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JOURNAL OF ECONOMIC ISSUES

Vol. XLVII No. 2 June 2013


DOI 10.2753/JEI0021-3624470222

Dissecting the Conjunction of Capitalisms Environmental,


Energy, and Economic Crises: The Example of One Liberal,
Market-Based Economy
Lynne Chester
Abstract: Contemporary capitalism is marked by economic, energy, and
environmental crises. This article explores the interrelationships between these
crises using the example of Australia, one of the worlds highest per-capita carbon
gas emitters. In this paper, I consider key features, impacts, and state policy
responses to these three crises through the lens of Australias institutional
architecture. My finding is that the conjunction of the crises is driven by the
dialectical relationship between the three spheres. I conclude that the state, by
privileging policy responses to the economic crisis, is aggravating the energy and
environmental crises and compounding the economic crisis.
Keywords: Australia, capitalism, economic crisis, energy, environment
JEL Classification Codes: B52, P16, P48

Contemporary capitalism, in all its forms, is finance-driven, highly dependent on nonrenewable fossil fuels for energy, and impacted by climate change (Crouch 2011;
International Energy Agency 2012; Parry et al. 2007). Historically, a defining feature
of capitalism has been its tendency to crisis, given the potential blocking points to
the circulation of capital (Harvey 2011, 101).
The contemporary crisis of capitalism is global and multi-dimensional. This
multi-dimensionality includes (1) the economic crisis, stemming from financial
liberalization and the global financial crisis (GFC); (2) the environmental crisis, of
which global warming has become the hallmark; and (3) the worlds unsustainable
energy use. All three crises arise from the capitalist model of economic growth. Each
crisis has generated considerable discourse in economics, but there has been little
discussion of their interrelationships.
The motivation for this paper, therefore, is to advance an understanding and
explanation of the interrelationships between the environmental, energy, and
economic crises, and the way these manifest themselves within Australian capitalism.
Australia has some of the worlds largest fossil-fuel reserves, emits one of the highest
Lynne Chester is a senior lecturer in the Department of Political Economy at the University of Sydney (Australia).

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Lynne Chester

per-capita shares of greenhouse gases, and has been hailed as an exemplar of energy
sector restructuring. Although emerging relatively unscathed from the GFC, it is a
patchwork economy. Australia is also commonly regarded like the United States,
the United Kingdom, Canada, Ireland, and New Zealand to have a liberal market
form of capitalism, given its high reliance on market mechanisms for coordination of
the economy. These market-oriented economies privilege the market as the most
efficient and cost-effective means of determining price, and frame policies in
conventional economics abstract terms of competition, efficiency, supply and
demand, and the need to address market failures.
The following three sections examine key features, impacts, and policy responses
of each crisis against Australias institutional architecture, which depicts its growth
regime. The analysis reveals a set of financial and market interrelationships that
illuminate the states support for the power imbalance in favor of capital. A final
section concludes that the state is aggravating the energy and environmental crises,
and compounding the economic crisis by privileging policy responses to the economic
crisis. As a result, a pervasive new icon of inequity has emerged from the conjunction
of these three crises.
Economic Crisis
The capital crisis that began in 2007 has progressed from the financial system and the
banks to a full-blown fiscal crisis of nation-states. Austerity measures to reduce budget
deficits have placed a high reliance on expenditure cuts targeting the social wage,
public-sector labor, and environmental programs (see U.S. Appropriations Committee
2011). The impact of the GFC, and the subsequent economic decline, has been
uneven. China recovered from it faster and more successfully than any other nation;
the U.S. recovery faltered in late 2010; the Eurozone countries face ongoing recession
and record unemployment levels; while Australia has experienced growth, albeit at
reduced rates.
In response to the GFC, in late 2008, the Australian government eased interest
rates, guaranteed bank deposits and wholesale funding of Australian banks, and
passed two fiscal stimulus packages (e.g., a cash-payments program for low-income
households and an infrastructure program). In the first half of 2009, there were two
further fiscal stimulus packages directed at both quick-starting mid-scale and largescale infrastructure. During late 2008 and 2009, the state injected into the economy
the equivalent of about eight percent of the Gross Domestic Product (GDP) (Kennedy
2009).
In 2010, Australia embarked on a deficit reduction strategy to restore the
budget to surplus by 20122013. Real growth in government expenditure is to be
held at two percent per annum until the budget surplus is at least one percent of the
GDP (Australian Parliament 2010). This is tantamount to expenditure cuts, given the
projections for the largest budgetary (social wage) expenditure areas of healthcare,
social security and welfare, and education. Cuts have been made to a range of climate
change, renewable energy, and energy efficiency programs (Talberg 2012).1 Publicsector labor has been significantly reduced and new taxation measures implemented.

