QUARTERLY ESSAY 78 The Coal Curse

 

Correspondence

Zoe Whitton

Judith Brett’s The Coal Curse is an insightful overview of Australia’s struggle to develop industries beyond commodity exports, and the effect this concentration has on our national discourse and policy-making.

It is a rare treat to read a deep case study of the resource curse in action, even if it is a little depressing to be reading it about one’s own country. Two features of our predicament, as outlined by Brett, stand out for me. First, the idea that our lopsided success might be challenging our ability to develop new strengths and growth opportunities. Brett doesn’t suggest there is a causal link between our strength in extracting and exporting resources and our weakness in other industrial sectors, but she does note a number of ways they interrelate. One of these is that the resources industry breathes in people and capital as commodity prices rise and exhales them as they fall, challenging the growth of other sectors. The effect of our resource exports on other exporters via exchange rates is another.

This dynamic is reminiscent of the failure to innovate often observed in incumbent corporations. Why, so often, do strong organisations, dominant in their industry and aware of oncoming disruption, fail to respond and therefore get damaged or swept aside? Such companies tend to have high-powered and experienced boards, well-resourced strategy departments, and established customer relationships and infrastructure. They should be best positioned to seize new opportunities and see off attackers. Nonetheless, over and over again we observe such companies being overwhelmed and diminished by change. Why?

One proffered reason is the power of the existing successful business units within the organisation. Often an incumbent business unit negotiates so hard on all fronts that up-and-coming units don’t get a look in. Once leadership is established around a dominant activity, it becomes difficult to allocate resources and time to anything else. This dominance can play out in myriad tiny decisions. Should we spend our time and attention developing a new initiative which might fail, or should we double down on our most profitable activities? Should we change our governance slightly so that our new business unit can grow, or should we keep the existing structure which favours the dominant unit? Should we allocate growth capital to our new products, or to the products which presently make up the majority of our revenues? Each choice to back the status quo often makes sense in the short-or mid-term, and is hard to press back against. But over time they lead cumulatively to an inability to do much that is new.

How this translates is clear. Australia is extremely good at certain activities. We derive a significant portion of our income from those activities. We have experienced and capable leadership, resources to spare, and a reputation for delivery. But we have struggled to figure out how to become good at anything other than varieties of what we are presently good at (except in a few cases).

Where a company often struggles to spend the surplus from a dominant business on an upstart, Australia has struggled to tax established sectors to support the development of others. Where a company struggles to change incentives to favour a new unit, so we struggle to modify our national policy and norms to make space for the future. Our dominant industries often argue that they shouldn’t be taxed as heavily or should be supported because they contribute so much to the national economy. (Brett outlines how the narrative efforts of our dominant industries have been hugely successful in this respect.) This conversation is almost a direct mirror of that sometimes seen between business units.

I should note that not all companies have this problem. Cases in which an organisation completely fails (usually by being consumed by others) are actually fairly rare. Many companies manage to survive their incumbency. Nonetheless, each decade provides a steady flow of new examples. Furthermore, incumbents often survive by buying upstarts – a common practice for companies, but more controversial when attempted by countries.

The second notable feature of our predicament is the difficulty we experience regarding climate change and the industrial transition it entails. As Brett notes, our national debate on the topic has become deeply polarised, often seeming to pertain mainly to our national identity and relevance rather than really discussing the challenge. To many people, our national conversation on climate change appears to have become somewhat deranged – full of sound and fury, and largely unrelated to the issues at hand. This is likely due in part to the challenges faced in all modern political conversations: the extent to which our media now operate by soundbite and clickbait; the increasing polarisation of our news infrastructure; inequality and its many ills. However, when it comes to climate change, there is probably something else afoot.

When viewed up close, the deterioration of our debate seems like a specific failure. It appears that a number of determined individuals in a specific set of industries may have bumped us off an otherwise constructive path, setting us into the melee which we now experience. However, seen from a distance, our trajectory looks more predictable and less personal. Some have long expected that Australia will necessarily fail to navigate a transition because even thinking about it will prove too difficult for us.

Why would this be so? Following Hurricane Sandy, British environmental campaigner George Marshall undertook a series of interviews with residents of the New Jersey seashore. He noted that those who lived through the unusually severe, life-threatening storm were less likely to believe in climate change than before. Why? Marshall gathered evidence about the issue for his 2014 book Don’t Even Think About It: Why Our Brains Are Wired to Ignore Climate Change. His findings suggest that the desire to return to something like normal, to rebuild anew, and to express solidarity and perseverance prompted people to resist the prospect that the same disaster could happen again. The fact that climate change might be extremely threatening (it could destroy your house or kill you) makes conceiving of it even more difficult. More evidence of how threatening climate change might actually make it even harder to come to terms with.

