidies to encourage the trend. Chinese companies make 90 per cent of the world’s solar cells, used to make solar panels, 60 per cent of the world’s lithium-ion batteries and more than half of the world’s electric vehicles, The Economist tells us.

It’s because of China’s massive production of these things – for its own use and for export – that the move to renewables has become so much cheaper in other countries.

The rapid increase in China’s production of renewable energy makes it likely its emissions will soon stop rising, even before the government’s 2030 target date. So the next step is for it to start reducing annual emissions in pursuit of its pledge to eliminate net carbon emissions by 2060.

That won’t be easy, of course. But my guess is the Chinese will take great delight in showing the world how decadent the US has become.

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You can blame Albanese for all our woes - except the cost of living

I try not to be a pollie basher – we get the politicians we deserve – but I can’t remember a time when I’ve been more disillusioned and disheartened by the performance of both major parties. It’s fair to criticise them on every topic except the one that obsesses us: the cost-of-living crisis.

Let’s start with that. For several years, we had prices rising at a rate that was actually lower than the Reserve Bank and economists regarded as healthy: less than 2 per cent a year. But then, in the months before the federal election in May 2022, at which Scott Morrison and crew were tossed out, prices took off.

By the end of that year, consumer prices had risen by almost 8 per cent. As you remember, the Reserve Bank began trying to get inflation back under control the only, crude way it knows: to discourage households from spending so much by using higher interest rates – particularly on home loans – to leave us with less to spend on other things.

Why did the Reserve Bank start raising rates during the election campaign, rather than waiting until it was over? Because it foresaw that a change of government was likely and didn’t want anyone getting the idea that it was the new government that had caused the problem.

By the same token, it’s hard to blame the surge in prices on the Morrison government. Prices took off in all the rich economies for much the same reasons. First, because the pandemic caused major disruption to supply of many goods, and because Russia’s attack on Ukraine disrupted world gas and oil markets.

But second, because the efforts to prop the economy up during the lockdowns – by slashing interest rates almost to zero, and the shedloads of government spending on the JobKeeper scheme, the temporary doubling of unemployment benefits, and on many other things – proved to be wildly excessive. When people started spending all that extra money, demand for goods and services grew faster than businesses’ ability to supply them, so they whacked up their prices.

You could blame this gross miscalculation on Morrison & Co – except that it was the first pandemic the world had seen in a century, the medicos had no idea how bad it would be or how long it would take to develop a vaccine, and like all governments everywhere, our government and its econocrats decided it would be safer to do too much than too little.

Since then, the passing of the international supply disruptions and the Reserve Bank’s many interest-rate increases have succeeded in getting the rate of price increase down a long way. But the bank won’t start cutting interest rates until it’s convinced our return to the 2 to 3 per cent inflation target zone will last.

Despite the unceasing criticism of a largely partisan news media, the Albanese government’s part in helping get inflation back under control has been as good as it’s reasonable to expect.

One reason it’s taking so long is that both the government and the Reserve Bank have been trying to avoid causing a huge rise in unemployment, and in this, they’ve been spectacularly successful. The proportion of the working-age population with jobs is at a record high.

So if it’s not fair to blame Albanese and his ministers for the cost-of-living crisis, why am I so critical and disapproving of the government – not to mention the opposition?

Because on almost every other matter Albanese has touched, he’s done far less than he should have. And in their time on the opposition benches, the Liberals and their Coalition partners have laboured mightily to make themselves more extreme and less electable.

As always, we turned to a new government in 2022 full of hope that it would make a much better fist of dealing with our many problems. And it’s always been true that Albanese and his people knew what needed doing. It’s just that, somewhere along the line, he seems to have lost his bottle.

He’s done a bit to tackle each of our big problems, but with one exception, he’s stopped short of doing nearly enough. Everything gets a lick and a promise.

The one exception has been the government’s significant efforts to reduce job insecurity – to improve the wages and conditions of less-skilled workers – for which we can thank the unions. Under the Labor Party’s constitution, the union movement holds a mortgage over the party and its members of parliament.

On everything else, Albanese seems to live in fear of annoying some interest group somewhere. So he always does something, but never enough. When business and other interest groups lobby the government privately to tone down its planned changes, he invariably obliges.

You can see this in the government’s changes to gambling advertising, Medicare bulk-billing, the adequate taxation of mining and gas, the National Anti-Corruption Commission (no public hearings), the housing crisis, vocational education and training, aged care and so forth.

But on no issue has Albanese failed so badly as on the one most vital to our future: climate change. Sure, he’s shored up the Coalition government’s “safeguard mechanism” and legislated the target of reducing emissions by 43 per cent by 2030. At the same time, however, he’s acted to secure the future of natural gas extraction and authorised expansion of three big coal mines.

It’s as though he’s taking an each-way bet. He seems desperate to stay in office, but has no great plans to govern effectively.

Meanwhile, under Peter Dutton, the Liberals and their pro-mining National Party colleagues have used their time in opposition to make themselves negative, divisive and utterly unworthy to take over from a weak government. Their one substantive policy is to be off with the nuclear fairies.

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Let's all be more positive towards nature. But how?

Have you heard about Nature Positive? It’s a global movement to stop all the damage we’re doing to the natural environment – to forests, rivers, plants and animals – and start reversing that damage. It’s an idea whose time has come. And it’s coming to Australia next week.

Tuesday week will see the world’s first global Nature Positive Summit in Sydney, hosted by federal Minister for the Environment and Water Tanya Plibersek and NSW Minister for the Environment Penny Sharpe.

The summit will be “the next step towards turbocharging private sector investment in nature repair”. It will bring together ministers, experts, environmental groups, businesses, First Nations people, community leaders and scientists.

It will “bring together global leaders to discuss next steps for a nature-positive future, so that our kids and grandkids will be able to enjoy the wild places we love today”, Plibersek says.

Sharpe says that “getting nature on the path to recovery is as important as tackling climate change. Nature positive, and investing in nature, are newish concepts, and they are key to turning around destruction and pollution of land, waterways and air, and stopping biodiversity loss”.

The summit’s sessions and site visits will cover driving sustainable ocean economies and “blue finance”, developing nature reporting frameworks, business leadership on sustainability, boosting First Nations leadership in nature repair, and showcasing nature repair in practice, across landscapes, seascapes and borders.

Well, that’s great. At this late stage, you’d have to be pretty boneheaded not to agree with all that. The question is, what should we do to stop the continued destruction and start repairing the damage we’ve already done?

Well, the answer’s obvious – obvious to economists anyway. Surely, what we should do is create the incentives necessary to discourage destructive behaviour and encourage helpful behaviour.

We need to set up something similar to the present “safeguard mechanism”, which requires businesses in industries with major carbon emissions to limit and then reduce their emissions.

Where this is impractical, they must “offset” any excess emissions with “carbon credits” purchased from farmers and others who do things that reduce an equivalent amount of carbon emissions. These “Australian carbon credit units” are certified by a government agency to ensure they’re genuine.

Get it? Rather than just ordering companies to stop emitting greenhouse gases, the government uses an “economic instrument” that offers incentives to businesses to do the right thing. The government creates a new market where businesses unable to reduce their emissions can pay other businesses to reduce emissions for them.

The emissions are reduced by those businesses that can do so cheaply, rather than the firms for which doing so would be much more costly. The market thus allows the community to reduce climate damage at the lowest available cost.

