8.5 The economic factors influencing the extent of environmental sustainability

8.4 The reasons why environmental sustainability is of importance to Australia and globally

KEY KNOWLEDGE

• the reasons environmental economics is of importance to the economy at a local, national and international level Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission. We have seen that global economic growth has often come at the expense of the environment involving the depletion of natural and environmental resources, and the return of huge amounts of waste at a rate that the world’s natural regenerative ecosystems are unable to process. In attempting to meet our current needs and endless wants, the living standards of future generations have been put in jeopardy. As a result, the issue of environmental sustainability is of utmost importance. 8.4.1 The importance of environmental sustainability for maintaining material living standards Material living standards are affected by changes in the levels of production, employment, incomes, and consumption. Clearly, environmental sustainability and climate change will impact on these things. With this in mind, it seems that society is now presented with an important choice: • On the one hand, it could be ‘business as usual’ and continue to pursue unsustainable rates of economic growth with high CO2 emissions. However, this would see a further increase in the incidence and severity of extreme weather events that severely damage the economy and erode material living standards. Research and modelling by Deloitte Access Economics released in 2022 suggests that over the last 50 years these events lowered Australia’s GDP and hence incomes by $120 billion. However, more alarmingly, the modelling also suggests that this loss may rise to a around $1000 billion for the period, 2020–2050. • On the other hand, by taking decisive, effective, and prompt action starting now by investing to limit emissions and making the economy more resilient and able to cope with climate change, the expected loss by 2050 can be reduced by $380 billion, to $620 billion (a loss that is 38 per cent lower). In other words, there is a huge environmental dividend or return on investing to make the economy more sustainable. Either way, it seems climate change will continue to cost Australia’s economy through lost production, lower incomes and eroded material wellbeing. However, moving forward, Figure 8.12 shows that taking effective action to limit climate change would seem a far better and obvious option. Reflect for a moment on the massive disruption and devastation caused by Australia’s increasingly severe and frequent weather events. They have made aggregate supply conditions far less favourable for producers. In addition to the terrible loss of life, they have destroyed business and capital resources in farming, retailing, manufacturing, tourism, and services. In addition, infrastructure worth billions of dollars have been badly damaged. More specifically, consider the negative economic effects of these three examples of severe weather events on Australia’s GDP, employment, incomes, consumption, and material wellbeing: • 2017–19 Severe drought: The severe drought in Queensland and NSW during 2017–19 led to lower farm productivity and lost production. It accelerated the decline of rural communities, businesses closed, and UNCORRECTED PAGE PROOFS many services disappeared as people moved to the cities. In fact, GDP was depressed by 0.7 per cent or a loss of around $63 billion (where the drought cost $53 billion and bushfires cost $10 billion). In turn, this lowered levels of employment, incomes, consumption, and material living standards. • 2020 Bushfires: After years of drought and rising average surface temperatures, the bushfires in Victoria,

NSW, and Queensland in early-2020 reduced farm GDP by around $4–5 billion due to destroyed buildings,

equipment, crops and 100 000 livestock. Tourism and other services in these areas were decimated, reducing employment, incomes, and material living standards. • 2022 Floods: The floods in 2022 in eastern Queensland and NSW during early 2022 cost about $3.4 billion in insurance claims. In addition, there was over $6 billion in government outlays on flood payments to victims and repair of infrastructure. Farming, manufacturing, tourism, hospitality, and retail businesses were unable to operate, and workers lost their jobs and incomes. This depressed living standards already badly affected by the COVID-19 recession, lockdowns and border closures.

