By Michael Smith
Later this year, the world's media will focus on whether the G20 meeting achieves its stated main goal: to launch economic measures that will boost global gross domestic product by 2 per cent above business-as-usual growth within five years. If achieved, this would create at least an extra $US2 trillion in economic activity as well as tens of millions of jobs.
The Australian government, as host, has been working to ensure the meeting prioritises this goal. Prime Minister Tony Abbott said in July: ''Australia's task is to keep the G20 tightly focused on economic growth and to resist the temptation to deal with every ill that the world may face.'' Back in February, Treasurer Joe Hockey succeeded in gaining formal agreement on the growth target from G20 finance ministers.
But, by July, the International Monetary Fund had reported that G20 members' current commitments would fall well short of the growth target — by as much as half of the extra $US2 trillion. G20 nations have until next month to come up with additional strategies and submit their individual country plans. If the G20 fails to meet this target of an extra $US2 trillion by 2020, it risks embarrassing everyone involved, including the host, the Australia government.
The current G20 communique says members have, to date, focused on taking ''concrete actions across the G20, including to increase investment, lift employment and participation, enhance trade and promote competition, in addition to macroeconomic policies. These actions will form the basis of our comprehensive growth strategies.'' This reflects the traditional focus of trying to lift productivity by improving labour participation, labour productivity, trade and infrastructure investment.
But economists have long recommended a broader approach to raising productivity, including a focus on technical innovation to improve energy and resource efficiency. Treasury secretary Martin Parkinson said in 2011: ''The Australian economy will need to become more energy, resource and environmentally efficient. In fact … energy, resource and environmental efficiency will be key drivers of productivity in the 21st century.'' G20 nations can also boost economic growth by focusing on these areas.
Energy and resource productivity is a measure of how much economic value (how much GDP, or how many dollars) is produced per unit of energy or resource used. By becoming more energy and resource efficient, businesses can improve their profit margins (and help improve national GDP) because they spend less on energy and resource inputs while still earning the same revenue by selling the same products or services. Being more efficient and spending less on energy and resources goes straight to business's bottom lines and reduces their financial exposure to forecast rises in power prices.
A range of recent studies have suggested a renewed focus on energy and resource productivity could achieve much of the extra levels of growth - about $US1 trillion by 2020 - needed to meet the G20's goal.
These studies also suggest that such a focus could achieve close to an extra $US3 trillion in overall GDP growth above business-as-usual growth by 2030.
One advantage of adding a focus on this kind of productivity to the G20 agenda is that it is possible to progress rapidly within five years. In contrast, infrastructure projects often take a long time to contribute to GDP growth because of the time taken to approve, construct and implement them. However, energy, water and resource efficiency retrofits and upgrades are ''shovel-ready'' and can be implemented relatively quickly. For this reason, many G20 countries used energy and resource efficiency initiatives in their stimulus responses to the global financial crisis.
Investing in energy and resource productivity can also quickly unlock extra sources of capital and labour productivity through improved rates of production, quicker returns on capital spending and other benefits. A recent International Energy Agency report found the value of non-energy co-benefits of energy-efficiency investment ranges from 40 to 50 per cent to as much as 2½ times the direct value of energy savings. For example:
- Investing in energy and resource-efficient ''green buildings'' has been shown to increase labour productivity and reduce absenteeism of staff.
- Improving the energy efficiency of new resource developments can improve capital productivity. For large-scale resource developments, if profit margins on a long-term asset are 5 per cent and energy is 20 per cent of operational costs, a 25 per cent improvement in energy efficiency will double the profit over the life of that asset and project.
Adding energy and resource productivity to the G20 growth agenda would also help Prime Minister Tony Abbott honour his promise with US President Barack Obama to use the G20 to improve energy efficiency, a pledge they made when they met in June. Energy efficiency is a key part of national energy productivity. This is recognised by Obama, whose administration has committed to doubling the United States' energy productivity by 2030. The US Energy Productivity Roadmap study says achieving this goal would boost US GDP growth by 2 per cent above business as usual, achieving savings of $US327 billion a year. Other G20 nations have committed to improving energy productivity due to similarly significant economic benefits. More than 80 developing nations have also signed up to the UN's ''Sustainable Energy For All'' initiative, which includes the goal of doubling the global rate of improvement in energy efficiency. So there would be broad support among the G20 if the Australian government proposed to add energy and resource productivity initiatives to the list of ways G20 nations can boost GDP.
Energy and resource productivity improvements will also help Australian business. At the G20, the focus of the B20 (the parallel business summit) is on ''practical measures that boost productivity and competitiveness''. Australian business has much to gain if it reduces its exposure to rising electricity and gas prices and other resource costs. This is because Australia has relatively poor rates of energy and resource productivity (11th-worst and fourth-worst respectively among OECD nations). It is strongly in Australia's interests to improve both energy and resource efficiency to remain competitive. It is also another way to boost flagging efforts to address Australia's poor productivity performance over the last decade.
Taking this path would not be a walk into the unknown. Australia and the G20 can learn from nations and regions that have significantly improved their energy and resource productivity. In the US, California's energy productivity rate is now 1.7 times Australia's, partly because the Californian government has taken a systematic approach to implementing well-designed energy-efficiency and demand management policies since the late 1970s. As a result, California services twice Australia's population and an economy 50 per cent larger, but only generates slightly more daily electricity than Australia requires. The carbon footprint of California's electricity sector is also half that of Australia's.
Since 1978, California's energy-efficient appliance standards, combined with its energy-efficient building standards, have helped to flatten electricity demand growth, saving more than $US56 billion in electricity and natural gas costs. Its policies and incentives have also created over one million new energy-efficiency-related jobs since 1977. While this has meant reduced jobs growth in the fossil-fuel sector, for every one job lost in that area 50 were created in the energy-efficiency sector. California's focus on energy productivity also created a regulatory environment that helped the state's businesses become leaders in the cleantech industry.
Singapore and Israel have shown it is possible to significantly improve water productivity. Both countries created an environment of innovation that has allowed their businesses to develop world-class, water-saving technologies, which were initially produced for domestic markets but are increasingly in demand globally. This policy focus has strategically positioned businesses in these countries to take advantage of growing international markets.
Meanwhile, Germany's focus on resource productivity helped its businesses reduce their exposure to rising resource commodity prices over the last decade. From 2000 to 2013, global metal prices rose 176 per cent, rubber 350 per cent, fossil fuels over 200 per cent, and food by over 100 per cent. In Germany, the costs of material inputs for some manufactoring sub-sectors is about 40 per cent of total production costs. So a focus on improving the efficiency with which these materials are used to create manufactured goods is critical to insulate these businesses against resource price rises.
Finally, a focus on energy and resource productivity also aligns with recommendations from civil society groups, which have urged the G20 to address climate change. International Energy Agency and Global McKinsey Institute studies show a focus on energy and resource efficiency can contribute half of the required greenhouse-gas-emission mitigation by 2030.
This article was originally published in Fairfax Media