NSW State of the Environment 2012

SoE 2012 > People and the Environment > 1.7 Economics and the environment

People and the Environment chapter 1

1.7 Economics and the environment

Since 1992, the New South Wales economy has sustained positive annual growth of around 2.7% per annum, with gross state product increasing by approximately $16,000 per capita over the same period.

Economic instruments, such as taxes, subsidies, deposit-refund schemes, tradeable permits and financial enforcement incentives, offer a flexible way to meet environmental quality objectives with fewer regulatory costs by facilitating market responses to address environmental concerns.

A range of measures is being used to improve both economic efficiency and environmental outcomes, including load-based licensing, which provides a financial incentive for polluters to reduce the level of their emissions, and the Hunter River Salinity Trading Scheme, which allows participants to trade with each other for the right to discharge saline wastewater.

The NSW economy is primarily service-based and thus has far less environmental impact than economies based on extraction or primary industries. Service industries contribute over 70% of the NSW gross state product, with financial and insurance services, professional, scientific and technical services, information media and telecommunications making a large contribution.

Introduction

Economic growth (the increase in the production and consumption of goods and services in an economy over time) is intrinsically interrelated with the environment. The interaction is not a simple one, with different aspects of economic growth having different impacts on the environment.

Economic growth is related to various factors, such as population growth, increasing wealth, improving standard of living, the technologies in use, and productivity improvements. A growing population has environmental impacts (such as increased resource use and waste), while increases in the standard of living normally imply that each person is 'consuming' more resources. On the other hand, improved productivity and technologies mean that we are able to produce more with potentially less impact, while greater wealth increases society's willingness-to-pay for better environmental outcomes.

Status and trends

NSW is the largest contributor to the Australian economy, generating just under a third of Australia's gross domestic product. The state has experienced steady economic growth over the last two decades, with real gross state product (GSP) increasing at an average of around 2.7% per year. This is slower than the Australian average of around 3.1%, although the stronger national growth rate has largely been fuelled by the expanding Western Australian and Queensland mining sectors.

Service industries contribute over 70% of the state's GSP, including large contributions from financial and insurance services; professional, scientific and technical services; and information media and telecommunications (AE 2010). While manufacturing remains a major industry in NSW, contributing 8.6% of GSP in 2011, its growth has eased over the past two decades and was overtaken by the financial and insurance services sector as the state's largest sector at the turn of the century. Primary industries (agriculture, forestry and fishing, and mining) have experienced steady growth since 1990, with gross added value almost doubling, although the contribution of these sectors to annual GSP has remained relatively constant over this period at around 4%.

Population growth in NSW has occurred at a slower rate than economic growth, averaging 1.4% since June 2006 (see People and the Environment 1.1). In real terms, cumulative GSP growth has been about 47% greater than the growth in population, suggesting increasing levels of affluence in the NSW population. Since 1990, real GSP per capita increased by approximately $15,600 to $58,000.

Economic growth and the environment

Increasing levels of economic activity can place pressures on land and other natural resources or assets, often referred to as 'natural capital'. For example, the NSW mining sector depends on access to natural capital for growth. Mining's gross value added to GSP has increased by 86% since 1990: as of April 2011, $8.25 billion was earmarked for investment in major NSW minerals and energy sector projects (ABARES 2011b), further strengthening the sector's contribution to GSP. However, the cost of this expansion is the depletion of natural resources in the project regions and environmental impacts, such as particulate pollution.

Energy supply (at a reasonable price) is essential to economic growth. Fossil fuels currently meet around 94% of the primary energy demands of NSW. Government-led initiatives and technological developments have promoted an increase in the use of renewable and low-carbon non-renewable energy sources in recent years. The introduction of a charge for carbon emissions is likely to support this further. For example, there is considerable potential for investment in coal seam gas production in NSW in the near future. The industry has the potential to increase economic growth and provide a cost-effective energy supply, with lower greenhouse gas emissions than coal-based energy production. However there are significant environmental concerns with the gas extraction process, mainly associated with the risk of chemical contamination of surface and groundwater sources. Despite these developments, high-carbon non-renewable sources, such as coal-fired electricity generation, are likely to continue to dominate the state's energy supplies for the foreseeable future (Wood et al. 2012).

