Decarbonising the Australian economy is vital and will cost money. The longer we put it off, the quicker we need to do it to get to net zero emissions by 2050. 

Australia will need new power plants, some new transmission lines, new battery storage, new appliances and many other changes. It will be a much softer hit to the economy if we spend that money over several decades rather than just one. This is why getting cracking on decarbonisation is vital — to spread the cost out over time.

Governments and companies can act as a buffer for the costs for a time by paying upfront and holding debt, but this can’t last forever. We will pay back government debt with taxes and pay back company debt via higher prices, lower wages, and lower returns on investments.

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If the costs of change are too high in any one period, Australians will start to notice. Consumers could face higher taxes, higher prices and potentially even lower pay. Such a confluence would put living standards at risk, raise the spectre of populist politics and put at risk the viability of the whole vital project. 

To combat these risks, we should direct powerful economic forces to prop up living standards during the decarbonisation process.

The power of being productive

Productivity isn’t everything, but in the long run, it’s almost everything.

Paul Krugman 

An economy grows based on three things: more people, more capital (i.e. buildings, vehicles, computers, machines) and better ways of combining people and capital. The first two are easy but costly. The third is the holy grail. Any time a business comes up with a new, more efficient approach of using its staff and its capital, we call that a productivity gain.

If a business changes a process that turns a two-hour admin job into a two-minute admin job, that’s a productivity enhancement. Productivity gains allow the business to make more with less — expanding the potential output of the whole economy.

They explain why, in some areas like electronics, clothing, furniture and cars, prices are lower now than they were 30 years ago. Businesses use scientific advances to create better products more cheaply. Making consumer items better and cheaper is a major way productivity growth creates higher living standards. 

They also explain why economists love growth — you can, in theory, get perpetual growth in output while using the same amount of inputs. But as some Australian industries decarbonise, they will face a step down in productivity — producing the same amount at higher cost. 

One part of the solution is to emphasise that our living standards are directly enhanced by reducing emissions. Remind people that bushfires hit living standards hard, even though they damage GDP lightly.

But that may not be enough to convince everyone. Keeping the economy ticking is also vital. So if one sector gets less productive, we need to make sure other industries can be more productive to compensate. 

Unleashing productivity gains to compensate for the costs of decarbonisation is a terrific idea, but a difficult one. Governments have been trying to raise productivity for years, and it is hard. Australia’s multi-factor productivity growth was negative for much of the 2000s. GDP per hour worked was at least growing then. Now it is flat, with the latest data for 2019 actually lower than the final data point from 2016.

Productivity gains can come from two types of changes. The best is the continual grind of technological progress — better materials, better software, better computers, better engines, better robots. All these help businesses run more efficiently. 

Note of course that we don’t get the productivity benefit when these things are invented. We need to actually adopt them. This is why there is low-hanging fruit. Many businesses are so far behind the productivity frontier in Australia that adopting simple things like accounting software could yield big productivity bonuses. 

The second source of productivity gains is from rule changes. This is not a continual grind, it’s more of a once-off jump. But it is true we can occasionally help businesses be more productive by cutting taxes, deregulating, and introducing competition. 

Keeping the living standards of Australians from a sharp fall during the decarbonisation project is going to require us to attempt to milk extra productivity from both these sources. Every drop counts.

Because if people find themselves facing higher grocery bills and rising unemployment, they might soon vote for whomever promises to unleash cheaper fuel, and the decarbonisation project could face another damaging hiatus.

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Peter Fray
Peter Fray
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