Dr Marie-Louise Ayres: Yuma. Good evening, everyone. A very warm welcome to the National Library of Australia and to the 2025 Ann Moyal Lecture. I'm Marie-Louise Ayres, and it's my privilege to be Director-General of the Library. To begin, I'd like to acknowledge Australia's First Nations peoples, the first Australians, as the traditional owners and custodians of this land, and give my respects to their elders past and present, and through them to all Australian Aboriginal and Torres Strait Islander people. We undertake our work for the nation on the lands of the Ngunnawal and Ngambri peoples, and I especially acknowledge their custodianship of the land on which we are meeting. And noting the topic of tonight's lecture, I particularly acknowledge that First Nations Australians have cared for country, its beauty, its biodiversity, and its ability to sustain a population over many, many generations.

I also, because I just was spying who was in the audience tonight, I'd like to acknowledge some former colleagues, and I'd particularly like to note that my two predecessors as Director-General are both in the audience tonight, so it's lovely to have Ann-Marie and Jan with us this evening.

So thank you for attending this event either in person or online, coming to you of course from the National Library building here in Canberra. It's such a pleasure to see so many of you here for the third annual Ann Moyal Lecture. This instalment of our flagship lecture series is named for Dr Ann Moyal. And many of us, including me, were lucky enough to get to know Ann personally and well. She was a beloved member of the Library community, a Petherick reader, a Harold White fellow, and an established historian of science and technology. As a champion of independence in research and scholarly pursuits, she established the Independent Scholars Association of Australia in 1995, in fact, here at a conference here at the Library. Ann is remarkably well-represented in our collection, having conducted more than 20 oral history interviews and being interviewed three times herself. The Library also holds all of Ann's publications and her personal papers.

She regularly discussed the best way she could support future research, writing, and the communication of research outcomes. And in the end, she decided to fund an annual lecture on the theme Science in Society. She specified that the lecture should be given by a distinguished speaker and discuss a contemporary question, elicited from diverse academic fields such as science, environment, ecology, history, anthropology, art, and technological change.

Our speaker tonight fits that bill perfectly. It is my great pleasure to introduce Dr Ken Henry. Dr Henry is chair of the Nature Finance Council, the Australian Climate and Biodiversity Foundation, and Wildlife Recovery Australia, and a non-executive director of Accounting for Nature Limited, and the Digital Finance Cooperative Research Centre.

Dr Henry has had a long and distinguished career. He served as secretary to the Treasury from 2001 to 2011. He chaired the Howard government's Tax Review Task Force in 1997 to '98, the Rudd government's tax review, published in 2010, and the Gillard government's white paper on Australia in the Asian century. In 2022 to '23, he led the Independent Statutory Review of the Biodiversity Conservation Act of New South Wales. Dr Henry was also the chair of National Australia Bank from 2015 to 2019, and was a non-executive director prior to being chair, and a non-executive director of the ASX and affiliated entities from 2012 to 2022.

He's a recipient of the Centenary Medal, and was made a Companion of the Order of Australia in 2007. He's a fellow of the Academy of Social Sciences Australia, the Australian Institute of International Affairs, and the Australia and New Zealand School of Government. Awarded a PhD in economics from the University of Canterbury in 1983, he has also been awarded an honorary doctor of business from the University of New South Wales and an honorary doctor of laws from the ANU. His lecture tonight is titled 'What We Must Fix First'. I do love a big, ambitious aim. And Dr Henry will explain why our capitalist democracy has become dysfunctional, what we must do to fix it, including the policy challenges that must be accorded priority.

Please join me in welcoming Dr Ken Henry to present the 2025 Ann Moyal Lecture. Thanks, Ken.

Dr Ken Henry: Well, wow, thank you very much. I'm somewhat intimidated by the big screen to my left. I'm not going to make use of it at all, and that does seem wasteful.

