Understanding Australia’s COP28 through the Profit Lens

As we near the end of 2023, the struggle over living standards, the degradation of the environment and the associated management of the economy are at the forefront of public and household discussion.

Right now there is a long list of possible starting points, ranging from the cost of living and inflation to artificial intelligence and many others. How all of these interact, often contradictory, requires a socialist perspective to understand what is going on, relative to what appears to be.

Australia’s contribution to COP28 and its government’s approach to the requirement for a rapid, democratic, and just transition away from carbons to renewable systems is one such starting point.

Just before COP28, the ALP government released a set of climate information and, a big upgrade of an existing scheme to lift investment in renewable energy supply from 9 gW to 32gW that is a good example of why what’s happening with profitability – not just profits - is so important.

The policy is called the Capacity Investment Scheme (CIS) and has received widespread mainstream endorsement. It appears to be substantial.[1] ([1] The Guardian, The Guardian again, and Renew Economy, for example.)

In brief, “investors” can apply for investment support from government for projects that increase renewable electricity. Approved projects generate a contract in which the “investors” receive funding when revenue is below an agreed “floor”. When (if) revenue goes above an “agreed” ceiling for the project the support received is repaid to the government. The revenue “floor” and “ceiling” depend on an agreed future price worked out in the contract between the investor applicant and the government.  Thus, government – using defined criteria and requirements, including secrecy – underwrites new investment in renewable energy by covering for low and delayed rates of return, and then receives a return when (if) the project is successful. The scheme is set up so that its costs are not passed on to electricity consumers.

The stronger policy reminds us this government takes climate change seriously, even if erratically, as in new coal mines. That is not to be scoffed at, given the prospect of the LNP alternative.

However, it is a policy-oriented to the needs of private corporations, including the established electricity-providing corporations. It is market-driven. Bigger, established corporations will be in the strongest position to use the scheme. The scheme is exclusively for the established grid and thus excludes new and smaller grid proposals that might be based on some form of social ownership – e.g. a cooperative.

Why is this dramatic upgrade in investment subsidies so necessary and why must it be focused on the needs of corporations who are in or who want to get into supplying electricity to the national grid? What are the problems – and opportunities maybe - it presents?

The context:  the profits dynamic

To tackle such questions, we must look beneath the surface to the realities associated with the investment decision in general, and then specifically renewables. For reasons that ought to be obvious, profit is the core of the reality. However, it is the least and worst-discussed dimension of reality in mainstream media.

For a general overview, we start with the volume of profits. Using data from the annual version of Australia’s national accounts provided by the Australian Bureau of Statistics (ABS), we see that for the last 20-odd years the mass of profits has been steadily rising, even faster since about 2016. So, almost certainly, there has been enough profit for renewables investment.

However, that’s not enough because profits exist only in relation to wages. To put it somewhat crudely, for now, profits cannot be made without wages being paid.

The mass of profits relative to total wages is the rate of exploitation. This is not the same as the more commonly used “profit-wages share”, although it uses the same data. The “share” approach dodges the exploitation factor and is therefore inadequate to understand what is going on.

Reducing the rate of exploitation depends mostly on the success of working class struggles to raise wages and other aspects of living standards. Increasing the rate of exploitation can maintain or even increase profit when other factors are not favourable, for example, a short- to medium-term dip in demand. It’s the starting point for understanding inequality, the availability of public funds to substitute for private business failure and, the material justification for forms of public ownership.

Also, it explains the importance of labour laws that rob workers of their “rights” to effective industrial action, entrench division in the working class, and enable competitive gain based on wage suppression. Connecting environmental rescue, such labour laws make sure that workers do not have collective rights to act for the protection of the environment, as they have effectively in our history, starting from within the workplace and industry. The environment as an essential element of living standards is locked out as an industrial issue.

This brings us one step closer to the deeper logic of the CIS. What are the capitalists in general doing with the growing profits they are taking? What is the share of total profit assigned to new, productive investments? (From there we can explore more precisely what companies in the energy production and supply system – established and emerging – are doing.)

The annual (and quarterly) national accounts show a dramatic general fall in this type of investment over the past ten years or so. We could say that business has been on strike when it comes to productive investment, or even more accurately, they have been bludging. (Of course, there are other possible sources of investment besides profits taken but for now, that is a separate story, and in any case is dependent on the profits taken.)

Thus, we see the private sector has failed in general productive investment throughout the period when it has been crucial and obvious to get productive investment into renewables, and, the LNP government was comfortable, even protective, of that failure.

Our final question for now is of course “why?”

Conceptually, the answer is almost obvious: there is not enough profit from productive investment. The social importance plays a faraway second fiddle to the profit requirement. Other actions are easier and better – price gouging, share and money market gambling, spring to mind.