Neat idea, eh? One small problem. We have to be sure the businesses being paid to reduce their emissions really do so to the extent they claim. But these carbon-credit schemes are notorious around the world for being dodgy or downright fraudulent.

One problem is ensuring the carbon isn’t locked up (“sequestrated”) for a few years and then let go. Another is being sure people aren’t getting paid to do something they fully intended to do anyway for other reasons.

Officialdom insists that our federal carbon-credit system is kosher. But various whistleblowers beg to differ – and that’s not hard to believe.

With nature first, the schemes you use to reduce carbon emissions can be adapted to preserving and repairing bushland and plant and animal habitat. With bushland, there’s a fair bit of overlap between the two problems.

The NSW government has been running a biodiversity offsets scheme since 2017. But in its own politely ponderous way, a performance audit by the NSW Auditor-General in 2022 tore it limb from limb.

It found that the government department responsible for the scheme had “not effectively designed core elements” of it. There were “key concerns around the scheme’s integrity, transparency and sustainability” creating “a risk that biodiversity gains made through the scheme will not be sufficient to offset losses resulting from the impacts of [economic] development, and that the department will not be able to assess the scheme’s overall effectiveness”.

The point is, by now we’ve had enough experience of attempts by governments to create “markets” out of thin air, just by passing laws and setting up regulatory bodies, to know this doesn’t leave us with markets that work the way real markets work – let alone the markets that exist in economics textbooks.

When it comes to the environment, the trouble with government-created “markets” is that governments are creating the demand for something – a carbon credit, or a biodiversity credit – and also determining the supply of that something, by deciding who’s done something that entitles them to sell a credit.

So the buyer has been ordered to buy things called credits, while the seller has been allowed to sell things called credits. See what real markets have that this market doesn’t? Customers.

A customer is someone who wants value for their money and, if they aren’t getting it, will either go somewhere else or decide to go without.

But in this so-called market without customers, buyers have to buy credits just to please the government, while sellers who’ve been granted a piece of paper called a credit have a guaranteed buyer.

So sellers can sell anything they’ve persuaded the government to class as a credit, while the buyers forced by the government to acquire officially designated credits, have no reason to care whether the credits they buy are good, bad or indifferent.

It’s hard to imagine a “market” where the risk of buying something that’s no good could be higher.

Now get this. As originally intended, the purpose of the Albanese government’s Nature Repair Act, passed late last year, was to establish a nature-repair market. But the Greens would pass the bill in the Senate only if it didn’t permit miners and other developers to harm nature. And if they did, the polluters would have to offset any damage by buying biodiversity credits.

So, in the end, the Act created only half a market. It gives the government power only to award farmers and others who do nature-enhancing things with “biodiversity certificates”, which they can sell.

Who’d want to buy such certificates? Only philanthropists, environmental groups, companies trying to enhance their environmental credentials, or governments coughing up taxpayers’ money.

You get the feeling the Greens don’t have much faith in creating artificial markets to fix the environment. They don’t seem to share most economists’ conviction that governments shouldn’t order people about – particularly businesspeople.

So how else can we pursue nature positive? Well, here’s a radical thought: governments could stop logging native forests, stop further land clearing, stop subsidising fossil fuels, stop permitting new mines and gas fields, and start spending a lot of money restoring land and habitat.

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Why the planet needs the economy to go round in circles

By MILLIE MUROI, Economics Writer

For as long as humans have walked the earth, we’ve grappled with this dilemma: how to satisfy our unlimited wants and needs with limited resources. Eventually, people started putting pen to paper, and called the study of this problem “economics.”

Over time, we’ve become better at making – and doing – more: by piecing together machines that can dig more out of the ground, stripping the soil, and producing all sorts of foods, gadgets and shelter. Our ancestors would be shocked walking through the supermarket, and trawling online, at the seemingly infinite choices at our fingertips today.

But all this has come at a cost – which we haven’t been particularly good at factoring in.

For the past few centuries, we’ve measured our success, economically speaking, mostly by how much we’re able to produce. The bigger the amount (often measured by gross domestic product (GDP). the better.

In simply prioritising greater output, though, we’ve been pumping out emissions, producing massive amounts of waste and damaging land and waterways. We’ve been scoring own goals, even as we press forward in this seemingly never-ending game of producing more.

Now, the solution isn’t necessarily to rewind the work we’ve done. But it does pay to look back in time. For many indigenous communities, it has been the case for millennia that people take only what they need, leaving enough for remaining resources to regenerate, and reusing and repairing things rather than tossing them away.

These principles are also at the heart of the concept of a “circular economy”.

Our economy now is mostly “linear”, meaning we tend to take raw materials from the earth, make things out of them, then pretty quickly dispose of them when those things start falling apart. A lot of the valuable materials we take from the land end up buried in landfill or drifting around in the atmosphere or our oceans – which, apart from harming the environment, is a problem when we’re on a planet with limited resources.

Now, most of us have a decent understanding of recycling. You probably divvy-up your hard plastics from your soft plastics, and you might even have a compost bin or worm farm.

Australia’s overall material recycling rate in the 2021–22 period was about 63 per cent – or 1568 kilograms of recycled material for each person, up from 57 per cent in 2011-12. It’s an industry which added roughly $5 billion in value to the Australian economy, more than 30,000 jobs, and paid over $2.5 billion in wages and salaries in 2021-22. And there’s room to grow.

But the circular economy starts long before we decide to toss things out. It’s about designing things in ways that create less waste: from the process of making them (how can we limit by-products like carbon dioxide when building a house, or make a car using less material?) to designing goods that last the distance, or run more efficiently (how can we make T-shirts that hold their shape for years, or planes that run on less fuel and cough out fewer emissions?)

It’s also about a mindset shift – which could actually make us happier. In our consumption-led economy (household spending drives more than half of our economic growth), it’s easy to fall into the trap of buying things. Ads spruiking that thing you really need are everywhere. Whether it’s the newest iPhone, that cute outfit you’ve been eyeing up, or that power tool which will definitely complete your collection, the dopamine hit when you walk away with a new item is a fuzzy feeling many of us are familiar with.

But that excitement tends to wane over time, buyer’s remorse can creep in, and we often end up with a lot of clutter which we compare to other people’s clutter and fall into an endless cycle of sorting through.

Being more conscious about our purchases, buying things that are made sustainably, and thinking about how to extend the life of our possessions, are good places to start. “Buy Nothing” groups where people give away things they no longer need, and repairing things rather than throwing them away, are ways we can save money and feed into this circular economy.

The way we consume things is undeniably a game-changer. But the government and the country’s businesses also have a role. In October 2022, Australia’s environment ministers committed to speeding up the transition to a circular economy by 2030.

This week, the Productivity Commission opened up its desk to submissions for its inquiry into Australia’s opportunities in the circular economy. Requested by Treasurer Jim Chalmers, the inquiry will look into ways Australia can “improve materials productivity and efficiency in ways that benefit the economy and the environment.”

While we’ve tended to fixate on how we can improve the productivity of workers, international studies suggest a more circular economy can lead to higher economic growth and productivity, largely by boosting how productive we are with our inputs: essentially making more with a given amount of raw materials.

