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How implementing the right framework can enable climate innovation

To reach net-zero, almost half of the world’s emission reductions will need to come from technologies that are currently at the demonstration or prototype stage[1]. Australia’s own net-zero plan relies on the deployment of new technologies to abate 70% of emissions, 30% of which are pre-commercial[2].

To date, Australia has shown its understanding of the need for innovation, with key wins under our belt such as a high penetration of rooftop and large-scale solar, and developing the cells used within these solar panels[3]. Australia now needs to set a pathway to deploying new technology at the giga-watt and tera-watt scale and activating its commercialisation. It took solar 30 years to be commercialised; technologies such as hydrogen and direct air capture need to be at scale in less than ten years.[4]

Recent modelling demonstrates the confronting scale of infrastructure that needs to be deployed to decarbonise Australia and maintain our position as an energy export power (Figure 1). Our natural resources: sun, lithium, iron, aluminium and importantly, land, present opportunities for great wealth, but cruelly come with some of the greatest challenges for a just and orderly transition such as navigating native title, sourcing labour, having to fully redesign and rebuild infrastructure, and the low readiness level of the technology required.

Figure 1. Australian energy infrastructure map, 2020 and 2050. Source: Net Zero Australia Interim Results. Net Zero Australia projects 1.9 TW of solar PV; 132 GW of onshore wind; and 42GW of offshore wind will need to be deployed to reach net-zero by 2050 and establish a clean energy export industry.

To achieve scale, Australia needs to tap into institutional and international finance, de-risked on the back of a strategic, national climate policy framework to trigger these outcomes over this critical period. 

Unlocking new forms of capital                                                                       

Having national energy projects at the giga-scale will attract investors from banking, superannuation, and industry to build, maintain and operate the vast infrastructure required. These investors are looking to spend billions energy transition[5] and will require an investment environment to support large and long term capital deployment. As our clean energy opportunity expands, international investment will play a key role to help secure export pathways for commodities such as hydrogen and green metals.

Alignment of our governments will be an initial and ongoing requirement to support a conducive investment environment.

 A strategic policy framework for climate innovation 

Limited progression on climate and transition policy has impacted Australia over the last decade. A coordinated climate policy framework is now starting to form. The framework, however, still needs strategic implementation to provide a solution to society, while maintaining Australia as an energy export superpower. We see precedent of such a framework being set by the United States that aims to drive innovation from three fronts. This tripartite framework, named here the Brains, the Brawn, and the Backing, is expected to drive a sudden and permanent impact on investment in decarbonisation, with an emphasis on leveraging domestic resources and innovation.[6]

The US CHIPS and Science Act is the largest investment in American research and science in decades. The Act authorises ~US$80bn a year of spending into research, development and demonstration for new technologies, including for clean energy. The bulk of this funding is targeted at the push of technology from prototype to early commercialisation[7],  a major funding barrier for climate technology.

The Infrastructure Investment and Jobs Act invests US$98 billion into energy transmission, electric vehicle charging, supply chain resilience, public transport, and climate change impact mitigation. This Act establishes the skeleton of the energy system that climate technologies are built on. This Act establishes the skeleton of the energy system that climate technologies are built upon. The Act provides a base of secure financing to help demonstrate and test technologies that can then attract subsequent investment to reach scale.

The Inflation Reduction Act marks the US’s largest ever climate spend at US$386 billion[8].  The Act uses a carrot, not stick, approach to financing the climate transition by rewarding companies with tax credits for manufacturing and delivering technologies domestically, rather than punishing them with a carbon tax[9]. These credits now make the US one of the most attractive jurisdictions in the world to develop future, clean industries and will likely see a rapid influx of investment and growth (Figure 2). 

Figure 2. Impact of Inflation Reduction Act tax credits on climate technologies. Source: Climate Tech VC

This tripartite framework sets a strategic system for the United States to finance climate innovation, while avoiding the political dangers of carbon taxes. Ongoing development of Australia’s own coordinated climate policy framework must pay close attention to the US framework’s outcomes – its future successes, and undoubtedly its mistakes, and pivot based on those learnings.  This, coupled with giga-scale national energy projects to attract new investors, can see Australia achieve net-zero while establishing itself as a clean energy export superpower.