Economic growth may threaten the capacity of the environment to break down or receive waste without causing significant ecological harm. In densely populated areas, waste products, such as solid waste, sewage, hazardous waste, and atmospheric emissions, place increased stress on the environment. Such impacts have been observed in the Hawkesbury–Nepean River, where population growth and changing land-use activities have had a negative impact on the health of the river. This has occurred through increased runoff from agricultural, horticultural and urban land uses, and discharges from services such as sewage treatment plants, which are under greater loads as the population they service increases. This in turn can adversely affect other economic activity in the area, such as recreation, tourism and fisheries (HNCMA 2007).

While environmental impacts can result from increasing population and economic growth, it is important to note that they do not necessarily occur proportionately to these growth rates. Policy decisions, technological innovation and changes to individuals' behaviour can effectively reduce the rate of environmental damage over time as population and economic growth continues.

The share of total spending by NSW households over the past two decades has stayed about the same. However total household spending on transport has grown by 96%, more than the growth in overall household spending of 82%. This suggests that NSW households are becoming more mobile, thereby using larger amounts of fuel. The increase in transport spending may result from workers having to commute longer distances to work. Growth in transport spending may also reflect growing affluence and greater disposable income. See also People and the Environment 1.1, People and the Environment 1.4 and People and the Environment 1.5.

Economic analysis of environment protection

There are practical and methodological difficulties in applying economic tools to decisions about the environment. Economic tools are used to:

• assess the costs and benefits of proposed environmental standards, policies or investments to achieve net gains for society while minimising the regulatory burden on business and the community
• identify least-cost options for achieving specific environmental outcomes
• assess the economic impacts of environmental pressures
• provide advice on, and assessment of, regulations, market-based instruments and economic incentives
• support efficient and effective land management
• provide advice on the efficient and effective conservation and use of natural resources.

Economic tools are used to support appropriate policies that either improve environmental outcomes at least cost or provide the greatest net benefit to the NSW community. These assessments help the NSW Government meet its commitments to reduce the costs of regulation to industry and the community and provide conditions that increase the competitiveness of doing business in NSW (NSW Government 2011). In addition, economic instruments can provide policymakers with alternatives to traditional regulation for delivering environmental outcomes at minimal cost to businesses and the community.

Environmental regulations in NSW undergo a cost-benefit analysis (CBA) to ensure that key principles of good regulation are met. It must be demonstrated that new or revised regulations will maximise the net public benefit. CBA identifies the marginal costs and benefits of a given program and other options, quantifies them in monetary terms, and compares them to arrive at a net benefit. There are often challenges in quantifying the environmental impacts of policy decisions. Where costs or benefits cannot be quantified, they can be presented in qualitative terms and considered when interpreting the measured net benefit (or cost) of the program. Informed public policy requires environmental goods and services to be fully documented and assessed, even where precise quantitative monetary values cannot be readily or accurately estimated.

The economic value of environmental goods and services can be estimated using various techniques. For example, the net economic benefit obtained by visitors to a national park can be estimated using the travel-cost method (TCM). This uses the costs that visitors incur in travelling to a particular location (such as a national park) as a proxy for the amount they are willing to pay to obtain the recreational experience from that location. Data for TCM studies is obtained from surveys of national and marine park visitors. A 2007 travel-cost study of four marine parks estimated the economic benefits of these protected areas ranged from between $16 and $50 per visit (ignoring the cost of travel time). The total economic benefit from recreation at all four marine parks was estimated at between $5.1 million and $7.3 million per annum (DECC 2007c).

