SENATE INQUIRY SUBMISSION July 2014

Australia’s Innovation System

The Australian Conservation Foundation (ACF) welcomes the opportunity to provide a submission to the Senate Economics References Committee on the challenges to Australian industries and jobs posed by increasing global competition in innovation, science, engineering, research and education.

ACF is committed to inspiring people to achieve a healthy environment for all Australians. For over 40 years ACF has been a strong voice for the environment, promoting solutions through research, consultation, education and partnerships. ACF is Australia’s leading national not-for-profit environment organisation, funded almost entirely by our members and supporters.

Introduction

There are big challenges ahead for Australia. We have grown wealthy as a country, but with hidden costs, and the cracks are beginning to show more and more. Australia has the most carbon-intensive economy of any developed country; and we are squandering our natural capital – degrading and destroying the rivers, 1 oceans,2 land, climate, biodiversity3 and forests which provide materials and services that underpin our lives, businesses and the economy.

Economic activity in one system impacts on others – agricultural activities and other land uses pollute the water catchments that drain into the sea, having a substantial impact on the health of the Great Barrier Reef. This influences not only the intrinsic value of the largest coral reef in the world, but also the productivity of fisheries and tourism industries, which contribute $5.4 billion to the Australian economy.4 These already compromised ecosystem services will continue to decline if levels of exploitation and pollution remain unchecked.

The Australian economy is beginning to slow – our high dollar is making our manufacturing and agricultural sectors less competitive, our labour markets continue to weaken and the decline in mining income and fiscal consolidation is pulling steam out of the economy.

1 Queensland Government (2013) Land use impacts on Great Barrier Reef water quality and ecosystem condition http://www.reefplan.qld.gov.au/about/scientific-consensus-statement.aspx 2 OECD (2013), Environment at a Glance 2013. http://www.oecd.org/env/indicators-modelling- outlooks/environment-at-a-glance.htm 3 OECD (2013) op cit. 4 Queensland Department of the Premier and Cabinet, (2009) Reef Water Quality Protection Plan. http://www.reefplan.qld.gov.au/resources/assets/reef-plan-2009.pdf Meanwhile international economic uncertainty continues. A new study by the OECD predicts a weaker outlook and rising income equality to 2050.5 According to the OECD, aging populations in many advanced nations and a gradual deceleration in emerging economies in combination with the immense impacts of unchecked will see global growth in GDP contract. Concurrently, increasing concern about environmental sustainability and climate change is already affecting demand for fossil fuels and is contributing to global competition in sustainable goods and services.

Providing for a growing population and improving living standards and equality for all will challenge our ability to manage and restore those natural assets on which all life depends. Failure to protect and restore natural capital will have serious consequences, especially for the poor, and will undermine the prosperity of current and future generations.

The Australian economy needs a transformation. We must take action to ensure we can maintain our prosperity. But we also must ensure that this prosperity is fairly shared, that our economy creates enough jobs for everyone and that we are environmentally sustainable.

Reform and investment in a broad range of policies – education, innovation, taxation and infrastructure – are needed to maintain prosperity and make our economy more sustainable. Contrary to the assertions of some vested interests and their supporters, we do not have to make a choice between protecting the environment and creating prosperity.

Australia can take benefit from its comparative advantages – we are located close to growing Asian markets; have vast high quality renewable resources; highly skilled labour force; and a history of innovation. Sensible choices and forward-looking policy can ensure we are not building stranded assets, storing up costs for the future.

The type of economic development that will serve Australia well in the future will be clean and sustainable. By creating policies and institutions that drive research and foster innovation, governments can secure increased prosperity for all without increasing costs or compromising intergenerational sustainability. This submission sets out the rationale for stable and long-lasting innovation policies, in combination with evidence-based pollution and environmental regulations.

Recommendations

1. Embed ecological sustainability indicators and targets in innovation policy. Using GDP as the primary measure of our economic development, which does not adequately value the environment or social equity, creates risks for policy making in making socially-costly decisions. Natural and social capital should be measured, which results in informed policy decisions.

