This year’s federal budget features an avalanche of immediate subsidies in response to cost-of-living pressures, some smart initiatives, and the postponement of more fundamental decisions. This is reflected precisely in the way the budget deals with energy and climate change.
The billion Australian dollars to expand Australia’s low-emission technology capabilities, such as green hydrogen, is welcome. But fuel excise cuts are bad policy for fiscal and environmental reasons.
From the devastating bushfires of 2019-20 to this year’s shocking floods, unprecedented climate-related disasters have wreaked havoc across Australia.
It is deeply regrettable that the budget and forward estimates do not specifically recognize the current and growing scale of these disasters and the budgetary impact of these disasters.
Fuel excise is bad policy
For six months, the government will halve fuel excise duties to 22.1 cents per liter to offset soaring gasoline prices. This short-term reduction will no doubt be welcomed by anyone who owns a petrol or diesel vehicle and could provide the kind of political boost the government is looking for ahead of the election.
Yet this is bad fiscal policy. First, the outlook for world oil prices is as unpredictable as the outcome of the war in Ukraine. This means that reducing excise duties on fuel will quickly be either too much or too little of an answer.
Second, restoring the level will not be politically simple. To relieve households in financial difficulty, the measure is poorly targeted.
Read more: Cost of Living Budgeting: Discounts, Expenses, and Everything You Need to Know at a Glance
It’s also a stark illustration of how today’s motorists would already be better off financially if Treasurer Josh Frydenberg were able to implement his proposed fuel efficiency standards in 2017, when he was Minister of Energy and the Environment.
At that time, motorist benefits were estimated to be over $500 per year by 2025 – and that was based on prices below $1.50 per litre, well below current levels above $2. And of course, we would have made tangible progress in reducing emissions in the transport sector.
Financing low-emission technologies
The development and deployment of low-emission technologies – such as clean hydrogen, green steel and carbon capture and storage – will be key to meeting Australia’s net-zero carbon emissions commitment. here 2050.
The government’s commitment of over $1 billion to projects to support these technologies is welcome, as is the allocation of $84 million to support microgrid development.
These investments are generally aligned with the government’s technology investment roadmap, published in 2020. However, it would be preferable if these projects were selected through an independent agency with criteria set by the government.
Read more: Floods have left thousands without power. Microgrids could help communities cope with the next disaster
The government is emphasizing a ‘tech, not tax’ approach to bringing Australia’s emissions to net zero. But funding the transition to net zero from government coffers is not sustainable.
We need policies such as carbon pricing that encourage the market to deploy these technologies at scale. The recent history of such policies in Australia means that it will be a big challenge for anyone who becomes energy minister after the impending federal election.
Australia’s vast resources of renewable energy and critical minerals mean we could be a world leader in manufacturing, for example, downstream processing or iron ore, copper, lithium and similar essential metals in a low-emission world.
So the $1 billion in the budget to expand our manufacturing capacity is another step in the right direction.
But again, good governance should include a clear framework that determines which projects will be selected. This process should be based primarily on Australia’s potential competitive advantage.
The main source of this advantage is our renewable energy and mineral resources, while specific regions can also benefit from advantages based on existing infrastructure such as ports and skilled labor.
Read more: Federal budget: $160 million for nature may just deliver pork and a fudge
Investments in low-emission technologies and manufacturing are closely aligned with this budget’s focus on Australia’s regions.
Investments in new opportunities will be welcome in the regions. It should be accompanied by an equally strong commitment to working with regional communities that may face job losses and other economic harm in the transition away from fossil fuel industries.
Short term climate reflection
Frydenberg’s budget recognized the devastation caused in Australia by floods, drought and bushfires. Yet he failed to recognize the future cost of these disasters on the budget as part of climate change.
The budget includes measures to make regional Australia more resilient, to mitigate the impact of these disasters and to support insurance coverage. But these are short-term commitments.
Even if we manage to stop global warming beyond 1.5℃ this century, the frequency and severity of natural disasters will only get worse. Australia is already feeling the damage.
The economic and fiscal consequences of these disasters will only increase. And there will be other risks from climate change, such as increased health care spending and reduced government revenue from key exports, including liquefied natural gas.
So what should the government do differently?
At the very least, the federal government should act to better understand and quantify the fiscal risks associated with climate change.
First, it should include some of the immediate risks of climate change in the budget’s “risk statement,” which outlines general fiscal risks that could affect the budget.
Read more: Climate change has already hit Australia. If we don’t act now, a hotter, drier and more dangerous future awaits us, warns IPCC
Second, it should adjust medium-term fiscal projection models to account for falling fossil fuel revenues, rising cost of debt, and rising spending on health and natural disaster support. .
Third, the longer term impacts of climate change on the budget need to be modelled. This should inform the next intergenerational report in 2025, which provides an economic outlook for Australia over the coming decades.
Climate change is ultimately forcing governments to reconsider their fiscal strategy. The many climate-related uncertainties argue in favor of preserving fiscal flexibility and firepower to cushion the direct impacts of climate change, including natural disasters.