Economic Activity and the Environment 2018

The NSW economy is shifting to a less resource-intensive, services-based economy. A steady reduction in the resource and carbon emissions intensity of the NSW economy over time shows that economic growth does not necessarily have to be achieved at the expense of the environment.

Since 1990, the NSW economy has sustained positive annual growth of almost 2.6% per annum. Gross State Product has increased in real terms by close to $23,000 per capita over the same period.

The health of the NSW economy is strongly linked to the environment and the natural resources and ecosystem services it provides. However, over the past 30 years the NSW economy has been shifting from a more resource intensive industry base, to a service-based economy that has reduced environmental impacts.

Environmental-economic accounts which supplement conventional economic accounts are emerging as a focal point for the systematic collection of integrated environmental-economic information. These accounts can enhance decision-making by enabling environmental factors to be considered in decisions that traditionally have been based on economic factors alone.

The NSW Government employs a range of economic tools to manage its environmental resources, including cost-benefit analysis, market-based instruments and program evaluations.

Economic instruments such as levies or taxes, subsidies, tradeable permits and performance-based regulatory charges utilise market-based responses to offer a more flexible way to meet environmental quality objectives than traditional regulatory approaches. The recently-introduced container deposit scheme is a major initiative that relies on a market-based scheme.

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The economy is intrinsically related to the natural environment. This interaction is not simple, with different sectors of the economy having different levels and types of environmental impacts.

Economic growth (i.e. the increase in the production of goods and services in an economy over time) is influenced by various factors, including population growth, improved productivity, new technologies and growth in human capital (e.g. higher educational levels).

While population growth can affect the environment through increased consumption, resource use and waste production (see the topic), factors such as improved productivity and new technologies can reduce the resource intensity of goods and services (i.e. the same amount can be produced with fewer resources). Environmental impacts will also depend on whether an economy uses domestic or imported resources, and whether the goods and services that are produced are consumed locally or exported.

Environmental-economic accounts, which are still at an early stage of development and use, can potentially enhance the conventional system of economic accounts (the System of National Accounts) by extending them to apply to aspects of resource management from an environmental perspective. Changes in underlying natural resource wealth and environmental quality resulting from economic activity are excluded from conventional accounts, occurring outside the market, but can be included in environmental-economic accounts.

In 2018, a suite of national level environmental-economic accounts was released by the Australian Bureau of Statistics (ABS) which included:

• water consumption
• energy consumption
• greenhouse gas emissions
• waste generation.

NSW information on these issues is described later in this topic, or in other topics of this report (see the topics , , and ).

NSW has the largest economy in Australia, contributing around one-third of national economic output in 2017. Between 1990–91 and 2017–18, the economic output of NSW doubled. Over that period the NSW economy has sustained positive growth of real Gross State Product (GSP) of around 2.6% per annum, on average (see Figure 2.1).

GSP per capita increased by approximately $23,750 in real terms between 1990–91 and 2016–17, reaching $73,537 in 2017 (ABS 2018a, Table 1).

For the three year period covered by the latest State of the Environment reporting cycle, the average annual increase in economic growth was 3.3%, with business investment growing at 4.9% and employment at 2.7%, all recorded from July 2015 to June 2018 (ABS 2018a Table 1 & Table 2, ABS 2018a Table 4; ABS 2018b).

Structural change in the economy

NSW is primarily a service-based economy, with services contributing more than 70% of GSP in 2017–18 (ABS 2018a, Table 2).

Using chain volume measures to assess total industry gross value added (GVA), the five largest industries in NSW in 2018 were:

• finance and insurance (12.7%)
• professional, scientific and technical services (8.6%)
• construction (7.9%)
• health care and social assistance (6.5%)
• manufacturing (5.9%).

Over the past 30 years the NSW economy has been shifting from a resource intensive economy based on mining, manufacturing and agricultural production, towards the services and technological sectors. These sectors are less dependent on the use of natural resources and typically involve lower environmental impacts than primary and secondary industries.

