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Guides / hsc economist

[HSC] Economist: 13th December

A summary of this week's economics news: COP26 and the transition to renewables!

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In the aftermath of COP26 (more details here) Australia’s resources sector, particularly its coal industry, has been under close scrutiny. Coal is one of Australia’s three largest exports, however COP26 has highlighted the industry as a key area which must be addressed to achieve the goal of environmental sustainability. This week’s article will consider the significance of the coal industry within Australia, and why the government is reluctant to begin the transition away from the resource.

Syllabus Dot Points Explored: 

The Global Economy (Topic 1):

International Economic Integration

  • The Global Economy
  • Globalisation

Trade, financial flows and foreign investment

  • Role of international organisations ‚Äď WTO, IMF, World Bank, United Nations, OECD

Globalisation and economic development

  • Effects of globalisation
  • Environmental sustainability

Australia’s Place in the Global Economy (Topic 2):

Globalisation and economic development

  • Effects of globalisation
  • Environmental sustainability

Australia’s Balance of Payments

  • Structure: Current Account, debits and credits

Economic Issues (Topic 3):

Economic issues in the Australian economy

Economic growth:

  • Aggregate demand and its components: Y = C + I + G + (X ‚Äď M)
  • ‚ÄćEnvironmental sustainability:¬†preservation of natural environments, pollution, climate change, and depletion of renewable and non-renewable resources.

The significance of coal to the Australian economy

As mentioned, coal is one of Australia’s largest exports, contributing $55 billion towards the Australian economy during FY2020. In fact, Australia is the world’s second largest exporter of thermal coal, exporting 393 million tonnes in 2019 (just behind Indonesia which exported 455 million tonnes during the same period. In addition to this, the mining industry employed 50,000 workers, and supported another 120,000 indirect jobs during 2020 according to the Minerals Council of Australia. Furthermore, during the financial year of 2019-2020 the coal industry paid over $5.2 billion in taxes towards the national accounts, cushioning the impact of COVID-19 on the federal budget and thus supporting Australia’s external stability.

The dominant role that coal plays in Australia’s economy, has deterred politicians from taking further action to reduce dependency on the coal industry, especially considering the record price of $US222.60/tonne this year following post-lockdown re-openings in many major economies.

Politicians such as Barnaby Joyce have noted that leaning away from coal would be ‚Äúabsolutely economically devastating for our nation‚ÄĚ, not only due to the impacts on economic growth and external stability but also due to the impact on unemployment. This is supported by modelling undertaken by Victoria University that found that employment in the coal industry would fall by nearly 30% following a net zero target. However, the institution also highlights that the size of our economy will double by 2050 if net zero emission targets are made, meaning that there‚Äôll be a net increase of jobs across the economy despite the decline in the coal industry. This remains the main argument for the Australian economy to transition from relying on coal to renewable energy such as sun and wind, as well as liquified natural gas.

This particular structural change within the Australian economy has been highlighted by many business leaders and economists to be pivotal to the long-term growth of the Australian economy. This sentiment is prevalent even in the mining industry, which has historically been quite dependent on coal production, with Rio Tinto, BHP and Woodside investing billions of dollars into solar and wind farms. Fortescue Metals chairman and founder, Andrew Forrest has even gone as far to note that ‚Äúwe [Australia] could well be that Middle East of energy. We need to grasp that opportunity‚ÄĚ, highlighting Australia‚Äôs potential to be a renewable energy giant amidst increasing demand following the increased global push for environmental sustainability.

Will Steffen, a climate researcher, supports the notion of how the Australian economy would have the potential to benefit from a structural change, noting that, ‚ÄúWe have enormous renewable opportunities, solar and wind, more than any other OECD country. And we have a potentially huge market on our doorstep, up in South-East and East Asia in particular‚ÄĚ. Additionally, his remarks are further emphasised by the fact that failing to engage in the structural change from coal exports will cost the economy when global demand ultimately ceases.

This has been evident following COP26, with both Japan and South Korea pledging towards net zero emissions by 2050, and imported 27% and 11% of Australian coal exports respectively in 2019. Australia‚Äôs second largest customer during that year, China, had imported 21% of Australian coal during the same period and had committed to ‚Äėcarbon neutrality‚Äô by 2060. Furthermore, investment into coal-related projects has become increasingly difficult with over 100 banks (including ANZ) refusing to fund new coal projects in October this year. The above all ultimately underpin why economists, business leaders and researchers have all recommended a structural transition. It is also the reason why treasurer Josh Frydenberg supported a net zero target before the global summit stating that ‚Äúglobal [backlash] would have significant [negative] economic impacts if Australia does not adopt a net zero target‚ÄĚ.

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Guides / hsc economist

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