5 OECD Newsroom, ‘Global growth to slow as wage inequality rises over coming decades, says OECD’ accessed July 2014 http://www.oecd.org/newsroom/global-growth-to-slow-as-wage-inequality-rises- over-coming-decades.htm

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2. Embed principles of ecologically sustainable development in innovation policy. Australia's National Strategy for Ecologically Sustainable Development (1992) defines ecologically sustainable development as: 'using, conserving and enhancing the community's resources so that ecological processes, on which life depends, are maintained, and the total quality of life, now and in the future, can be increased'. Innovation policies and measures should primarily target achieving ecologically sustainable development at lowest cost.

3. Innovation and environmental policy should be consistent and interlinked to benefit from substantial double dividends. This should include setting the right institutional frameworks and developing a holistic cross-department policy framework. The government should set up systems to encourage cross-sectoral partnerships in the private sector, e.g. brining researchers and private companies together.

4. The government should assess both future export markets and Australia’s comparative advantage when devising innovation and environmental policy. Innovation and environmental policy are inherently long-sighted policies with products taking time to mature. Without an understanding what the future may look like, we may be left with stranded assets and products with no export markets.

5. Create the right conditions for a skilled and flexible workforce who understands sustainability.

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The case for innovation

Innovation is a primary driver of growth, employment and prosperity. 6 This view is backed up by mainstream economic theory showing that more effective products and processes lead to productivity gains and a sustained increase in output, wealth and growth, as seen in recent decades in India and China. Similarly, the OECD recognises we are “at a time when many countries have stagnating or declining populations and face diminishing returns from labour inputs and investment in physical capital. Future growth must therefore increasingly come from innovation-induced productivity growth.”7

However, the market under-invests in innovative capacity because of knowledge and technological co-benefits that may not necessarily benefit the innovating firm directly. 8 This is exacerbated by high market barriers and levels of individual risk. Now there are a number of additional contexts that contribute to the need to take a more considered approach to innovation policy.

First, Australia must compete in a changing global economy. The rise of Asian economies is causing a shift to a multi-polar world, increasing competition in innovation, science, engineering, research and education. This globalisation and growing wealth has led to new markets and the closure of old ones; the recognition of environmental costs – particularly from climate change – is leading to changes in behaviour and demand. Australia should take advantage of these opportunities, anticipating future markets and targeting innovation strategically.

Second, our economic growth is largely powered by unsustainable exploitation of natural capital. Well-functioning ecosystems deliver economic benefits – fisheries provide food; healthy wetlands filter water and alleviate flooding; forests store carbon; and green spaces cool the urban environment – in addition to more intangible benefits associated with heritage and wellbeing. There are costs to our economy and way of life of depleting and destroying this natural capital, but businesses and communities are not held accountable for the damage they make.

The value of our natural capital

Australia’s dependency on declining natural resources presents a number of risks. Reliance on exporting commodities to booming Asian markets exposes our economy to shocks in

6 See for example: http://www.oecd.org/inclusive- growth/The%20OECD%20Innovation%20Strategy.pdf 7 OECD (2010) Ministerial report on the OECD Innovation Strategy, key findings. http://www.oecd.org/sti/45326349.pdf 8 OECD (2010) The OECD Innovation Strategy http://www.oecd.org/inclusive- growth/The%20OECD%20Innovation%20Strategy.pdf

4 commodity prices.9 A recent report by global financial analysts AllianceBernstein found that Australia is the most likely country to be affected by a commodity downturn due to tapering off of Chinese demand, coupled with the end of mining investment.10

Depleting our resources is causing declines in productivity of dependent sectors. Recent extreme droughts have had economic consequences for agriculture; financial services are becoming left with investments in stranded assets; and insurance costs are increasing from climate change impacts. The International Labour Organisation finds that under a business- as-usual scenario, productivity levels in 2030 would be 2.4 per cent lower than today and 7.2 per cent lower by 2050 due to environmental degradation and loss of natural capital.11

