Inflation saps Inflation Reduction Act mini-me
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Antony Currie
MELBOURNE, May 16 (Reuters Breakingviews) -Australia's latest effort to green its economy looks a damp squib. On Tuesday the federal government unveiled the "Future Made in Australia" initiative,an offspring of sorts of the U.S. 2022 Inflation Reduction Act. Yet while the latter pledged at least $370 billion in tax credits and other measures to stimulate across-the-board investment in the energy transition, Canberra's version lacks ambition.
The country should be an ideal place to follow Washington's lead to achieve net-zero emissions and boost clean energy manufacturing. Almost one-third of exports from Down Under are fossil fuels; Coal still generates more than half of electricity while manufacturing has halved to just 6% of GDP in less than two decades. And compared to Western peers, public coffers look healthier: net government debt is around 30% of GDP, compared with 120% in the U.S. and Japan's 220%.
Yet Treasurer Jim Chalmers allocated just A$23 billion ($15 billion) over 10 years to the plan, mostly as production tax credits for critical minerals and green hydrogen. By partly matching similar incentives in the IRA, it helps level the investment playing field between the two countries. And it's only designed to help reduce high costs of production for a time, leaving the private sector to grapple with other risks. For green hydrogen, those range from energy and water availability to low production efficiency to transportation challenges.
But the amount on offer pales in comparison to the A$100 billion or so that research outfits like Climate Energy Finance were pushing for. And some elements are entirely absent, such as incentives to boost demand for household goods that would reduce energy needs - from electric vehicles to heat pumps to rooftop solar panels. The IRA included some $50 billion in tax credits for such purchases.
Trouble is, there will be a federal election within a year, and the left-leaning Labor government wants to avoid boosting spending in case it sparks more inflation. That'd prompt the central bank to raise interest rates again before polling day, rather than cutting them as is currently hoped. With most mortgages carrying adjustable rates, that'd increase bills for millions of voters. All this leaves Australia's IRA mini-me punching below its weight.
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CONTEXT NEWS
The Australian federal government on May 14 committed A$22.7 billion ($15.04 billion) over a decade, starting in 2027, to its Future Made in Australia initiative aimed at realising the country's "potential to become a renewable energy superpower".
The package includes a total of A$13.7 billion in production tax credits for critical minerals and green hydrogen.
($1 = 1.5092 Australian dollars)
Editing by Robyn Mak and Aditya Sriwatsav
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