We're on the way to peak everything

Some economists worry the world economy isn't growing fast enough. It's slowing down and reaching the point of "secular stagnation".

On a very different wavelength, however, environmentalists worry that if the world economy keeps growing the way it is, it won't be long before we run out of the natural resources on which that growth depends. Whoops.

But if all that's a bit heavy for the holiday season, here's something lighter. Remember all that crazy talk a few years back about the paperless office? What a joke.

Then there was peak oil. Whatever happened to that looming disaster?

If any of those possibilities piques your interest, I have news - courtesy of an essay by Professor John Quiggin, of the University of Queensland.

Quiggin thinks the paperless office is on the way, especially because the world has already reached "peak paper".

Despite continuing economic growth, peak paper was reached in 2013. "Global paper production and consumption reached its maximum, flattened out, and is now falling," he says.

Until relatively recently, the growth and spread of information was directly linked to the growth in paper, books and newspapers.

The closely related information revolution and digital revolution have broken that link. Businesses and governments don't print reports, they just put them on their website. We read e-books and online newspapers.

Banks and businesses want to stop sending us statements and bills through the post. If we hold out too long, they impose a fee for continued paper statements.

As for peak oil, Quiggin says that, in terms of oil consumption per person, the world reached it in 1979.

"In the developed countries, the decline in oil consumption per person has outpaced population growth, with the result that total consumption is declining. The average person in a developed country now uses less oil than her parents did 40 years ago," he says.

Why has this remarkable change attracted so little notice? Partly because much of the reduction in energy use has taken the virtually invisible form of improvements in energy efficiency. Both industrial processes and household appliances use far less energy than they used to.

But also because, until fairly recently, the main substitutes for oil have been other fossil fuels, such as coal and gas. Only in the past 10 years have renewable energy sources, especially wind and solar, begun to play a significant role, he says.

Peak coal has already arrived in the developed world. Coal consumption has fallen substantially in the US and Europe, and is set to fall further.

Until recently, the decline in fossil-fuel use in the developed world has been more than offset by rapid growth in the developing countries.

But even China - the planet's largest coal consumer by far - has changed course. Beginning with Beijing, it has begun closing down all the coal-fired power stations near major cities.

"In fact, China reached peak coal in 2013, at the same time as it reached peak paper," Quiggin says.

As for peak steel, it's different. Steel lasts a long time and can be recycled almost endlessly, but demand for it is finite.

In developed countries, the stock of steel reached about eight tonnes a person decades ago, he says, and has remained stable or slowly declining since then.

"With the stock of steel on a gently sloping plateau, the need for more can be met almost entirely by recycling scrap, rather than by burning coal to smelt iron ore in blast furnaces.

"The result has been described as a 'circular economy'. When this arrives, peak steel will have been reached."

All this has happened while economic growth has continued and living standards have risen.

Economists have been saying for years, particularly in the developed world, that growth is becoming "weightless". The part of the economy that's growing isn't goods - things you can drop on your toe - but services: people doing things for people, whether fixing their health, teaching them nuclear physics or waiting on their table.

With an ever greater proportion of gross domestic product - the quantity of goods and services produced in a period - accounted for by services, economic growth becomes ever less dependent on the increased use of natural resources.

Over the long term, growth in real GDP comes less from the use of more raw materials, human labour and man-made machines and structures and more from improved "productivity" - greater efficiency with which those inputs are transformed into outputs of goods and services.

What drives productivity improvement? Advances in technology and accretion of human capital. That is, the growth and spread of knowledge and information.

But an information-driven economy is very different from the one we've become used to since the industrial revolution, one driven by the use of natural resources to produce goods plus a few conventional services.

Natural resources are finite. If you want to use my coal or paper you must pay me (they're "excludable"). Any coal or paper you use can't be used by someone else (they're "rivalrous").

This makes economic growth relatively easy to measure. But knowledge and information are opposite to natural resources: they're often freely available (non-excludable) and my knowing something doesn't stop you knowing it, too (non-rivalrous).

What's the difference between a taxi and Uber? Information. What's the difference between renting a hotel room or self-catering accommodation and Airbnb? Information.

A knowledge and information-driven economy is one whose continuing growth makes less demands on the natural environment than many scientists and environmentalists imagine. That's particularly true as we move to renewable energy.

But a knowledge and information-driven economy is harder to measure, especially using the metrics (GDP) we developed to measure a raw materials and goods-based economy.

We're now in a world where GDP is going one way and raw-materials use is starting to go the other way.

That's why Quiggin doubts that world economic growth is grinding to a halt.

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Parties' similarities and differences on economics

I get criticised by rusted-on supporters of both sides of politics when I say this, but that doesn't stop it being true: there are differences between the two sides' policies, but they're not as great as they want us to believe (and their supporters do believe).

So let's identify the main points of agreement and disagreement. Most argument in election campaigns is about economic issues, with much less disagreement on other issues.

On economic management the parties are agreed on the issue which, though it's rarely acknowledged by either side, is by far the most significant: that the day-to-day management of the economy be left to the Reserve Bank, acting independently of the elected government.

That just leaves the government in control of its budget, which does have effects on the economy in the short and longer term but, because it's all the pollies have left to argue over, gets more attention than it deserves.

On getting the budget back into surplus – and so getting the level of public debt falling rather than continuing to rise – there's little to choose from. The Coalition isn't in any hurry, and nor is Labor.

Malcolm Turnbull says his policies won't have the budget back to surplus until 2020-21, after which the surplus will stay tiny.

Bill Shorten's plans say he will get back to surplus in the same year, though he'd spend an extra $16.5 billion over the four years, but then add an extra $27 billion to the surplus in the following years to 2026-27.

(You can say who knows what will happen in four years' time, let alone 10. True. But remember this applies equally to both sides' figuring. All we can do is focus on the estimated effects of the measures each side promises to take.)

The main differences between Labor and the Coalition occur because Labor would not proceed with the government's planned cuts to spending on education and health while, on the other hand, it would continue the 2 per cent "deficit levy" on income above $180,000 a year but wouldn't proceed with the government's planned cut in company tax.

It's because the cost of the company tax cut grows strongly in the later years, as do the savings from Labor's plan to "grandfather" its limits on negative gearing and the capital gains tax discount, that Labor's budget plan would take so long to improve the budget balance.

It's clear from this that when the Liberals accuse Labor of being into "spending and taxing" it is guilty as charged.

The harder question is whether government spending and taxes would be all that much lower under the Coalition. If so, it won't be by as much as it would have us believe.

It's not clear, for instance, that the Coalition will have the political courage to press on with the cuts in grants to the states for public hospitals and schools that are built into its budget figures.

The main difference is likely to be in the categories of spending that grow faster or slower under each side, and in the types of taxes and tax concessions that are cut or increased.

For instance, it's clear to me that the high cost of cutting the rate of company tax will have to be covered by more bracket creep and fewer income tax cuts.

On particular tax promises, though both sides are promising cuts to superannuation tax concessions, the Coalition's plans are clearly superior, whereas Labor's plan on negative gearing is far more attractive to young would-be home buyers.

The public's conviction that the Coalition is the better manager of the economy seems to roll on regardless of evidence. In truth, it's not supported by the record. Both sides have had their achievements and their stuff-ups.

Economic threats don't come bigger than climate change. Here, both sides' plans fall short. The Coalition has announced no credible plan to achieve the commitments it made in Paris which, in any event, were inadequate.

Labor is braver, but not by much. It plans a hugely ambitious target for growth in renewable energy, but doesn't show how it will be achieved. It plans a quite innocuous emissions trading scheme.

Both sides descend to dishonest scare campaigns. Both sides have previously supported policies they now vociferously oppose. Both may oppose policies simply because the other side supports them.

In some cases their disagreement is greater than they want to admit (penalty rates, for instance), whereas in others they disagree more in words than deeds (foreign aid; the national broadband network).

One rule-of-thumb that still works is that, in their decisions about spending and taxing, the Coalition will tend to favour business and higher income-earners, whereas Labor will tend to favour "middle-class and working-class Australians". Take your pick.

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We can grow GDP if we stop growing natural resource use

Some things are more important even than the fate of the goods and services tax. A question I regard as just a tiny bit more significant to our future is whether we can continue increasing our population and material standard of living without doing irreparable damage to the natural environment.

Few of us noticed in all the excitement over tax reform, but last week we made a big step forward in answering this question. The CSIRO unveiled the results of a ground-breaking, two-year project – the Australian National Outlook report – in which it integrated a model of the economy with no less than eight models of different aspects of the global and domestic natural environment in which the economy exists.

So, is ecologically sustainable growth possible? Is it possible to "decouple" continuing economic growth from continuing environmental vandalism?

It depends on what you mean by "growth". There's enormous confusion on this point because what economists take the word to mean is not what scientists take it to mean.

