Why should the economy care about the environment?

Not sure if this is just a me problem, but I’ve always wondered what the environment had to do with economics. It has its own category in the federal budget, it’s being taught in the HSC syllabus, and it’s policies have copped me a $200 fine for fishing without a fishing licence 🙁 Before the environmentalists come for me, I’m all about saving the trees and ecological sustainability. I just thought this would be an informative opportunity for me to research and understand the impacts of any implemented environmental policies on the Australian and global economy! The aim of the game is to translate this into everyday situations which affect both you and me. Hopefully we can show more appreciation to the fact that Australian cities are as far away from the ‘Global top 10 most polluted cities’ list as can be.

Economic growth vs environmental sustainability

There’s been an ongoing debate between achieving one economic objective versus another. Let’s take China for example. Their rising economic growth had an evident production of negative externalities, the most prominent being pollution. 

#Throwback to 1978, China’s economy was stagnant and relatively isolated from the global economy. Fast-forward to today, with China’s real annual GDP growth averaging 9.5% in 2018. But with great power comes great responsibility. China continues to be the world’s largest polluter, emitting 6,018 million tonnes of greenhouse gasses per year, burning 46% of the world’s coal and leaving 65% of industrial waste untreated (2018)… yikes.

Any government aims for Ecologically Sustainable Development, founded on the principle of intergenerational equity: “To ensure that economic development meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Australia’s commodities are the main source of exports, making up 21.8% of Australia’s real GDP output in 2018. Mining investment has also risen to 19% of GDP in 2019 and has steadily been increasing, despite falling commodity prices. Australia needs to be cautious in not falling into a similar situation China experienced. The Great Barrier Reef for example, highlights the main causes of deterioration from expanding coal mines and ports, the same commodities which are driving GDP.

The balance of the quality of the environment for economic growth may be represented by the Kuznets curve (figure.1), in which the excess exports of commodities initially leads to a deterioration of the Great Barrier Reef. After a certain level of economic growth, Australia begins to improve its relationship with the environment through implementing policies such as: the $500 million package through the federal budget 2018, to reduce levels of environmental degradation.

Figure. 1


Source: wikipedia

As an owner of many World Heritage sites, tourism contributes to 3.1% ($57.3 B) of Australia’s national GDP (2018). In combination with the heavy reliance on commodity exports, it seems like you can’t have the best of both worlds. It also doesn’t help that the bleaching of coral due to rising sea temperatures due to… you guessed it! Climate change.


Speaking of climate change, nations may offset their neighbours’ progress in achieving ecologically sustained development. For example, in June 2017, USA President Donald Trump announced that America would cease all participation in the 2015 Paris Agreement on climate change mitigation.

The Paris Agreement tried to encourage every nation to cut carbon pollution simultaneously like a group of girls cutting their bangs together over a zoom call. Trump significantly destroyed the USA’s role in the world’s fight against climate change. As a result, the world has seen 3% higher greenhouse gas emissions predictions in 2030 than with the policies still in place. Speculators fear that the USA’s withdrawal may spark a ‘follow the leader’ thread, and hope that it does not discourage non-member countries such as Syria and Nicaragua from signing the agreement.

Australian environmental policies

The one environmental policy which jumps to mind, is the Carbon tax, which was implemented by the Gillard Labor government in 2011 as the Clean Energy Act 2011. I remember doing a PowerPoint presentation on the carbon tax in high school, and having absolutely no idea why it even mattered. Let’s change that.

By increasing output prices, this resulted in a loss of competitiveness in trade-exposed domestic industries because of a higher relative production cost compared to foreign competitors. Firms turned into Mr. Worldwide as production was shifted into developing countries with more relaxed carbon emission regulations, increasing domestic unemployment. Employment fell by 1.2% specifically, in the mining industry and other manufacturing industries which caused total GDP to fall by 0.9%. Ah so now these numbers are starting to make a bit more sense. 

The tax’s impact on the distribution of income was especially interesting, as the price of essential consumption rose, which wouldn’t be great news for a recent p-plater trying to battle rising petrol prices. 

Cool. So essentially that’s my question solved, 

  1. The environment provides natural resources, such as commodities which are essential inputs for the production of goods and services.
  2. The production of these goods and services may lead to pollution or other pressures on the environment e.g the great barrier reef.
  3. Poor environmental quality leads to the reduction in productivity and the ultimate slowdown of economic growth, due to health restrictions, resource depletion etc. As seen in China having 4 of the top 10 most polluted cities 2018.  
  4. The requirement of environmental policies to reduce the effects of environmental damage, to ultimately achieve an ecologically sustainable economy.

Looking to the future, domestic projects such as Snowy 2.0 utilise the the constant improvement of technology. Keep an eye out for future innovative ways to combat not only climate change, but its overall impact of economic growth and development on the nation’s environmental quality.