Profitability is the mass of profit relative to the total investment in making the products (or services) and that total is the value of the fixed assets owned by the employers plus the wages they pay so that workers bring them to life.

Finding out about profitability in the Australian context is somewhat tricky because the ABS presentation of the data is in different data tables and forms of measurement.

Commonly, the “rate of return” is used, and there are a couple of versions of this that do have their place in building a complete picture. The more useful is the “rate of return” as profits relative to fixed assets only, even though this approach falls short of the real picture.

One source of Australia’s profitability as rate of return (IRR) is the Penn World Tables. The most recent data shows that the IRR trend is downward.

We need to know whether that is what is happening since 2019. Watch out for more to come.

Australia’s Electricity Supply Industry

Is this general profit story reproduced specifically in the electricity production and supply industry? What is the profit story for Australia’s electricity supply industry, both the established corporations and those trying to get into it through renewables (solar, wind, tidal etc.)?

At this moment, we can’t be sure.

However, recent research by the IEEFA (Institute for Energy Economics and Financial Analysis) suggests that sufficient profits are available for green transition for stronger transition investment, built up since about 2014 by pricing well above what is necessary.[1] 

We need to know whether that is what is happening since 2019. Watch out for more to come.

Australia’s Electricity Supply Industry

Is this general profit story reproduced specifically in the electricity production and supply industry? What is the profit story for Australia’s electricity supply industry, both the established corporations and those trying to get into it through renewables (solar, wind, tidal etc.)?

At this moment, we can’t be sure.

However, recent research by the IEEFA (Institute for Energy Economics and Financial Analysis) suggests that sufficient profits are available for green transition for stronger transition investment, built up since about 2014 by pricing well above what is necessary.[1] 

[1] With thanks to a recent Newsletter from Colin Long, Environment Officer at the Victorian Trades Hall Council.

In other words, the actual profits are price-gouging dependent but may be adequate for strong renewables investment. But that depends on continued government permission to inflate prices for profit purposes and is not happening yet. So, it’s quite likely that even these prices-manipulated profits are not enough to secure profitability relative to the new investment in technology and wages that it requires. 

Left to its own dynamic, the profitability of climate change transition, relative to other options is inadequate.

So, with the CIS (and other programmes) the government rides to the rescue by, in effect, providing an artificial and secure base for an adequate rate of profit back to owners and/or shareholders, including banks.

Chronic instability

Underpinning this is the chronic instability and sluggishness in the capitalist world order, and most of the national and regional economies. Australia has the disease. The two major wars in Ukraine and the Middle East do not look like they will clean out the system, as major wars have done in the past, to kickstart profitability and accumulation once more.

As always, this mess requires that government help the system by protecting and nurturing new profitability possibilities. Even, if successful, that profit dynamic will not be good for the working class – most of the population – in general.

However, blaming government as the prime cause of the problems is not good enough because can lead as much to embracing reactionary and fascist solutions as it might to better “progressive” management in which checks and balances don’t let the system run riot. Building the analysis of government actions into an analysis of the profit dynamic is the best way to confront and reverse the swing to right-wing “solutions” – e.g. in the USA, in Argentina and, eventually, in Australia.

Could it be done better from a working-class point of view?

Every reform of the system so far has sought to protect private profiteering and the assumption that will spin off in a good way for both most of the population and the environment. But that’s not working, so is there something better, including a much more constructive role for government?

The short answer is “yes”. What if that failed and idealistic “logic” was reversed so that every reform introduced and nurtured protected the majority and restored and protected nature, with consequent spin-offs for businesses that contribute to such a socially useful turnaround?

This alternative would have its specific features, along the following lines:

-       The problems we face originate in the core profitability dynamic of the system and our response must tackle some of the consequences, including how government manages it. What we see as corporate greed and bludging are real but originate from that dynamic.

-       Immediate proposals for urgent transition that contain the ingredients for a new dynamic based on democratic planning and public ownership, public appropriation and reallocation of the “profits” in which socially useful investment is the lead criterion. Green transition must be driven by us the people and our democratic organizations not done to us by corporations and government. Thus: no public funding without agreed forms of public ownership.

- Medium-term proposals that pick up and drive further the momentum for various forms of democratic public ownership, including in the industries that interact with electricity generation and supply, especially manufacturing.

-       A strategy and tactics to bring such a platform to life through majority support that fosters collaborative determination willing to confront the character of the system and the corporations that personify it.

So far, the best approach I have seen comes from The Energy Democracy Movement and its associated Trade Unions for Energy Democracy (TUED). The Energy Democracy Declaration can be found here, and a comprehensive explanation of its rationale can be found here. In other words, socialism in a 21st-century ecological form that drives the reversal of all forms of inequality is as relevant as it has ever been. It’s the real alternative to a government that sleepwalks Australia into the arms of its own Trumpian dystopia.