An Evaluation of the Future Made In Australia Plan

Overview of the Future Made In Australia Plan

The Future Made in Australia (FMiA) program is a government-led initiative aimed at promoting private investment in priority industries to help Australia transition to a net-zero emissions economy. With a planned investment of $22.7 billion in subsidies over the next decade, the program represents Australia’s efforts to reduce its carbon footprint while simultaneously positioning itself as a critical player in the global economy. However, while the program offers some benefits, it also carries significant drawbacks, including budgetary constraints and economic risks. This report will assess the costs and benefits of the FMiA program and propose alternative approaches to maximise the welfare of the Australian economy.

Benefits of the FMiA Program

As an initiative which seeks to empower Australia’s renewable industry, the FMiA program has several benefits which are immediately evident.

1. Green Hydrogen Production

One of the key benefits of the FMiA program is the promotion of green hydrogen production, which is more than three times as energy-efficient as fossil fuels. With countries like Japan investing heavily in green hydrogen initiatives, the global shift towards this energy source is gaining momentum. Australia’s investment in green hydrogen could help position the country as a major player in this emerging market, increasing both energy efficiency and export potential.

Green hydrogen also has the potential to significantly reduce Australia’s greenhouse gas emissions, as it can be used for both energy storage and transportation. By embracing green hydrogen, Australia stands to benefit from enhanced energy security and reduced reliance on fossil fuels, contributing to both domestic welfare and global climate goals.

2. Reduction in CO2 Emissions

Another major benefit of the FMiA is the potential for a significant reduction in carbon emissions. The program aims to increase the share of renewable energy in Australia’s grid from 32% to 82% by 2030. This shift would reduce carbon dioxide emissions from energy production by fivefold. As energy production currently accounts for one-third of Australia’s total CO2 emissions, this transition will have a substantial impact on reducing the country’s carbon footprint.

Reducing emissions will not only help Australia meet its international climate commitments, but it will also contribute to improved public health and environmental quality, particularly for communities living near energy production sites.

3. Improved Welfare for Coastal Communities

Given that 80% of Australians live in coastal regions, the FMiA’s focus on reducing carbon emissions will also have benefits for ocean ecosystems. By curbing ocean acidification—a key driver of coral bleaching—the FMiA can help protect natural resources like the Great Barrier Reef, which supports over 60,000 Australian jobs. While the immediate benefits may be moderate, as ocean conservation efforts grow, the long-term welfare impacts could be significant, ensuring sustainable economic growth for coastal communities.

4. Lower Energy Prices

As renewable energy becomes a larger share of Australia’s energy mix, consumers can expect to see lower energy prices. In the last quarter of 2023, energy prices dropped by more than half in some cases as renewables accounted for up to 72% of the grid. With the FMiA aiming for 82% renewable energy by 2030, this trend is likely to continue, providing economic relief to households and businesses alike.

5. Diversification of Trade Partners

While there is a risk of trade disruption with China, the FMiA could provide Australia with the opportunity to diversify its trade relationships. This would be a potential solution to Australia’s narrow export base, where currently ⅔ of our exports are based in resources like coal or iron, which is unsustainable in the long run. Furthermore, it will also reduce dependence on China and expand our trade relationships, allowing us to create a more resilient and diversified export base.

6. Tapping into the Lithium Market

Australia is currently the world’s largest producer of lithium, a critical mineral used in renewable energy storage and electric vehicles (EVs). With global demand for lithium expected to increase as a result of the “decarbonisation” movement, the FMiA’s focus on promoting critical minerals could provide Australia with substantial economic benefits. The Treasury predicts that Australia’s lithium exports will double over the next five years, further bolstering the country’s position as a leader in the renewable energy transition. This will create jobs and increase Australia’s aggregate welfare by tapping into a growing, high-value market.

Costs of the FMiA Program

However, the FMiA also has a variety of problems which arise due to the structure of the Australian economy and the nature of the policies.

1. Fiscal Constraints and Budgetary Impact

The FMiA is set to cost the government $22.7 billion over the next decade, which exacerbates already existing fiscal challenges with a forecasted $1tn net government debt this year. The Australian government is facing a projected budget deficit of $28.8 billion for 2024-2025, partly driven by a reduction in income tax revenue by $243 billion over the same period. This large subsidy allocation to the FMiA creates an opportunity cost by diverting funds away from other essential programs, such as those aimed at alleviating the ongoing cost-of-living crisis, welfare support, and other long-term investments.

Additionally, if Australia fails to secure a competitive advantage in emerging industries like renewable energy and continues to rely on subsidies to sustain these sectors, the FMiA may become a significant liability to the government. There is also the risk that the program will create an over-reliance on government support, especially if Australian manufacturers struggle to compete with more established players globally. In the worst-case scenario, the policy could result in continuous financial losses for the government, adding to the national debt.

2. Economic Displacement and Short-Term Risks

The transition to renewable energy will have disruptive effects on Australia's existing industries, particularly coal, which currently constitutes 3.5% of the country’s GDP. By targeting a reduction in coal exports and production to meet net-zero goals, the FMiA risks slowing down short-term economic growth. Moreover, Australia's coal industry supports approximately 48,000 jobs, and the displacement of these workers could lead to increased structural unemployment.

While the program is expected to create jobs in renewable sectors, industries like solar panel manufacturing are capital-intensive, meaning it could take years before employment and economic benefits materialize. In the meantime, the program carries the risk of reduced national productivity and labor market volatility, as displaced workers may struggle to find jobs in the new sectors being promoted under the FMiA initiative.

3. Geopolitical and Trade Risks

Australia's attempt to reduce its reliance on foreign solar panel production—90% of which is dominated by China—carries geopolitical risks. By challenging China’s dominance in solar panel manufacturing, Australia risks retaliation in the form of protectionist measures. A historical precedent for this can be found in the trade tensions between Australia and China in 2020, where Chinese restrictions led to a 35% reduction in Australian coal exports between 2018 and 2020. Any future retaliatory actions could reduce Australia’s export revenues, particularly from commodities such as iron ore and coal which dominate our current export base.

That said, this risk may be mitigated by the opportunity to diversify trade relationships. India, for example, presents a growing market for Australia’s exports, particularly for iron ore and coal, which may help offset potential losses from reduced trade with China.

Recommendations and Proposals

To maximise the benefits of the FMiA program, a few adjustments can be made. First, reducing the allocation of funds toward solar panel manufacturing—due to the risk of retaliation from China—would free up resources for other high-potential areas. For example, increasing subsidies for green hydrogen and critical materials industries could enhance Australia's competitiveness in these sectors and diversify its export base.

Furthermore, diverting some of the FMiA funding toward ocean conservation projects and addressing Australia's housing issues would provide long-term economic and social benefits. By incentivising construction and streamlining approval processes, Australia can boost economic stability, attract skilled workers, and reduce homelessness, contributing to greater overall welfare.

Conclusion

While the FMiA program carries significant costs and risks, it also offers major long-term benefits in terms of environmental protection, energy security, and economic growth. By refining the program’s focus and investing in emerging sectors like green hydrogen and critical minerals, Australia can better position itself for a sustainable and prosperous future.