Australia has opportunities and challenges in the new green cold war
The International Energy Agency predicts global demand for copper and silicon will double by 2040, while battery inputs such as lithium, cobalt and nickel could increase ten-fold. Like coal and gas in the 20th century, Australia is blessed with world-class reserves of all of these.
China is the unrivalled world leader in industrial supply of clean energy. It controls 75 per cent of global solar panel manufacture, 60 per cent of the lithium needed for batteries, and 78 per cent of battery cathode production. China produces half the world’s electric vehicles and 70 per cent of its lithium-ion batteries. It is the world’s biggest supplier of rare earths.
America’s strategic response
The US intends to reduce this dominance by spending hundreds of billions to develop its own clean energy manufacturing capacity from steel to solar, wind turbines, batteries and electric vehicles.
The headline $369 billion ($560 billion) Inflation Reduction Act (IRA) is as much about protecting American energy hegemony as it is about emissions. It’s a strategic response to a future energy security threat, a direct challenge to its new 21st-century cold war rival.
Domestically, its political success is anchored in its relevance to ordinary Americans: creating manufacturing jobs in rust-belt US and helping existing heavy industries navigate a decarbonising world.
This week, US President Joe Biden used the G7 meetings in Hiroshima to showcase support for its strategy from key allies. The US cannot do this alone. It will need global access to many of these resources.
Navigating this escalating rivalry may prove both challenging and opportunistic for Australian governments and businesses. China is our biggest trading partner, while our strategic future is increasingly entwined with the US.
In a paper last year by global insurance market Lloyd’s of London, a green cold war – low-carbon competition between economic and political blocs – was seen as the most likely geopolitical vehicle to drive global decarbonisation this century.
Since then, this scenario has only accelerated with the failed invasion of Ukraine and Russia’s strategic decline. The world has been sharply reminded of the economic and strategic importance of a secure energy supply.
Russia has redirected much of its energy exports into China, with plans to double gas pipeline capacity by 2030. This has only enhanced China’s energy security and its strategic power.
The US isn’t picking winners. It’s picking everyone.
For the past few decades, China has powered its economic growth by whatever engines and fuels it can get its hands on: coal, gas, nuclear, hydro, solar and wind. It’s an energy strategy that has, out of necessity, prioritised supply over emissions, pragmatism over virtue.
China is setting global energy records in everything. It built more than 100 coal-fired power stations last year alongside 125 gigawatts of wind and solar. It has the largest and fastest-growing electric vehicle fleet in the world.
The US is similarly broad-minded in what it is including in its energy renaissance: the IRA includes funding for renewables (manufacture and installation), nuclear, fossil fuels and carbon capture, heavy industry and new clean technology supply chains such as hydrogen, batteries and bioenergy. The US isn’t picking winners. It’s picking everyone.
The tone of the G7 meetings and the strengthening relationship between China and Russia suggest the development of informal trade blocs is already well progressed.
The EU’s carbon border adjustment mechanism, an import tariff on emissions-intensive goods, will come into force in October. It’s reasonable to assume the US will be keen to get to a position where it can exploit these sorts of measures to strengthen partnerships with its allies and marginalise its rivals.
Both China and the US may want access to Australia’s critical resources. Supplying both sides may not be easy in a cooling geopolitical world. The benefits of increased resources revenues will have to be weighed against the risk to other exports.