What scientists mean by growth is growth in the "throughput" of natural materials and energy – using those resources to generate economic activity and, in the process, turning them into various forms of pollution and other waste.

They point out that such growth simply cannot continue indefinitely because the natural world – the global ecosystem – is of fixed size. And they have to be right because they're merely stating the first law of thermodynamics.

But that's not what economists mean by growth. They mean an increase in gross domestic product, most of which is cause by increased productivity (efficiency). It may or may not involve an increase in the economy's throughput of natural resources.

So what does the CSIRO's modelling say about whether we can continue to grow without inflicting further damage on the environment?

It says GDP can continue growing strongly, but throughput of natural resources can't. So the people who want continued growth in GDP win, but so do those saying ever-increasing use of natural resources must stop.

Since no one knows the future, CSIRO's economists and scientists ran through their super model 18 different scenarios covering different rates of growth in the global population, different degrees of global action to restrain climate change and a range of differing development in Australia and its economy.

All 18 scenarios project continuing strong growth in Australia's population and GDP out to 2050. But get this: only three of those scenarios also saw improvement or no further deterioration on the model's three key indicators of environmental health: emissions of greenhouse gases, water stress, and loss of native habitat.

As well, two of the three scenarios see no increase in the economy's annual throughput of natural resources, while the third projects a fall in material throughput of 38 per cent.

All this says ecologically sustainable growth and decoupling do seem to be possible, provided the world gets its act together.

The good news is that the model's results don't rely on "technological optimism" (don't worry, market forces will call forth a technological solution to every problem before the proverbial hits the fan) but nor do they require that we renounce our materialist ways and become greenie vegan mud-brick makers.

We don't need to do anything we don't already know how to do and, in many cases, have already begun doing. We just need to do a mighty lot more of it.

The bad news is that we can't do it on our own. To achieve improvement in the key environmental indicators and a fall in material throughput we need effective international action to limit the world's population to 8 billion in 2050 and limit global warming to 2 degrees in 2100.

This would require "very strong" global and Australian effort to reduce greenhouse emissions.

The two other environmentally not-so-bad scenarios – involving world population growing well beyond 8 billion and global warming limited to 3 degrees – would require "strong" global and Australian effort to reduce emissions.

Strong translates as a worldwide price per tonne of carbon dioxide emissions of $US30 ($42) in today's dollars; very strong translates as $US50 a tonne.

These world prices would be applied in Australia. But we'd have a comparative advantage over many countries that would reduce the carbon price's adverse effects on our economy: we could achieve up to half our required reduction in net emissions by "carbon sequestration" – reforestation of cleared land, either with one species of eucalypt (to maximise sequestration) or a range of eucalypts (to also restore native habitat).

At these carbon prices, our farmers could earn up to five times what they make from using the land to produce beef.

Our greenhouse emissions per person would fall from five times the global average in 1990 to below average by 2050.

Our biggest problem would be avoiding water stress, particularly because reforestation would add to the problem. The price of water for agriculture would be a lot higher and, in the cities, we'd have to do a lot more desalination and water recycling for industrial use.

I don't regard this as the last word on the subject. All modelling is far from infallible and this exercise is no different. The good thing is that a last we've made a start at reconciling our materialist ambitions with the constraints imposed by the natural environment we hope to continue living in.

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CSIRO fills Treasury's gap on environment modelling

After Treasury's hopelessly inadequate attempt to peer into the future in its intergenerational report earlier this year, just look at the far more fair dinkum future-viewing exercise that CSIRO unveiled on Thursday.

Treasury's effort was little more than a propaganda exercise about the need to restrain government spending, and showed clear signs of government interference. It was widely criticised for purporting to tell us what could happen to the economy over the next 40 years while making no allowance for the effects of climate change and other environmental problems.

By contrast, CSIRO's peer-reviewed modelling exercise attempts to look at what may happen to the economy out to 2050, after accounting for the economic effects of climate change – and our efforts to reduce it – plus other environmental problems such as energy use, water use and use of other natural resources.

This attempt to integrate changes in the natural environment with standard economic modelling is a heroic effort, the first time to my knowledge it's been attempted for our economy.

It's contained in CSIRO's first Australian National Outlook report, but also reported separately in this week's issue of the prestigious scientific journal, Nature.

The project was directed by Dr Steve Hatfield-Dodds, a former Treasury economist now with CSIRO, with participation by another three economists and 13 scientists, mainly from CSIRO.

The question they sought to answer was whether the mounting ecological pressures in Australia can be reversed while our population continues growing and our material living standards continue rising.

To put it another way, can economic growth be "decoupled" from natural resource use and environmental stress?

The modelling takes a fairly conventional "computable general equilibrium" model of our economy, but surrounds it with eight other models of different aspects of the environment – global climate change and economic growth, water use, energy use, transportation, land use, material flows and biodiversity – which have effects on the economy.

But can any person or model accurately predict what will happen in the future? Of course not. So the exercise identifies 18 different plausible "scenarios" of how things may unfold and runs each of them through the nine-model set-up.

Each scenario combines differing global drivers of change with differing domestic drivers. The global drivers cover differing rates of growth in the global population by 2050 – it may grow to 8 billion, 9 billion or 11 billion – and differing rates of greenhouse gas emission.

Limiting global warming to 2 degrees above pre-industrial levels by 2100 would require "very strong" efforts to "abate" (reduce) emissions. Limiting it to 3 degrees would require either a "strong" abatement effort if the global population was allowed to grow to 11 billion, or a "moderate" effort if the population grew only to 9 billion.

That leaves "no abatement action", with the global population growing to 11 billion and global warming reaching 6 degrees. Gasp.

The domestic drivers of change cover differing degrees of improvement in agricultural productivity, differing land-use changes from the development of reforestation markets for sequestration of carbon dioxide or for protection of biodiversity, individuals' take-up of opportunities to use energy and water more efficiently, how much of our improving productivity we take as reduced working hours rather than higher real incomes, and how much of our consumer spending we devote to buying "experiences" rather than goods.

(Turns out those last two drivers made little difference to environmental outcomes, according to the model.)

It's assumed that Australia's abatement effort is at the same rate as the global effort. Up to half our net reduction in emissions is achieved by "carbon sequestration" – withdrawing carbon dioxide from the atmosphere and storing it in plants – achieved by reforestation of cleared land.

So, we build this amazing nine-model model, then run each of the 18 different scenarios through it. What results do we get?

In all scenarios, the economy and living standards are projected to grow strongly. The value of economic activity (gross domestic product) is projected to rise 10-fold over the 80 years to 2050 (the exercise actually starts in 1970, with actual data up to 2012).

This increase in GDP is driven by a 2.9-fold increase in population, leaving a 3.2- to 3.6-fold increase in GDP per person.

On some scenarios, net greenhouse emissions fall to zero or lower by 2040. From four times the global average today, our emissions per person could fall below the global average by 2050.

Apart from reforestation, emission reduction comes from reduced emissions (within Australia, not elsewhere) and from the economy's reduced resource-intensity (that is, fewer natural resources being used to generate each dollar of GDP).

National water extractions are projected to maybe double in 2050, but up to half this increase could be met by desalination in coastal cities and water recycling for industrial use.

Water stress – seen in rain-fed water use in water-limited catchments – improves or is stable in seven of the 18 scenarios.

Pressures on biodiversity (preservation of species) could also be reduced despite economic growth and increased agriculture. But carbon and biodiversity tree-planting could increase the pressure on river-based water systems.

Overall, 13 of the 18 scenarios show improvement in a least one environmental indicator, but only three – each requiring "strong" or "very strong" abatement effort and development of reforestation markets – show improvement in all three environmental indicators.

So the modelling suggests economic growth can continue without worsening – and even while improving – pressures on the natural environment, but only if we and the rest of the world greatly increase our efforts to reduce emissions.

Now, I should warn you that modelling exercises – economic and scientific – are always subject to limitations and open to criticism. They rely on many assumptions and are widely misused by vested interests.

I'm sure in 20 years' time, this CSIRO modelling will look very crude. Right now, however, it's a wonder of the modern world.

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We can't divorce the economy from the environment

In case you haven't noticed, a lot of economists are very concerned about Tony Abbott's choice of target for the reduction in greenhouse gas emissions by 2030, to be taken to the international climate change conference at Paris in December.

But if you think that means they believe Abbott's target is too tough and will do too much damage to the economy, you've got the wrong end of the stick.

Most would be likely to believe the target should be more ambitious, and few would be concerned that such a target would do significant economic harm. Conventional economic modelling almost invariably shows the loss of economic growth would be surprisingly small, almost trivial.

