Summary

Service economy graphic

Service-based economy

Grey Up

~70%

of the NSW economy is service-based

Decoupling of emissions from economy graphic

Resource use by the economy

60%

The decoupling of CO2 emissions from NSW Gross State Product since 1990

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.

Related topics: Population | Energy Consumption | Waste and Recycling | Urban Water Supply

Context

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 Population 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 Urban Water Supply, Energy Consumption, Greenhouse Gas Emissions and Waste and Recycling).

Pressures

Within the State of Environment (SoE) framework, based on the Pressure-State-Response model of reporting, the topics of Population and Economic Activity and the Environment 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 Population 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.

Responses

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.

References

ABS 2015, Australian Environmental-Economic Accounts, 2015, cat. no. 4655.0, Australian Bureau of Statistics, Canberra [www.abs.gov.au/Ausstats/abs@.nsf/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/abs@.nsf/mf/5220.0]

ABS 2018b, Labour Force, Australia, April 2015, cat. no. 6202.0, Australian Bureau of Statistics, Canberra [www.abs.gov.au/AUSSTATS/abs@.nsf/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/abs@.nsf/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/abs@.nsf/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