I should begin, I want to begin by joining with the Director-General in acknowledging the traditional owners of these lands, on which we meet this evening, and I'd like to welcome to this function any other Aboriginal and Torres Strait Islander people who might be with us.

I am honoured to have been invited to present this year's lecture in honour, in recognition of Ann Moyal. Now, I didn't have the opportunity to get to know Ann, though I certainly knew of her. Her contribution over a long and illustrious career to our understanding and appreciation of the history of science and of technology leaves an enduring legacy.

I'm not a scientist, neither am I an historian. I'm an economist, and I'm a traditional neoclassical economist at that. Some would say that makes me a pretend scientist. I would prefer to say that it makes me an economist who values the rigour of formal mathematical analysis and also values the empirical testing of ideas. That is to say it makes me somebody who is suspicious of truths that are self-evident, and even more suspicious of those who peddle them. When you hear somebody describe an economist as a person who doesn't believe what they're seeing until they had it proved in theory, they could be talking about me. I wish they could be referring to many more of us, and I hope that by the time I conclude this lecture, you'll understand at least a bit of the reason why.

This evening, I want to spend a little time reflecting on where we are as a nation, why we are where we are, and what we must do to get out of this place, and we really do need to get out of this place. I'll conclude my address by outlining, if only in somewhat scant detail, the thing that I consider must be fixed first. The European Union's Copernicus Climate Change Service reports that the global average temperature last year was 1.6 degrees Celsius above pre-industrial levels, an increase of 0.1 degrees on 2023, which was the previous hottest year on record. To state the obvious, humans have never previously experienced such levels of heat, and we are not the only species struggling to cope.

It now seems implausible, at least to me, that the Paris Agreement's safer target of keeping long-term average global temperatures to within 1.5 degrees of pre-industrial levels, that that target will be met. That just seems implausible to me. We are going to have to get used to the unprecedented. Unprecedented heat waves, unprecedented flooding, cyclones, typhoons, and hurricanes, unprecedented droughts, and wildfires that respect no limits and which cannot be contained by the technologies available to humans.

Unprecedented has already become the motive of human experience in the 21st century. A significant proportion of accumulated human wealth is now uninsurable at any cost. A very much larger proportion is in fact uninsured, because asset owners simply cannot afford today's insurance premiums. The global reinsurance firm Swiss Re estimates that less than one half of the losses due to extreme weather events in 2024 were covered by any insurance at all.

As you know, the damage being caused by a changing global climate is due overwhelmingly to the burning of fossil fuels and land clearing, especially, of course, deforestation. The burning of fossil fuels releases carbon into the atmosphere thousands of times faster than it was sequestered historically in deposits of coal, peat, oil, and gas.

There are some who, whilst acknowledging the reality of climate change, choose to doubt that it has been caused by human activity. I can't be bothered with this argument. There is no moral defence available to those who, having the capability to take action, to avoid or to ameliorate a crisis, refuse to do so on the basis that the crisis was not of their making. Climate change is a problem for all of us. Now would be a good time for a much more ambitious set of actions. A couple of decades ago would've been an even better time, but we are where we are.

Think of it like buying insurance. In this case, the longer action is delayed, the higher both the probability of the crisis and of its magnitude. If we delay for long enough, then the magnitude of the crisis becomes as large as can be conceived. Surely, there is no conceivable crisis of higher magnitude than extinction. So buy the insurance now, not in another decade's time when it will be much more expensive or even quite probably unavailable at any cost.

Climate-induced extreme weather events and global warming have had a devastating impact on Australia's biodiversity, but this is not the only cause of nature loss in this country. There have been many more direct contributors for which humans must also accept primary responsibility. It is we humans who have destroyed more than one half of the forested area of Australia that existed pre-European settlement.

In less than 250 years of industrial activity on this continent, we have rendered extinct about 100 species of fauna and flora, and thousands of unique invertebrate species. More than 1,700 species and ecological communities are threatened with extinction, and they will become extinct without aggressive intervention. Millions of hectares of land have been rendered unfit for agricultural activity or condemned to very low levels of productivity due to the leaching of nutrients, acidification, soil erosion, and chemical toxicity.

