The following is an edited extract from the Centre for Policy Development's newly released e-book, More Than Luck: Ideas Australia needs now, edited by CPD Director Miriam Lyons and author and CPD Fellow Mark Davis.

Australia has had a dream run since the end of World War II, built on our natural wealth. Despite the occasional hiccup, our economy has expanded year after year, with increasing prosperity. Much of our success has been built around supplying agricultural products and raw materials to the expanding economies of the world, particularly in Asia – initially Japan, then Korea and south-east Asia, now China and India.

Understandably, we are proud of being world leaders in agriculture, mining and processing, but we have also created a strong and vibrant society in many other areas, all built around a capitalist, market economy model.

Our resource base is formidable and expanding. Not only do we have substantial energy resources of gas and coal, but we have the world’s largest uranium and thorium resources and enormous untapped renewable energy – solar, wind, ocean, geothermal and bioenergy. Beyond that, iron ore, other metalliferous minerals and agricultural assets abound.

However, that bounty may well become our Achilles heel unless carefully managed. Much of our exports are carbon-intensive – thermal and coking coal, alumina, natural gas, with coal being the largest export earner of around $36 billion in 2009-10. Our domestic energy system is highly carbon-intensive, largely a result of readily available and inexpensive coal. Our carbon emissions are correspondingly high, around 19 tonnes CO2 per capita in 2007 – among the highest in the world.

A weak point is oil, where Australia has a particular vulnerabilty. We are around 50 per cent self-sufficient in oil, a situation that is declining rapidly unless new discoveries save the day, which seems unlikely. We rely on long supply lines from Asian refineries for around 85 per cent of our daily product use, offset by high exports.

We do not comply with the requirements of IEA membership – to maintain a 90 day net-import strategic petroleum reserve – relying instead on operational stocks and just-in-time delivery. With a small, geographically dispersed population in a large land mass, we are heavily dependent on transport fuels.

The cost of our oil and gas imports is now close to twice our oil and gas exports, with high coal exports saving the day. This will represent an increasing burden on our current account deficit as our level of self-sufficiency declines.

Despite this vulnerability, peak oil is not on the federal government's agenda. While some state governments have taken it seriously, studies at the federal level have been dismissive, even though it may have far more impact in the short term than climate change.

If the world now moves rapidly to a low-carbon footing due to climate change, while facing increasing oil scarcity due to peak oil, many of our traditional advantages turn into major strategic risks – that is risks beyond our control which have the potential to fundamentally change our way of life, and undermine our economic strength.

Whilst our raw material exports will not cease overnight, given likely strong demand from the developing world, a worldwide shift toward low-carbon alternatives will seriously disadvantage Australia if carbon sequestration technologies fail. Similarly, we may not find it that easy to secure the oil imports we require. Domestic alternatives, based on our coal and gas resources, such as Coal-to-Liquids (CTL) and, to a lesser extent, Gas-to-Liquids (GTL) technologies are likely to be expensive and environmentally damaging.

In agriculture, Australia is already experiencing the impact of changing temperature and rainfall patterns, which may well be the result of human-induced climate change, with serious drought in many areas and an overabundance of rainfall in others fundamentally altering farming patterns and water supply. 

As the Garnaut Review pointed out: "Australia has a larger interest in a strong mitigation outcome than other developed countries. We are already a hot dry country; small variations in climate are more damaging to us than to other developed countries."

On the positive side, we have enormous undeveloped renewable energy resources, and there is great potential for the biological, as opposed to geological, sequestration of carbon, which has substantial benefits for agriculture, and possibly for our coal industry.

A Janus nation

The  scenario, of rapid climate change combined with the onset of peak oil, while becoming part of mainstream thinking overseas, is still regarded as extremism in Australia, and not as part of the "official future."

Ironically, we have some of the best scientific and analytical advice in the world on the implications of climate change and energy supply, in studies such as the Garnaut Climate Change Review and extensive work by the CSIRO and other bodies. They indicate the need for rapid change – advice which is blithely ignored.