Some commentators expect the same from us as a nation. At a conference in 2019, energy finance analyst Kingsmill Bond presented an analysis of which countries might move more quickly through a climate transition, and which might instead be overcome by it. The audience was a global group, interested primarily in the fortunes of Europe, the United States and eastern Asia, where they were based. Bond noted almost as an aside that a few (energy-exporting) nations would of course find it almost impossible to undertake a transition. He noted that the political and economic negotiations needed to undertake decarbonisation would likely prove too challenging for these states to navigate successfully, given their interests. However, he argued that the trajectories of these countries were irrelevant. There were only a few of them, and their populations were small. The rest of the world’s population (largely living in countries which are net energy importers) would stand to benefit, and that was where the action would be in any case. The discussion moved on. I don’t need to tell you which group Australia was in.

The discussion reminded me of a similar one we regularly have in the investment community. We often find ourselves pondering why some companies find it such a struggle to develop a climate change strategy, or even to discuss the topic. Why are they defensive, even when many proactive options are available to them? A common answer is that acknowledging a threat sometimes requires choosing between options that all seem less appealing than the status quo. Even when the status quo is not sustainable beyond the short term, the alternatives can seem so unappealing that we choose not to consider them. In these cases, it often feels preferable to kick the can down the road. Many companies have reason to feel threatened by climate change, but some companies may feel that none of the options available to address the threat are in any way desirable. In these cases, avoiding the discussion (or even pretending the threat doesn’t exist) might feel more viable than looking at the danger straight-on.

Of course, we know that such companies, the reluctant nations Bond referred to and Marshall’s post-disaster communities are far from alone in struggling to come to terms with the fear of far-reaching and threatening change. Furthermore, one can imagine that for individuals, companies and countries, a larger and more existential threat might generate even greater reluctance.

Our commodity-exporting industries certainly have the emotional resonance needed to generate this type of attachment. Growing up in a Queensland mining family (a splinter group of an agricultural family at that), I know what it is to feel the ebb and flow of commodities industries almost viscerally. As the mining industry grew throughout my childhood, it felt as though Queensland did too – our wealth, our perception of ourselves in the world, and our confidence. I remember the luxury stores that opened their doors on Queen Street as the mining boom took flight. Alongside the growing number of stately modern headquarters dotted around town, these felt like glittering markers of our new place in the world. This was a temporary feeling – a giant breathing in, if you will. The same stores have now been aged by time as much as by finding themselves in a different economic context. But as a teenager, it felt as if our world and our esteem was expanding with the industry.

Perhaps, coming from that place and time, I am more inclined to read into this emotional resonance. But in the mining community in Queensland during the boom, the industry and the future and Us felt tightly wound – one and the same. What threatened one, threatened all. Feeling attached like this makes it difficult to think with any objectivity about things which threaten the industry. And when it comes to an energy transition, this emotional resonance might be enough to make one’s stance on transition a foregone conclusion.

Maybe as a consequence of these challenges, the Australian debate on transition has one more striking quirk, which is that we tend to speak about global change as if it’s something we control. Specifically, we speak about the industrial transition of others as if our choices will change theirs. As if our policy decisions will change what Asia, Europe or the United States does. This is risky for two reasons. First, we don’t get to choose whether climate change happens or not – or what the impacts are. Second, we don’t get to choose whether others respond to climate change or not, nor how they do so. What we decide to do on climate change matters, but possibly not for the reasons we think. We discuss climate change and international agreements as if pulling out of them will change something, or (even more hopefully) break a spell and convince the world that it was all a fantasy. This is magical thinking at its most fantastic and dangerous. Instead, what we do matters because it will determine how fast and successfully we respond to the challenge, and how the rest of the world treats us as it moves forward.

On the first point (speed and success), there is an industrial revolution presently afoot, and we have the natural and intellectual resources needed to succeed. However, we will not win this game if we refuse to get on the field. On the second point, if our choices take us in a different direction to others, then they are very likely to impose a variety of costs on us to ensure they don’t end up bearing our costs. Border-adjusted carbon prices are a good example of this – a policy mechanism under which a region can levy tariffs on imports which originate in jurisdictions without sufficient carbon constraints. These types of mechanisms allow regions to protect themselves and their industries – to transition without exposing their own economies to uneven competition. They might in some scenarios be used to protect these regions from us – from our high-carbon economy.