In addition to the “intrinsic” value of nature, our dependence on ecosystem services means further exploitation and degradation will damage our health and wellbeing and ultimately our life support system. Australia is one of the most biologically diverse countries on the planet. It is home to more than half a million species of plants and animals, many of which are found nowhere else in the world. Large stretches of the continent are still covered by intact expanses of natural vegetation and ecosystems including the savannah woodlands of the tropical north and the arid landscapes of the centre and west. Australia is also surrounded by some of the most biodiverse and intact marine ecosystems. This rich biodiversity creates economic benefits through provision of ecosystem services such as clean air, fresh water, fertile agricultural soils, and productive fisheries, as well as providing the basis for Australia’s substantial tourism industry. These relatively intact ecosystems also positively impact the quality of our lives through the provision of cultural landscapes and opportunities for recreation and renewal.

The challenge of living within sustainable limits also presents opportunities for Australia. There are programmes in place to restore and preserve our environment that create economic benefits. Declines in some fisheries have been reversed, and there has been restoration of water for environmental use in the Murray-Darling Basin. Like most developed world economies, Australia is decoupling its emissions from its economic activity – GDP grew by nearly 90 per cent between 1990 and 2010, but with a 31 per cent reduction in carbon intensity.12

9 InvestorDaily, ‘Australia exposed to biggest shock over end to mining boom’. Accessed July 2014 http://www.investordaily.com.au/31336-australia-exposed-to-biggest-shock-over-end-to-mining-boom 10 AlianceBernstein (2013), The Commodity Supercycle and the Risks of "Dutch Disease" https://www.alliancebernstein.com/Perspectives/Perspectives-Articles/Commodity- Cycle/Stories/Contents-Text.htm 11 International Labour Organisation, (2012) Working towards sustainable development: Opportunities for decent work and social inclusion in a green economy. http://www.ilo.org/global/publications/books/forthcoming-publications/WCMS_181836/lang-- en/index.htm 12 OECD (2013), Environment at a Glance 2013. http://www.oecd.org/env/indicators-modelling- outlooks/environment-at-a-glance.htm

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But there are many areas where progress has not been fast enough – the ‘safe’ carbon pollution boundary (350 parts per million) has been passed and Australian businesses and industries have begun to feel the consequences of a more unstable climate. Australia is still the most carbon intensive economies per capita of any developed country and second highest level of carbon pollution per unit of GDP. Most fossil fuels cannot be burned if we want temperature to stabilise this century.13 -fired power is often erroneously described as ‘cheap’ because the impact of pollution is not being considered. ATSE estimate total external costs of greenhouse gas impacts and health damage of $A19/MWh for natural gas, $A42/MWh for black coal and $A52/MWh for brown coal14 – with a wholesale electricity price of around $45/MWh15 the magnitude of these is even starker.

Despite the overwhelming value to businesses and society, natural capital is invisible within traditional economic measures like GDP. 16 GDP can continue to grow (at least in the short term) when the resources it depends upon are being depleted.17 When its value is accounted for, natural capital is estimated at around twice the value of GDP.18 Our indicators being focused primarily on ‘economic’ growth do not show the true cost and encourages dependency on these resources and exposure to shocks in commodity prices. In Victoria alone, $15-36 billion in extra economic benefits and 100,000-200,000 additional jobs could be achieved fifteen years if we look after our natural capital. 19

Innovation policy

In this setting, a robust innovation policy framework is one of the most important drivers of future prosperity. The Government has a vital role in shaping and regulating Australia’s evolving innovation system. Well-targeted policy will enhance resource productivity, technology development and adoption, education and collaboration, all of which have

13 The Climate Institute, (2013) Unburnable Carbon: Australia's carbon bubble http://www.climateinstitute.org.au/unburnable-carbon.html 14 Australian Academy of Technological Sciences and Engineering (2009) The Hidden Costs of Electricity: Externalities of Power Generation in Australia http://www.atse.org.au/Documents/Publications/Reports/Energy/ATSE%20Hidden%20Costs%20Elect ricity%202009.pdf 15 AEMO, ‘Average price tables’, Accessed July 2014. http://www.aemo.com.au/Electricity/Data/Price- and-Demand/Average-Price-Tables 16 World Bank, ‘Brief Natural Carbon Accounting’. Accessed July 2014 http://www.worldbank.org/en/topic/environment/brief/environmental-economics-natural-capital- accounting 17 OECD (2013) Green Growth in Cities. http://www.oecd.org/greengrowth/greening-cities- regions/green-growth-in-cities.htm 18 Costanza, R et al. (1997), The value of the world’s ecosystem services and natural capital. Nature Vol 387. 19 The Future Economy Group (2014) Bringing Victoria’s Economy into the 21st Century. http://www.futureeconomy.com.au/download-reports/

