With the Victorian government announcing an end to native forest logging by 1 January 2024, we revisit a recent report prepared for WWF–Australia (World Wide Fund for Nature Australia) in August last year. In it, Rachel Lowry, Acting CEO, WWF–Australia explains, “This report was not commissioned to ignite or exacerbate ‘forestry wars’. Instead, it is designed to inform and motivate critical solution-focussed discussions, ideally led by the NSW Government.”
The New South Wales (NSW) native forest sector has been contracting over a long period as publicly provided wood supply has fallen to more sustainable levels. The 2019–20 Black Summer fires compounded this trend, significantly reducing sustainable wood supplies, particularly in the South Coast and Tumut regions. This shock to the sector, economy and regional communities – combined with an increased recognition of the significantly higher value that standing native forests offer in comparison to logging– provides an opportunity to reconsider the best use of NSW’s native forest resource. Other states including Victoria and Western Australia facing similar issues have made the decision to end the native forest logging.
In this context, Frontier Economics was engaged by WWF–Australia to consider options for the design of appropriate structural adjustment arrangements that would accompany a decision to end public native forest logging in NSW. Our Report, Transition support for the NSW native forest sector, outlines a design and cost estimate of such structural adjustment supports.
Our Report found that Forestry Corporation of NSW’s (FCNSW’s) native forest logging business appears to offer poor financial returns to NSW taxpayers, with some parts of the hardwood business unlikely to be covering costs. The Independent Pricing and Regulatory Tribunal of NSW (IPART) has also reported on the loss-making activities of FCNSW’s hardwood division.
There is also clear evidence that that value of the native forest would be higher as a standing resource.
The volume of wood supplied by FCNSW’s native forest business has been falling, and is unlikely to return to historic levels of production given the current state of the native forest after the Black Summer fires and the increasing impacts of climate change.
Employment and economic contribution have also fallen to modest levels, even when both hardwood and softwood, and private and public industry in NSW is accounted for. Direct employment associated with FCNSW’s hardwood business is in the order of 1,070 across the State – including those employed by FCNSW, harvest/haulage contractors and mills.
A comprehensive structural adjustment package should accompany the decision to cease the remaining native forest logging activity by FCNSW. This package would support impacted employees, firms and communities during the transition.
Across jurisdictions, there is a broad consistency in the design of public native forest logging structural adjustment packages, including:
Structural adjustment packages are also often complimented with longer term support for increased investment in plantation resources.
Alongside a package of structural adjustment support, our Report finds there are likely to be alternative employment opportunities for displaced workers from the public native forestry sector, particularly in management of protected forest areas, recreation and tourism, plantation-based forestry work, fire and invasive species management and the management of carbon and biodiversity credits.
The estimated cost of the government-funded structural adjustment is $302 million in total. This includes:
Our Report developed these estimates along similar lines to those adopted in other jurisdictions. It is assumed the adjustment package would be implemented from 2028- 29 once the majority of the current WSAs with processors have expired.
The cost of the structural adjustment package is likely to be readily outweighed by a range of positive budgetary impacts including:
Complementing a structural adjustment support package, the NSW Government may invest in increased plantation resources. The Victorian and West Australian governments have announced funding for plantations of $110 million and $350 million, respectively.
Alternatively, FCNSW may consider the investment opportunity to expand its hardwood plantation estate in the expectation of a long-term financial return.
The forestry sector would sensibly lead any plantation expansion in NSW based on its understanding of the best locations, appropriate size of expansion, plantation species and market needs.
View the full report commissioned by WWF-Australia here.
DOWNLOAD FULL PUBLICATIONClimate change impacts will continue to unfold across Australia with increasing severity in the years ahead. This will result in a set of complex and material financial implications for business. For Australian business to confidently rise to the challenge of systematically measuring, managing and mitigating risks and opportunities of climate change it will need a sound understanding of how climate change will most likely impact its finances. This Bulletin discusses Frontier Economics and Edge Environment’s approach to extending climate risk frameworks to build business cases for climate response against the inevitable, and potentially disorderly, climate transition ahead.