They'd be more concerned to ensure the instruments used to achieve the target were those likely to do so at the lowest cost in terms of economic growth forgone. That's why few would have approved of Abbott's decision to abandon Julia Gillard's hybrid carbon tax/emissions trading scheme and replace it with "direct action" payments from the budget.

I'm not claiming every economist thinks this way, of course; just the great majority. There are a few exceptions, naturally, just as you can find the odd scientist who disagrees with the overwhelming majority view that global warming is real and caused by humans.

If you hadn't noticed, consider the leading part played by economists in urging that Australia be at the forefront of international efforts to reduce emissions. First, the various reports by Professor Ross Garnaut​, then the chairman of the independent Climate Change Authority, Bernie Fraser – former Reserve Bank governor and former secretary of the Treasury – then leading non-government experts such as Professor Frank Jotzo​ and Professor Warwick McKibbin, both of the Australian National University.

Note, too, the role of Dr Martin Parkinson, who worked first on John Howard's emissions trading scheme, then on Labor's as the first head of the Department of Climate Change. When Parkinson moved on to become head of Treasury, he was succeeded by another Treasury chap, Blair Comley​.

In fact, there were so many senior Treasury people at the top of the Climate Change department, it was a virtual outpost of Treasury. Both Parkinson and Comley were sacked as one of Abbott's first acts on becoming Prime Minister. Presumably, they were punished for caring too much about global warming.

Remember too that, internationally, both the emissions trading scheme and the carbon and other pollution taxes are inventions of economists. A trading scheme was used with great effect by the Americans in their efforts to reduce acid rain.

Two characteristics of economists stand out when it comes to climate change. First, they accept what the scientists are telling us without argument. Unlike some, they're not disposed to explain to the experts where they're getting it wrong.

Second, they don't believe we can go on thinking "the economy" can be kept in a separate box to "the environment". There are major interactions between the two that can't be ignored.

But, as a journalist, I'm not a member of the economists' union, so to speak, so let me stop describing their majority views and give you mine. My thinking has been influenced by the more radical opinions of yet another economist, Professor Herman Daly, of the University of Maryland.

In defending his latest target, Abbott pledged he'd never put the environment ahead of the economy and jobs. This separate-box thinking is like saying you'd never put staying alive ahead of going to work. Lose your life and whether you get to work or not hardly matters.

Daly says the economy is a "wholly owned subsidiary of the environment". Whether at a national or global level, the economy exists inside the environment – the ecosystem. It's a box inside a circle, if you like.

The point is, all human activity – all our producing and consuming – depends directly on the natural environment. The air we breathe, the water we drink, the food we eat, the clothes we wear, the shelters we build and the energy we use all come from the ecosystem that surrounds us.

Much of our economic activity involves misusing, overusing and abusing the natural environment. We've done great damage to our soil, rivers and aquifers, we've destroyed much habitat and many species, and now the world's overuse of fossil fuels is playing havoc with the climate.

We can be divided into those who want to do what we can to stop the destruction and start on the clean-up, and those who want to put it out of mind and keep on as we are, leaving the bill to be picked up by the next generation.

The latter group will always justify their insouciance by claiming to be putting jobs first. Yeah, sure. For the next few years, at least.

Let me be honest with you. I don't believe those modelling exercises seeming to prove that the economic costs of acting to reduce greenhouse gas emissions will be minor. Such results are a product of the assumptions built into all conventional economic models that, whatever shock the economy is hit by, after 20 years or so, everything will be back to where it would have been.

So, the cost in terms of growth and jobs forgone might be greater than we're being told. But of one thing I'm sure: the longer we leave it, the higher those costs will be.

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All we should be doing to protect land and water

You get the feeling Tony Abbott doesn't lie awake at night worrying about what our economic activity is doing to our natural environment.

In which case, those of us who do care about ecological sustainability – including many Coalition voters and, in all probability, Abbott's successor, whether Liberal or Labor – will have a lot of catching up to do.

This looks like being true of our excessive contribution to global greenhouse gas emissions. But it also applies to the more mundane problems of protecting and restoring our degraded land, water systems and native flora and fauna.

So what should we be doing, even if we aren't yet? The Wentworth Group of Concerned Scientists have produced a paper on Using Markets to Conserve Natural Capital. As the name implies, it has economists' fingerprints all over it.

In many cases the adverse environmental consequences of economic activity aren't reflected in the costs faced by producers and their customers, a classic instance of "market failure" – where the operation of market forces does not produce satisfactory outcomes for the community.

For instance, industries will continue to emit excessive greenhouse gases if there's no market value placed on retaining a stable climate system. And farming may cause land degradation if there's no market value placed on preserving the services the ecosystem provides to society by allowing us to grow food and fibre.

All this is a way of saying that the economy and the environment are inextricably linked but, left to its own devices, the market isn't capable of ensuring we don't stuff the environment and thereby stuff the economy.

Most economists accept this truth, but argue that the least economically costly way to fix the problem is to intervene in markets in ways that harness market forces to the service of the environment.

Often this can be done by getting the social (community-wide) costs of environmental damage incorporated into the private costs borne by producers and consumers. This was the rationale for the Gillard government's policy of using a hybrid carbon tax/emissions trading scheme to put a price on emissions of carbon dioxide and other greenhouse gases.

The concerned scientists accept this logic and propose four market-oriented interventions to reduce future damage to the nation's "environmental assets" and to fix past damage.

Their first proposal is to change the law to impose on all landowners, public or private, a "duty of care" to prevent further damage to their land and water resources. Developing codes of practice would give landowners greater certainty about their obligations.

This reflects the principle that the community's right to a clean and sustainable environment overrides the rights of individuals to unrestricted use of their private property.

Actions of great environmental value that go beyond the standard of care required – such as fixing damage done in the past – could be purchased by governments from private owners using programs that use market-based instruments, such as Victoria's BushTender​ program.

The scientists' second proposal is for the federal government to supplement our efforts to reduce carbon emissions by paying farmers, Indigenous communities and other landowners to engage in "carbon farming" – doing things that improve the rate at which carbon dioxide is removed from the atmosphere and converted to plant material or soil organic matter, where it stays.

If you do this right, it can also be used to restore degraded land. But it involves having a price on carbon so farmers can be rewarded with valuable "carbon offset" certificates.

However, there are risks if the market for carbon offsets isn't properly regulated. "Without complementary land-use controls and water accounting arrangements in place, carbon forests could take over large areas of high quality agricultural land and affect water availability," the paper warns.

"This could create adverse impacts on food and fibre production, and affect regional jobs that are dependent on these industries."

The scientists' third proposal is that we reform the tax system to make it one that doesn't encourage unsustainable practices, but rather encourages the conservation and repair of the natural environment.

"Subsidising or providing economic incentives for fossil fuels makes no sense because it results in increased costs to the environment, costs we will all have to bear sooner or later," the paper says.

It particularly makes no sense when at the same time we're using a tax on carbon to discourage the use of fossil fuels or, as now, spending taxpayers' money to pay for "direct action" to reduce emissions.

And yet our miners and farmers are exempt from paying petrol excise on fuel used off-road. It's the obvious tax break to get rid of – and save the government money.

The paper also recommends establishing a broad-based land tax to provide long-term, equitable funding for paying farmers, Indigenous communities and other land holders to restore and maintain environmental assets in a healthy condition.

Finally, the scientists propose government action to encourage sustainable farming practices. They say farmers need to receive a financial reward for managing their farms sustainably and suppliers, retailers and consumers need to have confidence that their products satisfy rigorous standards.

A farm is sustainable when environmental assets located on the farm are being maintained in a condition that contributes to the overall health and resilience of its surrounding region.

Environmental assets – not all of which will be on farms – include soil, native vegetation, native fauna, water resources (rivers, aquifers, wetlands, estuaries) and carbon.

The financial reward doesn't have to come from the government. Consumers will pay a premium for food that has been grown sustainably, provided they have some assurance this is so.

The government's role is to support the development of voluntary, industry-based sustainable certification of farms and to ensure such schemes are trustworthy. The government should also be active in the development of international sustainability standards so our exporting farmers can participate and benefit.

All very sensible stuff. Now we just need a sensible government.

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Greenery has magic properties

I've just got to get through extended Christmas festivities - and subsequent mopping up - and I'll be off on my hols. What am I doing this year? Same as most years: heading for the bush. This time, we're going to the mountains.

As a denizen of the inner city, I've long had a great desire to get out into the country whenever possible. Get into the grass and trees, where the air is clean and the sleeping seems better.

There's a place we rent not far up the coast that backs on to a national park. I call it Lyrebird Lodge. And even when we go overseas, I often find the country towns beat the big cities.

In recent times, I've been singing the praises of big cities: how efficient they are and how they promote creativity and productivity, particularly in the era of the information economy.