The Conjunction of Environmental, Energy, and Economic Crises

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The Petroleum Resource Rent Tax (PRRT) was expanded and a new Minerals
Resource Rent Tax (MRRT) applied from mid-2012, although no MRRT was
collected in the first three months and the estimated revenue has been revised
downwards three times since its announcement.2
Australia is currently experiencing its most remarkable resources boom.3
Historically, the country has experienced six terms of trade booms (1880s, 1900s,
1920s, early 1950s, and now) and five resource investment booms (1902, 1971,
1983, 1998, and 2012). The current boom is unique in that both the terms of trade
and the level of resources investment are at historically unprecedented levels and that
these peaks are concurrent (Gregory and Sheehan 2011, 2). Australia has more than
tripled its resources exports in the past decade, and has committed investment in
major resource and energy projects that reached a record level in 2012 (Barber et al.
2012). Nevertheless, the boom has masked the economic crisis confronting Australia.
Starting in 2003, the current boom faltered during 20082009. The initial
phase saw minimal increase in production and value added. The current phase is
showing modest growth in value added. Greater output growth is expected as projects
come on stream during the next decade. Foreign ownership dominates these
projects in the mining and resource sectors, which are predominantly financed by
global markets. Although some labor has been drawn from other sectors due to high
wages, local labor markets have also been minimally impacted. Federal immigration
policies permit the temporary employment of skilled overseas workers, as do the
recent Enterprise Migration Agreements project-specific arrangements to engage
sufficient skilled labor during construction stages.
Mining currently contributes about nine percent to the GDP, which is more
than double since 2004. But this increased contribution has been at the expense of
other industry sectors. Since the beginning of the boom, the Australian dollar
reflecting commodity price movements has rapidly appreciated against the U.S.
dollar, as well as other major currencies, and parts of the Australian traded sector are
exposed to severe and sustained foreign competition. Manufacturing, tourism, and
tertiary education have been particularly impacted, leading to geographically
concentrated levels of unemployment. In addition, the central bank steadily increased
interest rates, both pre-GFC and post-GFC, in response to rising commodity prices.
Australias economy has become dominated by energy production that is
primarily financed offshore and repatriating profits to international owners. World
mineral-commodity prices have surged, causing interest rate rises and appreciation of
the Australian dollar. This, in turn, has reduced the competitiveness of other sectors
and has created a patchwork economy analogous to the Dutch disease. Late in
2012, falling commodity prices threaten the return to budget surpluses and thus
raised the likelihood of further expenditure cuts to the social wage, environmental
programs, and public-sector labor.4
Energy Crisis
Significant changes to technology and economic organization have propelled the scale
and intensity of capitalisms energy use along with transformation of the energy

488

Lynne Chester

regime the arrangements to extract, convert, store, transport, use, and dissipate
waste through the growing domination of non-renewable fossil fuels. Oil, coal, and
gas now meet more than eighty percent of the worlds energy needs. These three fossil
fuels generate nearly seventy percent of the worlds electricity (International Energy
Agency 2012).
Over the last three decades, electricity sectors around the world have been
restructured to purportedly increase competition, reduce government involvement,
and place greater reliance on market-determined pricing and investment. Companies
have been de-integrated with the competitive activities of generation and retail being
separated from the monopolies of transmission and distribution. Some governmentowned electricity companies have been privatized. New forms of regulation have
created wholesale and retail markets, and determine the charges for monopolynetwork services. But there has been no universal adoption of these policies, with the
most consistent change being de-integration of monopoly suppliers.
Capitalisms insatiable appetite for non-renewable fossil fuels and the radical
restructuring of electricity sectors has created an energy crisis. The core dimensions of
energy security adequacy of capacity, availability of supply, affordability, and
sustainability are threatened.
Australia produces around three times more primary energy than it consumes. It
is the worlds largest coal exporter and the third-largest uranium producer. The
country is also expected to become the worlds second-largest exporter of liquefied
natural gas, but it is presently a net importer of liquid fuels. Coal and oil dominate
primary-energy consumption, which has more than doubled in the last thirty years.
Electricity generation, transport, and manufacturing are Australias three largest
energy users. Fossil fuels generate ninety percent of Australian electricity (seventy-five
percent from coal and fifteen percent from gas), contributing nearly forty percent to
Australias greenhouse gas emissions. The Australian electricity sector has been hailed
by the International Energy Agency as a role model, having implemented the full
suite of key policy instruments (de-integration, privatization, a mandatory wholesale
market, retail competition, as well as regulation of transmission and distribution).
Competition has increased and there is less government ownership of electricity
assets. However, new regulatory regimes, governing wholesale and retail markets, have
created a stronger regulatory role for government. In addition, like restructured
electricity sectors elsewhere, Australia is exhibiting outcomes contrary to the
proclaimed benefits. There has been a rapid escalation in household electricity prices,
primarily caused by substantial increases in regulated network charges for investment
in peak capacity and asset replacement. In some Australian States, average household
prices rose by more than one hundred percent during the 20072012 period, causing
widespread poverty and deprivation for low-income households (Chester and Morris
2011). In addition, generators are price-makers, with wholesale prices being set by the
exercising-of-market power as well as by the strike price of electricity derivative
contracts. Wholesale price volatility is consistently occurring at less than maximum
demand levels, with the volatility created by permitted market rebidding practices by
generators. Investment in new generation capacity is not being stimulated by