After centuries of relative climate stability, the world’s climate is changing. As average temperatures rise, acute hazards such as floods and fires and chronic hazards such as drought and sea level rise intensify. These hazards are categorised as the physical risks of climate change.
The frequency and severity of weather events in Australia is increasing and may further intensify as ecosystems are pushed beyond tipping points. Recent weather events in Australia such as the unprecedented rainfall and flooding in South-East Queensland, New South Wales and Victoria, extreme heat in Western Australia and the 2019–20 bushfires have resulted in highly significant financial losses for businesses and the communities they operate in.
Climate risk, however, remains an emerging discipline compared to other traditional risk areas. Climate risk management will necessarily grow in importance over coming years – recently, the Australian Prudential Regulation Authority (APRA) warned business around the need to prepare for “rapidly increasing expectations” on climate risk disclosure.
Against this backdrop, forward looking businesses are taking steps to understand, quantify and manage their climate risk exposures.The good news is we have the tools to address urban heat: integrated planning of our natural and built environment covering blue, green, and grey infrastructure.
The Taskforce on Climate-related Financial Disclosures (TCFD) reporting framework has emerged as the global benchmark in climate risk reporting. It seeks to make businesses’ climate related disclosures comprehensive, consistent and transparent. TCFD enables effective investor analysis of a company’s demonstrated performance of incorporating climate related risks and opportunities into businesses’ risk management, strategic planning and decision making.
The TCFD was set up in 2017 by the Financial Stability Board – an international body of regulators, treasury officials and central banks – to provide voluntary recommendations on how business could voluntarily disclose the risks and opportunities from climate change (see Box 1).
The purpose of TCFD is to provide a framework for organisations to make consistent and transparent climate-related financial disclosures. The TCFD framework document provides the following overview of the types of disclosures that it recommends:
It is recommended that the business provides its disclosures in their public annual reporting.
Source: Recommendations of the Task Force on Climate-related Financial Disclosures
Since being first published in 2017, TCFD has been rapidly adopted by a broad range of organisations across the globe – the 2022 status report for TCFD points to TCFD “support” encompassing US$220 trillion of assets and US$26 trillion of combined company market capitalisation.
There is a trend towards mandating climate-related disclosures. Mandatory climate risk disclosures have been announced in jurisdictions including the UK, the EU, Hong Kong, Japan, Singapore and New Zealand. Significantly, the United States Securities and Exchange Commission has proposed rules to enhance climate-related risk disclosure drawing from the TCFD recommendations. Collectively, these actions will set norms and expectations for Australian businesses to develop their own disclosures.
In 2021 the New Zealand Government passed legislation mandating climate-related disclosures for around 200 financial entities. Further to impacting those covered by the introduction of this mandate, the move is widely expected to act as a catalyst for increased climate-related disclosures across businesses operating in the wider New Zealand economy.
While TCFD is ultimately intended to support more informed capital allocation by investors, it can also be an important tool for organisations to respond to the risks and opportunities of climate change.
For an approach to inform practical decision making it needs to provide climate-related impacts in financial terms:
Clearly this is a complex task, but it needn’t be daunting if we have the right tools and systematic approaches. Finding a solution requires assessing the changing climate exposure and vulnerabilities of an enterprise through time. A collaborative approach which brings together the key stakeholders across an enterprise provides the means to map the material climate impacts, their drivers and the likely financial consequences to the company. This collaborative approach also enables joint ownership of critical uncertainties to be addressed within business’ operations, financial reporting and data management. A structured approach is then required to cut through the uncertainty and deliver a clear path forward to adequately measure, manage and mitigate climate risks.
Frontier Economics and Edge Environment have partnered to combine our skills in financial analysis, ESG, risk management, climate science and sustainability to work through this complexity (see Box 2).
