Capital for kilowatts: The (non)-inflationary impacts of the green transition
The report examines Australia’s need for significant investment in renewable energy infrastructure. It argues that despite high costs, the green transition’s inflationary effects will be minimal and manageable, contributing to long-term macroeconomic stability and a more sustainable future.
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OVERVIEW
Executive summary
Australia requires substantial investment in electricity infrastructure and export industries. Although some view the renewable transition as inflationary, this ignores the need for investment regardless of its nature. Green investment may incur higher costs but will likely have minimal impact on inflation. Decarbonising electricity infrastructure, with a projected cost of $625 billion compared to $400 billion for fossil fuels, is expected to have limited inflationary effects due to the extended timeline and declining technology costs.
Much of Australia’s electricity infrastructure is reaching its retirement date
Australia’s electricity infrastructure, largely built in the mid-20th century, is nearing the end of its operational life. Approximately 38 GW of coal and gas generation capacity will retire by 2050, necessitating significant investment to meet demand and replace aging infrastructure. The Australian Energy Market Operator (AEMO) predicts an additional 20 GW of capacity will be needed, creating almost a 60 GW gap by 2050.
The inflationary impacts of decarbonising Australia’s current grid
The Commonwealth Government aims for 82% renewable electricity by 2050, costing an estimated $625 billion. Without decarbonisation, $400 billion would still be needed to replace and expand existing infrastructure. The additional $225 billion for green investment is small from a macroeconomic perspective. Rapid technology advancements and government interventions can reduce costs, while insufficient electricity supply poses a greater inflationary risk than green investment. Focusing on renewables can also reduce economic exposure to fossil fuel price volatility, promoting a stable and sustainable energy future.
The inflationary impacts of building green export industries
Australia’s ambition to become a green export superpower requires substantial investment. Comparatively, investment in new export industries is essential due to declining global demand for fossil fuels. This investment, akin to past resource sector booms, will have moderated inflationary impacts due to currency appreciation, which makes imports cheaper.
It all comes down to demand management
Investment in the green transition impacts aggregate demand similarly to other investments. Standard governmental and central bank tools can manage this demand. Lessons from previous resource investment cycles are applicable. Sustained high investment levels will not be inflationary as the economy adjusts over time.
The long-term vision: low cost energy
Long-term benefits of renewable energy include reduced price volatility compared to fossil fuels. Renewables offer stable and lower-cost energy, mitigating risks associated with fossil fuel supply shocks and climate change. Significant investments in renewable infrastructure will ensure sustainable and stable energy supply, fostering macroeconomic stability and reducing inflationary pressures over time.