6 positive spillovers for the entire economy. 20 Well-functioning labour markets driven by labour, education and training policies allow necessary job shifts across sectors, as has been seen in recent decades with the rise of ICT.

Australia has a culture of innovation, but cannot compete with low-cost, high-volume production overseas. Re-thinking business models, products, technologies and processes will allow our economy is to thrive in today’s highly competitive and connected global economy. However, in the past innovation policy has been targeted at mining, manufacturing, to some extent, agriculture, endangering our environment and future prosperity. Focusing our efforts on socially-beneficial innovations which regenerate our natural capital and improve resource efficiency, will create long-term prosperity.

Yet the current political environment prioritises a dramatically reduced national government, including significant scaling back of resources and regulations. While cutting back public investment in support of innovation may provide short-term fiscal relief, it will hurt long-term prosperity.

Combining environmental and innovation policies to drive prosperity

Environmental and innovation policy are inextricably linked. The UN centres its principles of development on redirecting science and policy towards a global sustainable development goal.21 The OECD notes that “innovation-driven growth makes it easier for governments to make the necessary investments and policy interventions to address the many global challenges facing society”.22

Environmental policies and regulations create a stable setting for investment and job creation in new, productive clean industries. Sustainable innovation policy can improve resource productivity e.g. through developing low-emission vehicles or water-efficient buildings; it can advance the cost-competitiveness of technologies; and cause shifts to new industries that do not depend on exploiting our natural resources. And innovation policy that does not regard environmental impacts stores up unnecessary risks and costs for the future and ill prepares us to benefit from emerging export markets.

The government can take advantage of the double dividend from an integrated environmental and innovation policy framework. Many of the enabling conditions are the same for clean innovation as for innovation more generally, such as a well-designed system of intellectual property rights to provide incentives for innovation and the diffusion of new technologies. The government should work to remove market barriers and ensure policy is

20 OECD (2013) Ministerial report on the OECD Innovation Strategy. http://www.oecd.org/sti/45326349.pdf 21 United Nations (2014). Prototype Global Sustainable Development Report. http://sustainabledevelopment.un.org/globalsdreport/ 22 OECD (2013) Ministerial report on the OECD Innovation Strategy. http://www.oecd.org/sti/45326349.pdf

7 consistent and aligned, creating the right macroeconomic and industry-specific conditions for clean innovation.

The policy mix should include a mix of “technology push” for early stage technologies such as publicly funded research and development, and “demand pull” such as environmental performance standards; as well as a range of polices to support technologies in the pre- commercial phases to avoid the “valley of death”.23 The OECD notes finds “the optimal approach would be to combine taxes levied directly on environmentally harmful activities with broad policies that address the main barriers to innovation.”24

In Australia, the Renewable Energy Target (RET), Clean Energy Finance Corporation (CEFC), ARENA and the carbon price have spurred innovation in recent years. The RET generated more than $18.5 billion of investment in renewable energy technologies such as solar, wind, bioenergy and hydro 2001 – 2012; much of which has been targeted in rural areas.25 The CEFC removes barriers to investment from the private sector by de-risking and co-financing low-carbon projects. To date, the CEFC has successfully invested over $0.7 billion, leveraging a further $1.8 billion by co-finance partners it has catalysed investments in projects over $2.5 billion.26 Their portfolio is expected to double the 3.5 per cent benchmark of 5-year government bonds. Their participation reduces costs of finance and creates new forms of clean technology business, new jobs and development of technological know-how.

These policies have driven employment in the renewable energy industry, which had an estimated 24,000 workers at the end of 2012, “with the solar industry now a major employer across a vast array of direct and indirect industries”.27 This drives both economic growth and accelerates transformation to a low-carbon economy.