While manufacturing remains a major sector in the NSW economy, it has not kept pace with the rest of the economy. Since 1990 it has remained relatively flat, with a recent up-turn inconsistent with a declining trend that started in about 2005.

The next slowest growing sector is utilities, with electricity, gas and water services growing by only 22.3%. By contrast, over the same period the financial and insurance services sector grew by over 223%, overtaking manufacturing as the State's largest sector in the year 2000. Information, media and telecommunications is the fastest growing sector, with real growth of 262%. Agriculture, forestry and fishing grew by 65%, while mining grew by 181% (ABS 2018a, Table 2).

The way that economic growth affects greenhouse gas emissions and energy use over time is indicative of the changing relationship between economic activity and its environmental effects, including resource use. Figure 2.2 contrasts the change relative to 1990 levels for a range of performance measures – economic performance (measured as GSP), population growth, greenhouse gas emissions and total energy use. Since 1990, real GSP has grown at an average annual rate of 2.6%, suggesting that the residents of NSW have become more affluent. Over the period until mid-2017, population growth has occurred at a substantially slower rate than economic growth, averaging 1.1% (ABS 2018a Table 4; 2018c).

While the key drivers of economic and population growth have both continued to grow steadily, total carbon emissions have been steadily declining (see Figure 2.2). The pattern is less regular for energy consumption which has largely grown at about the same rate as population, before declining from around the start of this decade.

Figure 2.3 shows the change over time in the carbon emissions intensity and the energy intensity of the NSW economy; that is, the emissions produced, or the energy used for each dollar of GSP.

Relative to economic activity, both carbon emissions production and energy use have declined notably between 1990 and 2017. Carbon-equivalent emissions per dollar of GSP have fallen by about 60%, to about 40% of their 1990 levels. Energy use per dollar of GSP has fallen at a lesser rate to about 60% of 1990 levels. This suggests the NSW economy has been ‘decoupling’ from carbon emissions production, in particular, but also from energy use, so that less energy is required, and lower emissions are produced, for every dollar of economic activity.

Sustained economic growth relies on energy for the production of goods and the delivery of services. While NSW’s population and economy have grown, energy consumption has fallen (see the and topics). Electricity consumption and generation has been and continues to be affected by a broad suite of factors, including:

• adoption of more energy efficient technologies (see above and the topic)
• a significant, industry-led transition towards low-emissions, renewable energy sources in NSW to generate electricity (see the topic)
• greater consumer engagement and attention to energy use and cost, including increasing the amount of generation for own use.

As noted above, the economy has been restructuring away from the production of goods towards the production of services, which typically requires less energy per dollar of value added. Figure 2.3 above shows that emissions from the energy sector per dollar have also fallen since 1990, with this decline matching the reduction in energy intensity quite closely.

Additionally, the mix of energy sources continues to transition toward renewable sources, reducing emissions per unit of energy generated. Finally, energy prices are stabilising.

Figure 2.2 above shows that total energy use has fallen from the start of this decade, while Figure 2.3 also shows that energy emissions dipped below energy intensity from about this time. This corresponds with a downturn in economic activity due to the global financial crisis, but more significantly the rapid uptake of energy from renewable resources in NSW, from about this time.

Energy pricing

Electricity prices are driven over time by several key factors including:

• changes in network costs
• wholesale costs (that is to say, the costs of generating electricity from an energy source)
• environmental costs (such as feed-in tariffs for solar panels)
• retail costs and margins.

In 2018, the Australian Competition and Consumer Commission released a report on electricity pricing, which found that the major factor contributing to rising prices over recent years has been the growth in network costs (ACCC, 2018). Specifically, between 2007–08 and 2017–18, growth in network costs contributed 38% of the total cost increase, while environmental costs contributed 15%.

New sources of energy

In the rapidly transitioning energy market (see the ) topic it is becoming increasingly apparent that when considering new sources of power supply, in most instances it would now be cheaper to build and supply electricity from renewable sources than from coal-fired generators. For example, the Australian Energy Market Operator has undertaken modelling for the Integrated System Plan, a cost-based engineering optimisation plan that forecasts system requirements for the National Energy Market over the next 20 years. The modelling is based on new generation capacity coming mainly from renewable sources backed up by gas for security of supply, with no role foreseen for new coal-powered generation (AEMO 2018).