There are some who, whilst acknowledging the reality of this loss of natural capital, choose to excuse previous generations on the argument that they could not have understood the consequences of what they were doing, they didn't know better. I can't be bothered with this argument, either.

Everything done by previous generations is still being done today, everything. On Australia's eastern seaboard, several hundred thousand hectares of native vegetation are still being cleared every year. In New South Wales and Tasmania, governments are still using taxpayers' money to prop up the logging of native forests, mostly to subsidise the export of very low value wood chips and pulp, and also, and this seems almost too silly to be able to say, but subsidise the supply of firewood to households, to be burned of course.

In our remnant forests, habitat of endangered species, including the koala, the leadbeater's possum, Victoria's faunal emblem no less, and the greater glider, whose habitat is still being destroyed, willfully. Native species key to the integrity of natural ecosystems are still being culled as pests and also for sport, willfully. Wetlands are still being drained and then filled, willfully. Mangroves are still being ripped out, willfully. Paddocks are still being ploughed or sprayed with chemical fertilisers known to kill every living organism, willfully.

The Wentworth Group of Concerned Scientists estimates that we would need to spend about $7 billion a year over the next 30 years to repair most of the loss of ecological functioning on the Australian landscape that has occurred over the past 200 years. No Australian political party has a plan to do that. There appears to be a general sense that, "It's just all too hard, it's too expensive, we simply cannot afford the insurance."

Our political system treats environmental policy issues, it seems to me, merely as an opportunity for procrastination, an opportunity to kick a can a bit further down the road, let some other sucker worry about it, preferably, of course, a political opponent, such is the fate of Graeme Samuel's recommended reforms to the EPBC Act, for example.

Poor policy outcomes are not confined to environmental matters and they're not unique to Australia. They're a feature of every capitalist democracy in the 21st century. For more than a decade, serious analysts have been pointing to a twin crisis affecting the Western world, a crisis in the functioning of both capitalism and democracy. Core to their analysis, it's the proposition that the systems have been hijacked by vested interest.

The way in which my discipline of economics has framed some of the biggest issues in human development has not helped. For a long time, those few economists who bothered to take an interest in matters of sustainability considered that we should think of the natural environment in much the same way we think of any other thing from which humans derive what we call utility, or wellbeing, if you like, you know, like an ice cream or a glass of wine.

The esteemed neoclassical economist Robert Solow, in a much-cited address delivered in 1991, defines sustainability as a moral obligation to conduct ourselves such that we leave to the future the option or the capability to be as well off as we are. In conceptualising the contribution the environment makes to human wellbeing, Solow notes reasonably that, when we think about our own wellbeing, or that of our family or community, or even the wellbeing of the present generation, we should recognise, and these are his words, that, "Different amenities really are, to some extent, substitutable for one another."

Thus, we might see an opportunity for enhanced wellbeing in trading off some amount of environmental amenity for gains elsewhere. For example, we might choose to substitute a year's supply of firewood for the ongoing environmental amenity derived from appreciating the existence of a 500-year old eucalypt, choosing to trade off environmental amenity for temporary comforts.

But Robert Solow's perspective, drawn directly from standard neoclassical consumer choice theory, is less than half the story. It ignores the fact that the choices we've been making have degraded the stock of natural capital. Perhaps the loss of one 500-year-old eucalypt doesn't matter that much, but if you chop down enough 500-year-old trees, you impact just about everything else that matters, especially if those trees are then burned as firewood.

