Transition's economic waves set to strike the shore

Transition is often spoken about in the context of a dollar sum – the estimated amount needed to finance the shift to a decarbonised economy – with little reference to the inevitable wider impact of such a massive investment task. The KangaNews Sustainable Finance Summit 2024 gathered a group of Australian economists to discuss the far-reaching but less discussed impacts of this type of spending.

  • Joseph Capurso Head of International and Sustainable Economics COMMONWEALTH BANK OF AUSTRALIA
  • Elliot Clarke Executive Director, Economics WESTPAC INSTITUTIONAL BANK
  • Richard Yetsenga Chief Economist and Head of Research ANZ
  • Susan Buckley Managing Director, Funding and Markets QUEENSLAND TREASURY CORPORATION

Buckley The UN Climate Change Conference last year included in its consensus the need to transition away from fossil fuels in energy systems to achieve net zero by 2050. What are the greatest opportunities from the energy transition?

CLARKE Value add for a country’s industry and the efficiency on offer from new technology. I view China as the best example of how this is developing. Many wonder how China is still getting 5 per cent growth when residential investment has fallen by 10 per cent, or near enough – and a large part is the investment they put into energy infrastructure and the way they are leveraging into high-tech manufacturing.

Electric vehicles [EVs] are a good example of how this works. The sector is providing a lot of new jobs and new income for the Chinese economy. It is up to them to distribute the benefits around the economy – including to those who are not directly involved.

A swathe of countries want to develop in general, and this is coming at the same time as the green transition. It is not only about the developed world benefiting. We can gain from an efficiency perspective but also, in geopolitical terms, by recognising that different countries have different competitive advantages – and by working together. This is how we will get the best outcomes.

CAPURSO There will be capacity issues associated with delivering the metals and manufacturing capability the world needs to make sustainable assets and provide them at a low cost to every country. We will see this from the very start of the supply chain, which is mining. We need to significantly increase the volume of minerals and metals we extract so we can make solar PV, wind turbines and the like. Capex spend by mining companies is still too low relative to where we need it to be to extract a very large increase in copper, lithium and others.

Overlaying the economic analysis is geopolitics, which can be very good or very bad in this space. The US and Western Europe want to take market share, in particular manufacturing, from China.

The US Inflation Reduction Act (IRA), for instance, is a response to Chinese dominance, particularly in manufacturing. This is potentially good news for Australia, because we are good friends with the US and Western Europe, and we have a lot of natural endowment in metals – so we can be a very large receiver of the capital we need to expand our mining industries. Lithium stands out, as do iron ore, copper and, potentially, hydrogen. Australia can benefit from this transition.

Buckley We are confronting a massive global investment task to fund the energy transition. Will this inevitably mean economic trade-offs?

YETSENGA The renewable energy pipeline in Australia before the pandemic was less than A$5 billion (US$3.3 billion) a year but within a couple of years it will about A$30 billion of construction annually. The capital seems to be there. Most countries that can move ahead are doing so, but not every country has the endowment of Australia.

There are two areas where there are still some things to do. One is advanced economies’ commitment to provide US$100 billion a year in financing to developing countries for the transition. That target was by 2020 and we missed it. The new target is 2025. From a global angle, there is a big hole.

The second issue is the fiscal choices Australia will have to make. In the past two budgets, spending on the transition was about A$30 billion over the forward estimates. This is up by around 400 per cent over where we were a year or two ago, but it’s still only A$30 billion. In the US, the IRA is talking about total expenditure of around US$800 billion. Europe is likely to have a response to the IRA and the Japanese are very interested in carbon capture and storage, and in hydrogen.

The private sector is moving ahead – which is the equity piece. But Australia has to respond to the IRA and to competition in the transition arena. We might not like it, but to some extent this is a race. We are all trying to do the same thing and the competition for resources and capital is quite real.

Buckley Could there be significant watering down of the IRA if the Republicans win the US election in November?

YETSENGA We need to accept that governments change more often these days and they are more active in the economy. In Australia, fiscal expenditure and revenue as a share of GDP is materially higher than it was pre-pandemic.

Global measures show industrial policy steps have increased eightfold over the past seven years, so there is more likely to be change. Also, we have had eight years of experience with the modern breed of populism like Brexit, Trump and Duterte. They may grate on us a little but they are not necessarily bad for the economy. They typically have issues with trade and with migration, but economies can still do quite well.