FIGURE 8.12 The costs of doing nothing about climate change are expected to be far bigger for Australia, than if appropriate action is taken to limit emissions. 1000 620 150 120

1200 Estimated cost to GDP ($ billion) 200 400 600 800 1000 The costs of doing nothing are rising each 1970–2020 (total cost to 2020–2030 (cumulative the economy so far) costs to the economy if there is no effective climate action 2020–2050 (cumulative costs to the economy if there is no effective climate action

2020–2050 (cumulative cost are lower by $380 billion if there is effective climate action Source: Data derived from Deloitte Access Economics, ‘Economic reality check: Adapting Australia for climate-resilient growth’, January 2022, see https://www2.deloitte.com/content/dam/Deloitte/au/Documents/Economics/deloitte-au-daeeconomic-reality-check-minderoo-foundation-17012022.pdf. 0 UNCORRECTED PAGE PROOFS

As a result of these and other events, environmental sustainability has now become a far more important issue than previously. For instance, in a poll conducted by the Lowy Institute in 2021, 60 per cent of those surveyed believed that global warming is a serious problem. In addition, 74 per cent thought that the benefits of further action would outweigh the costs, and 91 per cent supported Australia’s commitment to net zero emissions by 2050. Finally, environmental sustainability is not just a costly economic problem for Australians, but especially in low-income countries. Climate change, brought on by unsustainable global economic activities (especially in high-income countries), is a matter of life and death. The increased severity and frequency of drought and other events have depressed farm productivity, output, employment, and incomes. It has been a factor that has added to poverty, the spread of disease and, for survival, climate-induced migration. It seems that those whose material living standards have suffered most are not responsible for the current environmental crisis, yet they pay the highest cost. 8.4.2 The importance of environmental sustainability for maintaining non-material living standards It might be easy to think that environmental sustainability is only important because it affects material living standards. However, this is not correct. Climate change, global warming and severe weather events, brought on by unsustainable economic activities, have also lowered society’s non-material wellbeing or quality of daily life. • Reduced health: Climate change reduces health outcomes for most who live through extreme climatic events. First, the event brings on mental health issues, including psychological distress and depression, that persists for some time after. Here we might think of the impact on people of the 2022 floods or the bushfires in 2021 in NSW and Queensland. Many people were severely traumatised by the loss of loved ones, homes, personal possessions, businesses, security, jobs, and incomes. On each occasion, government mental health support for victims ran into billions of dollars. Their quality of life and happiness have been severely reduced. Second, extreme weather events result in a reduction of other outcomes, leaving people worse off. Perhaps the most obvious problem, especially in low-income countries, is that severe weather events, including drought and floods, lower agricultural productivity, depressing incomes that lead to reduced food security, hunger, malnutrition, and poverty. The quality and quantity of drinking water is diminished, leading to illness. In addition, malaria, diarrhoea, typhoid, hepatitis, cholera, and kidney and liver damage associated with undernutrition of the body’s nervous and respiratory systems are worsened by UNCORRECTED PAGE PROOFS climate change. For instance, studies suggest that by 2080 an extra 260–320 million people in Africa could be living in malaria-infested areas. These impacts shorten life expectancy and lower the quality of life. • Domestic violence: Many studies show that severe weather events, including heatwaves and drought that increase stress and economic hardship, usually lead to higher rates of domestic violence, especially against women and children.

• Loss of biodiversity, altered ecosystems and reduced places of natural beauty for recreation:

Climate change alters nature and the landscape. First, it has led to the loss of animal and plant species at an accelerating rate, and an increase in the number on the endangered list. Studies out of Africa indicate that by 2080, 25–40 per cent of mammal species like Zebra my be either extinct or endangered.

In Australia, the 2020 bushfires devastated nature and fragile ecosystems. Around 400 million native animals died in the fires, along with a 14 per cent increase in threatened plant species. Second, climate change and unsustainable types of economic activity have helped to destroy areas of natural beauty used for recreation. Rising temperatures have seen glaciers disappear, hiking areas blackened, coastlines eroded, and a shrinkage of snow coverage for skiing. Third, the environment helps to break down some household and business wastes, pollinate crops, filter water, and regulate weather patterns. However, not all products are biodegradable — many cannot be processed by nature. Additionally, some waste including plastics and chemicals have entered the food chain, poisoning plants and animals.

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Track your results and progress Find all this and MORE in jacPLUS 8.4 Exercise 8.4 Quick quiz 8.4 Exercise 1. Define the term, environmental sustainability. (1 mark) 2. Explain why all economies, especially those of rich countries, now need to become more environmentally sustainable. (4 marks) UNCORRECTED PAGE PROOFS 3. a. Outline how worsening climate change can affect each of the following: • GDP • Employment • Incomes and material living standards. (6 marks) b. Examine Figure 8.13. Quoting data from Figure 8.13, select the two worst climate-affected industries or sectors and, according to the forecasts, explain why they are likely to suffer more than others.

