Monday, April 16, 2012

The Asian Century and Australia’s energy future

The economic rise of Asia brings with it an unprecedented growth in energy use.

How that growth in energy demand will be met depends on technology development and policy for climate change and energy security. These choices will profoundly affect the prospects of energy exporters such as Australia. A prudent strategy would not assume that coal will always reign supreme but prepare for a future where demand for coal gives way to gas and zero-carbon energy sources.

China has had the fastest growing energy system among the Asian powerhouses, doubling domestic energy use between 2002 and 2010, and trebling it since 1990. Coal has made up the bulk of the increase, accounting for 70 per cent of incremental energy use in China since 1990, and half in India. In the process, China has turned from coal exporter to coal importer, and prices have shot up. Prices paid for coal traded internationally for power production are now about twice as high as five to 10 years ago, and over three times the prices at low points during the early part of the last decade.

That means golden times for energy exporters such as Australia. Australia’s coal exports in 2011 were worth A$47 billion — equal to about $2000 for every person in Australia (two-thirds of this came from coking coal for steel production, one-third from thermal coal for power stations). Oil and gas exports were worth another A$24 billion. The value of Australia’s fossil fuel exports is about three times that of a decade ago. And large projects are underway to further increase production and export capacity for coal and gas. The story is similar in Indonesia, now the world’s largest exporter of thermal coal.

But extrapolating past trends is rarely a good guide to the future.

China’s economic growth spurt has been voracious in its appetite for energy, especially electricity, and the quickest and cheapest way to provide power has usually been coal. Yet China is now clearly intent on significantly improving its energy efficiency and dampening the rise in carbon dioxide emissions. Its Copenhagen pledge to cut the Chinese economy’s emissions intensity by 40 to 45 per cent between 2005 and 2020 will require significant changes from business as usual; and, because of its indexation to GDP, the target is more ambitious at lower rates of economic growth.

This means dampening demand growth and realising more of the remaining increase through gas and renewable energy sources. China’s desire to achieve a more secure supply of energy, to gain leadership in energy technologies and to curb local air pollution all point in the same direction. The Twelfth Five-Year Plan sets out changes in economic structure towards lighter industries, improvements in energy efficiency and reductions in carbon intensity, intensifying existing policy efforts — including through huge investments in renewable energy such as wind, solar and hydro power.

The capacity within the Australian government and research community to evaluate trends in other countries’ policies is not as strong as one might expect in light of the importance of energy exports in Australia’s economy and the attention that has, in recent times, been placed on climate change policy. While there is extensive analysis being done of domestic energy supply, Australian research and analytical capacity on energy and climate policy in China and elsewhere in Asia clearly lags that available in the US, the UK and Europe.

To see how strongly climate change mitigation policies could affect energy investments and future energy markets, consider the latest projections by the International Energy Agency (IEA). The IEA projects that global coal demand will increase by over half between now and 2035 if there is no change to current policy settings; level out under a scenario with policies consistent with the Copenhagen Accord; or that it will decline by about one-third in a scenario of strong global climate change action. Most of the global difference would arise in China and India, where very large investments in power-producing infrastructure are to be made in the coming decades. International energy trade reacts very sensitively to such changes in demand. Any slackening of demand tends to result in lower prices.

It is impossible to predict the future conditions in global and Asian energy markets. Past experience suggests the true range of possible outcomes could be much larger than mainstream projections indicate. Surprises are commonplace. For example, energy supply projections 10 years ago did not foresee the global boom in unconventional natural gas, which may see the US build no further coal-fired power stations and become a gas exporter. Meanwhile, the prospects for carbon capture and storage technologies are much bleaker now than they were just a few years ago, while on the other hand the cost of solar power has declined dramatically.

With such deep-seated uncertainty about future technology development and international policy settings, Australia’s future as an energy exporter needs to be considered with an open mind. A linear trajectory would see Australian coal export volumes and revenue continue to increase, whereas expansion of gas supplies could weaken demand for coal, and strong global mitigation could even spell a potential comparative advantage for Australia in renewable energy.

Australia has vast and diverse opportunities for renewable energy generation, including wind, hydro, solar, geothermal, wave, tidal and bioenergy. Most of these sources are essentially undeveloped because the renewable technologies are either still being developed or are not currently cost competitive against cheap fossil fuel supplies. But technology is improving, costs are coming down and a price on carbon emissions also changes the equation.

Taking the long view, if key countries were to implement truly strong climate action, Australia could be a cost-competitive producer of energy-intensive commodities such as aluminium or steel, using renewable energy sources rather than coal. It could even be possible to produce synthetic liquid fuels using renewable energy, and export these to Asia as a substitute for oil.

Given the size of the energy industry in Australia and its large untapped potential, shifts in the nature of international energy demand could spell major change in energy supply structures. Market forces drive such transitions, but regulatory frameworks, microeconomic policies and fiscal settings are crucial in allowing and facilitating change. A forward-looking strategy therefore might support research and development where markets will not invest in it, provide necessary infrastructure and shake out the regulatory framework to rid it of obstacles to new technologies.

But policy that embraces the opportunities of future change faces big political hurdles in the here and now. The nature of Australia’s political system and the way public debate is conducted tend to favour existing patterns of economic production and trade. Australia’s recent experience with the reform of resource rent taxation has shown that governments face tensions between serving the interests of established industries on the one hand and policy reform in the broader national interest on the other.

Another prominent example is climate policy. Strong global action has been recognised as Australia’s overarching national interest and a significant policy package to restrain greenhouse gas emissions is about to be implemented. But much of the policy effort and carbon pricing revenue was devoted to assuaging influential carbon-intensive industries, and the political rhetoric tends to focus on how little practical impact the scheme will have on consumption and production patterns, rather than the changes it is meant to achieve.

To counterbalance the tendency to lock in to existing patterns, we need long-term strategic thinking that is prominent in the policy arena. The Asian Century Review has an opportunity to tell policymakers that Australia’s energy future is likely to be more complex than continually rising exports of fossil fuels. And it can drive home the need to make serious investments in knowledge about the changing nature of Asia’s energy and climate policies, and in understanding how they could affect Australia.

Frank Jotzo is Director at the Centre for Climate Economics and Policy, Crawford School of Public Policy, the Australian National University. This article draws on a submission to the Australian Government White Paper on Australia in the Asian Century, and is part of EAF’s series on the Asian Century which feeds into the White Paper.

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