But cities have their dark side and insufficient grass and trees is it. That's more than just a personal preference. Environmental psychologists and others have been gathering impressive evidence of the health-giving properties of greenery.

It's evidence to support the US biologist E. O. Wilson's "biophilia" hypothesis: because humans evolved in natural environments and have lived separate from nature only relatively recently in their evolutionary history, people possess an innate need to affiliate with other living things.

Research published last year found that people who live in urban areas with more green space tend to report greater well-being - less mental distress and higher life satisfaction - than city dwellers who do not have parks, gardens or other green space nearby.

Mathew White and colleagues at the University of Exeter Medical School used a national longitudinal survey of households in Britain to track the experience of more than 10,000 people for 17 years to 2008.

They found that, on average, the positive effect on well-being was equivalent to about one-third of the difference between being married rather than unmarried and a 10th of the effect of being employed rather than unemployed.

A different study followed the experience of more than 1000 people over five years, in which time some moved to greener urban areas and some to less green areas. The results showed that, on average, people who moved to greener areas felt an immediate improvement in their mental health. This boost could still be measured three years later.

"These findings are important for urban planners thinking about introducing new green spaces to towns and cities, suggesting they could provide long term and sustained benefits for local communities," the lead author of the study said.

A study from Canada began by summarising all the various benefits from contact with nature that other research had found: it can restore people's ability to pay attention, improve concentration in children with attention-deficit hyperactivity disorder, and speed recovery from illness. It might even reduce the risk of dying.

Yet another study notes that the first hospitals in Europe were infirmaries in monastic communities where a garden was considered an essential part of the environment in that it supported the healing process.

This study of studies, from Norway, says: "In most cultures, both present and past, one can observe behaviour reflecting a fondness for nature. For example, tomb painting from ancient Egypt, as well as remains found in the ruins of Pompeii, substantiate that people brought plants into their houses and gardens more than 2000 years ago."

Many studies find health benefits from contact with nature. The Norwegian paper says a key element in this may be nature's stress-reducing effect. Stress plays a role in the causes and development of cardiovascular diseases, anxiety disorders and depression.

Contact with nature may help "simply by being consciously or unconsciously pleasing to the eye".

Office employees seem to compensate for lack of a window view by introducing indoor plants or even just pictures of nature. One study found that having a view to plants from the work station decreased the amount of self-reported sick leave.

One of my favourite blog sites, PsyBlog, conducted by the British psychologist Dr Jeremy Dean, notes research estimating that people now spend 25 per cent less time in nature than they did 20 years ago. Instead, recreational time is often spent surfing the internet, playing video games and watching movies.

But this is more up my line: Dean reports a study finding that taking group walks in nature is associated with better mental well-being and lower stress and depression.

The study evaluated a British program called Walking for Health, and involved nearly 2000 participants, divided into two matched groups of those who took part in the walks and those who did not.

The walks, which extended over three months, combined three elements, each of which you'd expect to make people feel better: walking, being in nature and being with other people.

Those who seemed to benefit most were those who had been through a recent stressful life event, such as divorce, bereavement or a serious illness.

"Our findings suggest that something as simple as joining an outdoor walking group may not only improve someone's daily positive emotions, but may also contribute a non-pharmacological approach to serious conditions like depression," one of the study's authors said.

You beaut. When I get to the mountains, I'm hoping to do a lot of bush walking.

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Don't forget our other environmental problems

There's a hidden danger in the ascendancy of climate-change denialism in Canberra. It won't last - denials of reality can never last - but while it does it's an enormous distraction.

The obvious cost is that the longer we leave it to get serious about playing our part in reducing global greenhouse gas emissions, the more expensive and disruptive our efforts will need to be.

But there's also a hidden cost. The more time we spend arguing about climate change, the more our attention is distracted from the many other threats to the economy and our way of life coming from other environmental problems.

We've been conscious of the many other ways economic activity has been degrading our natural environment for decades. We've been working to reduce that degradation for decades, and the need for action has been clear to people on all sides of politics.

What's more, as the Wentworth Group of Concerned Scientists acknowledges in a report published last Thursday, we've made progress in some areas. Air pollution controls have given us much improved air quality in our cities and water pollution controls have created cleaner waterways and restored the health of coastal estuaries.

Controls over land clearing, the creation of additional national parks and investments to manage fire and restore native vegetation on private land have given greater protection to our biodiversity.

New farming practices, such as "minimum till" and landcare, have improved soil structure, increased vegetation and reduced soil erosion.

Overused water resources, such as the Great Artesian Basin, have started to recover following the agreement in 2004 laying the foundation for long-term sustainable management of our freshwater resources.

And incentives to generate renewable energy are driving the transformation of energy markets.

But despite these improvements, the Wentworth Group reminds us that the most recent official survey, the State of the Environment report, in 2011, found other environmental assets are still in poor condition or are getting worse.

Despite all we've done and spent to repair the damage to our land, for instance, the report found the trends for many indicators remain adverse.

On rivers, wetlands and estuaries, many catchments remain in a degraded condition. Within many drainage basins, river condition is still affected by inadequate environmental flows, pollution and changes in ecological processes.

"In Australia's food bowl, the Murray-Darling Basin, 20 of the 23 river systems are in a poor or very poor condition," the group says. And despite the Howard government's appropriation of $10 billion in 2008, the Gillard government's basin plan in 2011 won't restore these rivers to a healthy condition.

The first State of the Environment report in 1996 described the loss of Australia's biodiversity as "perhaps our most serious environmental problem". Since then, the rate of land clearing, a primary driver of species extinction, has slowed.

Even so, land clearing for agriculture, mining, coal seam gas and urban development is continuing to fragment and degrade native vegetation. In the decade to 2010, clearing of native vegetation across Australia still averaged a million hectares a year.

"Clearing of native vegetation, when combined with pollution and over-extraction from waterways, the introduction of weeds and feral animals, and unsustainable fire practices, has resulted in the listing of over 1600 species of native plants and animals as threatened with extinction," the group says.

The condition of the Great Barrier Reef has declined over the past two decades. Since 1986, on average across the reef, hard coral cover has declined by half.

It's surely not saying anything new or controversial that our economy - and our way of life - depend on our preserving a healthy natural environment. Healthy waterways are needed for swimming, fishing, drinking and irrigation, and to allow us to recover from floods and droughts.

Healthy soils store carbon and nutrients, support production of food, fibre and raw materials, store and filter water, and host rich biodiversity.

Healthy native vegetation protects river corridors, filters water, stores carbon, provides wood, protects against erosion, gives people access to nature, manages salinity and provides habitat for plants and animals.

Healthy coasts, estuaries and beaches provide habitat, buffer the effects of storms and give people a place to enjoy nature. Healthy oceans provide food, recreation and habitat for marine plants and animals.

So there's no either/or. If we want the economy to stay healthy we must restore the health of the environment. Should we continue degrading the environment it will rebound on the economy, causing great loss and disruption.

We need to modify our economic activity to reverse the damage we're doing to the environment. This will involve some cost and some frustration for business people who want to be free to make a buck however they please and let others worry about the eventual environmental costs.

But the good news from the Wentworth Group is that if we introduce the right policies the economic cost need not be great. It offers a five-point "blueprint for a healthy environment and a productive economy" on which it will elaborate next year.

The trick is that productivity - how much we make relative to how much we use - is the key to long-term economic growth and a pillar of ecological sustainability. People can create greater value while using less materials and energy, with less impact on the environment.

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Many reasons for the impossible: power demand falling

We know the two great certainties in life are death and taxes, but many thought there was a third: the inexorable rise in consumption of electricity. As the population grew and each of us got a little more prosperous each year, we'd use more power. The mighty electricity industry was built on that certainty.

Except that electricity consumption has been falling for the past four years. To say this has taken the industry by surprise is an understatement. For well over a century – even during the Great Depression – the quantity of electricity used in Australia each year was greater than the year before.

It took the industry and its regulators two or three years to accept the trend was more than just a hiccup on the ever-upward path, which delay probably added to the decline.

There are few aspects of the economy – global or national – where change is more significant, more diverse or more interesting than energy supply and demand – where energy covers coal, gas (conventional and unconventional), petroleum, wind, solar and other renewables. Expect to hear more from me on the topic.

But there are few questions more interesting than exactly why the unthinkable, a fall in electricity consumption, has come about. Short answer: a surprisingly large combination of reasons, although Tony Abbott's crusading against the carbon tax must get some of the credit.

The best attempt to quantify the various factors involved comes from a report prepared by Dr Hugh Saddler, an energy expert with the Pitt and Sherry consultancy, for the Australia Institute. Saddler's modelling covers the years to 2012-13, but we know from reporting this week by Origin Energy and AGL that the fall continued in 2013-14.

