1.4 Economics and the environment
Until the global financial crisis triggered a severe economic downturn in late 2008, New South Wales had experienced an extended period of economic growth, with gross state product increasing $7000 per capita in the preceding decade. Growth and downturn pose both opportunities and challenges for the environment.
Economic assessment frameworks can help to explain the complex interactions between the economy and the environment. Economic growth provides a range of benefits for society, including improved environment protection, but also places additional pressure on the environment through a growing demand for land, natural resources and energy.
Most environmental issues have strong connections with the economy and integrated solutions are required. The NSW Government uses a range of measures, including innovative economic instruments and regulations. These aim to improve overall economic efficiency and environmental outcomes. A broad focus on deploying new technology and improving productivity is the key to facilitating economic growth without detrimental effects to environmental quality.
In the past, economic development has often been seen as conflicting with the goals of environment protection. Consistent with this view was the belief, and commonly the practice, that environmental matters should be considered separately from wider economic issues. There is now a much wider appreciation of the linkages between economic activity and environmental quality, and acceptance that policies need to take explicit account of these linkages to achieve the best outcomes for current and future generations.
NSW State of the Environment legislation has an important and unique requirement that SoE reporting includes 'an examination of trends in economic analysis and of the costs and benefits (including economic evaluation) of environment protection' (section 10 of the Protection of the Environment Administration Act 1991).
Status and trends
Economic growth is the increase in the value of goods and services produced in an economy over a period of time. It is normally measured by the annual percentage increase in gross domestic product or, in the case of NSW, gross state product (GSP). Growth is generally measured in real terms, which excludes the effects of inflation. Sustained growth in the economy can provide a range of benefits for society, including new employment opportunities, higher living standards, and improved infrastructure and community services.
Australia has recently enjoyed a period of economic prosperity, averaging real economic growth of 3.5% per annum over the decade to 2007–08. By comparison, all OECD countries averaged 2.6% growth each year over the same period. Until recently the Australian economy has benefited from a global resources boom, with rapidly developing countries such as China and India fuelling strong growth in exports of coal, iron ore and other commodities. With a relatively smaller resource and mining industry compared with some other states, NSW posted more modest economic growth than the nation as a whole, averaging 2.8% per annum in real terms over the decade to 2007–08 (Figure 1.6).
Economic growth has been accompanied by a growing population (see People and the Environment 1.2). The NSW population has been growing at an average rate of about 1% per annum over the past 10 years, well below the state's average rate of economic growth. With the economy growing at a faster rate than the population, NSW has become an increasingly wealthy society. Figure 1.6 shows that real GSP per capita rose from around $43,000 per person in 1998–99 to just under $50,000 per person in 2007–08.
With both total and per capita increases in economic activity, there is a growing need for land, natural resources and energy to produce goods and services. These requirements place the natural environment under increased pressure. A strong economic position, however, can also provide the opportunity to respond to environmental pressures using direct measures, such as remediating rivers, or indirect measures, such as environmental levies.
Figure 1.6: Economic growth and real gross state product per capita, NSW
Source: ABS 2008b
Notes: Figures are independent of inflation. Reference year for chain volume measures is 2006–07.
While the recent economic downturn was less severe than expected, it has contributed to slowing growth in household consumption (see People and the Environment 1.3), which may reduce pressure on natural resources and the environment. However, the environmental implications of an economic downturn are difficult to determine: for example, there is a risk that a fall in disposable income may mean that people are less willing to commit money to explicit environmental considerations in household spending decisions. Furthermore, tighter economic conditions may also result in less spending on direct environment protection and remediation measures. Nevertheless, the 2009–10 NSW Budget showed a continued commitment to the environment and natural resources, with budgeted expenditure of $1.9 billion (32% higher than in 2005–06).
The industry structure of the NSW economy is also important in determining environmental outcomes. Individual industries depend differently on raw materials and energy and generate varying amounts of waste and pollution. A notable trend in NSW over the past decade has been the growing importance of service industries, such as finance and insurance, which now account for over 75% of the value of NSW production. While still significant to the overall economy, the share of output from manufacturing industry has been falling. Manufacturing is a relatively energy-intensive industry, so a falling share of output from this sector and a growing share from less energy-intensive service industries contribute to reduced energy consumption per unit of economic activity (see also Figure 1.11).
Approaches to measuring ecologically sustainable development
Indicators such as economic growth and income per capita are useful in providing information about economic progress. However, these statistics generally do not directly report on the state of natural resources and the general condition of the environment, and hence do not permit analysis of whether economic development is sustainable.