Economic techniques can also be used to estimate the value of reducing pollution on health. The CBA for the review of the Protection of the Environment Operations (Clean Air) Regulation 2010 used the damage-cost approach to estimate reductions in health costs from measures that reduce air pollution in NSW (DECCW 2010c).

Finally, there is a growing body of literature on the use of stated preference techniques, such as contingent valuation, that identify consumer preferences for non-market goods (such as the value of species preservation). Contingent valuation techniques have recently been used in regulatory impact assessments of the disposal of televisions and other electrical equipment.

Use of economic instruments in environment protection

Economic instruments, including taxes, subsidies, deposit-refund schemes, tradeable permits and financial enforcement incentives, offer a flexible way to meet environmental quality objectives with fewer regulatory costs by facilitating market responses to address environmental concerns. These instruments can be applied to stimulate the adoption of more efficient pollution abatement technologies and ensure resources are allocated efficiently.

An example of an economic instrument used by the NSW Government is the Hunter River Salinity Trading Scheme, a type of emissions trading scheme. The Hunter scheme allows participants to trade with each other for the right to discharge saline wastewater into the Hunter River without exceeding environmental thresholds. A similar but smaller scheme is the South Creek Bubble Licensing Scheme, which involves trading of emissions between three sewage treatment plants into South Creek, a tributary of the Hawkesbury–Nepean River.

Another economic instrument used in NSW is load-based licensing. This provides a financial incentive for industry to reduce pollution by charging fees that depend on both the toxicity of pollution emitted and its proximity to exposed populations. In a similar way, the NSW Waste and Environment Levy provides a financial incentive for commercial and residential premises to reduce the amount of waste they send to landfill.

Pressures

Economic factors and the environment

Greenhouse gas emissions and energy

The largest contributions to NSW greenhouse gas emissions are the use of fossil fuels for electricity generation (approximately 41%), industrial processes (17%) and transport (14%) (see Figure 1.12 in People and the Environment 1.2). In general, the expansion of production around the world has been accompanied by outputs that often have significant ecological impacts.

As concerns about the impacts of climate change have become more widespread, there has been increasing adoption of cleaner fuels, such as natural gas for public transport, and the generation of wind and solar electricity, as well as a general reduction in the energy-intensity of production.

Although the flow of raw materials through the economy is unlikely to slow in the near future, the quantity of energy used per unit of output (energy intensity) is expected to decline (Figure 1.26). To date, reductions in the energy intensity of output have been driven by changes in the behaviour of individuals and businesses, as well as through complementary policies, such as demand-management education and rebates for solar panels (see People and the Environment 1.5). In coming years, a tax on carbon emissions is likely to further change behaviour by ensuring that market prices reflect the full costs of production, including the costs to the community from climate change (see People and the Environment 1.2).

Figure 1.26: Energy intensity of NSW production indexed to 1990

Source: ABARES 2011a, Table B; ABS 2011d, Table 1

Air quality

With population density rising in Sydney, the community is at greater risk from adverse health effects associated with air pollutants. People are also moving to larger regional centres elsewhere in NSW. The increasing population density of urban and regional centres combined with the growth in incomes and spending, including spending on private transport, is placing pressure on outdoor air quality.

In regional areas, air quality problems are being driven by similar demographic trends and broader economic growth, in particular the expansion of mining, agriculture and industrial processing. For instance, population growth in Tamworth has increased the exposure of residents to surrounding agricultural and industrial processing facilities. In the Hunter Valley, high international demand for coal and the statewide demand for low-cost electricity are driving increasing development of coal mines. This in turn creates dust and vehicle emissions that may have an impact on local residents.

Land management

As the resource demands of the NSW economy grow, there is likely to be more interaction (and possibly conflict) between alternative land uses for residential, commercial, agriculture, mining and conservation purposes.