CAPURSO To put a geopolitical frame on this, even if Trump thinks climate change is a hoax and he still loves mining and manufacturing jobs, I don’t think he is going to put the IRA in the bin. The bigger force is competition between the US and China for dominance in high tech – and climate tech is part of high tech. I don’t think this is going away, whether Biden or Trump is president in a few months.

“We say that if companies aren’t on track they should adjust tomorrow. But this is the second time we’ve seen this movie. The first time was free trade, where we said to businesses and communities that couldn’t handle it that they should just adjust. What actually happened was communities didn’t adjust.”

Buckley How are economies in Asia positioned relative to China in the race for market share in renewables manufacturing?

YETSENGA Japan and South Korea are very big on electronics, which is absolutely a key part of solar PV, wind turbines and the like. They will carve out a niche. Part of the outcome hinges on what governments are willing to dish out in subsidies and incentives.

Regardless, though, the really big players are going to be the US and China. They are willing to throw a lot more money at the issue than medium-sized countries like South Korea. Australia has a role to play but our obvious advantage will be mining and niche manufacturing rather than very large-scale manufacturing.

CLARKE Asian countries have different levels of development and niches of expertise. The EV sector is not China’s alone. South Korea can do very well out of the IRA, because of US restrictions against China. It is not surprising South Korean manufacturers are exploring developing plants in the US and Mexico. Japan is another example, as is Taiwan, obviously, with its prowess as a chip manufacturer.

For other nations in the region, it is about how they engage with the major powers. Indonesia is an example, with China and South Korea investing heavily in nickel mines. There will be many similar examples. 

The other interesting thing is that these economies have quite young and increasingly educated workforces. It is not just about manufacturing EVs, solar and wind technology – it is also about how development of these sectors inspires or engages the rest of the population to do different things.

YETSENGA China accounts for two-thirds of regional emissions and it is the largest carbon emitter in the world. We talk about EVs and solar panels, which are in many ways China’s contribution to the decarbonisation of other countries – and even this is challenged by geopolitics.

The Europeans have talked about putting retrospective tariffs on EV imports, because of the effect on the domestic industry. The US has raised concerns about whether there are national security issues associated with cars that can be accessed remotely. If the US makes a determination on this, there may
be knock-on effects. There are national security issues about trade in high-tech products in any sector – in this case it is the climate-related sector.

The bottom line is that we shouldn’t overplay China’s ability to drive the transition. Projections for advanced economies look challenging and China’s targets look challenging squared. China emits about 12 gigatonnes of carbon a year. When it started its enormous economic transformation 25 years ago it was issuing about 3 gigatonnes.

China’s objective is to get to zero by 2060. If it wants to continue to develop, this transition must come from reducing emissions intensity. So far, all China has managed to do is slow the growth in emissions intensity – it is off by about 5 per cent. It really needs to crater over the next couple of decades.

If we are talking about the world, the emerging world has the biggest task in cutting emissions – and China is front and centre. I suspect China’s economy will deliver less growth than it expects.

“Even if Trump thinks climate change is a hoax and he still loves mining and manufacturing jobs, I don’t think he is going to put the IRA in the bin. The bigger force is competition between the US and China for dominance in high tech – and climate tech is part of high tech.”


Buckley How will major capex investment in renewables and changing consumption patterns affect growth in Australia?

CLARKE We are moving into an era that is less about immediate, everyday consumption and more about investment by the household. It is not just EVs; it is also about the energy efficiency of our homes and pushing down energy costs by putting solar on the roof, insulating buildings so less electricity is used, or switching to heat pumps. There is plenty governments can do to incentivise such investments while limiting cost inflation.

It is one thing to have EVs, as an example, but another to be able to transmit enough power through the grid to not cause problems in every street. Infrastructure must evolve for transition to take place.

YETSENGA In a more climate-focused world, my assumption is that consumption is a smaller part of the economy. To meet our targets, in other words, we are going to have to do a bit less of everything. As we embody climate into more of what we do, we realise we can’t keep doing as much as we used to.

There is also a transition impact associated with energy prices. Some studies will say the transition doesn’t have to increase energy prices, but I am a bit sceptical about this. More investment is going into renewables and less into fossil fuels, and there is likely a transition story that includes some element of higher prices.