If we make certain choices, we may find ourselves playing a different game to large parts of the global economy, and paying for it on a number of fronts (including missed opportunities). We will miss the opportunity to win the game they are presently playing – one we are well set up to win. This is why it matters what we do – because it determines whether we’re on the field, or not. To miss the commercial layer of this conversation is at best to be incumbent, complacent and a bit distracted. At worst, it is to be unbelievably naive in the service of our own hope and nostalgia.

Given this, why is there reason for hope? First, although there are many famous examples of entities which failed to navigate their own incumbency, there are also many which succeeded. Companies that, understanding their own mental blocks, targeted the futures they wanted. In order for these futures to be in play for us, we will have to do as these successful incumbents did – explicitly work our way through our challenges, knowing that our mental gravity will pull us back. Tie ourselves to the mast, if you will.

There are signs of hope in a number of recent policy projects. Though it has not been much discussed, the first half of the COVID-19 Commission’s draft recommendations focuses very usefully on which advanced manufacturing activities might be built out in Australia. The Technology Investment Roadmap focuses on innovating through the problem and building new strengths and industries. CSIRO’s new national missions aim to focus and protect innovation for specific outcomes. Beyond these policy efforts, we have the resources and expertise to solve the problem. As with incumbents, there is no reason it shouldn’t be us that disrupts us – we merely (!) have to set ourselves on the path, find some rope, and perhaps use a little figurative wax to drown out the complaints of our established sectors.

A second cause for hope comes from outside Canberra, from the rest of Australia. I have framed the above discussion as if “we” are one entity. One community struggling to perceive the challenge, one group grappling with a single set of hopes and desires. This is, of course, not the case. Indeed, much of the furore I have described above is happening not in all of Australia, but in a much smaller, tighter arena, comprising Canberra and a collection of commentators. This arena is certainly extremely powerful. However, it is also a small and shrinking part of the national discussion on transition, likely because it has been so unwilling to engage on the topic to date and so has been effectively sidelined. Outside this arena, a growing majority of decision-makers are already putting in the work to navigate a transition.

When discussing the transition, many commentators elevate the importance of this small arena, equating a failure of federal transition policy with the failure of the nation as a whole. In some respects, this is true – overarching federal policy would speed up our response to the challenge and reduce the extent to which we make problems for ourselves in the future. It would boost our ability to compete in the game of our lives, ensuring that our footing is strong and that all our limbs are running together and in the right direction. It would make investment and action easier, faster, more competitive and more coordinated.

However, if Canberra fails on this issue – if our national leadership fails to ward off its own sirens – we still have many avenues for action. As Brett notes, every state or territory in Australia is presently committed to align with Paris. Many of our largest companies are decarbonising at a rate of knots (including some of our resource majors). Citizens, investors, regulators and companies alike are grappling with a transition – negotiating ways to hold one another to account, to invest despite uncertainty, and to innovate in the right direction with little assistance.

These decision-makers are pushing together towards the growth that we need to take the game (although, I will grant you, they argue every step of the way). When viewed as a whole, Australia looks very different to when viewed as Canberra. Recent history would suggest that our challenge will actually be addressed beyond Canberra and by other actors. Much of the action in Australia is now moving steadily in the right direction, despite the noise. As a major commodity exporting nation – and a major energy exporter – Australia faces a transition path which will be unlike those of many other developed economies. Nonetheless, it’s possible for our path to be one of growth. To achieve this pathway, we must remember that we’re more than just the apparently intractable fights which presently dominate our political conversations, and that we’re capable of functioning despite being threatened by change. Like a family living in a cyclone-hit delta, we cannot just rebuild the same house our grandparents lived in. Nor the one our parents lived in. To thrive in our distinct part of the world with our distinct history, we will have to innovate, tie ourselves to the proverbial mast, and build something that is designed for our future rather than only our past. Many of us are already building it.

 

Zoe Whitton leads Citi’s Environmental, Social and Governance Research team in Asia, advising institutional investors globally on issues such as climate change and the energy transition.

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This correspondence discusses Quarterly Essay 78, The Coal Curse. To read the full essay, subscribe or buy the book.

This correspondence featured in Quarterly Essay 79, The End of Certainty.


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