Our next economic growth phase must somehow deliver strong GDP growth, strong wages growth, and a huge reduction in economy-wide emissions. Can a low-carbon infrastructure investment spree deliver on all three?
Our economy, like our health, is meant to serve us. Decades ago we received a shock diagnosis that we’re still reeling from.
Fossil fuels, whilst underpinning explosive economic growth, were slowly making our planet sick. Avoiding longer-term catastrophe demanded nothing short of a heart transplant for the global economy.
But just as we started fretting over the diagnosis, the patient took an unexpected turn for the worse, even before being wheeled to theatre.
Crisis and macroeconomic failure
The Global Financial Crisis sent the global economy spiralling.
In response to the crisis, central banks frantically reduced cash rates to encourage investment and revive the economy. But as the world loaded up on debt whilst interest rates were low, under-performing governments struggled to create new investment horizons.
This failure has left a stale and still-sluggish global economy haunted by the spectre of another debt crisis, and still woefully addicted to greenhouse gas emissions (global emissions rose to record levels in 2018).
The Paris task
The Paris Agreement’s central aim is to keep global temperature rise this century well below 2 degrees celsius above pre-industrial levels (1.5 degrees celsius if possible). The Climate Action Tracker graph (below) translates this visually into a brutal transition that could bring acute downside risks to an already-vulnerable economy.
The fear, quite simply, is that our sickly economy might just end up dead on the operating table.
An anxious populace
Short-term anxiety relating to this predicament was nowhere better displayed than in this year’s Australian federal election.
Shouldered with record household debt (190 per cent) in a weakening domestic economy, low-to-middle income Australia forged a narrowband deal with the political class; “Prioritise strong, steady, short-term economic growth to help us pay down our debts and you have our vote”. Little else resonated.
So, when the Left came to the election talking about a climate emergency and the need for urgent economic transformation, working Australia recoiled in fear.
And with the camera lenses blurring leftist policy pitches alongside passionate anti-Adani protests there was an assumption, at least amongst so-called “quiet Australians”, that leftist climate policy was emotionally driven, and by extension, economically reckless.
Whilst climate-sensitive voters felt disgust when Scott Morrison brandished a lump of coal in parliament, the rest of the electorate was left petrified when, across the Chamber, zealous surgeons brandished the economy’s new heart, but without communicating how it would be safely inserted.
Defining today’s economic trilemma
With the economy and indebted households desperately needing a leg up, and emissions desperately needing to come down, our next economic growth phase must somehow deliver strong GDP growth, strong wages growth, and a huge reduction in economy-wide emissions. You could call it our modern-day “economic trilemma”.
The good news is that there’s no shortage of cheap credit out there to fuel our successful low-carbon economic transition. With Philip Lowe and the rest of his board still fretting over the health of the domestic economy, the RBA is busy plunging the cash rate to new emergency lows.
with government incapable of developing policies to direct this credit towards productive growth, investors continue directing it straight back into already-inflated housing and equity markets
Yet with government incapable of developing policies to direct this credit towards productive growth, investors continue directing it straight back into already-inflated housing and equity markets.
A Low-carbon Infrastructure Fund?
The need to direct private credit into productive growth horizons to stimulate the economy is driving calls for increased infrastructure investment managed by an independent infrastructure fund. And as John Hewson (former Liberal leader and now ANU professor) suggested recently, the creation of a long-term, government-guaranteed, Australian Infrastructure Bond could deliver vast amounts of private capital to this fund to fast-track our next infrastructure investment spree.
Whilst an Australian Infrastructure Bond along with a reformed or redirected Infrastructure Australia might help us manage GPD and wages growth, an infrastructure spending blitz is definitely not going to manage down our economy-wide emissions.
That is unless the infrastructure fund was also seeded with a Paris-alignment mandate.
Urban rail and high-speed regional rail options might suddenly jump up the infrastructure funding queue
If a reformed or redirected Infrastructure Australia benchmarked investment options against a Paris-aligned emissions reduction target then we might start to see all sorts of weird and wonderful things happening in Australia’s infrastructure landscape.
Urban rail and high-speed regional rail options might suddenly jump up the infrastructure funding queue. Road developments would only get up if strapped with intelligent system designs to support vehicle innovation and electric vehicle uptake.
Only the smartest and most efficient buildings would attract funding, and the electricity grid would be transformed to fast-track renewables penetration.
Only the smartest and most efficient buildings would attract funding, and the electricity grid would be transformed to fast-track renewables penetration.
Will government buy it?
Whilst the government might eventually warm to the idea of an infrastructure blitz, it’s much harder to envisage a Morrison cabinet comfortable with the “low-carbon investment mandate”.
But by the government’s own admission it is “committed to taking strong domestic and international action on climate change” in line with its Paris Agreement obligations. And with the Climate Solutions Fund seemingly imploding at the same time as diplomatic rows escalate over climate in the Pacific, it’s a fair bet that the government is actively considering new climate policy options behind closed doors.
And let’s forget about climate for a moment. Since trade wars is the “sujet du jour” why not use our natural advantages to repatriate energy-intensive industries on the back of expanded renewables and green hydrogen infrastructure?
The International Renewable Energy Agency (IRENA)’s report earlier this year suggests that states with best access to renewable energy resources will be able to leverage this to progressively improve their competitive advantage and influence. That sounds manifestly positive for the domestic economy, and with absolutely no mention of the ‘c’ word.
Tackling our economic trilemma through infrastructure spending is an enormously difficult brief.
Whilst upside risks are real, it’s also true that new technologies bring heightened early-phase investment risks. Which is exactly why the government should consider handballing the hard work to a fund with the mandate, depth of skills, access to private capital, and the independence to manage our way out of trouble.
There’s no guarantee of success, but then there never is with a living, breathing thing such as the economy or our health – so let’s not die wondering.
Evan Stamatiou is managing director of Carbon Risk Management, which advises Australian and international corporates on climate-related risks, based in Melbourne.