Much of humanity's degradation of natural capital has proved irreversible. Much of it contributes now to recursive environmental dynamics, tightly integrated vicious cycles, involving pollution of the atmosphere, pollution of the hydrosphere, and of course, destruction of the biosphere. Deserts have been created. Waterways have been made so toxic that they're incapable of supporting marine life fit for human consumption, or even any marine life at all. Crops have been failing with increasing frequency and severity. Areas of productive grazing land have become more and more fragmented, challenged by herbicide-resistant exotic weeds and feral pests.

Instead of affording protection from wild weather events, the natural environment has now become their accelerator. We have turned nature against us. Our destruction of natural capital now poses an existential threat to everything we value, and we in this generation cannot claim that we know not what we are doing.
This is a matter of primary importance to any moral claims we might have to the nurturing of intergenerational equity. Nature is one of several capitals now generally understood to be the key determinants of human development. Think of natural capital as an endowment, a bequest, if you like, that the present generation passes to the next, along with stocks of physical, financial, human, and social capital. The last four of these capitals have been created by humans. They exist only because of us, they exist because of human activity. Natural capital, on the other hand, is being destroyed by us, it's being destroyed by human activity. The future of humanity, the quality of the lives available to future generations of humans depends upon all five of these capitals.

Paradoxically, natural capital, the one we are destroying, turns out to be the most important. It is foundational, upon it rests everything else. Unless we invest in the rebuilding of natural capital, often referred to these days as nature positive, we will fail to meet our moral obligation to future generations, to ensure that, in Robert Solow's words, "We leave to the future the option or the capacity to be as well off as we are." To be clear, there is no human development pathway now available that does not involve a substantial investment in natural capital, in rebuilding what has been destroyed. Investments in physical, financial, human, and social capital, they cannot compensate, for the simple reason that, absent the substantial repair of natural capital, those investments are unsafe, with contributions to human wellbeing that will prove ephemeral, insubstantial, and ultimately inconsequential.

Indeed, it appears that, as the degradation of the stock of natural capital has become more apparent, our rates of investment in the other capitals have fallen away, have declined. Now, my gut tells me and my intuition tells me there's some powerful economic theory to be uncovered here, and if I had more time, I'd find it an irresistible field of inquiry, but I'm running out of time. In any event, the economic pie has been growing more slowly. And as is common in periods of slower growth, we humans have been expending more and more energy squabbling over the distribution of this slower-growing pie.

The democratic system allows a lot of voices in such squabbles, but not all who matter have a voice. I'm referring especially to the young and to those not yet born. I could be referring to others, of course. In our squabbles, those without political voice have become our victims. From them, we take. Our democratic system has facilitated our stealing from the future.

The larceny is now quite apparent. Because of decisions we've been making about the rate of accumulation and sectoral allocation of physical capital, young Australian workers find themselves in an economy that is no longer capable of generating rates of productivity growth, supportive of durable increases in real wages, with financial capital increasingly concentrated in the hands of those who no longer have to work for a living, and some who never did.

Today's young workers are being denied a reasonable prospect of home ownership. They're burdened by mountains of public debt and the punishing costs of securing a tertiary education. Young workers are being held back by a tax system that relies increasingly upon fiscal drag, being forced to pay higher and higher average tax rates on declining real incomes. Young workers, a declining proportion of the population, are being forced to pick up the tab.

There was a time when our polity would not have tolerated such iniquity, when its mere prospect would've motivated a far-reaching programme of economic and social policy reform. That is what we saw in the last 15 years of the 20th century, an extraordinary programme of economic and social reform. We floated the currency, we liberalised cross-border capital flows. We broadened the income tax base to include previously untaxed sources of income, like capital gains, fringe benefits, and even income from gold mining. Do you recall, that was completely exempt from tax in Australia until 1987, for God's sake.

We made explicit the independence of a reserve bank pursuing low inflation, deregulating labour markets, including by dismantling centrally-determined wage indexation, establishing Medicare, compulsory superannuation scheme, securing bipartisan agreement to deliver intergenerational justice in the conduct of fiscal policy, through a shared political commitment to balance over the course of the economic cycle, that being one of the hallmark products of the Charter of Budget Honesty Act.