Australia has the fourth-lowest rate of materials productivity among OECD countries, generating $US1.20 of economic output for each kilogram of materials we consume. That’s less than half of the OECD benchmark of $US2.50.

Of course, it’s important to remember Australia is a bit of an outlier. We’re a highly resources-driven economy, with vast amounts of land separating us from our cows, sheep, mines and one another. While we can make transport less wasteful, achieving 100 per cent circularity is practically off the table.

Moving towards a more circular economy, though, is a worthwhile exercise – and one we’ve been making progress towards. Our material productivity has increased from $1.45 generated from a kilo of materials in 2010, to nearly $1.60 a kilogram in 2023, and we’re generating a bit less waste per person than we were a couple of decades ago.

Since the industrial revolution, we’ve rapidly fattened up our economy by pumping out products and consuming more. While going around in circles is generally a bad thing, the best way forward might be just that.

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The moribund political duopoly is rapidly self-destructing

Why do we have so many economic problems, and why do our governments make so little progress in fixing them? Because the two main parties just play politics and by now have boxed each other in. Neither side is game to make tough decisions for fear of what the other side will do to them.

Our tax system needs repair, but neither side dares to make changes somebody somewhere might not like. So we put up with poor government services, growing waiting lists, tax avoidance by the highly paid, bracket creep and phony tax cuts.

We have a system where people with mortgages get squeezed unmercifully whenever inflation gets too high. There are fairer and less painful ways to fix the problem, but neither side has the courage to change.

When occasionally the two sides agree on some policy, it’s often a bad one. Many defence experts quietly doubt the wisdom of AUKUS. By the time the nuclear subs arrive in many years’ time – if they ever do – they’ll probably have been superseded.

But the political duopoly’s most egregious failing is its inaction on climate change. For a while, it looked like the climate wars had ended, with the Albanese government making very cautious progress towards net-zero emissions.

Now, however, Peter Dutton has come up with a new reason for delay: let’s go nuclear instead. And we don’t have to do anything unpleasant for a decade or two. It will probably never happen, but what it has done is rob commercial investors of the certainty they need to keep investing in solar and wind farms at the rapid rate we need them to. With our ageing coal-fired power stations so close to the grave, our transition to renewable energy could be very bumpy.

So, what can we do to free ourselves from the clutches of a two-party political system that’s stopped working? Well, we’re already doing it. Voters are increasingly taking the law into their own hands by opting for the minor parties and independents. We saw this at the last federal election, in 2022, where the two big parties’ combined share of first-preference votes – which has been declining since World War II – fell to 68.3 per cent, its lowest level since the Great Depression.

So, the share of first-preference votes going to minor parties and independents is now just a little short of a third. In consequence, the number of crossbenchers in the House of Representatives rose to a record 16.

It’s not difficult to judge that the duopoly’s poor performance on climate change explains much of their decline. Labor loses votes to the Greens while, for the first time, teal independents took six previously safe seats from the Liberals.

Nor is it hard to believe that Labor’s caution and the Liberals’ nuclear red herring may add to the big parties’ loss of first preferences at next year’s election.

New research by Bill Browne and Dr Richard Denniss, of the Australia Institute, finds there are now no safe seats in House of Representatives. While some Labor seats are safe from being taken by the Liberals, and some Liberal seats are safe from Labor, such seats aren’t safe from the Greens or an attractive independent candidate.

In the supposedly safe Liberal seat of Mackellar on Sydney’s northern beaches, the teal independent Dr Sophie Scamps won the seat with a two-candidate preferred swing of more than 15 per cent. A strong independent candidate’s advantage is that they can pick up the preferences of the minor parties, plus those of the other big-party candidate who was never going to win.

It’s usual for the big parties to focus on the “marginal seats” that could be won or lost if a few “swinging voters” change their votes. And it’s mainly these marginals that one big party loses to the other.

But it’s not usual for the minor parties and independents to pick up such marginal seats. No, they’re much more likely to win supposedly safe seats.

So while the big guys focus on winning or retaining the marginals, they leave themselves open to the small guys when they neglect the concerns of voters in their heartland seats. Again, climate change would be the classic concern.

The standard way of predicting the results of elections using the psephologist Malcolm Mackerras’ famous pendulum has been overtaken not just by the lack of a uniform national swing between the two majors, but by the rise of the minors and independents.

I think it will be rare for governments to be elected with big majorities in future. Wafer-thin majorities will be the norm, with “hung” parliaments common. The big guys will warn us this will lead to chaos and inaction.

Don’t you believe it! It’s never been true at the state level where, at present, only five of the eight state and territory parliaments are dominated by a majority party.

I think a move to more power for crossbenchers at the federal level could be a good way to break the big-party logjam. It’s hard to see how it could be worse than what we’ve got.

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Australia's future to be made under Treasury's watchful eye

The Albanese government’s Future Made in Australia has had a rapturous reception from some, but a suspicious reception from others (including me). In a little-noticed speech last week, however, one of our former top econocrats gave the plan a tick.

Rod Sims, former chair of the Australian Competition and Consumer Commission, and now chair of Professor Ross Garnaut’s brainchild, the Superpower Institute, has been reassured by the plan’s “national interest framework”, prepared by Treasury and issued with the budget.

But first, the budget announced that the government would “invest” – largely by way of tax concessions – $22.7 billion in the plan over the next decade.

Treasury’s framework will be included in the planned Future Made in Australia Act. It will “clearly articulate” how the government will identify those industries that will get help under the act, to “impose rigour on government’s decision-making on significant public investments, particularly those used to incentivise private investment at scale,” according to Treasury.

So, Sims is reassured by the knowledge that the framework – and Treasury – will ensure that “sound economics has been applied”. “In my view, [the plan] represents a growth and productivity opportunity every bit as bold as seen under previous governments,” he says.

Some of those giving the plan a rapturous reception believed it was “a welcome return to activist industry policy and making more things and value-adding in Australia,” Sims says. But “despite what has been said for political reasons, this is not the logic driving [the plan] as described by Treasury”.

Sims says we don’t need to revisit old and tired debates about protectionism. But as it happens, he notes, making more things in Australia will be an outcome of the plan.

Some said the plan represented the end of “neoliberalism” and a return to interventionist thinking. “It is not that either,” he says. “[The plan] relies on sound economics, and any change in economic thinking is a return to the application of sound economics.”

The way I’d put it is that to intervene or not to intervene is not the question. A moment’s thought reveals that governments have always intervened in the economy. (One of the most incorrigible interveners is a crowd called the Reserve Bank, which keeps fiddling with the interest rates paid and received in the private sector.)

No, as we’ll see, the right question is usually whether the intervention is adequately justified by “market failure” – whether, left to its own devices, the market will deliver the ideal outcomes that economic theory promises.

Others have approved of the plan because it’s about encouraging some local production in necessary supply chains. Sims admits there’s an element of this, as local battery and solar panel manufacture are mentioned, but they are a small part of the program.

Similarly, some move to make supply chains less at risk of disruption may be involved, but it’s not the driving logic of the plan.

Yet others have said the plan is copying the United States and its (misleadingly named) Inflation Reduction Act. “This is incorrect,” Sims says. The Americans’ act “spreads money widely, whereas [the plan] is targeted to Australia’s circumstances”.

The US act “also has many destructive features that we will not copy, such as its protectionist approach.”

