Guest essay by Eric Worrall
My question – if Australia’s green economy is such an amazing investment opportunity, why is $20 billion of taxpayer’s money needed to make it happen?
Financial markets are preparing for climate change and so must we
By Josh Frydenberg
September 24, 2021 — 12.00am
From the industrial revolution to the digital age, financial markets have been affected by significant structural change. Each time it drives a reassessment of risk and value and, in turn, asset allocation.
Climate change is no different.
Markets are moving as governments, regulators, central banks and investors are preparing for a lower-emissions future. It’s a long-term shift, not a short-term shock.
Historically, Australia has relied heavily on imported capital to fund our economy. Whether it’s in the form of foreign investment, the stock of which currently stands at $4 trillion, or in the form of wholesale funding of our banking system, with around 20 per cent sourced offshore.
When it comes to Commonwealth government bonds, close to half are held by foreign investors. Reduced access to these capital markets would increase borrowing costs affecting everything from interest rates on home loans and small business loans, to the financial viability of large-scale infrastructure projects. Australia has a lot at stake.
We cannot run the risk that markets falsely assume we are not transitioning in line with the rest of the world. Were we to find ourselves in that position, it would increase the cost of capital and reduce its availability, be it debt or equity.
One in 4 Australian households have solar panels, the highest rate on a per capita basis anywhere in the world. Our technology investment road map will guide $20 billion in government funding and is expected to leverage $80 billion in total investment by 2030.
Snowy 2.0 in NSW, Battery of the Nation in Tasmania and new interconnectors around the country will create a more reliable, affordable and lower emissions energy system.
Partnerships with Japan, Germany, Singapore, and the United Kingdom will also drive new energy investments particularly in hydrogen, where we have a comparative advantage.
My problem with Aussie Treasurer Josh Frydenberg’s vision, is none of these amazing green hydrogen markets and technological solutions to renewable energy stability actually exist.
Snowy 2.0 will not even come close to stabilising a 100% Aussie renewable grid. Snowy 2 will be impressive when it is fully “charged”, but how often will that happen? All we need is a series of bad years (not uncommon in Australia), or a prolonged wind drought in winter, and the snowy river hydroelectric “battery” will be way too flat to contribute meaningfully to the stability of the Australian electricity grid.
Another finance minister, Sir John Cowperthwaite, the legendary architect of the Asian Miracle, would have immediately understood the risks of Josh Frydenberg’s plan to throw billions of dollars of taxpayer’s money at the renewable industry.
His hands-off approach meant an almost daily battle with Whitehall. The British government insisted on higher income tax in Singapore; when they told Hong Kong to do the same, Cowperthwaite refused. He opposed giving special benefits to business; when a group of businessmen asked him to fund a tunnel across Hong Kong harbour, he argued that if it made economic sense, the private sector would pay for it (as indeed it did). His instincts were revealed in his first speech as financial secretary: “In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government, and certainly the harm is likely to be counteracted faster.“
Cowperthwaite, like Frydenberg, pretty much went straight from university to government service. Cowperthwaite could have become yet another career public service nobody. But Sir John Cowperthwaite had a personal revelation which changed the world.
When Cowperthwaite arrived in Hong Kong shortly after the end of WW2, he expected to find the city in ruins, with everyone waiting with their hand out for government help to rebuild their lives. Instead, what Cowperthwaite saw was a bustle of activity. People had simply gotten on with rebuilding their own lives, without government help.
In this moment, the Asian Miracle was born. Cowperthwaite was so moved by what he saw, the revelation that people don’t need government help when what they are attempting makes economic sense, he dedicated the rest of his career to blocking well meaning but foolish attempts by the British Government to interfere with the Hong Kong economy. In time, Singapore, South Korea, Taiwan and eventually even Communist China copied Cowperthwaite’s high growth economic policies.
The Hong Kong businessmen in the story I quoted above ended up building that tunnel across Hong Kong Harbour using private money, because the tunnel made economic sense. The same cannot be said for Josh Frydenberg’s green vision.