As ecologically sustainable development spans environmental, social and economic considerations, a significant challenge exists in measuring the effect of current activities on future generations. Consistent with SoE legislative requirements for an examination of trends in economic analysis, Appendix 1 provides a summary of the recent evolution of economic approaches used to measure sustainable development.
Appendix 1 provides examples from two broad approaches to measuring sustainability. Economic approaches have in common the notion of increased (or at least undiminished) capacity to sustain current living standards. For example, the Genuine Savings approach to measuring sustainability looks at net changes in capital stocks of produced, human and natural capital. Sustainability in this context requires total capital stock to at least be maintained over time. Such economic approaches are 'weak sustainability' measures, as there are generally no restrictions on substituting between various forms of capital, such as produced capital for natural capital.
Biophysical approaches measure some concept of capacity relative to activity, and assess whether capacity is sufficient for the amount of current economic activity. For example, the ecological footprint measure is interpreted as the total land area required to indefinitely sustain a given population at the current standard of living, and at an average per capita consumption rate. Ecological footprints are discussed in People and the Environment 1.3. Biophysical approaches are based on 'strong sustainability', meaning existing natural capital must be maintained and enhanced. Biophysical measures are limited to the extent that they generally do not address the potential to substitute between various forms of capital, and assume fixed technology and institutional arrangements.
Economic drivers of environmental change
Recognising a link between economic activity and the environment has resulted in the development of environmental assessment frameworks that specifically capture the economy-environment relationship. One such framework is the Driving Forces-Pressure-State-Impact-Response (DPSIR) model originally developed for the European Environment Agency (EEA 1999).
The DPSIR framework consists of a chain of causal links starting with driving forces, which are the underlying economic and social factors influencing human activity. Driving forces exert pressure on the environment, generally in the forms of resource use, changes in land use and emissions of waste and other pollutants. Pressures alter the state of the environment, or have the potential to alter it if they are not managed appropriately. This modified state results in various impacts on the health of the environment prompting responses to undesirable impacts from society and policymakers. The range of response mechanisms, including regulations, economic instruments and consumer preferences, can affect any part of the framework between driving forces and impacts. Therefore responses can have either an indirect influence on the environment through changing the nature of economic activity, or a direct influence by changing ecosystem processes.
Figure 1.7 presents a modified version of the original DPSIR framework developed by the Department of Environment, Climate Change and Water (DECCW). The focus of this model is economic driving forces and accordingly includes a three-stage process of economic activity. There are other non-economic driving forces which also exert pressure. For example, naturally occurring variability in climate might reduce rainfall in certain areas and affect the quality of NSW river systems.
Figure 1.7: Driving Forces-Pressure-State-Impact-Response Framework
The solid black lines represent progression through each stage of economic activity. For example, raw materials are used as an input in production and imports may be used in production or consumed directly by households. The solid red lines indicate that each stage of economic activity affects the environment through the technology/pressure/state/impact relationship. The dotted lines represent an influence of one component on another. For example, technology as a high-level driver will influence the capital available to firms to produce output, and interest rates as a high-level driver will influence the level of investment in the economy. The level of demand for the end uses of production also influences future raw material extraction and production; thus there are interrelationships between all stages of economic activity.
Each stage of economic activity is affected by high-level drivers which include population demographics, incomes, interest rates, exchange rates, prices and technology. There are practical difficulties in identifying direct causal relationships between high-level drivers and environmental change. High-level drivers tend to have indirect effects. These drivers affect the scale and composition of economic activity, which in turn varies the pressure on the environment. There are also generally many drivers affecting the same form of pressure, making it difficult to isolate their individual influences. In some cases there is also a lack of reliable data on the state of natural resources, which hampers the process of mapping economic drivers to environmental conditions.
Motor vehicle travel and greenhouse emissions
The DPSIR framework is best explained with an example. It is well known that trends in passenger transport will influence the level of greenhouse gas emissions. An overview of transport is provided in Human Settlement 3.3. Economic drivers have played a significant role in shaping passenger transport emissions.
Within Figure 1.7, passenger motor vehicle usage could be considered to be part of household consumption. There are several high-level economic drivers that influence motor vehicle usage. Among the most important are population growth, incomes, the price of motor vehicles and the price of automotive fuel.
In People and the Environment 1.2, the population of NSW was shown to be rising, with much of this increase due to net overseas migration. A larger population of driving age supports greater use of motor vehicles. As per capita real household incomes have also been rising, more people are able to afford to own and operate motor vehicles, which also supports greater usage.