Lessons from overseas

The rest of the world, having been through a recession, has been forced to reassess their industry policy, taking a longer-term and more holistic view of the economy and society. Policies are being implemented to provide caps on pollution; ambitious energy efficiency strategies to reduce emissions at least cost; low-interest loans and standards for new and retrofitted buildings; removing planning barriers e.g. for rainwater tanks and

23 Australian Conservation Foundation, (2008), Green . http://www.acfonline.org.au/resources/green-gold-rush 24 OECD (2013), What have we learned from attempts to introduce green-growth policies? http://www.oecd- ilibrary.org/environment/what-have-we-learned-from-attempts-to-introduce-green-growth- policies_5k486rchlnxx-en 25 SKM MMA (2012) Benefit of the Renewable Energy Target to Australia’s Energy Markets and Economy. 26 CEFC, ‘Our Investments’, Accessed July 2014. http://www.cleanenergyfinancecorp.com.au/our- investments.aspx 27 REC Agents Association, Solar Business Services, Greenbank Environmental. (2013). Impact of Abolishing the Renewable Energy Target on jobs in the Australian solar industry. http://www.recagents.asn.au/wp-content/uploads/2014/01/140129-solar-jobs-report.pdf

8 microgeneration; facilitating private investment; working to eliminate landfill; and introducing emission performance standards.28

One example of sustainability policy creating jobs and financial savings overseas is the retrofitting the existing building stock. It is of particular relevance to Australia with the green construction industry being widely recognised as one of Australia’s comparative advantages.29 It provides financial savings with short payback periods and creates immediate jobs because it does not require reskilling of the workforce.30 In 2011, Chicago announced it would retrofit 100 public buildings, expected to create 375 jobs and US $4-6 million annual savings for the city; Toronto followed suit by retrofitting concrete apartment blocks built before 1985 creating several thousand person-years of employment and reductions of 50% energy cost, 20% water usage, and 30% waste diversion rates. Similarly, Stockholm is retrofitting buildings public built in the 1960s and 1970s aiming for a 50% reduction in energy usage and a 15-year payback. Berlin addressed barriers to energy efficiency retrofits by providing low-interest loans and information services on energy performance. This has resulted in renovation or around one-third of the city’s residential buildings to date, providing energy savings of 50% and 630,000 tonnes of avoided carbon emissions each year.31

Taking advantage of our natural assets

Australia is in a fortunate position to lead on sustainable innovation given its natural advantages.

1. Emerging markets. The OECD finds that technological change may allow “some countries to become technology leaders and develop green export champions that become a source of net employment gains.”32 By 2030, the bulk of global GDP is expected to be generated by non-OECD countries like China and India.33 As resources become more constrained, meeting the increased demand for energy, water, food and environmental stresses will create a billions of dollars’ worth of export opportunities for early-mover Australian firms that can meet the demand more efficient goods and

28 Australian Conservation Foundation, (2008), Green Gold Rush. See also OECD (2008) Eco-innovation policies in Australia. 29 Australian Conservation Foundation, (2008), Green Gold Rush. See also Department of Industry, (2013) Australian Innovation System Report 2013. 30 OECD (2013), Green Growth in Cities. 31 OECD (2013), Green Growth in Cities. 32OECD, June 2012, ‘The jobs potential of a shift towards a low-carbon economy’. Accessed June 2014 http://www.oecd.org/els/emp/thejobspotentialofashifttowardsalow-carboneconomy.htm 33 OECD (2010) Perspectives on Global Development 2010: Shifting Wealth, OECD Publishing.