Ultimately, transition is an investment story – across a range of sectors. It is not the only investment story that has a multidecade horizon. Housing is an example, in the US, the UK and in Australia. Also, everybody is trying to raise defence spending: NATO needs to reach member nation investment targets of 2 per cent of GDP and Japan is raising its defence expenditure, to take just a few examples.

All of these are investments calling on similar pools of materials and labour. I anticipate more investment and less consumption – and this means we are going to encounter quite different economic dynamics.

Buckley Are there opportunities for onshore processing, manufacturing and skills development?

YETSENGA Lots of countries want to do things domestically – for example, New South Wales has a minister for domestic manufacturing. What this comes down to is a matter of prioritising the trade-offs.

This is the inflation equation in very simple terms. If apparent demand in the economy is higher than the economy’s ability to supply, and if we can’t raise productivity to get higher supply to meet demand, we need to prioritise demand. This is what costs us all in living standards and is where the productivity rubber hits the road. It is not clear to me that prioritisation is really being recognised and that these choices are being made.

I read things like Australia ranking 92nd for economic complexity and the editorial tone is that this is a really bad thing. But Australia is about the 15th wealthiest economy in the world. In other words, we might be simple but we are also simply rich.

My conclusion is that we shouldn’t want to do onshore processing just because it makes our economy more complex. We should want to do it because there is a good economic or other reason for it.

“We are moving into an era that is less about immediate, everyday consumption and more about investment by the household. It is not just EVs; it is also about the energy efficiency of our homes and pushing down energy costs by putting solar on the roof, insulating buildings or switching to heat pumps.”

Buckley Is there going to be an inflation problem at some point in the transition process? With resource constraints, do you think it will be challenging to maintain the 2-3 per cent inflation band?

CLARKE I am relatively sanguine about goods pricing globally, as long as we don’t get caught up in tariff barriers that may follow a change in US administration later this year. This is because capacity has been built out in Asia.

The question is more about bottlenecks – things like whether there will be labour available to construct what needs to be built. For example, if we all rush out and try to put solar panels on the roof at the same time, funnily enough, the cost rises quite quickly.

We must be mindful about how government engages with the economy to make sure there is a smooth, consistent transition that mitigates risks for services inflation.

The other point is the uncertainty created by climate change and the effect it has on the environment, as well as thinking about the higher cost of maintenance and insurance.

Housing is another area with a lot of capacity constraints. We need to be thinking about how we can provide supply and do so in an effective way.

Buckley In Queensland, where the electricity generators are largely public-owned, there is an energy workers’ charter that guarantees jobs from the coal-fired sector will be replaced in the renewable energy sector. Can the labour market expect a just transition?

CLARKE We need coordination across the economy. There will likely be good stories and bad stories. It depends on how quickly government engages with the private sector and whether the task is skills redevelopment or simply trying to manage an activity so there are no bottlenecks.

We also need to consider population growth and what sort of skill mix we bring into the country. There is a very clear ability to ease some of the labour constraints, but it must be managed well and ahead of time. We saw how quickly these flows can move coming out of the pandemic. We need to be very forward-thinking.

YETSENGA It seems to me that the just transition is talked about a lot and then quickly forgotten. It also feels as though climate issues are put in empathetic terms: that we should care about nature for some empathetic reason. I agree with this, by the way – we certainly should.

But then we say that if companies aren’t on track they should adjust tomorrow. But this is the second time we’ve seen this movie. The first time was free trade, where we said to businesses and communities that couldn’t handle it that they should just adjust. What actually happened was communities didn’t adjust.

The economic development indicators for communities that were affected particularly by trade liberalisation and the rise of some of the Asian giants were things like lower lifetime income, more job churn, lower job security, higher indebtedness, higher incidence of single parenthood, and greater incidence of death due to drug and alcohol abuse. The humans involved didn’t really adjust at all. We just left them to the side.

Some studies show, for instance, that when coal-producing areas of the US felt the impact of mine closure it doesn’t matter whether or not an individual works in coal – everybody’s income, everybody’s human capital, the whole society starts to fracture.

What happened next, of course, was that we white-anted free trade. It has made the world this incredibly wealthy place but we are now going back against it. We have to sustain the transition effort for a couple of decades. We need to make sure just transition is a really active part of the discussion.

Will Australia become an EV lover?

Transition to electric vehicles (EVs) might be the most direct contribution to decarbonisation most Australian households can make. Takeup is still slow, though – and part of the reason is likely the supporting infrastructure story.