On the other hand, the vested interests defending the status quo, particularly those linked to some sections of the resource industries, are among the strongest in the world – which is not surprising, given the importance of those industries, historically, to the development of Australia and the resulting power they have accrued.

The resistance to accepting the implications of climate change is well documented. At virtually every turn in the tortuous path of climate reform over the last two decades, the vested interests have dominated, determined to slow reform, maximising compensation and escape clauses, without regard to the longer-term implications. Gradually, as the evidence has mounted, outright denial has given way, publicly, to grudging lip service to the need for action while, privately, delaying tactics continue.

Successive governments have either not believed the science, or have been brow-beaten into adopting minimalist reform agendas, which are largely meaningless in the context of the real problem. Statesmanship and leadership are notably absent.

Environmental NGOs have, in the main, opted to work "in the government tent," finessing a minimalist reform agenda rather than insisting on meaningful reform, on the basis that it is better to get something started and then modify it, than do nothing at all. But the history of major reform in Australia is that, once implemented, it takes at least a decade to make significant change – a decade we no longer have.

The abject failure of that strategy has been demonstrated by the backsliding of the federal government post-Copenhagen, in shelving their emissions trading scheme while other countries move forward.

Other sectors of business are taking a far more positive approach to the changes and opportunities ahead and are acknowledging the risks of inaction. From all sides though, comes the demand for certainty to facilitate investment decisions. But "certainty" if based on the wrong definition of the problem, is bound to unravel rapidly.

Meanwhile the resource sector, buoyed by bullish forecasts of coal and gas demand from organisations like the IEA, is forging ahead with fossil fuel developments. These include the doubling of coal exports over the next 20 years, the expansion of LNG exports and the establishment of a coal-seam gas industry with major investment in mines, railways, ports and processing facilities. There are however no proven means of sequestering the associated carbon emissions.

The investment in alternative clean energy is minuscule in comparison. The strong research capability which Australia developed in many renewable energy areas has departed to more fertile investment climates overseas.

Our great strategic error

So, Australia ends up in the worst of all possible worlds. The science is clearly indicating the need for radical emission reductions. The vested interests ignore these calls, continue to undermine any sensible reform and, by special pleading, render ineffective even the minimalist reform proposed in the interests of short-term advantage.  In the process, sound policy instruments such as emissions trading are discredited due to the political horse-trading of governments as they bow to vested interest pressure. 

Lack of certainty on a carbon price stunts the growth of fledgling alternative energy industries, stifles consumer behavioural change and, combined with conflicting regulatory measures, leads to non-optimal short-term investment decisions.

Business demands leadership from government while, with a few notable exceptions, showing none itself, and both main political parties lack the stomach to take on the vested interests. So we fall back into the comfort zone of our dig-it-up and ship-it-out high carbon mindset. In so doing, we are making arguably the greatest strategic error in Australia’s history.

For while Australia is moving backwards on climate change reform, the rest of the world is accelerating. The Chinese, other Asian countries, Europe and the US are all now vying for leadership in the low-carbon economy. A decade hence, with the climate science better understood, it is likely that the incremental demand for our high-carbon products will evaporate and the bullish IEA demand forecasts, yet again, will never eventuate.

Australia, at that point, will be left with a large inventory of stranded assets, minimal investment in low-carbon alternative energy and little resilience to weather the impact of both climate change and peak oil.

The irony is that Australia has some of the best low-carbon resources and opportunities in the world, which we seem determined to ignore.

The time has come for a radical re-think of our strategy for the 21st Century. However it is not good enough just to tinker at the edges of current discredited environmental and energy policies – root and branch surgery is needed.  Furthermore, this must be done on an integrated, sustainable basis – what is the realistic carrying capacity of Australia given the societal, environmental and economic pressures likely to confront us?

The pre-requisite is vision and an honest acceptance of the challenge we face.

Ian Dunlop is one of 21 contributing policy experts selected to provide informed analysis of the big issues facing Australia for More Than Luck: Ideas Australia needs now. His chapter is called "Facing our limits."