If budgets are the government’s attempt to chart the course for the next few years, what can this one teach us about how climate change is leaving its mark, and how the government is looking to tackle it?
Climate is already costing the budget
It’s difficult to measure just how much climate change has already cost the federal budget, but there are some key figures to look at.
The most obvious one is how much we already spend on disaster recovery payments.
“Climate change and global climate action will have profound impacts on the economy, reshaping Australia’s industry mix and requiring effective mitigation and adaptation to manage climate impacts like more severe bushfires and floods,” the 2024-25 budget read.
When Jim Chalmers became federal treasurer after Labor’s 2022 election win, he asked Treasury to do something that had been abandoned a decade before under Tony Abbott — model the economic impacts of climate change.
Treasury has done this in its 2023 Intergenerational Report, and what it found wasn’t pretty.
Assuming global action on climate change was limited to only 3 degrees, the government would fork out roughly $130 billion in payments over the next four decades.
This budget shows we’re shelling out $7.3 billion in recovery payments for natural disasters that have already hit the country in the past few years. That’s up $3.9 billion since last December, and shows the scale of costs that will increase as the planet warms further.
These costs dwarf the policies in the budget devoted to reducing the impact of natural disasters.
There’s $138.7 million over four years for disaster preparedness, including $35 million to bolster the national aerial firefighting fleet, and $26.8 million for disaster response resources. And $450 million partnering with the US on a satellite program to gather data on natural disasters, climate change, and agricultural production.
Preparing for the end of the fossil fuel era
While it’s full of figures and tables, the budget also is an opportunity for the government to draw attention to things it thinks are important. And this year it highlighted an unexpected boon from record fossil fuel profits.
“Strong corporate profits, including from iron ore and coal prices in late 2023 and the very early part of 2024 exceeding those assumed in MYEFO and robust demand, contribute to an upgraded company tax outlook,” the papers say.
But it is also warning that we can’t keep relying on these profits in the future.
“Australia’s exports will be increasingly comprised of low carbon products. Over 97 per cent of Australia’s trading partners have set net zero targets,” the papers say.
Grattan Institute Energy and Climate Deputy Director Alison Reeve says Australia needs to be ready for this drop.
“As the world commits to net zero and coal, oil and gas start to decline, there should be less tax revenue coming into the government as well and that also has an effect on the budget,” she said.
“Even though we might be seeing record high prices at the moment, and therefore record high revenue for governments, the overall trend is going to be downwards.”
While fossil fuels like coal will see a dramatic decline, the Intergenerational report lays out how Australia is in a good position to benefit from the increased demand for the critical minerals required for the transition.
It’s also important to put fossil fuel contributions to the budget into context.
Fossil fuel companies and miners are quick to tout their role in contributing to the budget button line, and after the budget, the gas industry released figures saying it contributed $12.7 billion in company tax.
That’s compared to more than $326 billion in this budget coming directly from regular Australians paying income tax, and another $87 billion from GST which we all contribute to.
These figures, which make up the bulk of budget revenue, are under threat from a heating world.
“As shown in the 2023 Intergenerational Report (IGR), rising temperatures are expected to result in reductions in labour productivity and hours worked, particularly for employees who work outdoors, such as in agriculture, construction and manufacturing,” the budget papers state.
“Agricultural yields are expected to decline with climate change. The increased frequency and severity of natural disasters will also lead to reductions in output through disruptions to economic activity and destruction of property and infrastructure.”
Alison Reeve says Australians have avoided having a proper conversation about this.
“We need to stop pretending that this whole transition is possible without anybody having to pay anything, because that is simply not true,” she said.
“The sooner that we face up to that and start talking about what is fair about those costs, and who should bear them, rather than pretending that everybody can be a winner, I think the better off will be.”
How to tackle the transition
Warwick McKibbin, a distinguished Professor of Economics and Public Policy at the ANU, is an expert in looking at the costs of a climate transition and the most effective ways to address it.
He measures the economic impacts of climate change and what sort of policies give you the biggest reduction in emissions for the least cost, and his modelling has been used by the Treasury.
The two best ways to reduce emissions according to McKibbin’s work are a price on carbon and abolishing fossil fuel subsidies.
On both fronts, there’s not much evidence in the budget the government is looking to take this approach.
Properly pricing carbon in Australia has become a politically toxic topic after the Coalition revoked the carbon tax when it came to power in 2013.
For McKibbin the lack of bipartisan support highlights how short-term political goals create problems in addressing longer-term issues like climate change.
“In the end, it’s a long-term problem that needs long-term political foresight and wisdom and bipartisanship and that’s the reality.”
A future made in Australia?
Bowing to this political reality, the government has instead followed the lead of countries like the US, Korea, and is planning big investments in the industries and technologies that will power the post-fossil fuel world.
The transition away from fossil fuels has entered a new stage where countries like China and the US are locked in increasingly fierce competition over who can dominate this space.
The centrepiece of this year’s budget, and the likely foundation of the federal government’s next election strategy, is its ‘Future Made in Australia’ policy.