Edge Environment and Frontier Economics have worked across a broad range of climate risk and resilience projects, mostly within the property, infrastructure and government sectors. Together, this partnership provides a unique opportunity to better understand both financial risks and opportunities of climate change for Australian and New Zealand businesses.
Edge is a specialist sustainability services company focused on Asia-Pacific and the Americas. Its teams are based in Australia, New Zealand, the United States and Chile. Edge exists to help its clients create value from tackling one of world’s most fundamental challenges: creating truly sustainable economies and societies. Edge does this by combining science, strategy and storytelling in a way that gives clients the confidence to take ambitious action, and do well by doing good.
Source: Frontier Economics
Confident climate-risk decision making requires a multi-disciplinary approach, incorporating climate science and financial analysis. However, deep technical expertise alone is not sufficient.
There is also a need for broad buy-in and engagement from within and across an organisation in order to access information, form granular insights, identify key operational climate-related impacts and quantify financial consequence. Organisations are encouraged to systematically look beyond the acute and direct impact of extreme events but also to the aggregated impacts of chronic and indirect effects of climate extremes.
Even with all these elements, it can be difficult to know where to start a climate-related financial analysis.
A useful starting point in analysing climate-related risk and opportunities is to assess the impacts of recent extreme climate events – such as the Eastern Australia bushfires and drought of 2019-20 and the extreme rainfall of 2021-22 – on a business’ operations and related cashflows.
This “looking back to look forwards” approach provides multiple advantages. It allows the:
The logic mapping and notional financial consequences can then be tested and validated using actual operational and financial data to identify the impacts of recent extreme events.
This approach also clearly highlights any data gaps which limit the extent to which financial consequences can be isolated – providing insight to improve risk management systems.
This baseline analysis has standalone value as it provides a snapshot of the resilience of an organisation to recent climate change events which can be linked back to materiality thresholds in a firm’s enterprise risk framework. It is also vital in building a foundation for robust and defensible scenario analyses of the likely impacts of future climate extremes on an enterprise. It can be used to inform forward looking analysis of climate change impacts, which considers both cash flow and asset valuation risks and opportunities.
The approach taken by Frontier Economics and Edge Environment focusses on undertaking robust, transparent and actionable analysis. For example, we focus first on the short-term (to 2025) before extending analyses further into the future. A short-term lens reduces uncertainty and allows organisations to home in on impacts which require urgent action. It also allows for extensions such as cost-benefit analysis to support investment decisions around certain interventions.
Building the business case to confidently make decisions about managing your organisations climate risk is a journey – come and talk to us about getting started.
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Infrastructure Australia today released the 2021 Australian Infrastructure Plan, which provides Australia’s green, grey and blue infrastructure sector with a 15 year roadmap to drive economic growth, maintain and enhance our standard of living and improve the resilience and sustainability of Australia’s essential infrastructure.
The 2021 Plan provides Infrastructure Australia’s reform pathway to respond to the 180 infrastructure challenges and opportunities identified in the 2019 Australian Infrastructure Audit. There are a number of key themes in the plan. We highlight and discuss several of these below.
The inclusion of waste and social infrastructure (such as green and blue infrastructure) for the first time, alongside energy, transport, telecommunications and water.
The need for place-based decision-making, including the need to holistically plan blue, green and grey infrastructure.
Recognition of the need for a consistent approach to valuing the economic, social and environmental benefits of blue, green and grey infrastructure (which has also been recognised by NSW’s Department of Planning Industry and Environment). Frontier Economics has discussed this in two recent bulletins: Greening our cities: from vision to value and Greening our cities: from vision to reality.
The need to embed sustainability and resilience into infrastructure decision-making, including the importance of a consistent all-hazards, systems approach to resilience planning and quantification of the costs, impacts and benefits of resilience investment.
Recognition of the need for clear management and governance of the water cycle, including stormwater and waterways.
The need to remove targets, mandates and subsidies for certain types of water, including recycled water. (For a look at how to encourage uptake of recycled water initiatives, and barriers, Frontier Economics undertook a review for Infrastructure NSW.)