But, to be fair to the sceptics, he adds, “the policy’s introduction was poorly handled. It was linked to making solar panel modules, when they can be purchased much more cheaply from China, and then there was the announcement of $1 billion for quantum computing.”

“It helps neither global mitigation [of climate change] nor Australian development to force manufacture here, if the final products are produced most cost-effectively elsewhere.”

So, if the plan isn’t mainly about protectionism, what’s its main purpose? Achieving the net zero transition and turning Australia into a renewable energy superpower.

Treasury’s national interest framework says the net zero transition and “heightened geostrategic competition” (code for the rivalry between the US and China) are transforming the global economy.

“These factors are changing the value of countries’ natural endowments, disrupting trade patterns, creating new markets, requiring heightened adaptability and rewarding innovation,” the framework says.

“Australia’s comparative advantages, capabilities and trade partnerships mean that these global shifts present profound opportunity for Australian workers and businesses.” We can foster new, globally competitive industries that will boost our economic prosperity and resilience, while supporting decarbonisation.

In considering the prudent basis for government investment in new industries, the framework will consider the following factors: Australia’s grounds for expecting lasting competitiveness in the global market; the role the new industry will play in securing an orderly path to net zero and building our economic resilience and security; whether the industry will build key capabilities; and whether the barriers to private investment can be resolved through public investment in a way that delivers “compelling public value”.

So, that’s quite a few hurdles you have to jump before the government starts giving you tax breaks. And proposals will be divided between two streams: the net zero transformation stream and the economic resilience and security stream. We can only hope that a lot more of the money goes to the former stream than the latter.

To justify government intervention, the framework requires evidence of “market failure” such as “negative externalities” that arise because the new clean industry is competing against fossil fuel-powered industries which, in the absence of a price on carbon, haven’t been required to bear the cost to the community of the greenhouse gases they emit.

Another case of market failure are the “positive externalities” that arise when the first firms in a new industry aren’t rewarded for the losses they incur while learning how the new technology works, to the benefit of all the firms that follow them.

Politicians being politicians, I doubt whether Treasury’s policing of its national interest framework will ensure none of the $22.7 billion is wasted. But we now have stronger grounds for hoping that Treasury’s oversight will keep the crazy decisions to a minimum.

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How Albanese can make Australia's future the smart way

Thank goodness we’ve finally got someone saying something sensible about Anthony Albanese’s Future Made in Australia. So far, it’s been a phoney war between the old fogeys from the Productivity Commission – all government subsidies are rent-seeking – and the Bring Back Manufacturing Brigade, pushing the notion that making goods is more economically virtuous than providing services and quoting bulldust measures of “economic complexity” to prove it.

The man talking sense – adroitly picking his way through the blind ideology, partisanship and rent-seeking to find the sound economics – is Rod Sims, former chair of the Australian Competition and Consumer Commission and now chair of Professor Ross Garnaut’s brainchild, the Superpower Institute. Sims spoke to the Melbourne Economic Forum last week.

For reasons I’ll explain another day, the Productivity Commission old-timers are right to insist that the basic principles of economics haven’t changed. We must resist the false promise of self-sufficiency and stick to doing the things we’re particularly good at – our “comparative advantage” – which, throughout our history, has included exploiting our “natural endowment” of some of the most valuable deposits of minerals and fossil fuels in the world.

On the other hand, though the basic economic principles haven’t changed, the Back to Manufacturing Brigade is right – or half right – in saying that the circumstances in which the world economy now finds itself have changed radically.

This is not because, in its present period of craziness, the United States has turned protectionist, staging a trade war with China and subsidising various local industries. Others acting contrary to their own best interests – their comparative advantage – is not a sign that we should go crazy too.

No, the big change is the world’s grudging realisation that if we want to stop global warming, we must cease burning fossil fuels and switch to renewables. The move to net zero emissions of greenhouse gases by 2050 will surely be the biggest and fastest structural change the industrialised world has ever experienced.

The implications of this euphemistically named “transition” are huge for every economy, but for ours, they are monumental. Why? Because, as Sims points out, Australia is the world’s largest exporter of coal and gas, combined.

What everyone knows but doesn’t seem to get is that, within a decade or two, our economy will have been hit by a meteor. The world will have stopped buying our fossil fuels. It will have taken a huge chunk of our natural endowment and declared it worthless.

So, our greatest comparative advantage is in the process of ceasing to exist. This is what Albanese lacked the courage to say in his happy-clappy speech about a Future Made in Australia.

This is what the generals busy fighting the last war don’t get. This is why their implication that the government should sit back and see how the market reacts to this sudden drop in our standard of living is bad economics.

What we must do is something we’ve never needed to do before: hunt around in our natural endowment to find something else offering us a new comparative advantage. This is why we’re so heavily indebted to Garnaut for being the first to realise and trumpet the news that, in a decarbonised world, all our sun and wind have suddenly gone from being of little value to hugely valuable.

Australia has much more sunlight than most other countries and as much wind as the best of them. What makes this so valuable is that it’s so expensive to turn renewable energy into a form that can be exported.

Sims demonstrates the value of our new comparative advantage with the example of iron metal. At present, we export iron ore, the metallurgical coal used to reduce the iron ore to iron metal, and both the thermal coal and gas, which can provide the heat to make the iron metal.

We export the ingredients and let others bake the cake because that’s what makes economic sense. In the coming zero-carbon world, however, it will make economic sense to produce green iron in Australia.

Green iron is likely to need green hydrogen in place of the coking coal that turns the ore into metal. However, making green hydrogen requires a massive amount of renewable energy to power the electrolysers that split water into hydrogen and oxygen.

So green iron should be made in Australia because the economics has been turned on its head. If it costs, say, $100 to mine a tonne of metallurgical coal in Australia, you can send it to China for just an extra $5 or $10. But if hydrogen costs $100 to make here in Oz, it will cost at least another $100 to ship it to China.

With hydrogen, you need to turn it into ammonia, at great expense, to be able to ship it, and then you need to turn it back into hydrogen at the other end. This is complex and will involve much leakage.

So renewable energy should be used close to where it’s produced. Sims says all overseas studies he’s seen suggest that Australia is likely to be the cheapest place in the world to make green iron. Those trying to make green iron by importing hydrogen will be uncompetitive.

It should be the same story for green aluminium, green fertiliser, green silicon and green aviation fuel. We will be able to export our masses of surplus renewable energy embedded within those many products.

So, yes, we can have a lot more manufacturing in our future. And the best place for this further processing will be close to the regional sources of sun and wind-produced electricity.

But while green iron-making technology is proven, it’s not yet been done at scale, Sims says. Those who go first will inevitably make mistakes, from which others will learn. Those mistakes will be costly for the first mover but hugely beneficial to those who come after.

In other words, this learning by doing is a “positive externality” – a benefit to other businesses and the community generally for which the first business isn’t rewarded.

This is the hard-headed economic justification for temporary government grants to firms starting out in industries directly related to the exploitation of our new-found comparative advantage.

(The key “negative externality” relevant to the transition to renewable energy is the cost to the environment from the use of fossil fuels to make steel and many other things that the relevant businesses aren’t required to pay for, thus putting renewable energy producers at a price disadvantage – something the former Productivity Commission bosses keep forgetting to mention.)