Over time, the affordability of motor vehicles depends on how their prices change relative to incomes. Figure 1.8 plots the purchase price of motor vehicles in Sydney (taken from Consumer Price Index (CPI) data) relative to NSW adult average weekly earnings. The chart shows the 'real' price of motor vehicles rose from the mid-1980s to the late 1980s and then commenced a slow downward trend to the mid-1990s. The downward trend then accelerated sharply to early 2009. Thus as incomes have risen relatively faster than the price of motor vehicles, their real price has fallen, and motor vehicles have become more affordable. It is not surprising that the number of passenger motor vehicles in NSW rose from under 3 million units in 1998 to just under 3.5 million units in 2007 (an 18.1% increase over this period).
Figure 1.8: Motor vehicle price index relative to average weekly earnings, NSW
Source: ABS 2008c; ABS 2008d
Notes: Data begins 1 March 1985.
The cost of running motor vehicles depends on fuel prices, vehicle efficiency and usage. Figure 1.9 shows the automotive fuel price index from the Sydney component of the CPI. In nominal terms, the index increased substantially from 1985 to mid-2008 (almost three-fold). Falling oil prices in late 2008 and early 2009 contributed to the sharp decline in the index evident at the end of this series.
The second series in Figure 1.9 compares fuel prices with prices generally. It shows that from around 1999–2000, fuel prices had grown faster than the overall CPI. The fall in oil prices in late 2008 and early 2009 has also affected this series, and by the end of the period the two price indexes have moved overall at very similar rates relative to March 1985. Fuel prices relative to average weekly earnings (real fuel prices) show an overall decline since March 1985. This result is also sensitive to the sharp fall in the fuel price at the end of the series.
Empirical evidence suggests that fuel is relatively price inelastic (for example, Komanoff 2006). This means that consumers are generally not very responsive to an increase in the price of fuel. This is not surprising given the fundamental importance of fuel in the economy and the lack of readily available substitutes. With real fuel prices remaining relatively stable over the last 25 years, running costs are not likely to have had a major influence on motor vehicle usage over this period.
Figure 1.9: Fuel price indexes, Sydney
Source: ABS 2008c; ABS 2008d
Notes: Data begins 1 March 1985.
Motor vehicle usage can be measured by vehicle kilometres travelled (VKT), which is a function of the number of motor vehicles on the road and the average distance travelled by each vehicle. Figure 1.10 shows the previously mentioned increase in the number of passenger vehicles in NSW between 1998 and 2007 of 18.1%. Even though there has been a recent slowing in the rate of VKT growth, it also shows that over the period the total kilometres travelled rose by an almost identical percentage (18.2%), meaning the average distance travelled per vehicle hardly changed. It is likely to take a substantial increase in either or both the real prices of motor vehicles and automotive fuel before these trends are reversed.
Figure 1.10: Number of passenger motor vehicles and distance travelled, NSW
Source: ABS 2007b
One of the main environmental pressures arising from motor vehicle use is the emission of greenhouse gases. The amount of greenhouse emissions originating from motor vehicles is a function of the total VKT and the average emission intensity of that travel. This means that improved technology has the potential to reduce the emission intensity of motor vehicle travel.
There have been some enhancements to motor-vehicle technology in recent times, such as in fuel efficiency. The ABS Survey of Motor Vehicle Usage shows some modest improvements in passenger vehicle fuel efficiency between 1998 and 2007 (ABS 2007b). Improvements have also occurred in new car fuel efficiency from better engine technology, particularly since 2004 (BITRE 2009). However, the environmental benefit from increased fuel efficiency has to date been offset by the increase in VKT, although a recent stabilisation in this suggests a realisation of some environmental benefit. The NSW Government response to greenhouse gas emissions is outlined in Climate Change 2.2.
Reducing the economy's environmental impact
The pressure exerted by the economy on the environment depends on the scale of economic activity and the technology applied to these activities. Development of new technology has the potential to gradually reduce the environmental impact created by economic growth. For example, improvements in renewable energy technology and improved energy efficiency may substantially reduce air pollution associated with electricity generation, allowing economic activity to continue with a much lower level of environmental impact.
A particularly important area where this impact reduction would be environmentally valuable is society's use of energy, which produces a large share of greenhouse gas emissions. The environmental pressure caused by extracting primary energy and the combustion of fuels can be improved by developing more renewable (clean) energy sources and improving energy intensity (the amount of energy input required to produce a given output).
The energy intensity of the NSW economy over time is presented in Figure 1.11 as petajoules (PJ) of total energy consumed per billion dollars of GSP. Total energy consumed includes primary fuels (such as coal, oil, natural gas and solar) and derived fuels (mainly petroleum, electricity and natural gas) but excludes the derived energy produced in energy conversion industries. This data also includes energy consumption in the Australian Capital Territory. The effects of inflation have been removed.