Saddler focuses on energy produced and consumed from the National Energy Market, which covers the five eastern states and the ACT, but the decline is occurring also in Western Australia. After peaking in 2008-09, consumption from the national market in 2012-13 was down by almost 8 terawatt hours, or 4.3 per cent.

But that's only half the story. Just as important as why demand has fallen is why it hasn't continued growing, as continued growth in the population and the economy would lead us to expect. Saddler estimates that had demand continued growing from 2004 at its average rate of growth over the previous 20 years (2.5 per cent a year) it would have been 37 terawatt hours more than it actually was in 2012-13.

This shortfall is equal to the output of almost 5000 megawatts of coal-fired generation capacity, the combined capacity of the Bayswater and Eraring power stations in NSW, or Loy Yang A and B and Hazelwood in Victoria.

"All of the decline in consumption has been at the expense of coal-fired generators, with the result that many are now barely profitable," Saddler says.

Greenhouse gas emissions fell by 9.2 megatonnes of carbon dioxide equivalent, about 2 per cent of Australians total annual emissions.

So what has caused our power consumption to fall rather than rise? The biggest single reason is the introduction from the late 1990s of regulations to increase the energy efficiency of refrigerators, freezers and many other residential and commercial appliances, and to increase the energy efficiency of new buildings.

Saddler estimates this explains 37 per cent of the 37 terawatt-hour shortfall from what might have been.

The next biggest part of the explanation is structural change in the economy away from electricity-intensive industries. Over the year to September 2012, three major NSW industrial power users – Port Kembla steelworks, Kurri Kurri aluminium smelter and the Clyde oil refinery – were partly or completely shut down. This explains 10 per cent of the 37 terawatt-hour shortfall.

The evidence also suggests that power consumption by other major industrial users has been little changed over the three years to 2012-13. Saddler estimates that this failure to grow explains a further 14 per cent of the shortfall, taking the total contribution from structural change to almost a quarter.

The next most important part of the explanation is the response of electricity users, particularly residential users, to the higher prices they were being charged. Saddler finds that after 2010 there was "an abrupt change in consumer responsiveness to higher prices".

This was the time when the possible effect of a carbon tax on electricity became a major political issue thanks to the efforts of Abbott and his "sceptic" mates. At the time, retail electricity prices were rising spectacularly, mainly because of a huge increase in spending on upgrading the transmission and distribution networks (poles and wires) to cope with an expected ever-rising peak demand on hot summer afternoons.

Saddler finds evidence to support his argument that all this carbon-tax-related fuss about the high cost of electricity caused many households to be a lot more conscious of what was happening to their power bills and to respond by finding ways to cut their usage – to the extent that they "have managed to completely offset the effect of higher prices on their household budgets by reducing consumption".

This highly unusual jump in the short-run "price elasticity" of electricity explains 19 per cent of the shortfall, he estimates.

He further calculates that the growth in output from rooftop photovoltaic solar and other small, distributed generators accounts for about 13 per cent of the shortfall. This, of course, is a fall in the demand for electricity supplied by the major, mainly coal-fired generators, not a fall in the use of electricity as such.

Saddler notes that for the past three years the annual peak demand has been falling, not increasing, despite the huge investment to cope with ever-rising peaks. When will this additional capacity, which is now built and for which all electricity consumers are paying – and will continue to pay for some years to come – be required, if ever, he asks.

Good question.

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Ignoring climate change will cost the economy

Sometimes I fear Australia has decided to go backwards just as the rest of the world has decided to go forwards. Take climate change. If the repeal of the carbon tax gets through the Senate this week there will probably be celebrations in the boardrooms of all the business groups that lobbied so hard for its removal.

But if they imagine the lifting of this supposedly great burden on them and the economy will mean it's back to business as usual, they'll soon find out differently.

They may have rolled back the economic cost of doing something about climate change, but now they'll face the increasing cost of not doing something about it. As Martijn Wilder, an environmental lawyer with the Baker & McKenzie law firm, finds in a new report for the Committee for Economic Development of Australia, we're going to be hit from all sides.

There are the costly physical effects of climate change we've already started experiencing, there are the consequences for us of measures our trading partners are starting to take to limit their emissions, there's the growing reluctance of foreign institutions to fund new coalmines and power stations and there's the threat to our fossil fuel industries from ever-cheaper renewable energy.

In case anyone's forgotten, Wilder reminds us that the physical effects of climate change include a rise in the sea level, acidification of the ocean, change in rainfall patterns and an increase in the frequency of natural disasters, including droughts. Extreme weather may lead to more bushfires, while heavy rainfall and cyclones may lead to flooding.

Do you think all that generates no costs to business, no disruption to the economy? Take the Queensland floods in 2011, Wilder says. They not only hit insurance company earnings, they also halted production at various coalmines. This forced up world coal prices, with adverse effects for industries reliant on coal.

Since we've always had cyclones and floods, no one can say climate change caused this particular disaster. But the scientists tell us events such as these will become more frequent. And the insurance industry's records tell us the number of catastrophic weather events is already increasing, with the economic losses associated with weather rising.

As for the idea there's no hurry in preparing for problems that may not become acute until later this century, consider this. Had a levee to protect Roma, in Queensland, been built in 2005, it would have cost $20 million. Since it wasn't built, $100 million has been paid out in insurance claims since 2008 and a repair bill of more than $500 million incurred by the public and private sectors since 2005.

This sort of thing is happening in other countries, too. Hurricane Sandy, in October 2012, caused widespread damage in New York, crippling electricity infrastructure and leaving downtown Manhattan without power for four days. The record-breaking storm surge alone cost the local electricity company $500 million and New York businesses $6 billion.

Perhaps such events explain why many other countries are moving forwards rather than backwards in their efforts to combat climate change. Australia's coal and natural gas industries won't escape being affected by tougher regulation of the use of fossil fuels in the countries to which they export.

While Europe has had a weak emissions trading scheme since 2005, the Chinese are trialling such schemes in six provinces. South Korea, one of our main trading partners, is to introduce a scheme next year. The US is taking direct action to cut power station emissions.

China is moving to limit coal to 65 per cent of energy consumption by next year and has banned new coal power generation in Beijing, Shanghai and Guangzhou. Wilder says this will cut demand from the largest importer of Australian coal and thus affect the value of big mining and loading assets in Australia.

The more the rest of the world seeks to reduce its use of coal and other fossil fuels, the more Australian businesses need to contemplate the possibility of their mines becoming "stranded assets" - assets that suddenly become unprofitable and so lose their value.

Until recently, foreign investors and financiers haven't taken climate-change risk into account. Now they're starting to worry not just about the morality of emitting more greenhouse gas, but the risk that investments in new mines and power stations will lose their value before they reach the end of their useful lives. The change started with international agencies such as the World Bank, but is spreading to pension-fund investors.

Then there's the threat from the rise of renewable energy. China's goal of becoming a world leader in renewable energy has made it the world's largest maker of renewable energy equipment and the single largest destination for investment in renewables.

Wilder says renewables are reaching a "point of disruption" and will displace coal and gas power stations in many parts of the world. In Australia, the sharply rising price of gas is increasing the cost-competitiveness of renewables.

"Unlike natural gas and coal, the input for renewable energy is not subject to the volatility of global energy markets and with renewable costs continuing to decline, renewable generation represents a safer long-term investment," he says.

I know, let's get the government to put the kybosh on renewables. That would be a smart move.

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Botched reform causes higher power prices

There's no subject more likely to stir people up than rising electricity bills. With prices roughly doubling since 2007, that's hardly surprising. But why have prices risen so fast? And will they keep rising?

It has suited various business lobbies and Coalition politicians - federal and state - to leave people with the impression the main reason is the carbon tax and the renewable energy target, which requires that 20 per cent of Australia's electricity come from renewable energy sources by 2020.

In truth, the price rises started well before these measures took effect and they explain only a small part of the increase. Which suggests the politicians will suffer yet another loss of credibility when eventually (and stupidly) the carbon tax is abolished and the renewables target is dropped, as seems on the cards, but power prices don't seem to fall by much.

The more important reasons were given by Professor Ross Garnaut, of the University of Melbourne, in a recent speech. Here's my version of his explanation.

One part of the reason is that more people have been using renewable energy and this reduced their demand for conventional electricity from the grid, which is produced mainly by coal-fired generators, of course.

Apart from all the wind turbines, governments - federal and state, Coalition and Labor - have offered incentives to people to incur the significant expense of installing rooftop solar power systems.

The most generous of these incentive schemes have been abandoned but, at the same time, the cost of photovoltaic systems has been falling rapidly, partly because of advances in technology, partly because more purchasers mean greater economies of scale.

The most important economic characteristic of renewable energy is that once you've incurred the high "fixed cost" of installing a system, the "variable cost" of using the system to produce more energy is negligible. Sunshine is free. So once you've got a system, you use it.