We implemented a sophisticated model of financial system regulation that demonstrated when the global financial crisis hit that it was at least as good as anything anywhere else in the world. We removed quantitative trade restrictions and tariffs that had, for decades, penalised Australian consumers with high prices and poor-quality products. We developed world-class competition and consumer protection policy, and we underpinned corporate regulation with sound economic principles. Ultimately, the reform project also produced a complete overhaul of the indirect tax system, including the introduction of a broadly-based goods and services tax. The policy advisors who drove those reforms were considered hard-headed economic rationalists. Today, they attract the equally pejorative label "neoliberal".

There have been several attempts at policy reforms this century that would stand well in the company of those products of the late 20th century, but all have failed to secure enduring support. And much of what was achieved in that period in the last 15 years of the 20th century has not been maintained. The tax system especially is in a powerless state. Its repair demands a package of reforms at least as transformative as the entirety of what was achieved in the 1980s and 1990s.

But the history of Australian climate policy is surely the most instructive. Australia was a party to the 1997 Kyoto Protocol. Our emissions cap for the first commitment period under that protocol was so generous, we got such a good deal that our government considered it didn't need to do anything sensible to meet it, so it didn't. But that didn't stop Australia's public service leaders across multiple agencies from preparing for the future. Assuming that Australia's carbon abatement obligation would be more challenging under the Kyoto second commitment period, and even more challenging again under any subsequent global agreement, those public service leaders reached a consensus in the late 1990s that Australia should implement a whole of economy carbon tax or emissions trading system as the sole carbon abatement policy instrument, abolish everything else. We only needed that.

Carbon taxes and emissions trading schemes have broadly equivalent economic impacts, though typically differing in their distributional consequences. Importantly, provided they have economy-wide coverage, both ensure that the marginal cost of carbon abatement, of reducing carbon emissions, is equalised across all activities that emit carbon, and that's, I would think, I would hope obviously a necessary condition for least cost abatement. That's one reason why sectoral decarbonization approaches should not be pursued, unless there's a single tradable instrument that links them in some way, and I'll return to this point in just a moment.

It wasn't until late 2006 that the Australian government, having experimented with virtually every conceivable less consequential measure, conceded the case for exploring an economy-wide emissions trading scheme. Prime Minister Howard's task group on emissions trading, and I was a member of that task group, marked a seminal turning point in Australian climate policy. Ultimately, an emissions trading scheme was legislated by the Rudd and Gillard governments, but it lasted only a couple of years, defeated by a dishonest political scare campaign, supported by misinformation and disinformation, peddled by people from all sectors, including business leaders and the media.

We've had numerous other reports written this century that were intended also to produce transformational change, to deal with emerging challenges. I would instance the succession of intergenerational reports, the first of which was published in 2002. Of course, I would refer also to the tax review published in 2010, and the white paper on Australia in the Asian Century published a couple of years later. None of these, none of them has had enduring influence on policy development.

On publication, all of these reports prompted commentary that we were jumping at shadows, that we were imagining things on the horizon that were no more than a mirage. The common view shared by the nation's leading economic commentators even today is that, at least until the covert pandemic, the Australian economy was doing very well in the 21st century. We were enjoying the tailwinds of a strongly growing Asian market for our iron ore, for our coal, and for our gas, tailwinds that pushed our terms of trade to levels unimagined by the late 20th century economic reformers.

These commentators maintain that, because of the mining boom in the two decades pre-COVID, the Australian economy, uniquely in the world, managed to avoid any instance of recession. "Compare that," they would say, "With the last two decades of the 20th century, that saw two deep recessions and a trend decline in the terms of trade."