But, Sims rightly warns, if all the Made in Australia talk means subsiding businesses making solar panels, wind farm components, batteries and electrolysers – in none of which we have a comparative advantage – then there’s no way we’ll become a superpower, and the extra manufacturing jobs will come at the expense of jobs in all other industries. Labor voters and the ACTU take note.

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Buildings as batteries. For net zero, we need bright ideas like this

There’s a joke about the economist who thought he saw a $20 note on the ground but didn’t reach down for it because he knew that, if there had been such a note, someone else would have picked it up long ago. Sometimes we don’t see what’s there to be seen because we aren’t expecting to see anything.

Have you ever been in the city at night, looked up to see all the office blocks with lights ablaze, and wondered why they were wasting so much electricity? Perhaps it’s because people are working late, or the cleaners are busy. In any case, it’s not lighting that uses so much power: it’s heating and cooling.

But your instincts are right. All those office blocks have an important part to play in our efforts to limit further climate change. How? Keep reading.

As every sensible person knows, but prefers not to think about, the most important single challenge we face as a nation is to play our part in achieving the global goal of reducing emissions of greenhouse gases to net zero by 2050.

This is far more important to our kids’ future than the housing calamity or the cost-of-living crisis, both which will pass soon enough.

And, as most people realise, the main strategy we’re pursuing to reduce emissions is to eliminate the use of coal and gas in the production of electricity, then use this clean power for as many of our energy needs as possible. The move to electric vehicles is a big part of this.

All of which is much easier said than done. We’re already getting much of our energy from renewable sources – solar and wind power – but we need a lot more of it. And we need it to be available before our ageing coal-fired power stations give up the ghost. We can use some gas to tide us over, but it too must go.

Another part of the problem is reconfiguring our huge system of “poles and wires” transmitting electricity around the country. We need high-voltage powerlines joining up the eastern states. Currently, powerlines mainly transmit from huge coal-fired power stations located near coal mines to the nearest big city.

Trouble is, the solar and wind farms replacing the old power stations are spread all over the place. And then there’s the need to link all the solar systems on people’s roofs into the network.

Further complicating the transition from fossil fuel to renewables is the problem all those looking for an excuse to do nothing love pointing to: what happens when the sun’s not shining and the wind’s not blowing?

The short answer is that we have to capture and store some of the free energy that’s coming while the sun is shining, so we can use it at times when it isn’t. Batteries are the obvious way to do this. But we can achieve the same effect by pumping a lot of water up a hill, then letting it run back down to power a generator at night. Or you can do something vaguely similar in an office block.

While we’re working on all this, however, climate change is making our summers hotter and increasing the demand for air conditioning. The way we see it at present, we have to increase the capacity of our electricity transmission network so we can cope with peak demand on a few very hot afternoons each year without blackouts.

But this extra capacity goes unused for all the other days of the year, which is wasteful. Surely there must be a cheaper way to avoid blackouts?

This is where Craig Roussac, founder of Buildings Alive, a company that helps commercial building managers to better manage their use of energy and so reduce their emissions, has had a bright idea, which he’s developed with Dr Richard Denniss, boss of the Australia Institute.

On hot summer days, building managers could turn their cooling a degree or so lower in the morning, then let the temperature rise slowly in the afternoon, while everyone else had their air conditioners going full blast.

Because the wholesale price of electricity jumps at times of peak demand, this would save the building owners money. Lower peaks being cheaper, this would reduce the average retail price being paid by the rest of us.

It would also reduce the need for new investment in transmission capacity – the cost of which is passed on to electricity users. Above all, it would immediately reduce emissions, at zero extra cost.

But if it’s such a smart idea, why aren’t people doing it already? Mainly because the electricity industry makes its living by selling more of the stuff, not less. But also because the energy efficiency ratings awarded to buildings don’t encourage businesses to change the timing of their demand.

Now, obviously, sorting out our office buildings would make only a small contribution towards achieving net zero. But the idea of changing the timing of our demand during peak periods could be spread to other classes of buildings, including apartment blocks and even detached houses.

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Climate change is taking over the news - in case you hadn't noticed

I keep reading psychologists warning that talking about how terrible climate change will be is counterproductive. Rather than causing the deniers to see the error of their ways, it just makes them close their minds to further argument.

So this column isn’t for them. Rather, it’s to speak to the rest of us – those who don’t try to tell the scientists they’ve got it all wrong – to review the latest evidence that climate change is already upon us (what sane person could not have realised it?) and getting worse as each year flashes by our eyes.

I fear for my five grandkids’ future (as I may have mentioned before) but, to tell the truth, I’m glad I’ll be dead and gone before it reaches its worst. What we must do, like all those who voted teal at the last election, is to press both major parties to speed up our efforts and make Australia a leader rather than a laggard in the global push to limit how bad it gets.

Professor Albert Van Dijk of the Australian National University, an expert on precipitation, is part of an international team of researchers who’ve issued a report, the Global Water Monitor, using data from thousands of ground stations and satellites to document the effect of last year’s record heat on the world’s water cycle.

“We found global warming is profoundly changing the water cycle,” he says. “As a result, we are seeing more rapid and severe droughts, as well as more severe storms and flood events.”

Van Dijk says the most obvious sign of the climate crisis is the unprecedented heatwaves that swept the globe in 2023. Some 77 countries experienced their highest average annual temperature in at least 45 years. This “gave us a glimpse of what a typical year with 1.5 degrees Celsius of warming may look like,” he says. Warming consistently more than 1.5 degrees above pre-industrial levels is expected to have extreme and irreversible impacts on the Earth’s system.

“The high temperatures were often accompanied by very low air humidity. The relative air humidity of the global land surface was the second-driest on record in 2023. Rapid drying of farms and forests caused crops to fail and forests to burn.

“Lack of rain and soaring temperatures intensified multi-year droughts in vulnerable regions such as South America, the Horn of Africa and the Mediterranean ... This continuing trend towards drier conditions is threatening agriculture, biodiversity and overall water security.”

Get this: “The world’s forests have been soaking up a lot of our fossil fuel emissions. That’s because plant photosynthesis absorbs carbon dioxide from the atmosphere. Large disturbances like fire and drought reduce or even reverse that function.”

Rising sea surface and air temperatures have been intensifying the strength and rainfall intensity of monsoons, cyclones and other storm systems, Van Dijk adds.

We saw this when Cyclone Jasper battered northern Queensland and severe storms formed in south-east Queensland, leaving a trail of destruction. The cyclone moved much slower than expected, causing torrential rains and widespread flooding.

Enough of that. Australia’s Climate Council, a community funded organisation created by former members of the Climate Commission after it was abolished by the Abbott government in 2013, has created a “heat map” using thousands of data points from the CSIRO and help from the Bureau of Meteorology.

If we assume, perhaps optimistically, that all countries meet their present UN commitments to reduce emissions, the heat map predicts that western Sydney will swelter through twice as many days above 35 degrees and three weeks above 35 degrees every summer.

Temperatures will be worsened by the “urban heat-island effect”, as materials such as asphalt and concrete amplify heat by as much as 10 degrees during extreme heat.

Melbourne, too, faces double the number of days above 35 degrees by 2050. Will it take that long for the Australian Open to be moved?

Which brings us to last month, when six transmission line towers in Victoria were destroyed by extreme wind gusts from thunderstorms, leading to about 500,000 people losing power. The intense winds knocked trees onto local power lines or toppled the poles. Some people went without electricity for more than a week.