A second important part of the reason for rising power prices is that many businesses and households have reacted to the rising price by being more economical - less wasteful - in their use of electricity.

Another factor (one many economists tend to ignore) is that all the talk about the need to reduce emissions of carbon dioxide to stop climate change, and all the talk about how much power we waste, has made more firms and householders waste-conscious. Some people are being careful in their use of electricity as a self-interested response to its rising price, while others - including businesses - are doing it from a sense of duty to society.

By now, I trust, a big red light is flashing in your head. If people are using less power from the grid because more of them are collecting their own and more are reducing their wastage of electricity, doesn't that mean demand for conventional power is falling?

Indeed it does. According to figures from the Grattan Institute, since late 2009 electricity demand in eastern Australia has fallen by about 7 per cent.

But hang on, is this guy saying the price of electricity has gone up because demand for it has gone down? Isn't it supposed to be the other way round? Isn't a fall in demand supposed to lead to a fall in the price?

Well, assuming no change in supply, yes it is. So you're right to be to be puzzled. The relationship I've described between price and demand is, as an economist would say, "perverse".

But why? Because, as Garnaut explains, we've stuffed up the deregulation of the electricity market. (Moral: as we're being reminded by the plan to "deregulate" university fees, if you deregulate or privatise without knowing what you're doing you can make things worse rather than better.)

Before the reform process began, each state had its own, government-owned electricity monopoly, with little trade between the states. From the late 1980s it was decided to break the integrated state monopolies into their component parts - generation, transmission, distribution and retailing - and form one big eastern Australian electricity market with as much competition and as little monopoly as possible.

The power stations were separated into individual businesses - some of which were privatised, particularly in Victoria - and made to compete in a highly sophisticated "national" wholesale market for electricity. Garnaut says this has worked well, with competition keeping the wholesale price low in response to the reduced demand.

But transmission (high-voltage power lines) and distribution (local poles and wires to the premises) are natural monopolies. That is, it's not economic to have more than one network. So whether these businesses are publicly or privately owned, the prices they charge have to be regulated to prevent them overcharging.

Trouble is, Garnaut says, we've done this by fixing the maximum rate of return the businesses are allowed to earn on the capital they have invested. Economists have known for 60 years that this always causes problems because it's so hard to pick the right rate of return.

If it's too low it leads to underinvestment in the physical network, causing blackouts. If it's too high, however, it leads to overinvestment in the network at the expense of business and household customers.

But as well, when monopoly businesses that are guaranteed a certain rate of return suffer a loss of demand, the regulator has to allow them to restore their profitability by raising their prices.

Another red light flashing? Surely if you keep responding to a fall in demand by raising prices, this will lead to a further fall in demand (particularly as the cost of renewable energy keeps falling) and the whole thing will keep going round and round and getting worse and worse.

Just so. People in the know call it a "death spiral". One day soon the regulators of the regulators - aka federal and state governments - will have to step in and call the madness to a halt. Until then, prices will keep rising.

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Our econocrats' vision is too narrow

Part of my job is making sure readers are kept fully informed about the messages our top econocrats are trying to get across to the public. They're usually much franker and clearer than the spin we get from our political leaders.

But just because I report their views faithfully doesn't mean I always agree with them.

As it related to the outlook for the economy, the message in the speech Treasury secretary Dr Martin Parkinson delivered last week fitted well with the messages we've been getting from Glenn Stevens and Dr Philip Lowe, of the Reserve Bank.

It's a warning that, between the slowdown in our rate of productivity improvement, the expected continuing fallback in mineral export prices and the reversal of the "demographic dividend" delivered by the baby boomers, "we face a significant challenge in maintaining the rate of growth in living standards that Australians have come to expect".

Specifically, Parkinson projected that, even if we assume labour productivity grows at its long-term average, the other two factors would cause real income per person to grow by just 0.7 per cent a year over the decade to 2023-24, rather than the 2.3 per cent "to which Australians have become accustomed".

So over 10 years our present annual real income of $63,600 per person would grow only to $69,000, rather than $82,000, leaving us only $5400 a year better off, rather than the $18,400 a year to which we've become accustomed.

To keep average incomes growing as fast as we've come to expect will require us to double our present rate of productivity improvement to 3 per cent a year.

Sorry, but I very much doubt we'll be willing to make the many controversial reforms needed to achieve such a transformation. More to the point, I'm not convinced we should.

The admonitions we get from our econocrats are far too relentlessly materialist and, hence, mono-dimensional. Whatever their professed "wellbeing framework", when the chips are down their advice is to make maintaining the rate at which our material standard of living is rising our highest priority, if not our only priority.

We're always being reminded of the pecuniary price to be paid for worrying about foreign ownership, or saving family farming or preserving the weekend. But the warnings never run the other way: the greater personal stress or relational problems or loss of leisure or greater social disharmony that could accompany going all out to maximise economic growth.

No one knows better than I do that you can't say everything you want to say in the time allotted for a speech or the space allotted for a column. But, even so, some obvious caveats and qualifications almost never rate a mention.

The most obvious is the environment. What reason is there to believe acting to maintain our rate of growth won't do significant further damage, even unacceptable damage to the ecosystem? How do we know continuing climate change - a problem about which we've decided not to make a genuine contribution to international efforts to combat - won't negate our productivity-raising efforts?

How can we talk about capturing a big share of the growth in Asia's demand for Western foodstuffs without mentioning climate change?

To be fair, their present political masters are so down on the environment that our econocrats aren't free to speak on the subject. Parkinson is facing the sack for having been chief designer of the emissions trading scheme (including the Howard government's version) and his successor - an outstanding Treasury officer - has already had the chop. It's a wonder Professor Ross Garnaut isn't behind bars - or at least had his office raided by ASIO.

Another obvious but never-mentioned caveat is the distribution of all this increased income. It's all very well to talk about increasing the average income, implicitly assuming the extra income will be shared in line with the existing distribution. Our experience of income growth over the past 30 years is that a disproportionate share ends up in the hands of the people at the top.

Why no mention of this when ordinary workers are being asked to support reforms that could cost them their jobs?

More basically, how do the econocrats know we'd find a slower rate of growth in our affluence bitterly disappointing? They don't. Their confident claims that we would are based on their faith in materialism, not evidence.

Most of us are condemned to spend 40 years of our lives working 40 hours a week. Why do econocrats never wonder whether making that work more satisfying would do more for our "wellbeing" than making extracting more productivity from our labour the only priority?

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What if growth slowed to a trickle and no one cared?

It is the professed belief of almost every economist, business person and politician that Australians require governments to achieve maximum improvement in their material standard of living. I'm not sure that's true - but we're about to find out.

Of late the econocrats have been warning that, unless we undertake major reform, national income will grow a lot more slowly in the coming decade than it did in the past one. According to Dr David Gruen, of Treasury, gross national income per person grew at an annual rate of 2.3 per cent over the past 13 years, but may grow by only about 0.9 per cent over the coming 10 years.

This projected slowdown is explained mainly by the switch from rising to falling prices for our mineral exports - that is, it focuses on income rather than production. It implies only a small slowdown in the underlying rate of growth in gross domestic product (GDP) per person, being based on the assumption that we maintain our long-run rate of improvement in the productivity of labour - an assumption some may question.

Reserve Bank deputy governor Philip Lowe says that, if we don't achieve a substantial improvement in productivity, "we will need to adjust to some combination of slower growth in real wages, slower growth in profits, smaller gains in asset prices and slower growth in government revenues and services".

So far, these supposedly dire warnings have met with a giant yawn from the public. And, assuming the slowdown comes to pass, I'm not convinced the public will notice it, let alone care. I doubt that we will retain the national resolve to implement the reforms economists say we need to keep incomes growing strongly, nor am I sure the economists' favourite prescription would work. As for myself, I think slower growth could be a good thing.

Would the punters notice? Maybe not. Despite a decade of above-average growth in real income per person, most people would swear that, whoever had been benefiting from the resources boom, not a cent of it had come their way.

For at least seven years, the popular perception has been that people are struggling to keep up with the cost of living - that is, living standards are slipping. And get this: politicians on both sides, who profess to believe that rising living standards are governments' raison d'etre, have fallen over themselves to agree - contrary to all the objective evidence - that times are tough.

Clearly, they believe failing to agree that times are tough is more likely to get them tossed out than falsely confessing to have failed in their supposedly sacred duty to keep living standards rising.

You may object that the punters' failure to perceive that their living standards have been rising may not stop them correctly perceiving that living standards are now rising only slowly. But consider the United States, where real median household income has been flat to down for the past 30 years because almost all the real income growth has been appropriated by the top few per cent.

Have decades of failure to enjoy rising material comfort caused the American electorate to rise up in revolt? Not a bit of it.