Well, if you share this view, then you might want to ponder a couple of facts. In the last two decades of the 20th century, real gross domestic product per capita, that's a bit of a mouthful, but it's the standard, well, measure that economists talk to one another about when thinking about what's happened to the quality of life in a place. Real gross domestic product per capita grew at an average annual rate of 2%, notwithstanding two deep recessions. And by contrast, in the first two decades of the 21st century, fueled by this extraordinary mining boom, with no recessions, we managed growth of only 1.4% a year. 2% fell to 1.4.

The difference in average rates of growth between the last two decades of the 20th century and the first two decades of the 21st is almost fully explained by what happened to the average rate of productivity growth, almost fully explained. And in my empirical analysis, and consistent with the theory that I studied as an undergraduate student of economics, the fall in productivity growth is largely explained by the negative impact of the mining boom on all other sectors of the Australian economy. For 20 years, I've been reading that Australian prosperity has been underwritten by the mining boom. This is a self-evident truth, but I don't believe it. I've not seen it proved in theory, and when I look at the numbers in the national accounts, I find that it's a lie.

The first intergenerational report published in 2002, let me call it IGR 1, actually turned out to be much too optimistic. We projected average annual real GDP per capita growth over the first two decades of the 20th century not of 1.4%, which is what happened, but of 1.8%, and at the time that projection was panned by just about everybody. The Treasury was being alarmist, we were trying to scare people, people who were suffering from decades of reform. They had reform fatigue. We were trying to scare them into a completely unnecessary further round of economic reforms to lift productivity and participation. IGR 1 set an explicit growth target for Australia. It made the case for a set of policy reforms that would lift the projected 1.8% growth rate to 2.3%, explaining that a failure to do so would impose a heavy fiscal burden on future generations of Australians.

So it turns out that, in the first two decades of the 20th century, before the impact of COVID, we missed the intergenerational report growth target by almost one percentage point a year. Now, you mightn't think that's such a big difference, but I put it this way, other things equal, had we achieved that growth target, the Commonwealth's budget balance would be improved by about four percentage points of GDP. Even in the first COVID year, 2019/'20, the budget would've been pretty much in balance. And in the subsequent year, 2020/2021, we would've recorded a deficit of 2.5% of GDP instead of 6.5%.

The mountain of public debt would be very much smaller. Instead of projecting a chronic structural budget deficit of about 1% of gross domestic product, this year's budget papers would've projected a structural surplus of about 3% of gross domestic product, growing even larger over the out years, repaying debt.

Now, of course, other things would not have been equal. Most importantly, the personal income tax system would've been reformed to remove fiscal drag. Young Australian workers would be in a much better position. Average Australian incomes, even in pre-tax terms, would be about 20% higher in real terms, and average after-tax incomes would be even higher, but we just couldn't be bothered. Today's young people and future generations, it seems to me, have been abandoned by the nation's leaders, by the very people whose primary responsibility is to ensure that they are even better off than we are.

Ironically, stealing from the future hasn't made the rest of us happy. As a symptom of widespread dissatisfaction with economic, social, and environmental outcomes, people from all age cohorts say that they've lost trust in the institutions critical to the functioning of our capitalist democratic system. Business is not trusted, nor government, nor even not-for-profit organisations, and most certainly not the media. The late 20th century period of economic reform was sparked by the Hawke government's assessment that several decades of poor economic performance and poor social outcomes were due to policy squabbles over the distribution of the pie, without regard to its size. We have returned to that place, this is who we now are. Some of this century's leaders have appeared not the least concerned with economic policy rigour. The only thing that seems to matter is whether something, anything really, passes the pub test. In this way, they have invited the forces of vested interest to hijack every important policy proposal. We are not in a good place. We should not be here. It certainly was not meant to be like this.

What then is the future we should be seeking? The economic rationalists of the late 20th century might not have used these words at the time, but I'm confident that they shared a vision of a nation in which all citizens have the capabilities to choose a life that they have good reason to value. The capabilities to choose a life that they have good reason to value. With leaders committed to ensuring that future generations have access to an even richer set of capabilities. We should want to live in an optimistic country, open to the world, globally competitive, with high rates of productivity growth, a country whose leaders engage robustly and effectively with other world leaders, and contribute strongly to coordinate a global action to deal with things like climate change, financial system vulnerabilities, transnational terrorism, and other crimes against humanity.