The Conjunction of Environmental, Energy, and Economic Crises

489

wholesale prices, and forecasts have consistently over-estimated future demand levels.
Trading of electricity derivatives has reached nearly five times the demand for
electricity as intermediaries, owning no generation assets, emerge as dominant players,
and generators and retailers re-integrate (Chester 2012a, 2012b).
The Australian federal governments Energy White Paper 2012 promotes the
expansion of energy-resource exports to Asia, the development of gas for domesticelectricity generation, and the strengthening of energy-market institutions. The
Council of Australian Governments has subsequently endorsed a number of marketbased electricity sector measures such as de-regulation of retail prices, national
adoption of smart meter technology, time-of-use pricing, demand-side participation
for big users, in addition to changes to the regulation of network charges.
These are the dynamics and characteristics of Australias energy crisis. Reliance
on market solutions has created this crisis. Long-term electricity generation from fossil
fuels is unsustainable. The adequacy of future electricity supply and its availability to
meet growing demand is under threat, because investment is not being stimulated.
Moreover, electricity has become increasingly unaffordable for more and more
households. Further and substantial electricity-price increases are imminent as lowincome households suffer poverty and deprivation as they struggle to pay their energy
bills.
Environmental Crisis
Ecological degradation has escalated with the evolution of capitalism. Air and water
pollution, deforestation, desertification, soil erosion, biodiversity loss, and global
warming dominate the ecological legacy from the conjunction of capitalisms
widespread use of fossil fuels, technological change, industrialization, mass
production and mass consumption, and globalization.
The extraction, transport, processing and delivery of fossil fuels the prime
contributors to carbon emissions have led to irreversible environmental impacts.
Oil spills, leaks, blowouts, and fires have damaged fisheries, farms, oceans, and
marine life. Petrochemicals, derived from oil, are toxic pollutants and generate
durable waste through the creation of plastics. There is also land waste and
contamination from coal mining, combustion, and slag disposal. Logging practices
have cleared tropical forests. Car manufacturing has stimulated metals and rubber
production with attendant air, land, and water impact. Nuclear energy waste remains
deadly for thousands of years. Genetic modification has impacted pest control,
fertilizers, recycling, and animal cloning. Globalization has also led to the
commodification of nature and the transformation of rainforests and wilderness to
meet world demand (Chester 2010).
This is capitalisms relation to nature. Capitalism requires nature as an
indefinite resource and condition of production (OConnor 1998). But the drive to
accumulate causes environmental destruction, imposing costs that threaten
profitability and ongoing accumulation. The response of capitalism has been to treat
each manifest problem as a commodity and to regard markets as the optimal solution

