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Climate change export opportunities for Australia

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Climate change is already remaking the global economy. The changes that Australia has to make in order to become a responsible and competitive player in this greener global marketplace are comparable to the liberal economic reforms made in the 1980s, says Austrade’s chief economist, Tim Harcourt.

Imagine a country that is inward looking and rarely notices the world beyond its own borders. There’s double-digit inflation and unemployment and a poor record of economic growth. Workers and their bosses are at each other’s throats, the country leads the world for working days lost due to industrial disputes and productivity (and how to improve it) is rarely talked about. Industry shelters behind prohibitive tariff walls (thinking only of the domestic market), the exchange is fixed every morning by officials of the central bank and the Treasury and international trade is an afterthought. There are few foreign tourists, or many foreign students on university campuses. There are few restaurants around and licensing laws are restrictive.

Well you don’t have to imagine this country because this country was our country, Australia, twenty-five years ago.

Fortunately, since then, much has changed. The Australian economy has progressed from being a poorly-performing (though well-endowed) economy to the highly-performing one that we have witnessed in recent years.

Global engagement with the world through trade and investment was a key part of this reform process. The beach-head reform was the floating of the exchange rate. Once the dollar was floated, Australians realised they had to compete with the rest of the world and could no longer allow poor productivity performance. Accordingly, tariffs were reduced and trade was orientated towards the emerging economies in East Asia.

In short, twenty-five years ago Australia was another country and it was trade reform that made the difference. In fact, it’s clear now that we’ve got through the worst of the GFC because of the reforms put in place by the Hawke-Keating governments and continued by their successors.

Trade is a very important part of this economic reform story. Openness to trade has been associated with higher living standards and Australia’s improved position in the economic growth stakes in the GFC-affected world.

Now we’re faced with a more complex problem in the form of climate change. But just as we had the drama of the float of the Australian dollar, or the banana republic warnings, to jolt us into the reform process, similarly with climate change they’ve been symbolic events that have changed the political economy landscape and the community attitude towards reform.

Certainly, The Stern Report – named after British economist Sir Nicholas Stern – raised the profile of climate change in Australia. An Inconvenient Truth, former US Vice President Al Gore’s Oscar winning film, did its bit too in popularising the issue. And our own Professor Ross Garnaut has done his bit as well. The Lowy Institute’s poll that recorded the Australian community’s ranking of climate change above the economy and global terrorism thrust the issue onto the political stage and increased the consciousness of climate change as a public issue.

The issue matters particularly for economists, because as Sir Nicholas Stern said, climate change is the biggest market failure or externality of all time. An area that had been left to scientists has now become a front and centre issue for economists as well.

In many ways, the issue of climate change reform is similar to trade reform.
In both cases, the global economy and the Australian economy, has to undergo significant structural adjustment.

In both cases, market mechanisms are needed to reflect scarcity and to offer incentives for investment.

In both cases, Australia will rely on its competitive advantage in its natural endowments and expertise in professional services rather than being a mass producer of low-value goods and services. Australia will export high-value goods and services – particularly to the developing world – while attracting investment in R&D from the developed nations.

In both cases, there are governance issues – particularly across international borders – that require multilateral and bilateral responses.

In both cases, there are winners and losers, especially in the labour market, as new jobs will emerge in new employment-creating sectors, with a decline in other areas.

In both cases, a middle way will be found between ideological standpoints – extreme global-advocates versus global-sceptics in the trade debate or green fundamentalists versus climate sceptics in the climate change debate. Economists can play a constructive role in tempering both sides in these debates.

But while the political economy debate will rage, export capability will and is being built up by the Australian exporter community. In fact, as Professor Nicholas Stern said in The Stern Report, Australia has great capability in environment technology and will be able to assist the emerging economies like China and India to reduce emissions and put their economies on a more sustainable footing.

I see this as an ‘airport economist’ everywhere all over the world. A great example is the Water Cube swimming arena at the Beijing Olympics in 2008, designed by leading environmental Sydney architects PTW and the energy and water recycling technologies used in the Olympic Village in Beijing that were originally designed for Sydney 2000. Similarly, if you travel like me, you’ll see Australian expertise when visiting a water treatment plant in Israel or a wind farm in Germany.

Australia has extensive export capability in key areas such as renewable energy (solar, wind geothermal, marine energy, biofuels), carbon capture and storage, carbon market services, clean technologies and services (water technologies and services, green buildings and sustainable urban design, environmental technologies and services, waste management and energy and efficiency services). The list goes on. The opportunities are there for the taking. And as we’ve seen in the last quarter century of global economic engagement, when Australia transformed itself from a closed, isolated economy to an open market, they’ll be plenty of emerging industries taking the reins as a source of growth and employment.

But how is climate change policy different from trade policy? Some trade economists like Ross Garnaut himself have pointed out one major difference. Some economists believe that if Australia had reduced tariffs on our own, regardless of what the rest of the world had done, we still would have been better off. But in climate change, the solution is a bit more complicated. Hence the need for multilateral action and a constructive round of talks at Copenhagen (COP15) in December, where Australia will play a leading role.

In fact, I was in Copenhagen last year at ‘The Energy Camp’ where a group of business, community, union and public sector leaders discussed solutions to climate change for Denmark to present this year as host of COP 15. Australia was the only foreign country invited to The Energy Camp as there was interest in Australia’s reputation as an environmentally conscious and innovative nation.

A nation’s reputation is important, after all, as a strong national brand drives demand for our exports. And as all economists know, especially during the GFC, it is all about demand. The national brand surveys consistently show that how a country treats its environment is important in how the world perceives it, especially with climate change being such a hot topic. Things like ratifying the Kyoto Protocol are noticed globally and do affect environmental exporters’ success in promoting their capabilities on the world stage.

Australia’s environmental credentials and capabilities will matter as we derive demand for our exports and aim to attract investment. We must always be conscious that we must put the green back into the green and gold.

Australia is a different place than it was twenty five years ago and trade played an important role in that structural adjustment. We can mark the float and the reduction of tariffs as landmark reforms. It was a time when we developed a strong export culture in industries we hadn’t considered as being ready for the world stage.

In many ways, in generational terms, the baby-boomers carried Australia from being a closed economy to an open one, and now Generation X and Generation Y will have to carry us through to be open and green.

So, in twenty-five years from now we may well look back to the current arrangements we are pursuing in terms of climate change and find that, although reform is hard yakka, there were many companies and sectors that emerged to help Australia guild its global competitiveness, not just for our own sake but for the good of the planet.

This article was based on a speech given to the Australian Economic Forum in Sydney and a presentation to Trade 2020 in Melbourne.  These are his personal views.

Tim Harcourt is Chief Economist with the Australian Trade Commission and the author of The Airport Economist (see www.theairporteconomist.com).

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