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services. Investment in renewable energy, sustainable water extraction, green buildings and products already outperforms trends that in the rest of the economy.34

There is also a growing market for Australian service exports with low environmental impact – we are highly sought after location for pharmaceutical manufacturing for Asia because of our stringent regulatory framework. Australia has reaped the benefits from the solar energy boom with an estimated five million Australians installing solar panels creating 18,500 jobs, supporting more than 4,500 businesses, halving their power bills, and removing 2.8 gigawatt of coal-fired generation from the electricity system.35

Of course, failure to anticipate declining markets will likely lead to “stranded assets”. The Asian economic boom of recent years led to soaring demand for Australia’s natural resources, such as iron ore, coal and copper. This benefited Australian jobs and income in the short term but has contributed to environmental devastation and left the economy exposed to shocks in commodity prices. A recent failure to anticipate global markets led to the decline of Australia’s car manufacturing industry, with the loss of thousands of direct and indirect jobs.36 While most countries and many of Australia’s trading partners introduced increasingly stringent (and cost saving) vehicle efficiency standards, Australian industry, the Federal Chamber of Automotive Industries and successive governments resisted efforts to innovate and modernise. This eventually led to the inability to export Australia’s highly emission- intensive vehicles. Similarly, in Europe, over the last five years, the top 20 energy utilities have lost half of their value (or half a trillion euros) largely due to an uptake of solar energy that was faster and more widespread than expected.37

2. Comparative advantage. Australia will have the greatest chance of success by focusing government support on areas where there is strong demand, existing R&D capabilities and with a holistic approach to policy-making.38

Australia’s capacity for environmental innovation is among the best in the world, with culture of innovation, high education and skills and abundant natural resources like wind and solar.39 A recent report by AIS finds that Australia’s advanced

34 The Future Economy Group (2014) Bringing Victoria’s Economy into the 21st Century. http://www.futureeconomy.com.au/download-reports/ 35 The Australian Solar Council http://solar.org.au 36 Ceda (2013) Advanced Manufacturing: Beyond the production line. 37 The Economist, Oct 2013, ‘How to lose half a trillion Euros’. Accessed June 2014. http://www.economist.com/news/briefing/21587782-europes-electricity-providers-face-existential- threat-how-lose-half-trillion-euros 38 Australian Conservation Foundation, (2008), Green Gold Rush. http://www.acfonline.org.au/resources/green-gold-rush 39 Australian Conservation Foundation, (2008), Green Gold Rush. http://www.acfonline.org.au/resources/green-gold-rush

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education and training system and its highly skilled workforce are existing comparative advantages that can be built upon to compete for the rapidly growing Asian markets.

In 2008 the ACF undertook an assessment of Australia’s natural assets and found overwhelming evidence of comparative advantage in six green industries in particular. First, given Australia’s established position as an energy exporter, we are in a strong position to develop renewable energy and take advantage of its global growth. Second, due to Australia’s history of energy dependency, we have the opportunity to develop and export technologies and expertise for decentralised energy.40 The Government supports the establishment of standards programmes and innovative practices which drive energy efficiency, since they create investment, innovation and jobs and results in immediate financial savings for households and businesses.41 Similarly, with an agricultural industry used to water scarcity, Australia is ideally placed to become a leader in the US$400 billion global water market. Fourth, development of biomaterials, and fifth green buildings – again with rapid urbanisation and the demand for cheap labour in Asia, many commercial partnerships will become available for Australian construction and engineering businesses that use sustainable processes, products and equipment. 42 Finally, there is a growing market for designing “closed loop” or “cradle to cradle” products utilising and recycling our waste. Australia is a leader on recycling non-renewable resources such as nutrients and water used in agriculture. Transforming waste streams into output will enhance the productivity, sustainability and profitability of agricultural and food production.43

By designing its policy and legal and institutional settings to drive research and foster innovation, the Australian Government can assist our economic development to meet our needs. This should embody shifting to a sustainable use of our natural capital and managing ecological risks such as carbon pollution and climate change. The type of economic development that will serve Australia well in the future will create a clean, safe and prosperous economy.