Land-use conflicts in urban areas usually result from population growth driving demand for residential development, which places pressure on remnant green space, including land used for agriculture and conservation. More recently, residential development has transformed old industrial sites into residential areas. Appropriate planning and design considerations can reduce the environmental impacts of growing urban populations. The population in NSW has increased by approximately 25% since 1990, while the number of occupied private dwellings has grown by 43% (though with changing sizes) (ABS 1991, p.43; ABS 2011f). Table 1.7 shows the extent of growth in various land uses in NSW over the last two decades.

Table 1.7: Issues affecting land use in NSW

Notes: * 1991
** 2010

Changes in world commodity prices and the exchange rate also determine the profitability of mining some types of materials in NSW. The value of NSW mining output has risen by 86% in real terms since 1990. But despite the mining boom elsewhere in Australia, the contribution of mining to NSW has remained relatively unchanged since 1990 at approximately 2–3% of GSP.

Water

Economic factors affecting the demand for agricultural produce will have the largest impact on water use in NSW, although water consumption is largely driven by environmental factors affecting supply.

The agricultural sector has played an important role in Australia's economy and currently accounts for approximately two-thirds of water consumption in NSW. Although the economic value of the NSW agricultural sector is relatively low (less than 2% of GSP), the sector contributes over $4 billion worth of exports annually (I&I 2010). Domestic demand for agricultural products is relatively stable and is expected to increase in line with population growth. While changes in the Australian dollar and world commodity prices have a large impact on the type (and value) of NSW agricultural production, another important driver is the availability of water.

The importance of water is no more apparent than in the Murray–Darling Basin where prolonged drought had until recently stressed farming communities, production, and river and wetland ecosystems. The return of water to the system over the last two years, including significant flooding, highlights the important role that rainfall plays as a driver of agricultural production. Meanwhile most farmers have benefited recently from rising world food prices, which despite the appreciating Australian dollar, grew by 40% in A$ terms between 2004 and 2011 (RBA 2011).

Responses

Established responses

NSW 2021: A plan to make NSW number one (NSW Government 2011), the Government's 10-year plan for NSW, sets ambitious targets for the economy and, while realisation of these will see great benefits for the people of NSW, they also pose significant challenges for the environment. Specific targets set out in the 'Economy' section of NSW 2021 that might pose environmental challenges include:

• growth in business investment by an average of 4% per year to 2020
• growth in GSP per capita by an average 1.5% per year to 2020 with specific industry growth targets
• growth in employment by an average 1.25% per year to 2020
• improved efficiency and effectiveness of expenditure with all capital projects to be assessed through a cost-benefit analysis
• protection of strategic agricultural land and improved agricultural productivity
• containment of electricity costs through efficient energy use.

Reviews of environmental legislation

NSW agencies are required by the Subordinate Legislation Act 1989 to consider the economic costs and benefits of environmental regulations every five years or at the time they are amended. Regulations and environmental standards in NSW are required to have well-defined objectives, based on robust evidence of the costs of compliance and the benefits that will be generated.

This process improves our understanding of the links between economic activity and environmental improvements and ensures that policies explicitly take these into account to achieve optimal outcomes for current and future generations. Table 1.8 summarises some recent assessments of the costs and benefits of environmental regulations in NSW.

Table 1.8: Summary of recent economic assessments

Notes: Costs and benefits are over five years (unless stated otherwise), discounted to present values
* Upper range of costs
** Lower range of benefits

Developing responses

There has been increasing interest in improving and streamlining regulatory practice in Australia through the work of the Council of Australian Governments (COAG) and the Productivity Commission, and in NSW through the Independent Pricing and Regulatory Tribunal (IPART) and Better Regulation Office. Areas with environmental implications such as waste, urban congestion, chemicals and plastics, and radiation have been specifically targeted by these reforms.

Future opportunities

If NSW continues to experience economic and population growth similar to recent decades, the state will have an annual GSP of around $490 billion by 2020 and a population of 7.8 million.

Responding to the new and increasing environmental challenges presented by a growing NSW economy will require a better understanding of how the economy and the environment interact, supported by the use of appropriate evaluation methods to assess environmental policies and investment decisions and innovative market-based instruments to manage pollution.