In this vast, burned continent, where the sun shines seven out of 10 days and anticyclones pump wind steadily out to sea in winter and on to shore in summer, Australians sate their rapacious hunger for energy by digging underground and fouling the air.

Where solar cells and wind turbines would seem to make complete sense, power lines stretch back to grids powered by the nation’s vast reserves of coal that even under new energy policies unveiled this week by Prime Minister John Howard will continue to underpin the economy for as long as anyone can see.

The reason is simple: while renewable, clean, sources of energy are available, they are not cheap enough nor yet sufficiently profitable to replace industries that directly employ 120,000 Australians and earn more than A$24 billion ($26.3 billion) in exports.

“It is not in Australia’s interest to lock up and leave undeveloped our natural resources,” Howard said. “Renewable energy sources such as wind and solar power will play a part in meeting growing energy demands – but for the foreseeable future coal, oil and gas will meet the bulk of Australia’s energy needs.”

It is a position that has dismayed environmentalists and the emerging renewable energy industry, infuriated even further by plans to provide big fuel tax cuts to high energy users such as construction, mining, farming and road transport.

“This statement contains no long-term target to cut greenhouse pollution, no long-term target to boost renewable energy and no long-term plan to control spiralling pollution from the energy and transport sectors,” said Australian Conservation Council executive director Don Henry. “In addition, spending on measures to benefit dirty polluters is more than twice that on clean, renewable energies.”

Australia has all the ingredients for a green economy: more than 3000 hours of sunshine a year across most of the continent, equating to 70 per cent of possible cloud-free days; steady winds that rise in average speeds to Perth’s 16km/h; tens of thousands of tonnes of agricultural plant waste to convert to energy, such as the bagasse left after cane is cut for sugar production.

But the production of renewable energy has barely increased over the past 25 years. Excluding a relatively modest contribution from hydro-electric power, for example, most of the electricity from renewable resources is generated by bagasse, equivalent to about 0.2 per cent of total electricity output.

Less than 9 per cent of electricity in Australia is produced from dams, geothermal, solar or other forms of renewable energy: slightly more than the United States, but well behind New Zealand’s 73.5 per cent or Canada’s 60.4 per cent, and about half the OECD average.

But just as hydro-electricity made such sense for New Zealand, Australia’s huge reserves of fossil fuels made coal, oil and gas the obvious answer. The nation’s economy is now locked into resources that include the world’s sixth-largest reserves of black coal and 20 per cent of the globe’s brown coal.

This is also the reason why Canberra has joined the US in refusing to ratify the Kyoto protocol on climate change. Australia believes its mining energy industries would be crippled because other fossil fuel producers and users have not signed up. “We will not ratify something that does not encompass the world’s largest emitters [of greenhouse gases],” Howard said.

But for all the disappointment of advocates of a green economy, Howard’s statement this week unveiled innovative and potentially lucrative measures that even with present restraints could in time carve a significant niche for renewable energy.

Howard’s strategy will take two main paths – cleaning up the present fouling of the environment by coal-dominated energy industries, and the development of new technologies to exploit the sun, wind, biomass, and even hot spots under the earth’s surface.

The vision runs from vast pools of carbon dioxide stored in underground reserves to “solar cities” powered increasingly by the sun and housing their populations in highly energy-efficient homes.

Central to this is a new A$500 million fund to boost the development of energy supplies with the potential to reduce greenhouse gas emissions by at least 2 per cent. Embracing both CO2 reduction in fossil fuels and new sources of renewable energy, the Government predicts the fund to kick-start further investment of A$1 billion by private industry.

The largest slice of this fund is expected to flow to geosequestration, which envisages separating CO2 from coal-fired electricity production and other fossil fuel-powered industries and pumping it to underground storage in exhausted petroleum reservoirs or similar formations.

The technology is already being developed. Green Pacific Energy, which is at present building green waste-powered electricity plants in Australia, is using a process called coal gasification in Dalian in northeastern China, capturing CO2 before it is burned.

Carbon dioxide is already regularly separated and piped for up to 1100km in American oil recovery plants, and the concept of storing it underground is being developed by a project called COAL 21 in Australia and the US$1 billion Futergen Project in the US.

In Australia, scientists are looking for sites they call ESSCI: an acronym for “environmentally sustainable site for CO2”, but also a play on Esky, the tradename for the portable chillers that keep food and drinks cool at barbecues across the nation.

With a required depth of more than 800m, potential reservoirs have been identified between Newcastle and Wollongong in New South Wales, Victoria’s Latrobe Valley, and other regions of South Australia, Queensland and Western Australia. Together, they have the potential to store the nation’s CO2 emissions for the next 1600 years.

But there are doubters. Critics warn it is an expensive and untested technology that will be confined to new coal-fired power stations and oil and gas platforms, missing other major sources of greenhouse gases. They also worry about leakage. While advocates say the reservoirs to be used have already successfully stored gas and oil for 20 million years or more, and that CO2 could dissolve or react to form new, stable minerals, others warn of dangers from earthquakes or other subterranean shocks.

A study by the University of NSW’s school of electrical energy said the proposal risked slow, long-term escape of CO2 into the atmosphere, a sudden, vast release of gas that could asphyxiate humans, animals and plants, or leaks that could contaminate water supplies.

Beyond fossil fuels and underground CO2 storage, Canberra has already set aside A$203 million in the May budget for other greenhouse projects, and the new low-emission technology fund also aims at renewable energy from wind, sun and plants.

The key is the mandatory renewable energy scheme, which guarantees a 2 per cent share of the national energy market for green generators by requiring retailers to buy energy from renewable sources.

Although critics question such a low target, the Government maintains its policy will generate investment of A$1 billion in green energy and lift production of renewable electricity by 60 per cent this decade.

Scientists already have some radical proposals. One is “hot rock” energy, already used on a small scale – powering the Canberra headquarters of Geoscience Australia, for example – and now being developed in a large-scale project in South Australia’s Cooper basin.

Hot rock power taps into heat trapped deep below the earth’s surface. Water is pumped down and through layers of rock heated at about 250C, returning to the surface as steam to power electricity generators. Researchers believe South Australia’s hot rocks could produce 50 times more electricity than the huge Snowy River scheme.

Solar and wind energy will also benefit, although their contribution to national power production will remain small. Key programmes in the Government’s new policy will include the “solar cities” project, initially targeting Sydney and Adelaide to trial sun power and increased energy efficiency.

But for a continent drenched in sun and rich in wind, Canberra’s vision is limited.

Professor Andrew Blakers, director of the Australian National University’s centre for sustainable energy systems, has estimated that solar technologies, if developed, could entirely displace Australia’s fossil fuels within 50 years.

As advances emerge – such as the ANU’s new Sliver Cell, which reduces the use of expensive silicon in solar panels by 90 per cent – costs are plummeting. In a country with sophisticated and highly efficient agricultural industries, plants also hold serious potential. The sugar industry, for example, believes the conversion of its waste bagasse to electricity or ethanol could help to underwrite its otherwise dubious future. Plantation timber producers see similar gains.

Electricity producer Green Pacific Energy has built what it claims to be the world’s first green waste-to-energy plant at Stapylton, near Brisbane, and plans others for Morwell in Victoria, Bell Bay in Tasmania, Kemerton in WA and Nowra, NSW.

But Howard remains unconvinced: “Solar, wind, geothermal and biomass all show great potential as sources of electricity. But the high cost of renewable electricity options remains a barrier to their wider use.”