Conclusion

Australia has come to a crossroads. Times of unprecedented economic growth are coming to an end and challenges lay ahead. Our high dollar is making our manufacturing and

40 Acola, ‘Securing Australia’s Future – Australia’s comparative advantage’. Accessed July 2014. http://www.acola.org.au/index.php/projects/securing-australia-s-future/project-1 41 Department of Industry, ‘Energy Efficiency’. Accessed June 2014. http://www.industry.gov.au/ENERGY/ENERGYEFFICIENCY/Pages/default.aspx 42 Global Real Estate Sustainability Benchmark (2012) Global Real Estate Sustainability Benchmark Report, http://gresb.com/benchmark/ 43 ATSE (2014) Enabling growth in agriculture Position statement p 2 http://www.atse.org.au/Documents/Publications/Policy/atse-agriculture-position-statement.pdf

11 agricultural sectors less competitive, our labour markets continue to weaken and the decline in mining income and fiscal consolidation is pulling steam out of the economy. Meanwhile, the OECD predicts a weaker outlook for the global economy and rising income equality to 2050.44

These economic challenges must be viewed within the context of the longer-term crisis brewing from the unsustainable exploitation of our natural environment. Economic activity in one system impacts on others – agricultural activities and other land uses pollute the water catchments that drain into the sea, having a substantial impact on the health of aquatic ecosystems. This influences the intrinsic value of the largest coral reef in the world, as well as the productivity of fisheries and tourism industries, which contribute $5.4 billion to the Australian economy.45

Australia is hugely dependent on natural resources. Our economic growth comes at the expense of our rivers, oceans, land, climate, biodiversity and forests that provide materials and services that underpin our lives, businesses and the economy. These already compromised ecosystem services will continue to decline if levels of exploitation and pollution remain unchecked.

Overseas, a different picture emerges. Increasing concern about environmental sustainability and climate change is already affecting demand for fossil fuels, dampening business opportunity and job creation in Australia. But these concerns are also creating new markets in sustainable goods and services, providing opportunities for Australia’s exports.

There are simple solutions to these problems, in the nexus of environmental and innovation policy. Environmental policies and regulations create a stable setting for investment and job creation in new, productive clean industries. Sustainable innovation policy can improve resource productivity e.g. through developing low-emission vehicles or water-efficient buildings; it can advance the cost-competitiveness of renewable energy technologies; and cause shifts to new industries that do not depend on exploiting our natural resources. Innovation policy that does not regard environmental impacts stores up unnecessary risks and costs for the future and ill prepares us to benefit from emerging export markets.

Sustainable innovation policy needs to be supported by reform and investment in a broad range of policies – education, innovation, taxation and infrastructure – to maintain prosperity and make our economy more sustainable. The government should ensure a consistent policy framework which incentivises sustainable innovation that can provide products and processes for the future – capitalise on emerging markets for green products and processes. This should set the right institutional frameworks and develop a holistic cross-department policy framework. The government should set up systems to encourage

44 OECD Newsroom, ‘Global growth to slow as wage inequality rises over coming decades, says OECD’ accessed July 2014 http://www.oecd.org/newsroom/global-growth-to-slow-as-wage-inequality- rises-over-coming-decades.htm 45 Queensland Department of the Premier and Cabinet, (2009) Reef Water Quality Protection Plan. http://www.reefplan.qld.gov.au/resources/assets/reef-plan-2009.pdf

12 cross-sectoral partnerships in the private sector, e.g. brining researchers and private companies together.

The OECD finds “the optimal approach would be to combine taxes [or prices] levied directly on environmentally harmful activities with broad policies that address the main barriers to innovation.”46

Australia can benefit from its comparative advantages – we are located close to growing Asian markets; have vast high quality renewable resources; highly skilled labour force; and a history of innovation. Sensible choices and forward-looking policy can ensure we are not building stranded assets, storing up costs for the future.

Australia should choose the path of growing prosperity, restoring our environment, capitalising on emerging markets and utilising our comparative advantage. The type of economic development that will serve Australia well in the future will be clean and sustainable. By creating policies and institutions that drive research and foster innovation, governments can secure increased prosperity for all without increasing costs or compromising intergenerational sustainability.

For further information please contact:

Dugald Murray

Chief Economist Australian Conservation Foundation Level 1, 60 Leicester St, CARLTON VIC 3053

46 OECD (2013), What have we learned from attempts to introduce green-growth policies? http://www.oecd-ilibrary.org/environment/what-have-we-learned-from-attempts-to-introduce-green- growth-policies_5k486rchlnxx-en

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