FIGURE 8.13 How the forecast losses of $92 billion resulting from climate inaction are spread across Australian industry ($ billions, for 2050)

Services

–$38b (41.6%) Conventional energy –$0.6b (0.6%) –$0.7b (0.8%) –$1.4b (1.5%) –$5.2b (5.6%) –$5.4b (5.9%) –$7.0b (7.6%) –$9.4b (10.2%) –$11b (12.0%) –$13b (14.2%) Water & utilities Clean energy Mining & gas Transport Construction Agriculture, Forestry Manufacturing Retail and tourism Source: Deloitte Access Economics, ‘Economic reality check: Adapting Australia for climate-resilient growth’, January 2022, Chart 2.1, page 21, see https://www2.deloitte.com/content/dam/Deloitte/au/ Documents/Economics/deloitte-au-dae-economic-reality-check-minderoo-foundation-17012022.pdf. Fully worked solutions and sample responses are available in your digital formats. 8.5 The economic factors influencing the extent of environmental sustainability KEY KNOWLEDGE • the economic factors influencing the extent of environmental sustainability Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission. The degree to which higher GDP is environmentally sustainable is affected not only by the speed of increases in global output, but also by the types of goods and services produced and consumed. Some production is far more sustainable than others and creates a much smaller environmental footprint. In this section, we will investigate the factors that have adversely affected environmental sustainability, and look at market failure including the concepts of negative externalities and the use of common access resources. 8.5.1 Market failure affects the extent of environmental sustainability A typical starting point in understanding the factors causing environmental problems is the concept of market failure. Market failure exists where, in the absence of government intervention, the free or unregulated operation of demand, supply, and the price system cause resources to be allocated inefficiently into uses that do UNCORRECTED PAGE PROOFS not maximise the community’s general wellbeing. Sometimes, the market fails to provide decision makers with all the necessary information needed to ensure that resources go into the production of those goods and services that are most wanted. As we shall soon see, common types of market failure include the problems of negative externalities and the abuse of environmental or common access resources.

Negative externalities are costs associated with the production and/or consumption of goods and services that are not paid by those involved with a particular economic activity. Instead, they are passed onto third parties who gain no direct benefit.

Take, for example, a business producing aluminium for soft drink cans and a consumer buying the soft drink. Production of the can required digging out and transporting the bauxite ore needed to make aluminium, and then the addition of lots of electricity to melt and extract the metal. While producers pay for the ore, transport, and power, they haven’t paid for the damage done by the CO2 emissions released into the atmosphere involved with extraction, transportation, and the burning of coal at the power station. This has contributed to global warming. Leaving some costs out means that aluminium cans are cheaper to produce, and profits are greater than they should be. As a result, firms are even keener to allocate more resources towards the production of this good. On the other side of the market, it is true that consumers of soft drink have paid for the can and its contents at the point of sale. However, the price they have paid does not include all the costs — the costs to the environment, the effects of global warming, the damage from severe weather events for third parties like farmers, those who have lost their life in storms and fires, people dislodged from low-lying island and coastal areas due to rising sea levels, the drop in farm productivity that has added to global hunger and rising food prices, mental disorders, the destruction of ecosystems and species, the disposal of non-degradable waste, and the spread of disease. Unfortunately, third parties who have not produced or consumed the soft drink have paid all of these costs that are external to those producing and consuming the good. Put another way, the market system has not accounted for all of these costs and the price paid for the soft drink is far too low. Sometimes, the market price is not a proper guide to how scarce resources should be allocated in order to maximise society’s general wellbeing.

