photo of train

Our next economic growth phase must somehow deliver strong GDP growth, strong wages growth, and a huge reduction in economy-wide emissions. Can a low-carbon infrastructure investment spree deliver on all three?

Our economy, like our health, is meant to serve us. Decades ago we received a shock diagnosis that we’re still reeling from.

Fossil fuels, whilst underpinning explosive economic growth, were slowly making our planet sick. Avoiding longer-term catastrophe demanded nothing short of a heart transplant for the global economy.

But just as we started fretting over the diagnosis, the patient took an unexpected turn for the worse, even before being wheeled to theatre.

Crisis and macroeconomic failure 

The Global Financial Crisis sent the global economy spiralling.

In response to the crisis, central banks frantically reduced cash rates to encourage investment and revive the economy. But as the world loaded up on debt whilst interest rates were low, under-performing governments struggled to create new investment horizons.

This failure has left a stale and still-sluggish global economy haunted by the spectre of another debt crisis, and still woefully addicted to greenhouse gas emissions (global emissions rose to record levels in 2018).

The Paris task

The Paris Agreement’s central aim is to keep global temperature rise this century well below 2 degrees celsius above pre-industrial levels (1.5 degrees celsius if possible). The Climate Action Tracker graph (below) translates this visually into a brutal transition that could bring acute downside risks to an already-vulnerable economy.

The fear, quite simply, is that our sickly economy might just end up dead on the operating table.

Source: CAT Emissions Gaps

An anxious populace

Short-term anxiety relating to this predicament was nowhere better displayed than in this year’s Australian federal election.

Shouldered with record household debt (190 per cent) in a weakening domestic economy, low-to-middle income Australia forged a narrowband deal with the political class; “Prioritise strong, steady, short-term economic growth to help us pay down our debts and you have our vote”. Little else resonated.

Source: Reserve Bank of Australia

So, when the Left came to the election talking about a climate emergency and the need for urgent economic transformation, working Australia recoiled in fear.

And with the camera lenses blurring leftist policy pitches alongside passionate anti-Adani protests there was an assumption, at least amongst so-called “quiet Australians”, that leftist climate policy was emotionally driven, and by extension, economically reckless.

Whilst climate-sensitive voters felt disgust when Scott Morrison brandished a lump of coal in parliament, the rest of the electorate was left petrified when, across the Chamber, zealous surgeons brandished the economy’s new heart, but without communicating how it would be safely inserted.

Defining today’s economic trilemma

With the economy and indebted households desperately needing a leg up, and emissions desperately needing to come down, our next economic growth phase must somehow deliver strong GDP growth, strong wages growth, and a huge reduction in economy-wide emissions. You could call it our modern-day “economic trilemma”.

The good news is that there’s no shortage of cheap credit out there to fuel our successful low-carbon economic transition. With Philip Lowe and the rest of his board still fretting over the health of the domestic economy, the RBA is busy plunging the cash rate to new emergency lows.

with government incapable of developing policies to direct this credit towards productive growth, investors continue directing it straight back into already-inflated housing and equity markets

Yet with government incapable of developing policies to direct this credit towards productive growth, investors continue directing it straight back into already-inflated housing and equity markets. 

A Low-carbon Infrastructure Fund?

The need to direct private credit into productive growth horizons to stimulate the economy is driving calls for increased infrastructure investment managed by an independent infrastructure fund. And as John Hewson (former Liberal leader and now ANU professor) suggested recently, the creation of a long-term, government-guaranteed, Australian Infrastructure Bond could deliver vast amounts of private capital to this fund to fast-track our next infrastructure investment spree.

Whilst an Australian Infrastructure Bond along with a reformed or redirected Infrastructure Australia might help us manage GPD and wages growth, an infrastructure spending blitz is definitely not going to manage down our economy-wide emissions.

That is unless the infrastructure fund was also seeded with a Paris-alignment mandate.

Urban rail and high-speed regional rail options might suddenly jump up the infrastructure funding queue

If a reformed or redirected Infrastructure Australia benchmarked investment options against a Paris-aligned emissions reduction target then we might start to see all sorts of weird and wonderful things happening in Australia’s infrastructure landscape.

Urban rail and high-speed regional rail options might suddenly jump up the infrastructure funding queue. Road developments would only get up if strapped with intelligent system designs to support vehicle innovation and electric vehicle uptake.

Only the smartest and most efficient buildings would attract funding, and the electricity grid would be transformed to fast-track renewables penetration.

Only the smartest and most efficient buildings would attract funding, and the electricity grid would be transformed to fast-track renewables penetration. 

Will government buy it?

Whilst the government might eventually warm to the idea of an infrastructure blitz, it’s much harder to envisage a Morrison cabinet comfortable with the “low-carbon investment mandate”.