We should want to live in a place whose leaders have the intelligence, creativity, and courage to deliver tax system integrity, fostering high rates of capital deepening, and economic and social inclusion. We should want to live in a place whose leaders understand the foundational role of natural capital and are committed to nature repair at scale, pursuing a nature-positive future trajectory. Shared vision is important, but as that earlier period demonstrates, more important than the shared vision, is political leadership capable of developing a compelling narrative to support large-scale economic transformation. I don't see anything like this today, and that is consequential.

So what must we fix first? I'm going to conclude with a big idea. Well, I think it's a big idea, that illustrates the sorts of things we're going to have to do if do we are to have any chance of securing the vision I've just outlined.

But let me say this is more than an illustration. I consider it to be the most important economic policy opportunity currently available, and by some margin. This is the thing we must fix first. Nothing else comes close.

... and the repair of nature. Meeting our carbon abatement obligations in a manner that also enhances climate resilience, protects threatened species, and restores degraded ecosystems. Obviously, pumping more funds into nature repair, whether sourced from the public or private sectors, makes little sense when governments continue to tolerate, even subsidise the destruction of nature. Thus, nature-destroying policies and institutional arrangements, they absolutely have to be reformed, and I would say an obvious place to start would be removing the taxpayer subsidy of the continuing destruction of Australia's native forest estate.

But the major task is to transform the entire economy so that carbon emissions abatement becomes a driver of nature repair, as an ordinary consequence of business activity, just as physical capital accumulation due to saving and investment is an ordinary consequence of the operation of the capitalist economic system. Well, as you know, Australia is a signatory to the Paris Agreement on climate change. According to that agreement, we have committed to reducing greenhouse gas emissions by 43% against 2005 levels by 2030, and then we've committed to net zero by 2050. At some point this year, whoever forms government after the forthcoming federal election will have to establish an abatement target for 2035 that is considerably more ambitious than the 2030 target. Experts are recommending a target of between 65% and 75% abatement relative to 2005 levels, although there are some experts recommending figures as high as 90% abatement.
The current policy framework for carbon abatement has been designed primarily to support our 2030 target. It has none of the finesse of an economy-wide emissions trading scheme or carbon tax. It's not inconsequential, but it's a long way from where we were more than a decade ago, and it's a very long way from where we need to get to.

The principle reason the 2050 carbon commitment is expressed in net terms is that land and the vegetation that land supports provides a natural carbon sink, of course, principally through the processes of photosynthesis, drawing carbon out of the atmosphere. Currently, the Australian landscape sequesters about 90 million tonnes of carbon a year in this way, literally drawing it out of the atmosphere. 90 million tonnes a year. Everything else, though, taken together, including agricultural activity, emits about 520 million tonnes of carbon a year. So our annual net emissions are some 430 million tonnes.

The Climate Change Authority projects that, by 2050, the total annual emissions of all sectors will have been reduced to about 130 million tonnes, with electricity decarbonising faster and further than other sectors. That is a very large reduction in emissions, but it does mean that 130 million tonnes of carbon will have to be sequestered by the Australian landscape every year, unless direct air capture or some other technology emerges to do some of the work. Current emissions imply the need for around a tenfold increase in the volume of land sector Australian Carbon Credit Units, ACCUs, in the years to 2050, 10 times as many carbon credits as is being generated today. We are certainly not talking business as usual.

Now, you would be aware of recent controversy surrounding the magnitude of carbon abatement achieved by current land-based ACCU methods. Obviously, the Australian community must have confidence that ACCUs are of high integrity and that Australia is receiving best value from their generation. But a tenfold increase in the volume of land sector ACCUs means that we must go well beyond polishing the bits we already have. We need to revisit the structural foundations of the scheme that supports land-based ACCUs.

