Economists Advise Australia Against Adopting US Inflation Reduction Act for Net Zero Transition

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TL/DR –

Australia’s top economists have advised Prime Minister Anthony Albanese not to mimic President Biden’s “think big” approach to clean energy, according to a survey commissioned by the Economic Society of Australia and The Conversation. Most economists recommend backing grants to innovative firms across all sectors, rather than offering special support for projects driving the energy transition. The economists also advise that support should be temporary and come with conditions, to ensure recipients provide value for money.


Leading Australian economists are urging Prime Minister Anthony Albanese to reconsider following US President Joe Biden’s extensive approach to clean energy.

The so-called Inflation Reduction Act in the US, recognized as the largest climate investment in US history, allocates nearly US$400 billion (A$605 billion) towards clean energy through diverse methods. This initiative aims to halve US emissions by 2035.

Hydrogen, wind turbine, solar cell and battery producers in the US stand to gain the most.

In the build-up to this year’s May budget, Albanese expressed his desire for Australia’s government to be a proactive partner in energy transformation.

Although matching the US spending might be unnecessary, Albanese believes that Australia could still deliver impactful programs.

Reconsidering the Approach

A recent survey conducted by the Economic Society of Australia and The Conversation revealed that most of Australia’s leading economists advised against specific support for energy transition projects. Instead, they advocated for grants supporting innovative firms throughout the entire economy.

The 44 economists participating in the survey, known for their expertise in economic modelling and budget policy, were asked about Australia’s approach in relation to the US Inflation Reduction Act. Two-thirds favored supporting innovation throughout the economy, while only four favored emulating the US.

Energy specialist Frank Jotzo and Economic modeller Warwick McKibbin disagreed with the options, suggesting labour market and tax reforms as better alternatives for encouraging new firms.

Former chief economist with the federal Department of Industry, Mark Cully, advised against competing directly with the United States, the European Union or South Korea in industries such as battery production.

A Different Approach

Cully believes that Australia is well-positioned to supply the necessary resources for these countries’ green industries. However, he pointed out the decreasing investment in research and development in Australia, which has been falling as a share of GDP for a decade.

He suggested that funding should be directed towards research and development throughout the economy, avoiding a “picking winners” approach.

On the back of the announcement of A$840 million in government loans supporting a rare earths mine backed by Gina Rinehart, economists have warned about the risks of public investments benefiting private companies.

Economist Saul Eslake warned against corporate rent-seeking, while John Quiggin supported advancing loans to firms supplying US projects. Consultant Rana Roy, who voted against government support, emphasized the importance of preventing a further decline in Australian living standards.

Consider a Carbon Tax

Most surveyed economists reiterated their support for a carbon tax as the best means of reducing emissions. While avoiding picking winners, some economists suggested a well-designed grants scheme could encourage investment if it ensured value for money.

Any support should be temporary and come with conditions, similar to the approach adopted in the United States.

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