Australia's struggle for carbon competitiveness

Global investment and positive trends in clean energy and other low emission technology are now likely unstoppable. International negotiations continue, slowly, towards a new legally binding treaty in 2015. Delicate but important progress is being made. The cost of climate impacts is becoming real and increasingly recognised as a danger to economic prosperity.

Countries continue to implement policies that slow the growth in carbon emissions and encourage investment in clean energy. They are doing this because of concerns about climate change and other self-interested reasons, including addressing local air pollution, improving energy productivity and energy security and building new industries.

These fundamental trends continue and combine to ensure the future global economy will be carbon-constrained. How smooth the transition will be and whether it can avoid extremely dangerous climate impacts are outstanding questions. There is no doubt, however, that carbon competitiveness matters now and will matter more in the 21st century.

Not all countries are equally prepared for this reality. Starting six years ago, The Climate Institute/GE Low-Carbon Competitiveness Index has measured the ability of G20 nations to provide prosperity for their citizens in a world that limits carbon emissions.

This work builds of one basic premise. In a world where we succeed in limiting temperatures rises, the right to emit carbon will become a scarce and valuable resource – like minerals, fertile soil, water, financial capital and skilled workers. In this carbon-constrained world, prosperity will depend on generating maximum value for each tonne of carbon emitted.

As Lord Nicolas Stern states in his introduction to The Climate Institute’s Global Climate Leadership Review 2013, “The key message … is important and clear: a great competitive margin in the world is going to be over carbon and energy productivity. Countries that slip behind … are going to damage themselves and their competitiveness and prosperity in the coming years.” (See this video for more from Lord Stern on the report.)

This year’s Index shows that France, Japan, China, South Korea and the UK are the G20 countries currently best positioned to prosper in the low-carbon economy.

France retains its top ranking due to its relatively low emission and energy efficient economy and its technology exports. Japan, South Korea and the UK all maintain similar scores and positions.

China has leapt up in the Index to break into the top five countries best placed to prosper in a low emission world, thanks to its increase in clean energy investment and high technology exports. If China had merely maintained its clean energy investment at 2008 levels, it would be in eighth place rather than third. In 2010, China alone accounted for just under half of all new public equity raised in clean energy. It now earns as much from exports of solar panels ($US36 billion in 2011) as it does from shoes.

This is indicative of a broader trend: The momentum for climate action has shifted away from Europe and the United States toward the emerging economies of Asia. The widespread reallocation of investment in renewable energy has contributed to an increase in low carbon competitiveness in Asian economies and a fall in low carbon competitiveness elsewhere, in particular in the United States.

Australia slightly improved its absolute score, reversing its declining carbon competitiveness. This has been driven by a number of factors along with relative good economic health:

-- Increased investment in infrastructure and, to a lesser extent, education;

-- A light increase in efficiency in the transport sector; and

-- An unusual decrease in the depletion of natural resources, which may be short-lived.

Australia’s improvement however rests on a fragile base. Our nation’s highly polluting power sector, emission-intensive exports, inefficient use of energy and extraction of natural capital will be economic liabilities as the world moves to limit pollution.

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The Low-Carbon Competitiveness Index identifies some global trends that Australia could learn from.

The significant renewable energy investment in Asia will through time impact on the export of Australian fossil fuel resources. Japan, South Korea and China are key coal markets for Australia and all are seeking to significantly boost clean energy investment and drive energy productivity.

According to the International Energy Agency, coal energy demand over the next two decades in China is projected to be 20 per cent lower than it would have otherwise have been as a result of new policy implementation (and nearly 60 per cent lower in a world which is on a path to avoid dangerous climate change).

Another emerging trend in the Index is that extractive economies should use the opportunity to increase their future competitiveness by channelling income derived from non-renewable resources into investment in education and physical capital, including investment into renewables. This helps promote the sectoral shift necessary for extractive economies to reduce emissions and remain competitive in a low carbon global economy.

Australia’s carbon laws start this journey by generating revenue from emission intensive industries and funnelling some of it back into productive activities like renewable energy, energy efficiency and the restoration of the landscape.

Ongoing politicking with key mechanisms required to drive low carbon competitiveness threatens our future prosperity. Addressing climate change in Australia and globally is a marathon not a sprint. Stable and long-term policy settings are needed to deliver investment and growth in the industries central to Australia’s long-term prosperity.

Erwin Jackson is Deputy CEO of The Climate Institute.