Australia needs a 'climate competitiveness strategy'

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The Superpower Institute, the Australian non-profit organisation whose stated mission it is to position the country as "a global leader in the post-carbon economy", has identified three significant challenges to Australia's long term economic prosperity and environmental sustainability.

First, the government is not on track to achieve its 2035 emissions target (a 62-70% decline below 2005 levels), nor reach net zero by 2050. Since 2006 the average annual decline in Australia's emissions has been 9 Mt CO2. If it is going to hit its 2035 target, the annual rate of emissions decline will need to more than double, to between 19 Mt CO2 and 24 Mt CO2.

Second, Australia has a structural budget deficit and the government needs significantly more revenue to meet rising housing demands and other pressing social needs. Third, and relatedly, the economy's productivity is low, and future prosperity requires increased investment in industries where Australia has a comparative advantage.

While it is very reliant on the export of commodities (including met and thermal coal, LNG, and iron ore), Australia cannot expect that to continue as other parts of the world decarbonise. The Superpower Institute believes that "Australia’s long-term productivity will depend on it producing and exporting goods that reflect its comparative advantage in a decarbonising world."

However, as the institute makes clear, Australia's failure to address its own emissions leaves it with "no authority to influence the global rules, standards, and markets that will govern the green trade." The only carbon pricing instrument in use in Australia is the Safeguard Mechanism. It applies a carbon intensity trading mechanism to industry, covering about 30% of national emissions. Unfortunately, it has largely failed to achieve any meaningful reduction in industrial emissions.

There is another form of government policy that often works directly in competition with carbon markets, a ‘negative price of carbon’ that can lead to an increase in emissions – fossil fuel subsidies. The OECD estimates that the global fiscal cost to governments from fossil fuel subsidies is ~€0.85 trillion per year; 90% of the cost relates to the consumption of fossil fuels, whereby governments regulate consumer prices at below market levels or provide direct cash transfers to consumers. The other 10% or so is directed at supporting fossil fuel producers.

Fossil fuel subsidies induce higher levels of consumption than would otherwise be the case while also numbing consumers response to higher energy prices. Meanwhile, production subsidies enable the economic extraction of fossil fuel deposits that companies might otherwise deem uneconomic. In either case, the implication is an increase in greenhouse gas emissions. Once subsidies are in place, they are also extraordinarily difficult to remove.

One single reform could help move the dial on all three of the challenges Australia currently faces. The solution? Phase out the Diesel Fuel Tax Credit (DFTC). The DFTC provides a rebate on the full federal fuel tax applied to imported liquid refined products such as petrol or diesel (Australia imports more than 90% of its needs). In the 18 years since the DFTC was introduced the government has provided AU$122.7 billion (€73 billion) in tax concessions, almost half of which have been directed to the mining and resources sector. The DFTC is currently applied at a rate of 52.6 cents per litre.

The climate impact of this one subsidy? Clean Energy Finance estimates that the DFTC has directly subsidised over 815 Mt CO2e since it came into force, ~370 Mt CO2e from the mining sector alone – at an implied negative carbon price of AU$190 (€113) per tonne CO2e. Australia's Safeguard Mechanism puts a price on the Scope 1 emissions from industry, including the mining and energy sector. The current prevailing carbon price of AU$30-40 per tonne CO2 would need to rise more than five-fold to offset the impact that the DFTC has on emissions.