Current use of economic analysis

Economic analysis is used to support policies and to make decisions that either improve environmental outcomes at least cost, or provide the greatest net benefit to the NSW community. Such assessments help the NSW Government meet its commitments to industry and the community by:

• reducing the costs of regulation
• providing conditions that increase the competitiveness of doing business in NSW
• safeguarding the environment and the people of NSW.

By harnessing financial incentives, market-based economic instruments can provide policymakers with an alternative to conventional regulation for delivering environmental outcomes at minimal cost to business and the community.

Cost-benefit analysis: regulatory review and environmental evaluation

The process of cost-benefit analysis is used to enable the trade-offs between economic activity and environmental outcomes to be appropriately weighed. Cost-benefit analyses are required for all new policies and programs. This means that new environmental initiatives and regulations are properly evaluated so that the desired environmental goals are achieved through measures that provide net economic benefits to the community. Examples of environmental benefits included in cost-benefit analysis are greenhouse gas emissions reductions or savings and lower health costs from reduced air pollution.

In November 2016, the NSW Climate Change Policy Framework was released. In the Framework, the NSW Government committed to developing a benchmark value for emissions savings and applying this consistently in government economic appraisal. This means cost-benefit analysis for all new policies and programs will use the same value for any emissions savings benefit.

Use of economic instruments in environment protection

Economic instruments encourage behavioural responses to market forces, to help address the environmental concerns of the wider community in a more flexible way, with less cost and with less government intervention. Economic instruments include taxes, subsidies, offsets, tradeable permits and financial incentives.

The ultimate goal of economic instruments is to provide incentives for businesses and the community to consider the wider social impacts of their behaviour. This enables economic growth to occur while at the same time achieving more efficient allocation of resources.

In NSW a range of economic instruments are used to improve both economic efficiency and environmental outcomes. Examples include:

• the waste levy which provides financial incentives for residents and businesses to reduce the amount of waste they send to landfill
• solar feed-in tariffs provide an incentive for investing in household solar generation capacity
• the Biodiversity Offsets Scheme encourages prospective developments while conserving nature by ensuring that comparable areas are conserved elsewhere
• the Hunter River Salinity Trading Scheme allows industry participants to trade with each other for the right to discharge saline wastewater, without placing excessive pressure on the river’s ecosystem
• the load-based licensing scheme imposes a charge on industrial facilities for each tonne of pollution they emit, encouraging these businesses to incorporate the wider social costs from pollution into their production decisions
• risk-based licensing matches the degree of regulatory oversight with the level of environmental risk posed by licensed operations in NSW, targeting poor performers and creating a financial incentive for facilities to improve their systems and performance
• the Return and Earn container deposit scheme uses financial incentives to encourage the return of used drink containers for recycling
• the NSW Energy Savings Scheme creates an incentive to reduce the consumption of electricity and gas by requiring electricity retailers and some large users to meet targets for energy savings certificates that are created on a voluntary basis by private sector service providers.

Rationale and history

Environmental-economic accounting is a developing approach to the use of environmental data in economic analysis. It is designed to complement conventional national and State economic accounting.

The standard System of National Accounts (SNA) tracks the changes in an economy over time in terms of industry production, income, investment and household consumption, among other indicators. However, economic indicators only tell part of the story of how a society is progressing over time, excluding information on changes in environmental quality or resource conditions. By focusing only on changes in economic activity, conventional accounts can overlook pressures on land and other environmental assets, often called natural capital, which includes renewable and non-renewable resources, as well as ecosystem services.

Environmental accounts data typically link economic activity to various aspects of resource use, environmental impact and the generation of residuals (waste products). Such data can be used to explore trends in the use of natural resources, how these trends affect the level and condition of remaining stocks and patterns of pollution and waste discharged to the environment. This helps decision-makers explore relationships between the economy and the environment (UN 2012).