It's significant that the advocates of eternal growth never promote it in terms of rising affluence, but always in terms of the need to create jobs. Barring recession, there's no suggestion production won't be growing fast enough to hold unemployment at about 5 per cent over the decade.

Of course, a recession that led to rapidly rising joblessness would undoubtedly cause great voter disaffection, but that's not what we're talking about.

While it may be possible for the economic, business and political elite to agree their precious materialism has sprung a leak and that something must be done, that doesn't mean they could agree on major reform; it's more likely to lead to continued rent-seeking at the expense of other interest groups. If my share of the pie is bigger, what's the problem?

Economists have no evidence to support their fond belief that the burst of productivity improvement in the second half of the 1990s was caused by micro-economic reform. But even if you share their faith, it's a dismal record: if you undertake sweeping reform of almost every facet of the economy then, 10 to 15 years later, you get no more than five years of above-average improvement. What's more, all the big reform has already been done.

With the global ecosystem already malfunctioning under the weight of so much economic activity, it's time the age of hyper-materialism came to an end and we switched attention from quantity to quality.

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How we lost our way on climate change - sorry, kids

I don't have grandchildren but I'm hoping for some, someday, so this column is for them. I want you to know that although, in the mid-teens of this century, Australians elected a government that wasn't genuine in its commitment to combating the effects of climate change, and that even abolished the main instrument economists invented for that purpose, I never accepted this complacency.

Partly because that government's predecessors had done such a poor job of introducing effective measures - and even a party known as the Greens played its cards all wrong - the nation lost its resolve and allowed its original bipartisan commitment to decisive action to be lost.

The minority of people who doubted the scientists' advice that the globe was warming combined with libertarians - who, as a matter of principle, oppose almost all arguments for intervention by government - to persuade the Liberals to break with bipartisanship.

If the Liberals under their new leader, Tony Abbott, had opposed action against climate change outright, Liberal voters who accepted the need for action would have been forced to choose between the party and their beliefs.

Instead, Abbott focused his opposition on the Labor government's main instrument for gradually bringing about a reduction in emissions of carbon dioxide and other greenhouse gasses, an emissions trading scheme whose price would be fixed by the government for the first year or two.

Abbott insisted the Coalition remained committed to Australia's international undertaking to reduce emissions by at least 5 per cent below 2000 levels by 2020, and by 15 per cent or 25 per cent provided other countries were taking comparable action.

The big difference was that, rather than using Labor's "carbon tax" to achieve the target, the Coalition would rely on "direct action", such as offering monetary incentives to farmers and others to reduce emissions.
This left Abbott free to run an almighty scare campaign about how Labor's "great big new tax on everything" would greatly increase the cost of living for ordinary Australian families and impose big costs on Australian businesses, which would impair their ability to compete.

Abbott associated with outright climate-change deniers and said things that seemed to brand him as one of them, while always adding, sotto voce, that he accepted human-caused climate change and the need to do something about it.

Apart from attracting voters away from Labor and its frightening carbon tax, the result of making climate change an issue of party dispute was to give Liberal supporters a licence to stop worrying about climate change - if the leaders of my party aren't worrying, why should I? - while providing a fig leaf for those Liberals who retained their concern.

The business lobby groups' initial position had been: if it's inevitable we do something, let's get on with it and make future arrangements as certain as possible. But with their side of politics inviting them to put their short-term interests ahead of the economy's long-term health, most business people found it too tempting to resist.

To be fair, some businesses stuck with their schemes to reduce their own emissions and some pressed on with repositioning their business for a world where the use of fossil fuels had become prohibitively expensive as well as socially disapproved of.

You will find this hard to believe, but in the mid-teens, it was still common to think about "the economy" in isolation from the natural environment which sustained it. Economists, business people and politicians had gone for two centuries largely ignoring the damage economic activity did to the environment.

The idea that, eventually, the environment would hit back and do great damage to the economy was one most people preferred not to think about. At the time, it was fashionable to bewail the lack of action to increase the economy's productivity. Few people joined dots to realise the climate was in the process of dealing a blow to our productivity, one that would significantly reduce the next generation's living standards.

At the time, we rationalised our selfishness - our willingness to avoid a tiny drop in our standard of living at the expense of a big drop in our offspring's - by telling ourselves half-truths and untruths about the global nature of climate change.

We told ourselves there was nothing Australia could do by itself to affect climate change (true), that at the Copenhagen conference in 2009, countries had failed to reach a binding agreement on action to reduce emissions (true) and that the world's two biggest polluters, China and the US, were doing nothing much to reduce their emissions.

We had no excuse for not knowing this was untrue because successive government reports told us the contrary. One we got just before the carbon tax was abolished, from the Climate Change Authority, said the two superpowers were stepping up their actions to reduce emissions. "These measures could have a significant impact on global emissions reductions," it concluded.

I recount this history to explain how my generation's dereliction occurred, not to defend or justify it. We knew what we should have done; we chose not to do it. I never fell for any of these spurious arguments.
Did I ever doubt that climate change represented by far the greatest threat to Australia's future economic prosperity? Never. Should I have said this more often, rather than chasing a thousand economic will-o'-the-wisps? Yes.

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Death of man who inspired the emissions trading scheme

The man who first thought that governments should auction off rather give away the rights to such things as broadcast spectrum or taxi licences, and who started the thinking that led to the invention of emission trading schemes, died last week at the age of 102.

He also inspired the joke economists tell each other as a warning against reading too much into statistics: "If you torture the data long enough, it will confess."

He was British-American economist Ronald Coase (rhymes with rose), of the University of Chicago, who in 1991 was awarded the Nobel prize for his trouble.

The first of his discoveries came in 1937 and launched a whole sub-field of economics, but now seems pathetically obvious. He asked why firms exist. Why do capitalists employ people to make or do lots of things for them, when most of those things could be bought from the market?

Why are many of the things produced by a "market economy" actually produced inside firms - some of them employing many thousands of people - where employees have to do as they're told by the boss and the rules of the market don't apply?

His answer was that buying things from others in the marketplace involved hidden costs, which he dubbed "transaction costs" - the cost of finding the best deal, checking quality, negotiating a price, writing a watertight contract and then, if necessary, enforcing that contract.

Business people would do things "in house" whenever this was cheaper than incurring all the transaction costs involved in buying from the market. (But once you start thinking like that, it eventually occurs to you that there will be times when it's cheaper to "outsource" the provision of services you formerly provided in-house.)

In a paper on the US Federal Communications Commission, written in 1959, Coase argued that the transaction costs faced by the commission in deciding which of the many applicants for a broadcast licence would make the greatest contribution to the economy were impossibly high.

But this did not justify the commission continuing to give away licences to whomever it saw fit. It would be better to replicate market conditions by auctioning the licence to the highest bidder. This way, the licence would go to the firm most likely to put the licence to its "highest-valued use".

Do you see how this led to the invention of the tradeable permit? Say the government is trying to limit to a certain level the catching of a particular type of fish, or limit emissions that cause acid rain, or those that cause climate change.

It issues permits for firms to catch or emit up to that level. Because this level is lower than the market would otherwise produce, it has thereby increased the item's "scarcity value", allowing firms with permits to get away with charging a higher price.

If it gives the permits away to firms, it's effectively allowing them to levy a tax on their customers. If it auctions the permits, it's ensuring the proceeds of the disguised tax are collected by the taxman.

The firms that get the licences by bidding highest can be expected to pay no more than allows them to continue profitably producing whatever it is. They'll also have a monetary incentive to find ways to continue producing their product while generating fewer emissions.

And by allowing firms to trade their permits - say, to sell any they discover they don't need - you increase their incentive to find ways to reduce their emissions, as well as ensuring the burden of reducing emissions is shifted to those firms that can do so at the lowest cost.

But Coase's greatest claim to fame came from a paper he wrote in 1960, The Problem of Social Cost, which became the all-time most cited paper by other academic economists and made him the darling of libertarians and free-market conservatives.

Social costs - also known as "negative externalities" - are costs imposed on third parties by transactions between people in the marketplace. Say I run a factory that imposes a lot of noise on my neighbours, emits fumes and puts gunk into the local river. Since this polluting costs me nothing it represents costs borne by the community, not by me and my customers. It's a cost that's "external" to the market.

What should governments do about this problem? The traditional answer was for them to protect the victims of this action by imposing restrictions or obligations on the perpetrator.

But Coase argued that, simply by clarifying the property rights involved, governments could leave it to the affected parties to negotiate a satisfactory solution. Again, the solution could be left to the market.

What's more, this ability to reach a privately negotiated solution meant it didn't matter to which side the government awarded the property rights. The libertarians loved this so much they called it the "Coase theorem".

What they liked was that it appeared to justify a greatly reduced role for governments in solving environmental problems. That it would also favour the rich and powerful was, of course, purely coincidental.

