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Productivity Commission: Shifting the dial or missing the point?

Last week the Productivity Commission released its first five-year review into the key reforms required to improve Australia’s prosperity in the medium term.

It’s good to see a recommendation to reintroduce a carbon price and there were some positive suggestions on demand management for energy. Other than this there was an absence of any suggestions to improve sustainability, resilience or adaptation to climate change.

In all its 255 pages, climate change was not even mentioned once in the “Shifting the Dial” report.

The three key areas the commission highlighted as being key levers for improving national prosperity were the performance of cities, health and education.

Energy got a small walkthrough under “Improving the efficiency of markets”, and there was discussion of the potential of data to improve markets, reforming government and reducing regulatory burdens – nothing new to see there.

There wasn’t much to be inspired by in the “Better functioning towns and cities” section from a sustainability perspective.

For a start, the report excluded all towns and cities with under 100,000 people – meaning only the major capital cities, plus Ballarat, Geelong, Toowoomba, Sunshine Coast, Cairns, Townsville, Gold Coast-Tweed Heads, Newcastle-Maitland and Wollongong were within the scope of consideration.

This placed an automatic focus on congestion, so a large part of the cities section was dedicated to creating a rationale for road user charges.

The report noted that while public transport could be part of the solution, as it has been somewhat neglected to date, it probably can’t be seen as a major solution in the future.

Another recommendation is that stamp duty be abolished, because it adds substantially to a house in Sydney – the only city mentioned in this context – and therefore, the commission concluded, poses a barrier to people wanting to move.

Instead of stamp duty, the commission recommends a system of annual land tax be introduced for all properties, based on the unimproved value of the land.

As it noted, this may pose a burden on low-income owner-occupiers that have no intention of moving anytime soon. Various suggestions were made around allowing them to defer payment until their death, or until they sell, whichever comes first.

The report also suggested the swap of stamp duty for land tax may encourage older people to downsize, freeing up property for other uses including denser development.

Infrastructure planning was also addressed, with criticism levelled at the costs of the failed East West Link proposal in Melbourne, highlighted as an example of poor planning and strategy.

There were calls for the planning system to make it easier for flexible uses of land, rather than many states sticking with current zoning systems. (The commission several years ago called for virtual deregulation of zoning – in a kind of market determinism on steroids, but clearly it’s backed away from such free for all, recognising hopefully, that property assets have a longer life span and are far more fixed than most other assets when things go wrong.)

In one of the few mentions of anything that sounds like liveability, the report said planning should consider integrating infrastructure and community amenity such as green space at the outset, as it is expensive and difficult to retrofit.

There was no suggestion that decentralisation of employment opportunities beyond the suburban areas of the largest cities could be part of the congestion solution, instead much was made of the way the centre of major cities benefits business through co-location and agglomeration.

The commission’s introduction to the report belied the lukewarm contents.

“Mediocrity beckons if we let it,” it stated.

“In the future, we cannot rely on high commodity prices or, given an ageing Australia, labour participation rates, to drive national income.

“We might try to invest more to add to growth, but capital must be paid for, and investment to GDP rates are already at historically high levels, so there may not be much room to move.

“That means that innovation and learning – doing things better – is the key for prosperity. Yet this has languished in Australia (and many other countries) for a decade.”

It then went on to outline what was described as a “new agenda focused on individuals” that involves the non-market economy.

Ross Gittins, in his recent commentary, described this shift of thinking towards people rather than the market as a positive change.

“It’s people-friendly, not business-friendly.”

Elements of the agenda he pointed to include a focus on putting patients rather than providers at the centre of the healthcare system.

Suggestions on education were also welcomed by Gittins.

The commission said that, ”Better teaching quality, re-building the VET sector, genuine options for acquiring new skills as people switch jobs and careers, using new technological models for educating people, and creating teaching-only universities are just a few of the many changes that need to be made.”

In the analysis of energy, the report described the sector as a “mess”.

Among its suggestions for cleaning up the mess were that renewable generators should receive prices for their energy that “reflect the additional costs they impose on the system”.

But no mention was made that coal-fired generators should face the same, except for the call for a carbon price.

We know coal-fired generators impose costs beyond carbon emissions – such as health impacts on people nearby, the environmental costs in terms of water and land pollution, and the cost of inspecting and regulating for compliance with pollution, workplace safety and other essential regulations. But none of this got a mention. People-friendly, you say?

The report said that if the renewable generators’ prices were amended, an efficient price on carbon would achieve a level playing field for all generators that “should lower long-term prices”.

It also said that investment would proceed on a sustainable basis following these reforms, as choice of technology would be determined by “rational pricing”.

The report has also called for a removal of moratoria on gas exploration and development in NSW, Victoria, Tasmania and the Northern Territory. These, it said, have slowed the growth in gas supply contributing to higher prices for gas as both a direct energy source and as an input for electricity generation.

The opportunity cost of this in terms of damage to water supply and impacts on productive agricultural land were not discussed, however the commission urged the exploration companies to adopt more efficient models of community engagement to smooth progress with landholders.

Demand management for energy was also discussed and here there was a positive.

“The system savings from demand management are considerable. Smoothing the transmission load by shifting energy demand from peak to off-peak periods reduces the carrying capacity required and would have reduced the past investment in transmission augmentation by billions of dollars.

“This horse has bolted, but the same mistake must be avoided in the future. Long-term contracts that allow wholesalers to actively manage demand reduce the need to maintain higher levels of spare generating capacity to meet spikes in demand – the ‘reserve plant margin’.”

The report endorsed strategies such as incentivising small consumers including residential users to reduce demand during heatwaves as a more effective method than load-shedding.

This is an approach already being trialled by ARENA and the Australian Energy Market Operator with its demand management project. However, the report appears to be suggesting more stick and less carrot than the ARENA/AEMO approach.

“Progress is being made on the information and technology to support demand management, but most small consumers still do not face demand reflective pricing, including time of day pricing,” the report said.

The report also went on to suggest that small-scale solar owners are a cost on the system because sometimes they use energy; sometimes they contribute it. This makes life hard for the transmission system operators.

One option the report suggested is that energy distributors impose an “insurance” charge on any premises that can access the grid, even if they do not draw power from it.

It was instructive to go right to the end of the report and see who was actively consulted with during the development of the report.

Missing were some of the bodies that have done the most substantial work on improving the sustainability and functionality of our cities and our energy system, such as ASBEC, GBCA, the Australia Institute, Energy Efficiency Council, Beyond Zero Emissions, and the CRC for Low Carbon Living, among others.

It appears that for the Productivity Commission sustainability is still a step too far in terms of addressing what really impacts Australia’s prospects for prosperity.

  • Read the full report and supporting papers here

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