The system of environmental-economic accounts

Environmental-economic accounts provide an important extension to the national economic accounts framework (the System of National Accounts). The System of Environmental-Economic Accounting (SEEA) was developed by the United Nations and adopted as an international statistical standard in 2012.

The SEEA Central Framework uses a systems approach to environmental and economic information to describe the stocks and flows of natural resources. Individual accounts are relevant to the analysis of a specific resource or issue and a related set of environmental and economic questions.

Adoption of SEEA in Australia and NSW

At the national level, the Australian Bureau of Statistics (ABS) has taken the lead by establishing an Australian Environmental-Economic Accounts (AEEA) system that uses common standards and measures consistent with the SEEA. Initially, the AEEA will concentrate on monitoring the economic value of tradeable assets like timber and water, while following stages will expand the system to include the value of ecosystem services (ABS 2015b).

At various times over the past 10 years the ABS has produced ongoing or experimental accounts on a range of environmental topics that are SEEA-consistent extensions to the national economic accounts, for:

• land
• energy
• fish
• minerals
• water
• waste
• greenhouse gas emissions
• environmental expenditures and taxes.

In 2015, the ABS released the first national-level Australian Environmental-Economic Accounts report (ABS 2015) and this was updated in 2018 (ABS 2018d). These reports contain aggregate national statistics. Work is now underway to disaggregate and adapt this type of information to support decision-making in NSW.

Following meetings of the Commonwealth, State and Territory environment ministers, jurisdictions have agreed that their governments will collaborate to work towards a common national approach to environmental-economic accounting, including data-sharing between jurisdictions. This agreement led to the National Strategy for Environmental-Economic Accounting, which was endorsed by environment ministers in April 2018. The strategy sets out priority actions and timeframes to progress environmental-economic accounting at national and jurisdictional levels.

Within the State of Environment (SoE) framework, based on the Pressure-State-Response model of reporting, the topics of and are treated as drivers of environmental change. Unlike pressures, which have a direct impact on specific environmental outcomes, these drivers of environmental change are broader and more diffuse in their effect. These effects are mediated through a multitude of pathways and at a range of scales, facilitating:

• the processing and use of resources
• the production of goods and services
• the generation of waste.

A healthy environment provides ecosystem services and resources to underpin a thriving economy. Economic growth is widely regarded as critical for improving societal living standards, but it is debateable how much environmental damage or degradation is either inevitable or acceptable in order to generate improved material wellbeing. The decoupling demonstrated in this chapter between economic growth and environmental impacts, in particular carbon emissions, indicates that it is possible to reduce the environmental impacts of economic growth and that economic growth does not necessarily need to be achieved at the cost of significant environmental harm.

Moreover, slowdowns in economic growth do not necessarily generate accompanying improvements in environmental outcomes. Extended recessions can lead to environmental damage/degradation as business enterprises struggle to maintain viability. This may result in pressures for short-term exploitation of available natural resources, or less care and attention paid to the generation and management of waste.

Population growth is often seen as a pathway to promote economic growth and has been identified as a key NSW Treasury economic indicator.

Population growth has a direct effect on the economy and the environment because bigger populations consume more goods and resources for food, clothing, housing, water, energy and transport, and they generate more waste.

However, not all economic performance and growth is necessarily dependent on the throughput of natural resources. Human capital is one of the most important inputs to the economy, converting labour into goods and increasingly services, with greater efficiency and productivity. Hence, population growth can stimulate economic growth through other pathways which have only an indirect or limited effect on the use of natural resources and the environment. The environmental impacts of growth will also vary depending on factors such as:

• policy settings
• technological progress and efficiencies
• improved management of natural resources
• changing social behaviours.

There is a stronger relationship between population growth and its environmental effects, than between economic growth and environmental effects. This is reflected in the observation that the economic growth rate is higher than the population growth rate. It is especially evident in comparing the per dollar trends to the per capita trends for emissions and energy use described earlier in this topic. The relationships between population and a range of other measures of environmental pressure such as use of transport and water and generation of waste are described in other topics of this report and summarised in Figure 1.4 in the topic.