Over the years, however, Coase made it clear the libertarians had taken him out of context. For one thing, he'd argued that to whom you awarded the property rights made no difference from the perspective of economic efficiency. Obviously, it made a big difference from an equity or fairness perspective.

And his theorem had been based on the explicit assumption that the transaction costs involved in negotiating a solution were negligible. Not surprisingly, the man who had discovered transaction costs thought that, in the real world, transaction costs would be significant and often prohibitive.

Is it easy for all the people affected by a factory's pollution to get together and negotiate a satisfactory solution with a rich factory owner? Sounds to me like a case for government intervention.

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Forest logging propped up by conservationists

Everyone knows the environment and the economy are in conflict; that any effort we make to protect the environment comes at the expense of profit and jobs.

So, for instance, everyone knows that if the community wants to see restrictions on the logging of native forests in Tasmania, it's only reasonable for the government to compensate the industry and its workers for their loss of livelihood.

And this is precisely what the federal government has been doing for years. As long ago as 1989, the Tasmanian forestry sector received $42 million under the Helsham agreement. Under the Tasmanian regional forestry agreement of 1997, it got $110 million and under the Tasmanian community forest agreement of 2005, it got $203 million.

Under the Tasmanian forestry agreement - negotiated by the industry, unions and conservation groups, and finalised earlier this year - it will get another $300 million. Two weeks ago, as the battle for Tasmanian votes hotted up, Labor announced that the release of some of this money would no longer be conditional on the preservation of certain forests.

The national native forest industry has been doing it tough in recent years. Over the period from 2009 to 2011, removals of "roundwood" (logs) were 30 per cent below the average of the previous 18 years. And woodchip exports fell by a third between 2008 and last year.

The fall in production and exports has bankrupted the native hardwood industry's largest producer, Gunns Limited, and led to the closure of numerous processing facilities around the country.

State forest authorities have also recorded substantial losses. Forestry Tasmania recorded a net loss before tax and other items of $64 million over the four years to last year, an average of $16 million a year. The Forests Corporation of NSW recorded a total loss of $85 million over the same period, an average of $21 million a year.

The way the industry likes to tell it, it was hit by the banning of logging in certain forest areas and the tightening up of forest management practices. But while it was recovering from this blow, it was hit first by the global financial crisis and then by the high dollar (which has reduced earnings from exports and reduced the price of the imported forest products it competes against).

Talk about bad luck. Clearly, the industry just needs a bit of government help to keep it on track until things get back to normal.

And, indeed, all of the parties to the latest Tasmanian forestry agreement believe it will deliver "an ongoing, vibrant forestry industry in Tasmania based on native forests and, increasingly in the future, plantation".

There's just one problem: this is wishful thinking. The industry's story uses the environment as a convenient whipping-boy to draw attention away from its long-term structural decline - and probably demise.

The chequered story of the native forest industry and the way it has sucked ever-growing subsidies from governments can be deduced (as I have done) from a report prepared earlier this year by Andrew Macintosh, of the Australian National University, for the Australia Institute, The Australian Native Forest Sector: Causes of the decline and prospects for the future.

It's true the industry has been adversely affected by conservation measures, the global financial crisis and the high dollar. But they're secondary to its underlying problem of declining demand for its products and increasing competition both from other products and other, overseas producers of its products.

When you look at it, you see that the logging of hardwood native forests is under pressure from every direction.

To the extent that people still want hardwood, they increasingly prefer it from plantations, not native forests. But demand for hardwood itself is declining in favour of softwood, most of which comes from plantations.

Demand for wood is being reduced by demand for other products such as steel, by engineered wood (where thin bits of wood are glued together in different ways) and by wood-saving innovations.

And all that's before you get to increased competition from wood producers in other countries - competing in our domestic market and competing in our export markets.

The supply and future supply of plantation wood has been greatly expanded by another government subsidy, managed investment schemes, in which misguided punters overinvested in crazy pursuit of tax breaks.

Where the native forest sector can't sell its logs for use in building construction - as increasingly it can't - it sells them to be chopped into woodchips for papermaking. Naturally, woodchips are worth less. But even the native forest woodchip market is facing reduced demand and increased competition.

Macintosh concludes that "with sluggish demand in many key markets, strong competition from Asian, South American and African producers, and a distinct market preference for plantation-sourced products" and "in the absence of additional government assistance, the sector is likely to continue to decline and, in some areas, it could collapse entirely".

See what's happening? Our perception that protecting the environment is always in conflict with the economy and jobs is being used by the industry, its unions and the politicians as a cover for continued handouts to the industry, handouts that will do nothing but delay the inevitable.

And the conservation groups, having been convinced the industry's problems are all their fault, are running cover for an industry that doesn't want to face the truth and politicians trying to buy Tasmanian votes.

The result is that taxpayers are paying to allow an industry that probably would have collapsed to continue doing damage to native forests. It's getting help other industries wouldn't get, partly because it's doing something most other industries don't do: destroying the environment.

This makes sense?

If the conservationists had more sense they'd joint the economic rationalists in urging governments to stop giving subsidies - explicit and hidden - to an industry trying to defy market realities.

Environmentalists would do more good if more of them knew a bit of economics.

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Sorry, productivity isn't almost everything

To be frank, I don't lay awake at nights worrying about how Australia is going to lift its rate of productivity improvement back to 2 per cent a year. Contrary to the impression Kevin Rudd is trying to convey with his seven-point productivity plan, higher productivity would do little to help us make the transition to the post-resources boom world.

The biggest risk in the potential hiatus between the waning of the boom and the return to healthy growth in the non-mining economy is an unacceptable rise in unemployment, and higher productivity won't fix that.

For one thing, the threat to employment is immediate and relatively short term, requiring deft management of the macro-economic levers, not the longer-term measures needed to enhance our productivity performance.

More fundamentally, improved productivity is about increasing our material standard of living - real income per person - not about increasing employment (which, in any case, shouldn't be more than a temporary problem).

I worry a lot more about whether our existing high material standard of living is compatible with the preservation of a healthy natural environment - including one that avoids excessive global warming - than about how we can drive our consumption levels even higher. The origins of the very resources boom we're struggling to adjust to - and our hand-rubbing contemplation of Asia's rapidly growing middle class - ought to be making us wonder whether the globe's natural resources and ecosystem will be able to cope with so much affluence.

So if we fail to get productivity improving at the rate of 2 per cent a year rather than 1.6 per cent, I won't be shedding too many tears. Apart from ecological sustainability, I give improving our non-material quality of life a much higher priority than increasing the number of cars, TV sets and gadgets per home.

But for all the business people, economists and politicians who profess to care so deeply about accelerating our rate of consumption let me offer some advice: you won't get far until you can see past your sectional interests and ideological hang-ups. If the hyper-materialists were genuine in their drive for faster productivity improvement they'd be ascertaining those measures likely to do most to enhance productivity and resolving to pay whatever price was necessary to bring them about.

But that's not what they're doing. Rather than asking which measures would be most effective, they're asking which measures they'd be most comfortable with. Whether the most comfortable measures would be particularly effective doesn't seem to worry them. Take the business lobbies. They're proceeding on the theory that anything making life easier for business must surely be good for productivity. So top of their list is a return to individual bargaining in industrial relations, followed by measures that reduce the tax burden on business and increase it for everyone else. As for the economists, they're really only interested in measures that fit their model's built-in presumption against government intervention in the economy.

So their preference is for measures that reduce intervention - micro-economic reform - and do little to add to government spending and taxation. The first problem with this approach is that it's generally unpopular with the electorate and invokes fierce opposition from vested interests, mainly business interests.

Successive governments have been reluctant to undertake further micro reform for well over a decade. So if more micro reform is the key to faster productivity improvement don't expect to see much improvement.

The second problem with the economists' approach is it means they have little enthusiasm for productivity enhancing measures that involve significantly increasing government spending.

Trouble is, this includes the two areas where big productivity gains are most likely to be found: greater investment in education, training and research to increase human capital, and greater investment in public infrastructure to improve the conditions in which our businesses operate.

It shouldn't be assumed that all we need to improve education and infrastructure is a lot more spending. But nor should it be assumed - as many economists do - that all that's needed is reformed government intervention in these areas. In truth, both better intervention and a lot more spending are needed. The first part is tricky, the second is ideologically unfashionable (as well as requiring higher taxes).

To be sure, the Labor government is already spending a lot more on education and training, and this should favourably affect productivity in due course. Ideological blinkers have prevented many people from seeing that the Gonski reforms to direct greater funding to disadvantaged students should have a productivity pay-off - as should the national disability insurance scheme.

My guess is any improvement we see in our productivity performance will happen more in spite of all the speech-making on the topic than because of it.

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