BUCKLEY Transport makes up 19 per cent of emissions in Australia and there is a lot of focus on policy settings to encourage uptake of EVs. How do you expect this to play out?

CAPURSO In 2023, EVs accounted for about 7 per cent of new car sales. The EV supply side really comes down to new fuel efficiency standards. They had been quite controversial in politics and industry but they align us roughly with what is going on elsewhere, particularly the US. They will encourage
an increase in low- and no-emissions cars, which will help us reduce emissions – so long as we keep decarbonising electricity generation.

The demand side is where there can be some more government innovation. New South Wales and Victoria have removed some car purchase subsidies though Queensland still offers up to A$6,000 (US$3,958) for buying an EV.

I think it is possible that government may introduce a HECS [higher education contribution scheme]-style EV programme that gives buyers A$5,000 up-front, say, to help them buy an EV and this gets repaid over time just like HECS debt.

This would stimulate demand for EVs in Australia. Given that 20 per cent of emissions is from transport, we need to get a move on. Less than 10 per cent of car sales is not enough if we are going to meet 2030 commitments.

BUCKLEY Have subsidies been effective in encouraging drivers to trade up to EVs? Or are some people holding back until charging networks are more developed?

CLARKE We hear a lot about the issue of ‘range anxiety’ but it might be more about charging infrastructure. If a user gets into a pattern of charging regularly they are not going to have these issues, unless they go on a very long journey and there is nowhere to charge. There needs to be a combination
of encouragement – using subsidies – for the car itself and also making sure
investment in charging occurs across the grid.

CAPURSO I think the charging infrastructure issue is probably overblown. Most Australians live in cities, and trips they do in the city are less than 50 kilometres. There is definitely a challenge, but I don’t think it is the be-all and end-all.


Buckley What changes in industry can be expected during the shift from fossil fuels to critical minerals?

CAPURSO A big question is whether Australia can increase its production of the various critical minerals needed to make this happen, to offset the eventual fall in fossil fuel production.

Let’s face it, we are a very large producer of fossil fuels. But we can also develop new industries – and hydrogen is the one that really sticks out. My concern is this is a really hard thing to manage. Australia is one of 40-odd countries with a hydrogen strategy – compared with being one of three countries with a lot of iron ore. It is going to be competitive.

There is no guarantee we can become a very large hydrogen power. We have obvious advantages, of course – we have lots of land and there is plenty of opportunity for harnessing the sun and wind power. Demand for hydrogen from north-east Asia will be very, very strong for decades to come. But other countries can develop clean hydrogen as well as us.

Let’s say we can pull it off. If so, we are going to import a lot of financial capital. As we learned 10-15 years ago during the previous mining boom, foreign capital coming into Australia increases the exchange rate. This affects various industries: it reduces the cost of imported goods and services in the wholesale and retail sectors, but it also makes life difficult in the export industries like agriculture, tourism and education.

The exchange rate is a wonderful mechanism for sending price signals and reallocating labour and financial resources from one industry to another. But, as Richard was saying, there can be real social impacts. If the exchange rate rises suddenly, they can happen very quickly.

YETSENGA Australia was very much a singular commodity story 20 years ago. Now, it is part of a global transition – and therefore the exchange rate effects are likely to be much more modest. But Joe makes a good point about the commodity switch Australia needs to do. If we want to stay the 15th wealthiest economy on Earth, it’s not really a choice. However, I’m reasonably optimistic that we are doing some of the right things.

There is another opportunity, though, which is potentially a game changer. In the fossil fuel world, global manufacturing set itself up where it was most cost effective and brought the energy to the manufacturing markets on ships.

But renewable energy is much harder to transport. Hydrogen will work for some markets but not for everybody. We are also redrawing the manufacturing map, in the sense that manufacturing needs to come to the energy. Australia has plenty of it.

Buckley Do you see any potential for nuclear to play a role in the energy transition in Australia?

CAPURSO It is going to be very difficult in Australia, unless the law changes. Maybe this will happen after the next election. If it was a pure free market, it could be expected Australia would play quite a reasonable role in uranium markets. Whether or not we develop our own nuclear power stations, we should leave to the market to decide.

YETSENGA The first question is, where are we going to put the power stations? We can debate the economics of nuclear all we like, but find the neighbour who wants to have it and take it from there.