Both mitigation and adaptation responses are required to address climate change. We need to act quickly to both reduce greenhouse gas emissions and adapt to climate impacts that are already occurring, and that are forecast to increase in frequency and severity. The earlier that mitigation action is taken, the less adaptation will be required later. However, for mitigation to be effective, concerted action is needed at the global level.

Major economic analyses commissioned by governments, Stern (2007) and Garnaut (2008), have recommended prompt action to mitigate emissions. Their work is supported by findings (Commonwealth of Australia 2008) that effective mitigation could be achieved at a cost that would be justified based on estimates of the future costs of climate impacts under business-as-usual scenarios, provided that mitigation action is part of coordinated international action.

The likely future, and potentially substantial, costs of climate change will include the costs of disaster relief, reconstruction and clean-up, and the rebuilding of infrastructure following extreme weather events, coastal erosion and bushfires. These are all likely to become more frequent and more intense in the future, due to the effects of climate change (see the Climate Change topic).

A report for the Australian Business Roundtable for Disaster Resilience and Safer Communities (PDF 37.4MB) (Deloitte Access Economics 2017) estimates that the total cost of natural disasters to Australia will rise from just over $18 billion per year on average now, to an expected $39 billion by 2050. For NSW, the costs are $3.6 billion now, which will rise to $10.6 billion by 2050. As climate change has specifically been excluded from this analysis, these costs are likely to be higher, potentially substantially higher, when the future effects of climate change are taken into account.

Economic modelling undertaken by the Commonwealth Treasury for the original Carbon Pollution Reduction Scheme, based on emissions trading (Commonwealth of Australia 2008), compared a reference scenario with several alternative policy scenarios involving different emissions-reduction targets. Compared to annual per capita GDP growth averaging 1.4% from 2010–50, the modelled scenarios showed only modest impacts on growth, with annual growth rates predicted to be 1.2% to 1.3% across the various scenarios. Since that work was done, rapid developments in renewable energy are likely to have lowered the cost of moving away from reliance on fossil fuels.

Various researchers, including Wagner & Weitzman (2015), have stressed the uncertainty involved in predicting the nature and extent of the future effects of climate change. This means that estimates of the costs of emissions reductions are likely to be (significantly) more reliable than estimates of the damages from climate change and the costs of adaptation if emissions are not reduced significantly. Since worst-case outcomes would result in significantly harmful and costly outcomes to humanity and the environment, mitigation is seen from a risk-management perspective as comparable to taking out insurance against significant potential risks.

Insurance companies are already beginning to factor the effects of climate change into their risk profiles. In February 2017 the Australian Prudential Regulation Authority advised insurance companies that some climate risks are distinctly financial in nature and many of these risks are foreseeable, material and actionable now. Climate change is likely to have material, financial implications that should be carefully considered.

It is a legislative requirement of the Subordinate Legislation Act 1989 that all new regulations in NSW must undergo a Regulatory Impact Assessment, including cost-benefit analysis. This is to ensure that the regulatory options adopted deliver the greatest net benefits to society. When environmental regulations and standards are developed they should have well-defined objectives and consider the cost of compliance and administration to industry and government as well as the economic, social and environmental benefits to the broader community.

NSW Environmental-Economic Accounts

Nationally, and in NSW, the development of harmonised waste accounts has been identified as a priority for environmental-economic accounts, and work has commenced to develop these accounts. Waste accounts will enable monitoring of flows of waste to landfill and recycling, helping to inform State management and planning for waste and resource recovery.

Market-based mechanisms

A range of economic instruments has been developed in NSW to provide market signals to achieve environmental outcomes, including:

• the Waste Levy
• the Biodiversity Offsets Scheme
• the Hunter River Salinity Trading Scheme
• load-based licensing
• risk-based licensing
• the NSW Energy Savings Scheme.

These are described in greater detail under Use of economic instruments in environment protection earlier in this topic.