But by the government’s own admission it is “committed to taking strong domestic and international action on climate change” in line with its Paris Agreement obligations. And with the Climate Solutions Fund seemingly imploding at the same time as diplomatic rows escalate over climate in the Pacific, it’s a fair bet that the government is actively considering new climate policy options behind closed doors.

And let’s forget about climate for a moment. Since trade wars is the “sujet du jour” why not use our natural advantages to repatriate energy-intensive industries on the back of expanded renewables and green hydrogen infrastructure?

The International Renewable Energy Agency (IRENA)’s report earlier this year suggests that states with best access to renewable energy resources will be able to leverage this to progressively improve their competitive advantage and influence. That sounds manifestly positive for the domestic economy, and with absolutely no mention of the ‘c’ word.   

Tackling our economic trilemma through infrastructure spending is an enormously difficult brief.

Whilst upside risks are real, it’s also true that new technologies bring heightened early-phase investment risks. Which is exactly why the government should consider handballing the hard work to a fund with the mandate, depth of skills, access to private capital, and the independence to manage our way out of trouble.  

There’s no guarantee of success, but then there never is with a living, breathing thing such as the economy or our health – so let’s not die wondering.

Evan Stamatiou is managing director of Carbon Risk Management, which advises Australian and international corporates on climate-related risks, based in Melbourne.

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  1. Hi Evan,
    Some reading on infrastructure costs..

    Jane O’Sullivan – Productivity Commission › __data › assets › pdf_file › sub054-migrant-intake

    Jun 2, 2015 – Jane O’Sullivan, June 2015. Introduction. I am a researcher who has published on the economic impacts of population growth. I congratulate

  2. @donowers: thanks for the feedback Don. If it is ‘complete and utter rubbish’ then I sure hope that it has a strong organic content so that we can at least set up a nice little waste-to-energy project. The basic premise of the article was that if the infrastructure spend was not aligned to an economy-wide net-zero emissions target then it should be deprioritised. If cement kilns are going to throw us off target, then the red flag gets raised.

    @Matthew: I can’t find anywhere were I wrote “leftist climate activists” in the article…

  3. @warri oviedo: as I understand (correct me if I’m wrong) the Climate Bond Initiative is more focused on driving down costs of capital for climate projects. The idea in my article is to redirect a fund like Infrastructure Australia to align its investment mandate with climate outcomes. So I think it’s as much about stopping the wrong projects from going ahead so that the ‘climate-friendly’ projects receive a positive weighting and jump up the funding priorities list. Regarding your ark at St Kilda, as long as it’s run on diesel and has a cement hull then I’m sure it will attract funding ?

    @Fin: the element that I’m trying to claim as my idea is really only seeding a reformed / redirected Infrastructure Australia with a low carbon mandate. For more ideas on the Australian Infrastructure Bond and how various layers of government would work together under the idea I would recommend that you open the link in my article to Dr Hewson’s article. He has been discussing this already – apologies there was no word space left in the article to flesh this out.

  4. @Bryce: thanks for the positive feedback. I’ll look forward to reading up on professor Herman’s work. I wonder how much traction his ideas are getting?

  5. Evan this is a very good idea and is similar to what the eminent economic professor Herman Daly proposed with the Steady State Economy where spending is focused on environmental / climate action or socially beneficial activities which are sustainable. Herman Daly was the Senior Economist for the World Bank and the recipient of multiple awards.
    The Netherlands is one country that has adopted these ideas more than most and is punching far above its weight in economic terms and also demonstrating environmental leadership.
    Good luck I hope your ideas get some traction.

  6. What complete and utter rubbish. It is this economic growth obsession that has created the current mess. The construction industry in Australia is responsible for 25% of our emissions largely because of its hunger for concrete and steel but also through land clearing and timber extraction for houses. What is produced slabs of tar and concrete absorbs heat creating the urban hot house that makes life very uncomfortable.

  7. Thanks Evan. That was a fairly heady offering which warrants dissection. Do you compare many notes with Climate Bonds Initiative? I like your optimistic, voice-of-reason angle toward politics and economy, rather than simply calling for their heads. We CAN work SOMETHING out, even as the human-natural matrix buckles and unravels before our very eyes. Do you think I might be able to get backing for the construction of an ark on the St Kilda foreshore?

  8. “Leftist climate activists”?

    You do know the right-wing British Conservative Party supports strong action against global warming and has presided over a rapid decarbonisation of electricity generation in the UK?

    Effective action to mitigate climate impacts needs cross-party support. This naive “culture wars” rubbish is well out of line.

  9. Evans piece looks pretty good but is a little loose when it talks about ‘government’. There are three layers of government in this country and it’s far from the truth to suggest they are aligned on this subject in fact at state gov level many millions are being spent to deliver economy wide mitigation and reductions that make new building sector look poultry by comparison. If you mean Federal government then say so.