Can green industrial policy grow a new competitive advantage for Australia?

To achieve net zero, Australia must do more than invest in renewable energy and reduce emissions – it must reinvent its economy.

In brief:

• The net zero transition will transform large sectors of the Australian economy.
• Governments and businesses must work together to decarbonise Australia’s energy systems and develop new low-carbon industries.
• To make the most of the opportunities ahead, we need a new type of ‘green industrial policy’.
  

The transition to renewable energy is just the most visible step on the journey to net zero. Behind the surge in solar panels and wind turbines lies a deeper transformation – one that reshapes industries, redefines economies and drives innovation across every sector. The real work is only just beginning.

Two recent EY Net Zero Centre reports laid out the opportunity in black and white. Seizing Australia’s energy superpower opportunities found that investing in new industries, notably green iron, steel and hydrogen, and ‘new economy’ minerals, could add up to AU$65 billion to national GDP by 2050.

Creating a nature-positive advantage found that repairing and restoring Australia’s precious natural capital could boost Australia’s national income by AU$47 billion by 2050.

Capturing the opportunities of the net zero transition requires a rapid expansion of cost-competitive renewable energy. But, by itself, clean energy will not be sufficient. Significant innovation will be required to position Australia close to the cutting edge of key emerging low-emissions energy-intensive industries.

To catch this ‘wave’, industry will need to be paddling in the right direction – and this will require a new type of  clean industrial policy.

Policy, practice and prosperity through the net zero transition

Delivering green growth together: How business and government can drive and thrive in the net zero transition is the third and final instalment in the EY Net Zero Centre Energy Infrastructure Executive Briefing Series.

This series, published throughout 2024, explores how governments and industry can meet the challenges of developing a competitive and prosperous net-zero economy.

Our first paper, From chaos to choreography, examines how Distributed Energy Resources (DER), like rooftop solar, batteries, electric vehicles and smart appliances, can be orchestrated effectively to deliver maximum benefits. The second paper, Powering progress, investigates why many essential transmission projects have stalled and how to restart them.

Our first two papers, in essence, argue that government must play an active role in energy markets, beyond market design. In Delivering green growth together, we argue that governments and businesses must work together to target ‘green industrial policy’ where Australia has a foundation for durable competitive advantage.

Clean new industrial policy can power Australia’s future

“Every country has an industrial policy,” economist and Nobel laureate Joseph Stiglitz observed in 2023. “The question is whether it’s explicit, whether it’s implicit, whether it’s coherent, or whether it’s incoherent.”

As governments increasingly intervene in a range of industry contexts, the debate has moved from whether they should engage to how they can do so effectively. Examples of this greater willingness to intervene in markets include the Green Deal in Europe, the Inflation Reduction Act and the Chips Act in the United States, Japan’s hydrogen-focused Green Innovation Fund, and Australia’s Net Zero Economy Authority, National Reconstruction Fund and Future Made in Australia policies.

However, there is a reason why industry policy has had ‘mixed reviews’ in the past. Too often, governments have tried to support the development of industries without a sustainable competitive advantage – and continued to underwrite unviable industries at an increasing cost.

Such failures would be doubly costly here, jeopardising not only Australia’s economic performance, but also the effectiveness of its actions to mitigate climate change.

So, how can Australia ensure that clean industrial policy achieves its dual climate and economic objectives?

Delivering green growth together argues successful green industrial policy will use proven policy tools to create a supportive innovation ecosystem – and we provide a detailed breakdown of some of those tools.

Importantly, clean industrial policy must address market failures in innovation – such as knowledge spillovers, financial frictions, coordination failures, and climate and energy market failures – that pose significant barriers to decarbonisation.