Intervention needed to power green switch

Pollination boss Zoe Whitton.

Commentary following the release of the Climate Change Authority’s Sector Pathways Review last week would prompt one to think that the CCA have taken to opining on the lifestyle choices of Australian households. The economic significance of the report seems to have been largely lost in the fray.

A successful and orderly transition will make Australia more resilient and also strengthen our economic position. Nonetheless, said transition has not been going smoothly of late. Having banked a first wave of renewable energy additions, progress on decarbonising other sectors has in many cases moved into the land of the slow, the expensive and the uncertain.

Australia’s private sector is our prime capital mover – the engine which will be largely responsible for making the big changes and putting forward the big dollars which will make transition possible. But despite very significant progress in some sectors, our private sector engine has not been turning over on transition at nearly the rate or scale that’s required.

The reason is not that there is insufficient capital, insufficient imagination or insufficient interest. Instead, it is the lack of certainty and confidence in the direction and trajectory of transition that has been acting as a handbrake.

The pathways released on Thursday are part of a much-needed intervention that can get this engine up and running again.

Australian companies and their capital providers have big decisions to make ahead of them. Which value chain for new fuels will be the right one to invest in? Can the grid be relied upon to decarbonise fast enough, or should some companies go it alone? Where, why and how do we invest to keep businesses thriving and transition on track?

If these decisions are made successfully, they will put us in pole position.

Nonetheless, these decisions are steadily getting harder. As transition targets get closer, so do the costs and investments required to deliver them. Once upon a time, transition was 10 years away, but for many companies the investments needed are now well and truly today’s problem.

Interest from various stakeholders is also getting more pointed. The introduction of mandatory climate reporting for companies means the bar for those shepherding companies through the energy transition has been raised. Meanwhile, many of our peers globally have come alive to the much-discussed transition opportunities which sit on our doorstep.

To date, companies and investors have had to navigate these rising pressures with limited visibility. They know emissions need to fall across a selection of industries, that the prevalence of renewables is going up. But these directions have been broad, and they allow for an array of possible futures for commodities, value chains and industrial assets.

To return for a moment to lifestyle choices, investing in parts of Australia’s transition at the moment is somewhat akin to trying to sort out which varietal to take for dinner with an inventive host. Which red, or white, or maybe both, or maybe an orange organic number? Who knows what might be on the table to match?

The pathways are the first piece of a new national approach which will give companies and investors visibility which until now has been lacking. The pathways are a precursor to the government’s net zero plan, which is likely to lay out pathways (within ranges) for Australia’s major sectors.

Laying out sector pathways will undoubtably get some hackles up. However, it is also the approach which has been used successfully to build and drive investment into increasingly valuable new industries globally (EVs, wind manufacturing and battery manufacturing, just for example).

These are not future industries, but today’s industries – industries which include in their ranks some of the most valuable companies on earth today, and which were built in specific developed countries using government-mandated sector planning.

This is because sector pathways helped companies and investors overcome decision fatigue and get investment going. The clarity provided (even on the choice of white or red) has in many cases allowed the private sector to get on with what it does best.

The net zero plan is not yet baked, and we have to make sure a few features stay in the mix. The private sector moves fastest when we find ways to change demand as well as supply. Nothing prompts the creation and funding of an EV manufacturing base quite like strong demand for EVs.

The review proposes the extension of existing mechanisms which create this demand (such as the Safeguard Mechanism). The creation of goals for sectors and the illustration of corresponding demand outcomes will also help companies and investors understand demand.

How much sustainable aviation fuel? How many EVs? Answers to these questions have driven the growth of new industries in Asia, Europe and the US. If we can strengthen policy mechanisms which drive this demand, we can take the best advantage of our prime capital mover. This can take the load off our public balance sheet, and reduce the risk our economy faces at the same time.

We have significant capability and capital in Australia looking to support the transition, but companies and investors still need to make their decisions based on business models that stack up. Sector pathways and a net zero plan will succeed if they can help companies and investors understand what is likely to be in hot demand in the transition in Australia, and what is not.

Zoe Whitton is managing director and head of strategy and impact at consultancy Pollination