We shouldn't make everything in Australia

In its latest foray into industrial policy, the Albanese government has decided that it’s going to subsidise the manufacture of so-called sustainable jet fuels (SAF) in Australia. Here’s Transport Minister Catherine King:

“It’s ridiculous that frankly we are exporting more and more of our feedstock to other countries to make low-carbon liquid fuels. These are things we should be making here in Australia. It’s good for farmers, it’s good for our manufacturing sector, it’s good for sectors like GrainCorp.”

So far the federal government has pumped $30 million into the sector, including $8 million for Ampol and $6 million for GrainCorp. Here’s GrainCorp general manager nutrition and energy, Don Campbell, saying why his firm needed the subsidy:

“The cost of SAF today is more expensive than jet fuel, so we need some temporary support to stand up this industry and get it going. How much? That’s what we’re working on.

We see that the forecast of 80 per cent of jet fuel by 2050 to be sustainable aviation fuel, whereas today we’re using barely less than 1 per cent”

The reason SAF is only used in 0.3% of global jet fuel is because it costs three to five times more than traditional jet fuel. Almost all the demand is in Europe, where it has been subsidised “to encourage carriers to swap kerosene for cleaner alternatives”.

Now, let’s be generous and assume that demand for SAF continues to increase through a combination of subsidies and airfare-hiking mandates. We already grow a lot of canola in Australia, so should the Albanese government subsidise domestic industry to try and tap into that higher value-added market, as Catherine King argued?

Only if we’re happy to pay a high price for a largely symbolic win.

Economists have long warned about the political world’s obsession with manufacturing. For example, here was The Economist magazine a few days ago:

“Jobs, growth and resilience are all worthy aims. Unfortunately, however, the idea that promoting manufacturing is the way to achieve them is misguided. The reason is that it rests on a series of misconceptions about the nature of the modern economy.

One concerns factory jobs. Politicians hope that boosting manufacturing means decent employment for workers without university degrees or, in developing countries, who have migrated from the countryside. But factory work has become highly automated. Globally, it provides 20m, or 6%, fewer jobs than in 2013, even as output has increased 5% by value. For all countries to take more of a shrinking pie is impossible.
…
Another misconception is that manufacturing is essential for economic growth. India’s manufacturing output, as a share of gdp, languishes about ten percentage points below Mr Modi’s target of 25%. But that has not stopped India’s economy growing at an impressive rate. In the past few years China has struggled to meet its growth targets, even as its manufacturers have come to dominate entire sectors, such as renewable energy and electric vehicles.
…
The manufacturing delusion is drawing countries into protecting domestic industry and competing for jobs that no longer exist. That will only lower wages, worsen productivity and blunt the incentive to innovate.”

The Albanese government’s SAF subsidies will likely lead to similar outcomes.

Take the environment. If we truly care about the planet, we should be trying to reduce emissions and pollution in the most cost-effective manner. Are SAF subsidies the least-cost way to reduce emissions? Almost certainly not, or European airlines would be buying fewer carbon offset permits and spending a lot more than the 1–3% of revenue they’re currently investing in SAF.

As for the economic impact, I agree with King that it’s “good for farmers, it’s good for our manufacturing sector, it’s good for sectors like GrainCorp”.

But that doesn’t mean it’s good for Australia as a whole.

Why? While it depends on the relative elasticities of demand and supply, subsidies will increase the price of canola, benefitting farmers, and boost the supply of SAF, benefitting producers like GrainCorp and Ampol. Airlines may also benefit through lower SAF prices—though many of them will be overseas, meaning a share of the benefits will leak abroad.

But there will also be costs:

• First, the money for the subsidy must be taxed or borrowed, which creates what economists call deadweight losses.
• Second, there will be a reduction in the amount of canola available for other goods, such as cooking oil. As a result, the price of it and all related goods (e.g. food) will increase and people will consume less, perhaps even substituting for other oils, raising their prices.
• Third, any farmland diverted to the production of canola because of the subsidy will also raise the price of whatever might have been grown there instead, like wheat and barley.

Producing SAF from canola is expensive. If Australia can’t do it competitively without ongoing subsidies or protective mandates, then we’re not building a globally viable industry—we’re building a government-dependent one.

We also risk creating a perpetual cycle of waste well beyond the $30 million already spent.

Once the SAF manufacturing industry is established, we will have created a concentrated group of lobbyists representing canola farmers and the likes of Ampol and Graincorp, who will inevitably push for perpetual subsidies.

Meanwhile, the dispersed losers—mostly buyers of canola and Australian taxpayers—are rationally ignorant because it’s not worth their time to learn about it and/or counter-lobby against the subsidies.

Put the two together and you get decades of waste, as the long history of the politically entrenched and economically inefficient US ethanol industry—which has distorted land use decisions, raised food prices, and failed to significantly reduce emissions—has demonstrated.

There’s no reason why Australia shouldn’t be involved in the SAF supply chain. But contra Catherine King we don’t need to make everything in Australia, and often it’s better to let others do it. Indeed, if the Albanese government is serious about getting productivity moving—not just optics—then it needs to end such “ridiculous” winner-picking industrial policy and start asking itself what will deliver the most value for taxpayers.

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