A month earlier, severe thunderstorms and wind took out five transmission towers in Western Australia and caused widespread outages. In January 2020, storms caused the collapse of six transmission towers in Victoria.

And, of course, in 2016 all of South Australia lost power for several hours after extreme winds damaged many transmission towers.

Recent research by Dr Andrew Dowdy and Andrew Brown, of the University of Melbourne, suggests that climate change is likely to cause more favourable conditions for thunderstorms with damaging winds, particularly in inland regions. But more research is needed to confirm this.

Van Dijk gets the last word: “Overall, 2023 provided a stark reminder of the consequences of our continued reliance on fossil fuels and the urgent need but apparent inability of humanity to act decisively to cut greenhouse gas emissions.”

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We can't escape a carbon tax, which is good news, not bad

When economists are at their best, they speak truth to power. And that’s just what two of our best economists, Professor Ross Garnaut and Rod Sims, did this week. In their own polite way, they spoke out against the blatant self-interest of our (largely foreign-owned) fossil fuel industry.

They sought to counter the decade of damage done by the former federal Liberal government which, for short-sighted political gain, engaged in populist demonisation of Julia Gillard’s carbon tax.

And, by their willingness to call for a new “carbon solution levy”, they shamed the present Labor government, which dare not even mention a carbon price and isn’t game to take more than baby steps in the right direction, for fear of what Peter Dutton might say.

But the two men’s message is actually far more positive than that. In launching a new think tank, the Superpower Institute, they pursue Garnaut’s vision of how we can turn the threat of climate change into an opportunity to revitalise our economy, raising our productivity and our living standards.

Sims, former boss of the competition watchdog, says that, following a decade of stagnant production per person, real wages and living standards, Australia’s full participation in the world’s move to achieve net-zero global emissions is the only credible path to restoring productivity improvement and rising living standards.

Climate change is a threat to our climate, obviously. But it’s also a threat to our livelihood because Australia is one of the world’s largest exporters of fossil fuels. Garnaut points out that, as the rest of the world moves to renewables, two of our three largest export industries will phase out.

This will send our productivity backwards, he notes – as all the big-business people reading us lectures about productivity never do.

The good news, however, is that “putting Australia back on a path to rising productivity and living standards doesn’t mean going back to the way things were”. It’s now clear that “Australia’s advantages in the emerging zero-carbon world economy are so large that they define the most credible path to restoration of growth in Australian living standards.”

Garnaut says that “In designing policies to secure our own decarbonisation, we now have to give a large place to Australia’s opportunity to be the renewable energy superpower of the zero-carbon world economy.”

Other countries do not share our natural endowments of wind and solar energy resources, land to deploy them, as well as land to grow “biomass” – plant material – sustainably as an alternative to petroleum and coal for the manufacture of chemicals.

From a cost perspective, we are the natural location to produce a substantial proportion of the products presently made with large carbon emissions in North-East Asia and Europe.

The Superpower Institute champions a “market-based” solution to the climate challenge. We shouldn’t be following the Americans by funding the transition from budget deficits, nor become inward looking and protectionist.

Rather, everything that can be left to competitive markets should be, while everything that only governments can do – providing “public goods” and regulating natural monopolies – should be done by the government.

Sims notes a truth that, since Tony Abbott’s successful demonisation of the carbon tax, neither side of politics wants to acknowledge, that markets only work effectively if firms are required to pay the costs that their activities impose on others and, on the other hand, if firms are rewarded for the benefits their activities confer on others.

When the producers of fossil fuels don’t bear the cost of the damage their emissions of greenhouse gasses do to the climate, and the producers of renewable energy don’t enjoy the monetary benefit of not damaging the environment, these two “externalities” – one bad, the other good – constitute “market failure”.

And the way to make the market work as it should is for the government to use some kind of “price on carbon” – whether a literal tax on carbon, or its close cousin, an emissions trading scheme – to internalise those two externalities to the prices paid by fossil fuel producers and received by renewables producers.

The price on carbon that Garnaut and Sims want, their “carbon solution levy”, would be imposed on all emissions from Australian produced fossil fuel (whether those emissions occurred here or in the country that imported the fuel from us) and from any fossil fuel we imported.

Only about 100 businesses would pay the levy directly, though they would pass it on to their customers, of course. It would be levied at the rate of recent carbon emission permits in the European Union’s emissions trading scheme.

Imposing the levy on all our exports of fossil fuel, rather than just our own emissions, makes the scheme far bigger than the one Abbott scuttled in 2014. It would raise about $100 billion a year.

But it’s bigger to take account of the Europeans’ “carbon border adjustment mechanism” which, from 2026, will impose a tax on all fossil fuels imported from Australia that haven’t already been taxed.

Get it? If we don’t tax our fossil fuel exports, the Europeans or some other government will do it for us – and keep the proceeds.

What will we do with the proceeds of our levy? Most of them will go to a “superpower innovation scheme” that makes grants to support early investors in each of our new, green export industries. In this way it will lower the prices of carbon-free steel, aluminium and other products, helping them compete against the equivalent polluting products. The positive externality internalised.

Garnaut says we need to have the new levy introduced by 2031 at the latest. But the earlier it can be done, the more of the levy’s proceeds can be used to provide cost-of-living relief of, say $300 a year, to every household and business, as well as fully compensating for the levy’s effect on electricity prices.

Thank heavens some of our economists are working on smart ways to fix our problems while our politicians play political games.

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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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'Planetary boundaries' set the limits of economic freedom

One of the most important developments in economics is something in which economists had no hand: the identification of the environmental limits which humans, busily producing and consuming, cross at their peril.

Earth has existed for about 4 billion years and humans have lived on Earth for about 200,000 years. For almost all of that time we were hunters and gatherers, but 10,000 to 12,000 years ago we settled down, to farm and create civilisation.

It’s probably no coincidence that, for about that time, Earth has enjoyed a stable climate, with no more ice ages nor period of great heat, in which palms grew in Antarctica. This is the geological epoch called the Holocene, in which we live – although it may be ruled that we’ve moved to the Anthropocene, a new epoch in which the human species has made major alterations to the planet.

In its modern form, economics can be dated to 1776, when Adam Smith published The Wealth of Nations. Beliefs about how the economy works were well-defined by the time Alfred Marshall published Principles of Economics in 1890.

The point is that all economic activity – all the efforts of humans to earn a living – both depends on the natural environment and adversely affects it. By 1900, there were only about 1.6 billion humans on the planet, not enough to do much damage.

If we wrecked some area, we could just move to somewhere that hadn’t been wrecked, while the first bit gradually recovered.

So, at the time conventional economics was established, it was perfectly sensible to assume that the environment’s role in economic activity could be taken for granted. It was just there and it always would be. It was, as economists say, a “free good”.

When, from the 1700s, we started burning fossil fuel – coal, oil and gas – for heat, light and energy, we had no reason to worry that one day it might run out. It certainly never occurred to us that this might end up having an effect on the climate.

It took many decades before scientists began telling us that all the things we were doing to improve our lives – cutting down forests, damming rivers, drilling for water, ploughing, fertilising crops, fishing with nets – were damaging the soil, causing erosion, killing species, lowering the water table, and damaging the environment in other ways.

