Environmental law reforms are critical to productivity

When an engine starts losing power, it rarely makes a loud noise. Smoke might not billow from under the bonnet immediately, and the car may still feel drivable. But that doesn’t mean the warning signs aren’t there – they just come quietly, and they matter.

Illustration Credit: Simon Letch

Over the past two decades of the 20th century, Australia’s real GDP per capita growth averaged 2 per cent a year. There were two deep recessions. Over the first two decades of the 21st century, before the pandemic, real GDP growth averaged just 1.25 per cent a year despite there being no recessions.

That should have rung alarm bells.

Poor GDP per capita performance is a consequence of either poor employment or poor productivity outcomes. We can rule out the former. Over the first two decades of the 21st century, the proportion of Australians in work increased from 59 per cent to 62 .5 per cent, a level never previously recorded. It’s even higher now.

People in work are, on average, working fewer hours than they did at the turn of the century. That has been a slight drag on GDP per capita growth. But the principal cause of our poor economic performance is dreadful productivity growth. In the last few decades of the 20th century, we recorded an average of 1 .75 per cent a year. Over the first 25 years of the 21st century, we have managed less than 1 per cent.

Productivity has many drivers, but all economists agree the strength and pattern of business investment plays a major role. It should worry policymakers that Australia’s rate of business investment collapsed about a decade ago and has been stuck at recessionary lows since.

The first Intergenerational Report, published in 2002, made a case for lifting productivity growth from the historical average rate of 1 .75 per cent a year to at least 2 .25 per cent. Decades of short-term policy thinking and political opportunism caused us to miss the target, cutting 40 per cent off the average income of Australian workers.

The election outcome is not merely the result of clever electioneering. The way I read it, Australians have had enough of short-termism. They are calling on the Albanese government to implement policy reforms to drive higher living standards for workers.

Early statements from the government give promise. First, Prime Minister Anthony Albanese has committed to prioritise environmental law reforms that proved too difficult in the last parliament. And second, in his National Press Club address last week, Treasurer Jim Chalmers identified lifting productivity and resilience as economic policy priorities.

Many people will see these two commitments as being in conflict. They are not. Environmental law reforms are a critical component of the productivity agenda.

Environmental policy is often framed as a contest between environmental protection and job creation. That makes no sense.

First, job creation has not been a problem for Australia. We are world beaters in creating jobs. We could lock up every pristine environmental asset left on the continent and still be confident in the economy’s ability to create jobs as well as any other place on Earth.

Second, the activities responsible for the industrial transformation of the Australian continent and its surrounding marine environment, the extinction of more than 100 species and the loss of more than half the continent’s forests, don’t provide a lot of jobs. Taken together, mining, forestry, fishing and agriculture employ less than 5 per cent of the workforce. Downstream processing of raw materials extracted from nature would involve many more jobs, but Australia has ceded comparative advantage in these activities to other countries. Today, we import engineered wood products for residential construction whilst subsidising the logging of native forests to export wood chips and pulp.

Third, the continued viability of agriculture, forestry and fishing now depends upon repairing the environment, not continuing to destroy what is left.

Former Treasury secretary Ken Henry says policymakers must ensure that business respects constraints.

Yet there is a real economic contest in environmental policy that must be tackled. It’s not about jobs. And it’s not about “balancing” economic, social and environmental outcomes, as if these things are merely arguments in some social welfare function that we can choose to trade-off against one another.

It’s about understanding our critical dependence upon the state of nature. It’s about ensuring that decisions taken about where people live, how and where they travel, what they eat, how the consumer durables they buy are manufactured, and where they source energy for their homes and cars, respect the laws of nature. That’s where we source fresh water, clean air, arable soils, waste disposal services, and protection from violent climatic events such as floods, fires and windstorms. Environmental constraints are immutable. Breach too many of them and humanity ceases to exist.

Policymakers must ensure that all the decisions taken by business respect these constraints. That means strong environmental protection laws. They must also ensure that those taking the decisions have a high degree of certainty about what sorts of developments can proceed, and where, with access to fast, highly efficient approvals processes. Both elements are critical to future productivity performance.

The review of the Environmental Protection and Biodiversity Conservation (EPBC) Act 1999, undertaken by Graeme Samuel and handed to then environment minister Sussan Ley in October 2020, concluded that the act was doing neither of those things. Investment decision-making was tied up in webs of uncertainty, whilst environmental assets were being degraded at an accelerating rate.

Environmental law reforms must deliver more certain regulatory boundaries, achieved through national environmental standards that establish clear environment outcomes and decision-making processes, provide open access to unimpeachable data concerning nature impacts and support development of regional plans to guide land use. They must remove duplication in regulatory approvals processes, with accreditation of state regulators that demonstrate competence in the implementation of Commonwealth laws, overseen by an independent Commonwealth EPA.

Lifting the nation’s dreadful rate of productivity growth is going to take years of serious economic reform. The Parliament’s first test will be the delivery of high-integrity environmental laws.

Dr Ken Henry is an economist who served as Australia’s Treasury secretary from 2001 to 2011. He is chair of the Australian Climate and Biodiversity Foundation.