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Lynne Chester

for each problem. Supranational institutions, like the United Nations Framework
Convention on Climate Change, have been created to promote economic growth as
mandatory for environmental improvement. Concurrently, scientific evidence about
global warming from ecological degradation and has led to climate change becoming
the hallmark of contemporary environmental concern, particularly the damaging
effect of greenhouse gas emissions arising from the use of fossil fuels. This has led to
the development of markets to trade carbon and renewable energy sources.
Australia accounts for less than two percent of global carbon emissions,
although per-capita emissions are the third-largest of all OECD countries and nearly
twice the OECD average (Australian Bureau of Statistics 2010). The high per-capita
carbon emission rate is strongly attributable to the dominance of coal in electricity
generation (seventy-five percent), with every Australian household and business
dependent on electricity. Carbon accounts for almost three-quarters of Australias
greenhouse gas emissions, which are at their highest level, causing temperatures to be
about a degree warmer than a century ago (Australian Government 2012).
Political indecision on climate change has marked the period since 2007, when
it became a major community concern. The former Federal Conservative
Government announced its intention to establish an emissions trading system (ETS),
but no targets were defined. Following its 2007 election, the Federal Labor
Government ratified the Kyoto Protocol and appointed a Minister for Climate
Change. A Green Paper for a Carbon Pollution Reduction Scheme (CPRS) and The
Garnaut Climate Change Review were released in 2008. A renewable energy target of
twenty percent of electricity from renewable sources by 2020 was implemented.
Complementary programs have also been introduced, although some such as the
green-loans program and home-insulation program were abandoned at considerable
cost in 2010, following disastrous implementation. Others, such as the solar rebates,
have ceased to provide savings and restore the budget surplus.
The CPRS proposed weak mitigation targets and generous assistance to the
biggest emitters the coal-fired electricity generators through free permits to
continue their emissions over ten years. The CPRS was abandoned in 2010 after the
legislation twice failed to pass the Senate.
In 2011, the Clean Energy Package (CEP) was announced. Comprising a
plethora of programs and new regulatory institutions, the CEPs key elements are: a
carbon tax from mid-2012 to be replaced by an ETS in 2015; tax cuts and cash
payments for low and middle-income households to compensate for electricity price
impacts; seed funding for a Clean Energy Finance Corporation to commercialize
renewable and low emissions technologies; and financial assistance to the electricity,
coal, steel, and manufacturing sectors. Free carbon permits and cash payments are
being provided to coal-fired electricity generators that, in turn, must submit annual
investment plans for new capacity and reduction in emissions intensity of existing
plants. In addition, the federal government proposed to purchase 2,000 megawatts of
high emissions-intensive generation capacity, but this measure was abandoned in late
2012. The proposed floor price for the ETS was also abandoned, so that it could be
linked to the European ETS. Finally, Australia agreed in late 2012 to a second
commitment period of the Kyoto Protocol.

The Conjunction of Environmental, Energy, and Economic Crises

491

Implications of the Conjunction of the Three Crises


Table 1 synthesizes the key features, impacts, and policy responses of the three crises
against the institutional forms of Australias mode of regulation, from which broader
conclusions can be drawn. Capitalisms insatiable quest for accumulation generates
significant economic crises, the most recent being the GFC. This quest, driven by the
use of fossil fuels for energy, has also caused ecological and energy crises. The process
of accumulation is the origin of all three crises.
Figure 1 depicts the interactions between the three crises and the role played by
financial and market interrelationships. Financial market liberalization led to
financial derivatives that, in turn, led to the GFC and the subsequent austerity
measures. Energy-market liberalization also led to electricity derivatives, as well as to
threatening longer-term supply and increasing unaffordability for households who are
also impacted by the austerity measures.
Capitalisms high reliance on carbon-emitting fossil fuels led to carbon trading
markets and the emergence of carbon derivatives. In addition, the state has
introduced green programs to curb carbon emissions, although these, too, have been
impacted by austerity measures.
By privileging policy responses to the current economic crisis, the state is
aggravating the energy and environmental crises that, in turn, pose new threats to
recovery from the current economic crisis. This is the conjunction of the three crises,
driven by the dialectical relationship between the economic, energy, and
environmental spheres, each significantly (re-) shaping the other two.
Figure 1. The Conjunction of Capitalisms Economic, Energy, and
Environmental Crises
Financial derivatives
GFC/economic crisis

Financial market
liberalisation

Austerity
measures

Electricity
derivatives
FINANCEDRIVEN
CAPITALISM
WITH HIGH
ENERGY USE

Energy market
liberalisation

Household
unaffordability

Threats to supply
Carbon derivatives

Carbon emissions/
Environmental
degradation

Carbon trading
Green programs
emissions

Money and finance: Policy and operational independence


of central bank. Monetary policy used to fight inflation and
scrutiny by financial market. Long-term decline in interest
rates. Price stability (inflation target of 2-3% p.a.). High
capital adequacy requirements for banks. Single prudential
regulator. Four-pillar bank policy and banks too small to
expand globally. Financial sector largely composed of
domestic banks.