However, in just the past century or so, the world’s population has gone from 1.6 billion to 8 billion. Every extra human does a bit more damage to the environment. But that’s not the main thing. The main thing that’s changed is our use of advances in technology to hugely increase our standard of living and, in the process, massively increase the damage we’re doing to the environment.

Which brings us to “planetary boundaries”. In 2009, the Swedish scientist Johan Rockstrom and a scientist from the Australian National University, the late Will Steffen, with many helpers, established a framework listing the key categories of environmental damage, and estimating the amount of damage that could be done to each before the risk increased that “the Earth system” could no longer recover.

A second update of these estimates, led by an American oceanographer based in Copenhagen, Katherine Richardson, was released last month. With the ANU’s Professor Xuemei Bai, Richardson has written an article explaining the planetary boundaries.

There are nine boundaries. Three of them cover what we take from the ecological system: loss of biodiversity (extinction of species), loss of fresh water (pumping too much water from rivers and aquifers) and land use (deforestation).

Something economists didn’t know – or didn’t realise affected them – is that the laws of physics say we can never truly get rid of anything that exists on Earth.

All we – or the ecosystem – can do is change the form of the thing. Water can evaporate, but it’s still up in the clouds, for instance. We can cut down a tree, but as it slowly sinks into the dirt, it releases the carbon dioxide it had previously taken up.

This means that all our economic activity leaves in its wake a lot of waste. Not just landfill, but in many other forms.

So, the remaining six boundaries concern the waste our activity greatly adds to what would have occurred naturally. They are: greenhouse gases which cause climate change, ocean acidification (carbon absorbed by the sea), emission of chemicals that deplete the Earth’s ozone layer, “novel entities” (synthetic chemicals such as plastics, DDT and concrete), aerosols, and nutrient overload (nitrogen and phosphorus from fertilisers that wash into rivers and the sea, causing algae blooms, killing fish and coral).

Crossing any of these boundaries doesn’t trigger immediate disaster. But it does mean we’ve moved from the safe zone into dangerous territory. And the nine boundaries are interrelated and interacting, in ways we don’t yet fully understand.

In 2009, the scientists found we’d already crossed three boundaries: biodiversity, climate change and nutrient overload. By the 2015 update, a fourth boundary had been crossed: land use.

And by this year’s update, only three boundaries hadn’t been crossed: ocean acidification (but only just), aerosol pollution, and stratospheric ozone depletion – where an international agreement banning CFCs is slowly reducing the ozone hole we created.

Richardson and Bai say we’re now well into the danger zone, “where we – as well as every other species – are now at risk”. “We are eating away at our own life support systems,” they say.

One thing to be said for economists is that, unlike some, they don’t try to tell scientists how to do their job. Very few economists dispute the scientists’ evidence that climate change has been caused by human activities.

It was economists who developed the best means to reduce carbon emissions – emission trading schemes – which other countries have adopted, but Australia rejected.

When our governments decide to act on the other planetary boundaries, it will be economists who work out the best way to do it.

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We need economic growth to make us better off, right? Well, actually

For all our lives, worthies – our politicians, business people and economists – have assured us we need economic growth to make us better off. Almost everything I write assumes this to be true. But is it?

These days, there are more doubters than there used to be. Some people don’t believe that spending your life striving to own more stuff will make you happy. (Spoiler: they’re right.)

But a growing number of scientists tell us unending growth in the economy simply isn’t physically possible, and the more we keep growing the more we’ll damage the natural environment, to our great cost. Climate change is just the most glaring example of the damage we’re doing.

Historians remind us that our obsession with The Economy is relatively recent. It didn’t take hold until the middle of last century.

What we call “the economy” is all economic activity. It’s people getting up every morning, going out to earn a living, and then spending what they’ve earned. So it’s “getting and spending”, production and consumption. This is measured by gross domestic product – the value of all the goods and services produced during a period.

It was only when we started regularly measuring GDP in the mid-1950s that we began our obsession with whether it was growing and by how much. Or whether – God forfend – it was going backwards.

But these are just modern words and concepts. In truth, Australians have been preoccupied by what today we call economic growth since the day white people arrived. Their magic words were “settlement”, “progress” and “nation building”.

The recent arrivals saw a “new” nation where nothing had been done, but with huge potential for endless bush to be made to resemble the old country. They set about clearing the land, damming rivers, building houses, establishing farms and digging up minerals.

Why? To become more prosperous. They spurred themselves on with the belief they must “populate or perish” – be taken over by invading Asians.

So how do you achieve what we call economic growth? The easiest way is to grow the population. Have lots of kids and encourage (in those days, white-only) immigration. That gives you more people to work, but also more people needing to be fed, clothed, housed and entertained.

Bingo. A bigger economy. But while increasing the population makes the economy, GDP, bigger, it’s really only if the growth increases GDP per person that it can be claimed to make us better off, to have raised our material standard of living. And this doesn’t follow automatically.

The harder way to grow the economy is to increase the proportion of the population in paid employment, or to increase our investment in plant and equipment, and (well-chosen) public infrastructure. This does increase GDP per person.

But there’s another, more magical way to increase GDP per person. It’s to take the same quantity of resources – raw materials, labour and capital equipment – and use them to produce more output of goods and services than you did.

This is what people mean when they talk about increasing our “productivity”. It’s achieved, as economists keep repeating, by “working smarter, not working harder”.

How? By building a better educated and more skilled workforce, and by finding ways to make the organisation of factories and offices more efficient, but mainly by advances in technology that create better machines (and these days, computer programs) doing better tricks.

This is the bit scientists don’t get. When they hear the word “growth” they think of one thing: growth in humans’ exploitation of natural resources and all the damage we do to the environment in the process.

But that’s not what GDP measures. Economists know that most of the growth in GDP over the long term comes from increased productivity, not increased inputs of raw materials, labour and physical capital.

This means that, unless you believe there’s a limit to human ingenuity, it’s not true that continuing growth in GDP is impossible.

But when scientists say more clearly the kind of “growth” they’re referring to – growth in the use of natural resources and “ecosystem services” – it’s not possible to argue with the laws of physics.

While economists used to argue that the “limits to growth” weren’t as close at hand as some scientists had calculated, the possibility of the developing world enjoying the same profligate use of natural resources as the rich world is not credible. We expect the bottom 80 per cent to resign themselves to lives of relative poverty, while we in the top 20 per cent continue partying as though there’s no tomorrow.

So I accept that we and other rich countries will have to greatly constrain our use and abuse of the natural environment if the planet is to remain functional. A “circular economy” in which resources are so expensive that almost everything has to be repaired, reused and recycled? Sure.

But here’s the joke. It wouldn’t be the scientists who worked out how we could move to such an economy, it would be the economists.

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Murray-Darling basin: farmers’ friends are helping them self-harm

Not only in America. If you think the United States has become dysfunctional and incapable of solving its pressing problems, I have three words to say to you: Murray-Darling Basin. Last week, federal Environment and Water Minister Tanya Plibersek announced a brave new plan to rescue the Murray-Darling rescue plan, which the feds, NSW and Victoria had agreed to give up as all too hard.

Since the issue’s unlikely to be front of mind, let me tell this sorry story from the beginning. I’ll do so with much help from Professor Jamie Pittock of the Australian National University, an environmental scientist who’s been studying it for most of his career. (His many articles are on the universities’ The Conversation website.)