Figure 1.11: NSW total energy consumption and economic activity
Source: ABARE 2008b; ABS 2008b
Figure 1.11 shows that total energy consumption has generally been growing. While the trend for total consumption is important for the environment, there has been a long-term decline in the energy intensity of the NSW economy. The Australian Bureau of Agricultural and Resource Economics (ABARE) noted recently that a similar trend exists across Australia. ABARE suggests that the decline in energy intensity is due to a relatively greater presence of less energy-intensive industries in the economy, improved energy efficiency and fuel switching (ABARE 2008b).
Looking forward, an important factor in achieving long-term improvements in energy efficiency is technology. Improvements in technology may permanently reduce the amount of energy required to produce goods and services, thus contributing to the reduction of the economy's environmental impact. The findings in another ABARE study (Sandu & Syed 2008) indicate that changing industry structures across Australia have been more significant for the decline in energy intensity to date than technology-related effects which have been relatively small.
The NSW Government responds to undesirable impacts of a changing environment through a number of measures which are detailed throughout SoE 2009. Within the DPSIR framework, these responses may influence any component of the model shown in Figure 1.7.
The heightened awareness of environmental issues has led to an increase in environmental regulations in most jurisdictions throughout Australia and internationally. The NSW Government has committed to minimising the regulatory burden imposed on businesses as a result of regulation; in particular, it is focused on cutting 'red tape' which is said to exist 'when regulatory requirements are irrelevant, unnecessary, duplicative or inconsistent with other compliance activities' (BRO 2008). The red tape associated with environmental regulations has been referred to as 'green tape'. There are a number of recent examples of green tape reduction initiatives.
The establishment in 2007 of the NSW Better Regulation Office (BRO) was an important initiative towards more effective regulation. The BRO acts as gatekeeper for new regulations, providing quality assurance and ensuring consistency with better regulation principles. The better regulation principles provide the cornerstone for the development of good regulation and are underpinned by sound economic principles.
A review of the Protection of the Environment Operations (General) Regulation 1998 finalised in 2009 resulted in the removal of the need to license certain activities with low environmental risk. These activities are instead being regulated by basic operational standards. This cuts administrative costs for industry while maintaining appropriate environmental controls.
Consistent with better regulation principles, before environmental laws and regulations are made in NSW a regulatory impact statement (RIS) must be prepared and public consultation undertaken. The purpose of a RIS is to ensure that the proposed regulation will provide the best approach for achieving the desired objective. A RIS will include identification of alternative regulatory options and an assessment of the costs and benefits of all options. Where possible, quantification of the costs and benefits is undertaken. Where this is not possible, a qualitative assessment of the anticipated impacts of the regulation and alternative options is described to facilitate a clear comparison of costs and benefits.
The Biodiversity Banking and Offsets Scheme, or 'BioBanking' as it is known, is a market-based economic instrument which has been developed by the NSW Government to help address the loss of biodiversity values and threatened species associated with development. Developers can voluntarily use BioBanking to minimise and offset their impacts on biodiversity. The scheme provides an alternative path for developers to the current threatened species assessment of significance process, enabling urban development to proceed while still accounting for biodiversity and ecosystem needs.
The legislative framework for BioBanking was incorporated into Part 7A of the Threatened Species Conservation Act 1995 in December 2006. The Threatened Species Conservation (Biodiversity Banking) Regulation 2008 established certain aspects of the scheme's framework which are important for its smooth operation.
In the RIS for the BioBanking Regulation there was an examination of some of the benefits and costs of the scheme. This examination assessed three options, including no regulation, establishing criteria for land which is not suitable to become a biobank site (proposed regulation), and an option to rely on credit generation rules provided by the BioBanking Assessment Methodology (alternative regulatory approach). The proposed regulation was preferred as it was expected to increase the administrative consistency, efficiency and transparency of the BioBanking Scheme while continuing to meet biodiversity objectives. It also allows the scheme to recover some of its operating costs to ensure it is appropriately resourced into the future.
The transition to an economy where economic growth is achieved with limited additional environmental pressure will be challenging, but will also create opportunities. To effectively make the transition, the NSW Government and business community must work together to ensure that all businesses are prepared to adapt to the requirements of a low-carbon economy.
Projections show that employment in sectors with high potential environmental impacts (transport, construction, agriculture, manufacturing and mining) will grow strongly in the future, increasing by up to 340,000 new jobs over the next 10 years (Hatfield-Dodds et al. 2008). New workers will need to have the skills and ability to drive sustainable outcomes.
The NSW Government has developed the Green Skills Strategy, to be implemented over the period 2008–10 (see People and the Environment 1.5). The strategy will assist business to become more sustainable and take advantage of new opportunities created by global environmental challenges. Additional programs that drive further uptake of skills and encourage innovation will complement the strategy.