The Prime Minister’s visit to China last week with Australian business leaders saw one issue put firmly on the agenda for the ever-evolving Australia-China bilateral relationship: green iron.
Canberra — and leading Australian mining companies such as Fortescue Metals Group and Rio Tinto — see the writing on the wall: the next stage of our export boom should be focused on where we as a nation have a global comparative advantage.
And WA’s iron ore heartland is critical to Australian’s next great export story. We have recently modelled five locations for green iron production in Australia: the Pilbara, Geraldton, Kwinana, Eyre Peninsula and Gladstone.
WA boasts three of the five. This is surely an opportunity that must be seized.
Green iron production locations
The five locations – were selected to reflect a range of renewable energy resources, ore grades, infrastructure access and electricity market conditions. Source: 'A Green Iron Plan for Australia: Securing prosperity in a decarbonising world'
WA’s iron ore heartland is critical to Australian’s next great export story.
Green iron production is a highly energy intensive industrial process, in which iron ore is combined with green hydrogen made with renewable energy. Green iron can then be used to make steel. This process can replace the widely used but highly polluting “blast furnace” process that combines iron ore with coking coal. Fossil fuel based steelmaking contributes nearly 10 per cent of global carbon dioxide emissions.
Most major economies have committed to net zero between 2045 and 2070. It is likely, therefore, that fossil fuel demand will decline sharply over the next few decades.
Australia, as the world’s largest exporter of coal and gas in combination, faces the largest threat to income posed by fossil fuel demand decline.
Coal and LNG were worth about $160 billion in export revenue to Australia in 2023-24. This is about a tenfold increase from the turn of the millennium. If you add iron ore, the value to Australia of these exports is about $300b. The importance of these exports to Australian economic security is obvious.
Fortunately, the same forces that are likely to drive the decline in fossil fuel demand are the same forces that will drive growth in green commodity demand.
Australia has abundant solar and wind that can be harnessed at low cost. Not every country is as fortunate as Australia, which has a comparative advantage in both the fossil and green energy trade.
The value of a large green iron industry to Australia’s economic prosperity can be substantial — we estimate export income building to nearly $400b over time. This will be important for sustained prosperity over the coming generations, contributing significantly to rising incomes and maintaining full employment.
Green iron also offers a large opportunity for Australia to contribute to global decarbonisation. While Australia’s total emissions are about 1 per cent of the world’s total, an Australian green iron industry could abate emissions equal to roughly 4 per cent of the global total. Australia can make an outsized contribution to reducing global emissions and do so in a way that is also in our economic interests.
So what needs to be done?
Follow sound economics, building on particular parts of the Albanese Government’s Future Made in Australia policy.
Work by our institute has demonstrated that three market failures need to be addressed by government for Australia to seize the green iron opportunity.
First, government can level the playing field between green products and fossil fuel products that damage the environment. In a perfect world all countries would price this damage efficiently and the market would guide production to green sources. In the absence of international carbon prices, the Australian Government should support green iron production via a production credit. This would be worth about $170 per tonne of iron and would enable green iron produced in Australia to compete with iron made using emissions-intensive coal or gas. Over time, as the world adopts efficient carbon prices, the need for this support would decline.
Second, early producers of green iron will take risks and produce knowledge that subsequent investors will benefit from. The market will not reward those risks efficiently. The Government should therefore provide capital grants of 15-30 per cent, depending on the nature of the technology used, to early investors in green iron.
A third role for government is efficient provision of critical common user infrastructure. Much of the supporting transmission, pipelines and storage assets needed to produce green iron will be of a scale that is beyond the investment capacity of single producers. Government can provide certainty either by building public infrastructure or underwriting some of the risk of select private investments.
Many call for other steps, such as boosting demand for green iron overseas and waiting for an international carbon price. Our proposals make green iron competitive now; the Government sets the policy framework, and the private sector invests. We need to move fast to ensure we have projects up and running in a few years. Less talk, more action.
Baethan Mullen
Chief Executive Officer
Baethan Mullen has over 20 years of experience in public policy, economics and advocacy. Prior to joining the Superpower Institute, Baethan was General Manager of Economics & International at the ACCC, and led the largest energy efficiency program in Australia as Executive Director at the Essential Services Commission.
Rod Sims
Chair, The Superpower Institute
Rod Sims is Enterprise Professor at the Melbourne Institute of Applied Economic and Social Research, Faculty of Business and Economics, University of Melbourne, and Chair of The Superpower Institute. He previously chaired the ACCC (2011-2022), served as Deputy Secretary (Economic) in the Department of Prime Minister and Cabinet, and Principal Economic Adviser to PM Bob Hawke (1988-1990).