Economist Mariana Mazzucato is a prominent proponent of the strategy and wrote glowingly about the policy in the Australian Financial Review on Monday.
“Climate and growth are not a trade-off. Renewable energy sources like solar and wind have proven to be the most economical forms of power in Australia. Recent additions of renewable energy to the grid have been instrumental in reducing wholesale power prices – a benefit that is beginning to reflect in lower retail power prices for households.
“Continuing reliance on outdated, high-pollution energy sources not only drains household finances, but exacerbates the climate crises that impose growing costs on the Australian public.
“And most importantly for the economic argument, green industries could be worth more than $10 trillion globally by 2050. Countries that get in there first will have important first-mover advantages.”
There is money in the budget to directly support the growth of industries like solar and battery manufacturing, but it also unveiled two tax incentives.
One for processing and refining critical minerals, the materials the world needs to build the transition, and another for green hydrogen production – to replace fossil fuel gas.
In plain terms, it means businesses in these industries can claim back an extra 10 per cent of their costs, which will help their technologies make money quicker.
Alison Reeve says tax incentives need to encourage new activity and facilities that are viable long term.
“I understand from talking to the treasury officials in the lock-up that the tax break is just 10 per cent of your operating costs and it’s available to existing facilities, not just new ones,” Reeve said.
“And the risk with that is it just means that companies that are already there and already producing will get a tax break for doing nothing.”
“They don’t have to increase their production, they may not be a competitive facility now.
She also said there needed to be an exit plan so that companies weren’t reliant on the incentives for too long.
Jim Chalmers addressed this in his speech to the press club, saying there is an ‘off-ramp’ on these credits.
“For example, when it comes to the hydrogen production tax credit, that ends in 2039-40,” he said.
“That’s how we don’t saddle the budget forever with these really important production tax credits.
Opposition Leader Peter Dutton has been quick to criticise the tax incentives.
“Those projects should be able to stand alone and we support them but not with taxpayers’ money,” Dutton said.
Fossil fuel subsidies
But both he and the government have been quiet on the idea of removing fossil fuel subsidies in the budget, something the World Trade Organization (WTO), The Organisation for Economic Co-operation and Development (OECD) and the International Energy Agency (IEA) have called for an end to.
Warwick McKibbin says the government would be better off removing the existing subsidies for fossil fuels.
“We showed years ago, decades ago that if you reduce subsidies to fossil fuels, you can get decarbonisation with economic activity increasing, because you’re getting rid of all these inefficient activities,” McKibbin said.
There were no new large-scale subsidies for fossil fuels in this budget, but the fuel tax credit scheme alone, where businesses get a rebate on the diesel they use, will cost the budget $10 billion this year, and $44 billion over the next four years.
The government’s hydrogen and mineral tax incentives are expected to cost $13.7 billion over more than a decade.
McKibbin said it can be difficult to measure the amount going to the industry in subsidies as a lot of it is hidden, but he believes state and federal governments pay out more than they get back on fossil fuels.
“If you look at what we get out of gas production in Australia versus what Dubai, or the United Arab Emirates get, I mean, we get a fraction of the revenue.
“Not only does it cost the taxpayer, but it moves resources from other parts of the economy into those sectors. And so you’re wasting not just the dollar amount. It’s also the opportunity cost of where that money might have gone.”
Arm’s length decision making
Both Reeve and McKibbin say investment decisions need to happen at arm’s length from politicians, and on this front, the government appears to be listening.
It’s giving the Australian Renewable Energy Agency (ARENA), which is independently run, the responsibility of administering many of the projects, worth billions of dollars.
“You may find cases where it’s worth the government doing something because there’s a market failure, or there’s some reason that the private sector won’t take the risk, you can make that case,” McKibbin said.
“The person who decides that should not be a politician, it should not be a political party, it should not be a bureaucrat whose job it is to make the minister happy.
“It should be a completely independent agency, whose job it is, is to save taxpayers money and increase productivity in the country.”
While Reeve was supportive of ARENA’s new bolstered role, she says it’s a big change to what’s a relatively small body.
“The size of the stuff they’ve been given to administer is orders of magnitude larger than what they’ve had before,” she said.
“You need to make sure that the governance of that organisation and the scrutiny and the oversight and everything are appropriate.
“That you’re not leaving them with the arrangements that were come up with in 2013 when they had a much smaller budget.”
What’s at stake
Mr Chalmers says, personally, the success of this budget is based on “making life a little bit easier”, but it’s also a plan to guide the country through a time of huge change.
“I like to think about how the world is changing and how we make Australia the big winner out of that change,” he said.
“That’s what the Future Made in Australia package is all about, but that’s what really in one way or another, all of our policies are about.”
Whether or not this approach will pay off will take years to be seen. But the need to act cannot be questioned – there are no winners in a world that fails to address the impacts of climate change.
And with the race to dominate the post-fossil fuel industries now a source of intense competition between the world’s largest economies, Australia’s economic future is on the line as well.