Return and Earn container deposit scheme

The container deposit scheme Return and Earn was introduced on 1 December 2017 to reduce drink container litter. Return and Earn is the largest litter reduction initiative introduced in NSW.

The scheme addresses beverage container litter by providing an incentive to consumers to hold on to their empty container after finishing their drink and return it for a 10 cent refund. It also provides an incentive for others to pick up littered containers and obtain the refund for their efforts.

In December 2018, on the one year anniversary of the scheme's introduction more than one billion containers had been collected, reducing the number discarded into streets and waterways. Over the next 20 years, Return and Earn is expected to result in:

• 6 billion fewer beverage containers littered in NSW
• almost 11 billion fewer beverage containers ending up in landfill
• 6 billion more beverage containers being recycled.

ABS 2015, Australian Environmental-Economic Accounts, 2015, cat. no. 4655.0, Australian Bureau of Statistics, Canberra [www.abs.gov.au/Ausstats/[email protected]/mf/4655.0]

ABS 2018a, Australian National Accounts, State Accounts, Annual NSW, cat. no. 5220.0, Australian Bureau of Statistics, Canberra [www.abs.gov.au/Ausstats/[email protected]/mf/5220.0]

ABS 2018b, Labour Force, Australia, April 2015, cat. no. 6202.0, Australian Bureau of Statistics, Canberra [www.abs.gov.au/AUSSTATS/[email protected]/Lookup/6202.0Main+Features1Apr%202015]

ABS 2018c, Australian Demographic Statistics September 2014, cat. no. 3101.0, Australian Bureau of Statistics, Canberra [www.abs.gov.au/AUSSTATS/[email protected]/Lookup/3101.0Main+Features1Sep%202014]

ABS 2018d, Australian Environmental–Economic Accounts 2018, cat no. 4655.0, Australian Bureau of Statistics, Canberra [www.abs.gov.au/AUSSTATS/[email protected]/mf/4655.0]

ACCC 2018, Restoring electricity affordability and Australia’s competitive advantage, Retail Electricity Pricing Inquiry—Final Report, Australian Competition and Consumer Commission, Canberra [https://www.accc.gov.au/publications/restoring-electricity-affordability-australias-competitive-advantage]

AEMO 2018, Integrated System Plan, July 2018 for the National Electricity Market, Australian Energy Market Operator [https://www.aemo.com.au/-/media/Files/Electricity/NEM/Planning_and_Forecasting/ISP/2018/Integrated-System-Plan-2018_final.pdf (PDF 4.1MB)]

Commonwealth of Australia 2008, Australia’s Low Pollution Future: The Economics of Climate Change Mitigation, Canberra

DEE 2017, Australian Energy Update 2017, Commonwealth Department of the Environment and Energy, Canberra [https://www.energy.gov.au/publications/australian-energy-update-2017]

DEE 2018, State and Territory Greenhouse Gas Inventories 2016, Australia’s National Greenhouse Accounts, Commonwealth Department of Environment and Energy, Canberra [http://www.environment.gov.au/climate-change/climate-science-data/greenhouse-gas-measurement/publications/state-and-territory-greenhouse-gas-inventories-2016]

Deloitte Access Economics 2017, Building resilience to natural disasters in our states and territories, Report commissioned by the Australian Business Roundtable for Disaster Resilience and Safer Communities [http://australianbusinessroundtable.com.au/assets/documents/ABR_building-resilience-in-our-states-and-territories.pdf (PDF 37.4MB)]

Garnaut R 2008, The Garnaut Climate Change Review: Final Report, Cambridge University Press, Melbourne

Stern N 2007, The Economics of Climate Change: The Stern Review, Cambridge University Press, Cambridge, UK

UN 2012, Revision of the System of Environmental – Economic Accounting (SEEA): SEEA Central Framework, prepared by the Committee of Experts on Environmental Economic Accounting, United Nations, New York [unstats.un.org/unsd/envaccounting/White_cover.pdf (PDF 4.3MB)]

Wagner G & Weitzman M 2015, Climate Shock: The Economic Consequences of a Hotter Planet, Princeton University Press, Princeton, USA