Australia joins the industrial arms race

Digging and shipping have turned Australia into one of the world’s richest nations. The country mines its vast reserves of everything from iron ore and coal to lithium and gold, and exports them. Yet as the threat from climate change grows more urgent, it faces job losses in the fossil-fuel sectors that made it rich. To make up for that and to stave off industrial decline, Australia is joining the ranks of governments around the world spending billions to build green industries.

On May 14th the centre-left Labor government presented a budget that looks like a smaller version of America’s $1trn Inflation Reduction Act (IRA), which aims to revive American manufacturing. It allocates almost A$23bn ($15bn) in subsidies and tax credits to clean energy and other technologies the government considers strategic. That includes almost A$14bn in tax breaks to help Australia establish a green hydrogen industry and to start processing “critical minerals” such as copper, lithium and rare earths that are needed for the transition to clean energy.

The goal is “to make ourselves a renewable energy superpower”, says Jim Chalmers, the treasurer (as the finance minister is known in Australia). The country has wind and sun aplenty and is rich in critical minerals. Yet Mr Chalmers argues that a leg-up is still needed to foster investment in new green industries.

One reason for the splurge is concern, shared with America, over China’s dominance of critical minerals and technologies. The government hopes that the handouts will allow local miners to challenge that dominance, particularly in processing. It is also hoping that the policy will spur growth in areas like solar-panel and battery production, reducing Australia’s dependence on a hostile competitor.

Australia is also trying to keep up with friendlier countries. Its clean-energy lobby complains that American subsidies have sucked investment out of Australia. Governments from Europe to South Korea are developing competing industrial policies. Australia must sharpen its elbows or risk losing out, Anthony Albanese, the prime minister, said in April.

Yet economists question the wisdom of manufacturing batteries or solar panels on a remote island with some of the world’s highest wages. They fear handouts will drain skills and capital from more efficient parts of its economy. Under a free-trade agreement with America, Australian companies are already eligible for IRA subsidies, says Danielle Wood of Australia’s Productivity Commission, an independent agency that reviews economic policy. That makes it wasteful to give more public money to such sectors, she says. Peter Dutton, the conservative opposition leader, argues that green projects worth the investment should “stand up on their own”.

The politics will only get harder. Ahead of an election next year the government must pass legislation to enshrine its policy. Without support from minor parties, it may end up dead in the water. ■