US-Australia green deal shows friends need benefits
US-Australia green deal shows friends need benefits
WRITTEN BY JAMES BOWEN
5 June 2023
At the recent G7 Summit in Hiroshima, the United States and Australia announced a new partnership on green industrial policy: the Climate, Critical Minerals and Clean Energy Transformation Compact. It positions climate as a “central pillar” of the bilateral alliance. This includes consolidating commitments to ‘friend shoring’ of clean energy supply chains, which primarily acknowledges that China currently controls, or aims to control, the output of many energy transition goods. These goods include: processed minerals such as lithium, cobalt, rare earths, and nickel; technologies such as solar panels and electric vehicles; fuels such as renewable hydrogen and ammonia; and commodities such as ‘green’ steel produced without fossil fuels.
The Australian government and industries currently see the deal as capable of boosting US cooperation in this area, while still advancing Australian economic interests. It could thus serve as a template for the broader partnership-building that Washington must engage in to ensure its climate-conscious economic renaissance under the Inflation Reduction Act (IRA).
Green is also the colour of money
Australia certainly shares the US’ concerns about improving climate action, and is also eager to act as a trusted supply chain partner that can help the US realise its green industrial ambitions. Most Australian observers of the new US deal have, however, been most excited by the promise of major financial transfers from American to Australian soil.
The official White House statement for the recent US-Australian compact speaks of leveraging US export financing for new investments in Australia. In comments tied to the announcement, US President Joe Biden pledged to seek Congressional approval for reforming the Defense Production Act to fund critical minerals projects in Australia, which would advance defence capabilities such as AUKUS, as well as clean energy. Following this, Australian Prime Minister, Anthony Albanese, celebrated the “enormous opportunity” for Australia to access investment unleashed by the IRA.
Securing capital may appear a small concern in the context of the new partnership’s overall remit. Yet financial rewards could act in a mutually reinforcing manner with loftier priorities. The promise of greater economic returns, including job creation, will incentivise Australian enthusiasm for climate action and enhance US-centric supply chain security (and vice versa). These are lessons that Washington could apply in its outreach to other countries.
Australia’s enthusiastic embrace of its new US partnership should inform Washington’s green industrial outreach elsewhere in the world.
US policymakers should appreciate that Australia’s journey towards climate action has somewhat mirrored the American example. Australia has long been globally lagging on lowering emissions, with much of the blame owing to its fossil fuel and industrial sectors. Australia is a major exporter of coal, liquefied natural gas, and carbon-intensive commodities such as iron ore, and these sectors exert considerable influence on public policy. International pressure on Australia to change tack has been immense, especially from existentially threatened Pacific Island nations. But most of the momentum for change has come from Australians that realise their country can still thrive in a decarbonising international economy.
The Albanese government took power last year, partly on the back of a promise to make Australia a “renewable energy superpower”, with a vision that incorporated accelerating domestic decarbonisation. It also included pledges to make Australia’s export profile less dependent on fossil fuels via investments in sectors such as hydrogen, critical minerals, and green iron and steel — all areas in which Australia has the potential to be a world leader. This positive narrative is now popular with a previously climate action-sceptical business community, as well as in the electorate, which increasingly touts the windfall that clean energy could deliver Australia.
Australia is also seeking to transition away from its traditional role as a quarry, providing raw materials that can satisfy the industrial needs of more diversified economies. Resulting commitments, including the USD 10 billion National Reconstruction Fund, support more minerals processing, battery manufacturing, and other value-adding pursuits. American investments that can advance these outcomes will be particularly welcome.
The US does not share Australia’s extractive economic profile. But it can certainly appreciate the Australian desire for a domestic industrial rejuvenation via decarbonisation. The Biden administration has made this explicit connection with the IRA, whose passage through Congress has depended on pledges to onshore clean energy supply chains and associated blue-collar jobs.
Clearing the IRA blockage
Therefore, the US can appreciate Australia’s desires to tether climate action to economic transformation. The US and Australia have also had a shared commitment to clean energy supply chain diversification away from China — Canberra entered Washington’s critical minerals-focused Minerals Security Partnership in 2022, for example. But common pursuits can also create competition. Prior to the recent climate, critical minerals, and clean energy compact announcement, there was a developing sense of disconnection in the bilateral relationship. The estimated USD 386 billion US support for clean energy under the IRA instantly overshadowed Australia’s relatively weak commitments in this space, threatening to monopolise the available capital.
Canberra has rightly taken on much of the responsibility for keeping its green dream alive. It has significantly increased some of the fiscal support it offers to incentivise investment in Australia in the wake of the IRA, yet even this continues to trail Washington’s own promises. For example, Australia’s 2023 budget allocated USD 1.3 billion to help lower green hydrogen production costs — but this was still unlikely to match the sub-USD 2 per kilogramme cost that the IRA made possible in the US.
The new US-Australia compact appears to recognise and respond to most of Australia’s IRA concerns. But it is not yet clear exactly what access to US benefits Australia might soon gain. Proposed reforms that will allow Defense Production Act investments in Australia have also previously failed to pass Congress and might do so again. Washington’s immediate priority should be to ensure its new deal with Australia lives up to the hype and is quickly legislated.
American support for the new Australian partnership should gain from the realisation that it could still deliver significant benefits on American soil. The IRA drafters acknowledged that the US could not easily onshore completely clean energy supply chains. They thus included concessions, such as extending tax credits for electric vehicles made with minerals from free trade agreement partners, such as Australia. Expanding IRA benefits further to trusted partners like Australia could provide US consumers and producers greater access to economic inputs, which could include processed materials and even manufactured components.
A new blueprint
Australia’s enthusiastic embrace of its new US partnership should inform Washington’s green industrial outreach elsewhere in the world. Motivations for acting on climate will differ from country to country. So too will levels of national economic complementarity with US priorities. Certainly, however, Washington’s partners and allies will share the desire to ensure their own economic competitiveness while advancing the greater good. This has undoubtedly been the case in Europe, where IRA pushback has so far been the greatest. Asian countries have also sought assurances they will not be economically harmed by Washington’s new policies; the US has already pledged to provide Japan access to some IRA benefits and continues to negotiate with Korea to minimise tensions in that relationship.
Policies that satisfy partner desires in ways that do not harm, and might even advance, US interests should be a priority of future American engagements. Washington should remember that there is an imperative to reduce the clean energy dominance of China above all others. Chinese commitments have been central to lowering clean energy costs and increasing deployment on a global scale. Yet diversifying supply chains away from China would invariably reduce the vulnerability of climate action to disruptions, like those which riled the global economy following the Covid-19 pandemic and Russia’s war against Ukraine.
Diversifying from China could ultimately help spark a ‘race to the top’ on climate and clean energy. However, the best way to do this would be to not isolate supply chain participation to one country, or even a small handful of countries. It would be to foster cooperation more expansively, ideally among a mix of advanced and emerging economies that can leverage differing comparative advantages. Domestically focused policies such as the IRA have been key to getting the US to lead on clean energy following decades of inaction. Washington’s partnership with Australia has shown that evolution requires sharing more of the ensuing rewards. The next step should be to expand the circle of friends, and benefits, even wider.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.
Author biography
James Bowen is a Policy Fellow at the Perth USAsia Centre in Western Australia. His work focuses on the intersection of climate, energy and geopolitics in the Indo-Pacific. James was previously a visiting fellow at Berlin’s Mercator Institute for China Studies and an editor and policy analyst at the International Peace Institute in New York. He was earlier an Australian government speechwriter, political risk consultant, and journalist. Image credit: Wikimedia.