It is a comprehensive plan addressing all aspects of infrastructure. It puts forth a compelling vision of Australia in 2036, that includes liveable, attractive and resilient communities with social infrastructure supporting a strong, healthy and prosperous nation.
The urban economics team at Frontier Economics advises across these areas. For more information or to discuss a project, please contact us.
Frontier Economics economists Alexandra Humphrey Cifuentes and Rosemary Jones presented a paper at OzWater21 on 5 May 2021. Decision making in the urban water sector is subject to an increasing number of challenges. "Flexible planning for an uncertain future: Applying adaptive pathways thinking to the water sector" presents an approach which values flexible decision-making.
Key points from the paper include:
Ensuring secure, reliable & cost-effective management of the water cycle is critical to support economic growth & to meet community’s growing expectations for liveable & healthy environments.
Urban population growth, climate change and interdependencies between infrastructure systems are placing significant pressure on ageing water-related infrastructure, and the health of our waterways, environment, and people. However, their impact and the appropriate policy, regulatory and investment response is uncertain.
In this context, a challenge for decision-makers is to identify resilient and flexible decision-making pathways, which are well placed to respond to uncertainty and change. Economic tools and techniques such as adaptive pathways (or real options) analysis builds on cost benefit analysis to value this flexibility, by modelling costs and benefits of responding (or not responding) to new information in future. Decision-makers can then compare the value of flexibility to the cost of the investment, and more importantly, accurately compare the costs and benefits of different options. This is extremely valuable information when making critical decisions about significant infrastructure investments.
While engineering and planning expertise in adaptive infrastructure already exists across the sector, robust approaches to placing an economic value on that flexibility and using economic analysis to explore maximum value infrastructure pathways under uncertainty is an underutilised decision-making tool.
Over the next 40 years, NSW will face strong population growth, particularly in Western Sydney around the South Creek corridor. This rapid urbanisation will place increasing pressure on water-related infrastructure and services as well as on the health of the key waterways and local environments.
Water recycling has the potential to provide significant benefits to both end-customers and the broader community in meeting the demand for water and wastewater services from a growing population, while at the same time protecting sensitive environments and promoting more productive, liveable and resilient urban communities. This requires the right policy and regulatory settings to be in place to promote investment in and use of cost-effective water recycling. Getting these settings right could deliver significant customer, community and environmental benefits to contribute to the Greater Sydney Commission’s vision for a Western Parkland City.
There have been significant changes in the NSW urban water market since the mid-2000s, but despite these changes the uptake of water recycling in metropolitan NSW has plateaued in recent years. This has generated concerns that existing regulatory, policy and institutional arrangements are impeding the potential for investment in and use of recycled water. Aspects of the regulatory framework covering or influencing water recycling in NSW have not been reviewed or updated for over ten years.
Frontier Economics was engaged by Infrastructure NSW to provide independent advice on the optimum regulatory framework for the uptake of cost-effective recycled water initiatives, with a focus on the economic regulatory framework governing the urban water sector.
Our review has found that while many elements of the economic regulatory framework are promoting cost-effective water recycling and remain ‘fit for purpose’, a number of aspects are likely to act as barriers to cost-effective water recycling. These aspects include:
Our report makes 32 recommendations aimed at addressing current and potential barriers to cost-effective water recycling. They seek to encourage greater consideration of the broader costs and benefits of water recycling, provide consistent incentives and signals for investment in and use of water recycling, and promote the entry of efficient private sector providers of recycled water. They require action to be taken by the NSW Government, the public water utilities and the Independent Pricing and Regulatory Tribunal (IPART), with an emphasis on acting sooner rather than later.
Not all of the actions recommended in this report are straightforward. But decisions need to be made now to keep ahead of the intense pressure that population growth will place on essential water, wastewater and stormwater infrastructure over the next decade and to avoid the potentially significant adverse impacts of this pressure on the NSW economy, natural environment and communities across the State.