Wage-labor nexus: Heavily regulated decentralized wage


bargaining system. Growing dominance of individual
employment contracts, instead of collective bargaining,
since 2000. Falling trade union density from 43% to 18%
19922011. 25% of all jobs part-time by 2011. Persistent
unemployment and labor under-utilization. Increasing
private provision of social wage. Welfare system pared back.
Escalating housing debt and house prices/housing stress.

Institutional Form

Ecological crisis: Federal government seed funding for Clean Energy Finance
Corporation to commercialize renewable and low emissions technologies.

Energy crisis: Rapidly growing markets in electricity and carbon derivatives.


Intermediaries (e.g., financial institutions) trading in derivatives.

Economic crisis: Global markets predominantly finance resource boom projects.


Interest rates increases in response to rising world commodity prices.

Ecological crisis: Carbon tax levied since July 2012. Cash payments and tax
cuts to low and middle-income households for electricity price impacts.

Energy crisis: Over 100% increase in average household electricity prices


(in some states) in 20072012. Low-income households suffering poverty
as increasing proportions of disposable income needed to pay energy bills.

Economic crisis: High levels of regionally concentrated unemployment.


High wages in mining sector deprive other sectors of labor.

Key Features, Impacts, and Policy Responses

Table 1. Australias Mode of Regulation and the Three Crises

492

Source: Adapted from Chester (2012a)

Form of the state: Proactive and market-enhancing state.


New forms of regulatory intervention and range of new
institutions created. Little public investment in social and
economic infrastructure. 6% of national budgetary
expenditure on defense. New forms of social regulation
(e.g., income management, intervention in indigenous
communities).

International position: Adhesion to free trade principles.


Increasing global integration via trade and financial markets.
Finance and investment promoted by international alliances
such as WTO, OECD, APEC, and bilateral FTAs.
7 FTAs and 8 being negotiated. High reliance on exports of
minerals, energy and agri. products, and manufactured
imports. Trade deficits from 1980s to late 2000s.

Competition: Legislative restriction of concentration.


Predominance of oligopolistic competition (e.g., media,
banking, grocery retailing, utilities, domestic airlines).
Increasing market concentration in all sectors. Increasing
sector specific and national regulation of economic activity
to improve competition.

Ecological crisis: 20% renewable energy target for electricity by 2020.


Carbon tax from mid-2012 to be replaced by ETS in 2015.

Energy crisis: 2012 Energy White Paper promoting further market solutions
and greater use of gas.

Economic crisis: Fiscal policy pro-cyclical until GFC. Surplus to be restored


through expenditure cuts. New resources taxes not generating revenue.

Ecological crisis: Carbon trading scheme linked to the European Union ETS.
Agreement to second commitment period of Kyoto Protocol.

Energy crisis: Role model for electricity sector restructuring. Like sectors elsewhere,
outcomes contrary to proclaimed benefits.

Economic crisis: High exchange rate driven by world commodity prices. Energy
production geared to export markets dominating the economy.

Ecological crisis: Free carbon permits and cash payments to coal-fired generators;
financial assistance to manufacturing, coal, and steel sectors for carbon price impacts.

Energy crisis: Regulated network charges driving household-electricity-price


increases. Generators exercising market power.

Economic crisis: Foreign ownership dominates mining and resources sector.


Resources boom has created a two-speed economy.

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Lynne Chester
Notes

1.
2.

3.
4.

Expenditure cuts have been made through reducing forward estimates, terminating programs,
deferring program commencement, and/or not implementing announced policies. In 2011, some of
these cuts were used to fund reconstruction following the unprecedented flooding in Queensland.
The federal government proposed a Resource Super Profits Tax (RSPT) for all mining and
petroleum companies. Following a political campaign by business, a change of prime minister, and
extensive consultations, the RSPT was reformulated into the MRRT, only applying to iron ore and
coal companies with annual profits exceeding fifty million Australian dollars. The existing PRRT was
extended to all onshore oil and gas projects (including coal seam gas).
A resources boom refers to the situation when, as a share of the GDP, the terms of trade (the ratio of
export-to-import prices), or the level of resource investment, are well above their long-term trend.
Falling commodity prices will reduce government budget revenue from company tax, the MRRT, the
Goods and Services Tax, and capital gains tax.

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