Here is another example of negative externalities created by economic activity. As a consumer you might buy meat for $20/kg. You believe the price paid covers all the costs for the farmer, meat processor, transporter, refrigeration, and packaging, but does this price reflect all of the external costs of production and your consumption? The farmer, for instance, looks at meat prices and decides it’s profitable and so allocates resources to its production. The cattle graze on pastures, breathe the free air and drink the free water collected from runoff and the environment. In the process, the cattle also release lots of methane — a greenhouse gas that leads to global warming and other environmental issues. In turn, this has lots of knock-on effects that result from climate change. These costs are not internalised where they are paid by the producer and consumer of meat. Instead, they have been passed on for third parties to pay, who are external to these economic activities and get no benefit. In the absence of government regulation and despite the broader negative effects of society’s general wellbeing, the free operation of market forces fail to reallocate resources efficiently and reduce this environmentally damaging economic activity.

Some economic activities lead to the abuse of environmental resources You may be wondering why only some costs are internalised where producers and consumers pay, but other costs to the climate, air, water, and environment are paid by third parties who are external to many economic activities. Again, the answer is that the free operation of the market fails to allocate environmental or common access resources (i.e. those owned and used collectively such as the air we breathe, the water we drink) to optimise people’s general wellbeing. Unfortunately, common access resources have two special features that make them different to other types of resources that are used in production, like the cost of wages, fuel, truck driver, electricity, bank loans, and machinery. • First, users of environmental resources are non-excludable. Those who refuse or choose not to pay can still consume and use them as they please. This is because it is not cheap, easy or practical to charge them a price for something that everyone owns. There is open access to these resources so this is taken to mean UNCORRECTED PAGE PROOFS they are free and have no price attached to them. Their real value is not reflected in the market price we pay for goods and services using these resources, even though these are scarce and valuable.

• Second, common access environmental resources are also rivalrous. That is, if one person uses them, this deprives others from consuming that same resource. For example, as a profit seeking business owner, if you extract 500 000 wild fish from the ocean, there are 500 000 fewer fish for others to consume. Over time, fish stocks are depleted, as we now see. The cutting down of old growth forests is also rivalrous.

They are no longer there for others to enjoy as areas of natural beauty and recreation. The removal of these trees also lowers the ecosystem’s capacity to process our wastes and remove CO2 from the atmosphere.

In the case of air as an environmental resource, if businesses take clean air from the environment or pure water from a river and use it to produce goods and services that have high CO2 emissions and discharge other wastes that go back into the environment, these economic activities have lowered the quality of environmental resources. Here, there is no financial incentive for these profit-seeking businesses to behave in any other way by perhaps installing expensive equipment to reduce air and water emissions, plant renewable forests or operate sustainable fish farms. In fact, it is profitable for producers of goods and services with huge negative environmental footprints to keep producing their products. These further harm the general wellbeing of many. Review Both negative externalities and problems in the use of common access resources are interrelated. They represent two examples of market failure that affect the environmental sustainability of some types of economic activity. With rapid global economic growth, especially since the 1970s and in high-income countries, and driven by an obsession with materialism and the population explosion, it is not surprising that the world now faces environmental problems including severe weather events. 8.5.2 Other factors affecting the extent of environmental sustainability Apart from various types of market failure, other factors can also affect the extent of environmental sustainability. Here are just a few: The growth in global GDP and some types of economic activity affect environmental sustainability Perhaps the most obvious factor affecting the extent of environmental sustainability is the rate of increase in economic growth. As a rule, rapid increases in GDP have led to an exponential rise in emissions of CO2 and other greenhouse gases, along with lots of waste that is returned to the environment. Figure 8.14 shows the almost unbroken expansion in global GDP over the last 3000 odd years. Whilst early data prior to the 1940s is likely to be only an educated guess from lots of sources, since then formal national GDP data provides us with a more reliable guide to global economic growth. FIGURE 8.14 The growth in global GDP has led to the rise in emissions and waste returned to the environment 20 30 40 50 60 GDP per person* UNCORRECTED PAGE PROOFS

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1000 750 500 B.C. 2500250 500 750 1000 A.D. 1250 1500 1750

0 2000

Source: Bank of England, ‘What was GDP growth in 1,000 BC?’, see https://www.bankofengland.co.uk/ knowledgebank/how-has-growth-changed-over-time.