The Murray-Darling Basin covers about a seventh of Australia’s land mass: most of NSW, all the Australian Capital Territory, much of Victoria, and parts of Queensland and South Australia. It covers the Murray and Darling rivers, plus all their many tributaries, including the Murrumbidgee.

You could call it the nation’s biggest food bowl, underpinning the livelihoods of 2.6 million people and producing food and fibres worth more than $24 billion a year. Vast amounts of water are extracted from the rivers to supply about 3 million people, including those in Adelaide, but particularly for irrigating farms.

It’s also a living ecosystem that depends on interconnected natural resources. About 5 per cent of the basin consists of floodplain forests, lakes, rivers and other wetland habitats. Like all our rivers, the Murray-Darling is subject to recurring droughts and flooding.

Over the past century, however, the extraction of water, especially for irrigation, has reduced water flows to the point where the system can no longer recover from these extreme events.

Over the past decade, millions of fish have perished in mass die-offs, toxic algae have bloomed, wildlife and waterbird numbers have declined and wetlands have dried up.

Efforts to reverse the river system’s decline began with big-spending announcements by John Howard and his environment minister Malcolm Turnbull before the election they lost in 2007. It took five years before Julia Gillard and Tony Burke reached agreement with the basin states on a plan to restore the river system.

Under the then $13 billion plan, 3200 billion litres a year would be returned to the rivers, largely by buying back water entitlements from willing farmers. But the plan’s been modified several times and in 2015 the feds decided to cease buying back entitlements. Both the NSW and Victorian governments had been persuaded by their farmers to oppose buybacks.

NSW and Victoria have not delivered on their promise to reach agreements with riverside landowners to allow bought-back water to spill out of river channels onto floodplain wetlands. Another problem has been farmers drawing more water than their entitlement.

The buybacks have stalled at 2100 billion litres a year, even though the planned 3200 billion litres is probably too little to counter the evaporation caused by global warming. The plan had been due to be completed by June next year, with a new agreement in 2026.

But, in the 2022 election campaign, Anthony Albanese promised to revive the scheme and buy back the remaining water needed to meet the 3200 billion-litre target, and last week Plibersek announced a new deal with all the states, bar Victoria.

She agreed to another two or three years to deliver the remaining water, more options to deliver it, more funding to pay for it and more accountability by the feds and other governments to deliver on their obligations.

But she will need the support of the Greens and independents to get the new deal through the Senate. The opposition won’t support the resumption of buybacks, whereas the Greens don’t like the extra time to be taken.

Of course, even if the legislation goes through, there’s no guarantee the various governments will do what they’ve committed to. The feds are doing what the feds always have to do to get the states’ co-operation – offer them more money – but Victoria and NSW will always be tempted to keep their own farmers and river towns on side, which remain strongly opposed to buybacks.

How can it be so hard to ensure the continued survival of such an important river system? To say that, without remedial action, the rivers could shrink to a chain of billabongs is no great exaggeration. That might not happen for 50 years but, the way climate change seems to be accelerating, it could be a lot sooner.

You’d think the people who’d see this most clearly were those who stand to lose most as the rivers continue to shrivel. But, no, myopia prevails.

Take some pain now to avoid catastrophe later? No way! You can keep all the city-slickers’ tax money you want to pay us to help us adjust. We’re betting it will never happen. In any case, I’ll be dead by then.

And politicians who will take the votes of people who’d prefer to self-destruct aren’t hard to find. Reminds me of the way things are in the Land of the Free.

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What a future: impossible climate, a life of renting and a crappy job

The older I get, the more I worry about the nightmare we oldies are leaving for our children and grandchildren. The obvious, in-your-face problem is climate change, but other difficulties are everywhere you look.

Now the northern hemisphere has been introduced to the joys of bushfires and heatwaves with, I imagine, a cleanser of flooding to come, global warming has become global boiling. Climate change is now — and will get a lot worse even before we oldies have popped off.

We wasted decades worrying about the economic cost of doing something about climate change, now we’re facing the daunting economic costs of not having done anything about climate change.

We’ve exchanged a government of closet climate-change deniers for a government that knows what it should do, but is dragging its feet under the influence of two powerful unions representing the interests of a relative handful of mine workers who don’t want to look for jobs elsewhere.

Then there’s the way the older generation of home owners has allowed the lure of ever-rising house prices to permit successive governments to turn housing into an inheritance lottery.

Australia is dividing into two distant tribes: the owners and the renters. If you have the good fortune to be born to home-owning parents (perhaps with an investment property or two on the side), the Bank of Mum and Dad will ensure you too eventually become a home owner, able to pass your good fortune on to your own kids.

But pick renters as your parents — or have too many siblings — and you, like them, will be a life-long renter. As will your kids.

And, naturally, governments couldn’t possibly oblige landlords to give their tenants more security and better maintenance without the landlords giving up and leaving thousands homeless on the streets. (Yeah, sure.)

HECS HELP debt is adding to the difficulty of making it onto the home ownership merry-go-round. The scheme was designed to have people who benefit from a university education contribute towards its cost without discouraging kids from poor families from seeking to better themselves.

But incessant tinkering by successive governments has turned HECS into a millstone.

And all that’s before you get to the gig economy, better thought of as the rise of insecure employment. The security of having a full-time, permanent job is something the older generation has been able to take for granted. Not so the youngsters.

In the latest surge of inflation, businesses haven’t hesitated to pass on to customers the higher cost of imported inputs, often seeming to add a bit extra for luck.

But in the decade or two before then, price rises were modest, sometimes even falling below 2 per cent a year, despite healthy growth in profits.

One way that businesses kept prices low was to find new ways of holding down labour costs. With the gig economy, people seeking to earn a living from digital sites are treated as contractors rather than employees.

They thus get no guaranteed work, no paid sick or holiday leave, no workers’ compensation cover and no employer contributions to their superannuation. Their work is precarious.

But that’s just the bit that gets the publicity. Less talked about are the various devices businesses have used to minimise labour costs, shift risks onto workers, and weaken the legal link with their workers by using labour-hire companies, setting up franchise arrangements and disposable subsidiaries.

Above all, workers have been hired as casuals. Casual employment is meant for cases where work is intermittent, short-term or unpredictable. But these days many casuals work full-time, most work the same hours from week to week, more than half can’t choose the days on which they work, and most have been with their employer for more than a year.

Casual workers get no sick or holiday pay, meaning if they’re too sick to work they earn no income. If they take a break, they have to live on their savings.

In principle, they get a 25 per cent loading instead. But get this: as best we can tell from official statistics, less than half actually receive it.

And because they’re casuals, they get no job security. Permanent employees can’t be sacked without due cause. If they’re laid off, they get redundancy money. Casuals don’t have to be sacked and don’t get redundancy. They just don’t get rostered on.

Some companies avoid union wage rates and conditions by using workers actually employed by labour-hire companies.

Last week, workplace relations minister Tony Burke announced further details of the government’s plan to make it easier for casual workers to apply to become permanent. Earlier he’d announced plans to require labour-hire workers to be paid the same as the regular employees doing the same work beside them.

Naturally, the employer groups cried that this would “increase business costs and risks” – which I take as a tacit admission that causal workers have been underpaid.

It’s not much, but it’s a step towards giving the younger generation a better future.

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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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