Even so, economic rationalists have quite a bit to work with. We have a bipartisan commitment to net zero by 2050 and we have bipartisan acceptance of ACCUs as the principle instrument for delivering carbon abatement in a politically safe manner.

We know from experience to date that ACCUs that also repair nature, like biodiverse plantings, have a higher probability of securing real carbon abatement. And we have good reason to believe that Australia has comparative advantage in generating land-based carbon offsets. Because we know a bit of economic theory, we know also that policies will be most effective if carbon credits are tradable in well-functioning markets that generate price signals to support required investments in direct abatement. Importantly, these price signals provide confidence to stakeholders in impacted industries and regions that the transition to net zero is manageable, that we can do it.

Most importantly, though, the powerless state of the natural environment and the foundational role played by natural capital in human development makes a strong case for carbon credits being generated in a manner that contributes to nature repair at scale, lifting this burden from the shoulders of future generations of Australians.

The Australian Climate and Biodiversity Foundation, which you heard I chair, has been working with others on the of what we call a nature-positive ACCU scheme, a scheme that does just what I've described. Under this scheme, any land-based ACCU project that does not contribute directly to nature repair through regeneration of priority habitat and ecosystems pays a royalty in the form of the surrender of a proportion of ACCUs generated into a nature repair public fund. The scheme that we've designed also proposes a limited export opportunity for those who generate ACCUs. In practise, this would be achieved by mandating a domestic reserve on land-based ACCU projects.

The public fund would be charged with investing in cost-effective, high-priority nature repair. For example, the fund could conduct biodiversity tenders, bridging the cost gap between monocultural plantings and those that deliver priority ecosystem restoration. This is very, very different from current land-based ACCUs that deliver carbon sequestration with little or no nature benefits, either through monoculture plantations or through the regeneration of habitat in low-priority locations, typically in regions with low land values and high levels of remnant native vegetation. Moreover, the regeneration of priority habitat and ecosystems ensures a high probability of actual carbon sequestration.

Land-sector ACCUs are a community-created resource, in the form of a right to generate and sell carbon credits under legislation. The proposed royalty provides a return to the community in the form of enhanced condition of Australia's natural assets, of its ecosystems, and its landscapes. Analysis commissioned by the ACBF finds that the nature-positive scheme could deliver significant restoration of high-priority habitat, reversing past damage, and materially reducing extinction risks for Australia's endangered flora and fauna. It would deliver spending on nature repair of the magnitude recommended by the Wentworth Group, to which I referred earlier, around about $7 billion a year.

Moreover, the scheme could lift farm profitability on average by about 10%, and it would contribute substantially to farm income diversification. It would bring forward sufficient land-based ACCUs to support Australia's net zero transition, with surplus credits available for export after 2035. It could be implemented in such a way as to allow government to manage the pace of change for regional communities. Very importantly, it would avoid any new on-budget government spending. It does not ask future generations to pay for the repair of natural capital. The analysis we've commissioned finds that Australia can supply more credits than required for the net zero transmission at domestic prices, below the government's announced cost containment that forms part of the existing safeguard mechanism. I won't go into the details of that, but some of you would be familiar with it.

It seems likely that, at some point, the international price for carbon credits will exceed Australia's cost containment cap. This will provide a strong incentive for export, and enabling access to export markets would also improve ACCU market function and price stability for investors, and it would enhance investor confidence. So the domestic reserve that is part of this scheme ensures that the domestic price of ACCUs remains below the international price. Modelling confirms that it can limit, even eliminate, pass-through of the royalty to domestic purchases of ACCUs, across a wide range of scenarios.

Implementing this scheme of nature-positive ACCUs would put Australia back at the vanguard of international efforts to deal with climate change, and in an economically rational manner. Importantly, it would secure the due goals of net zero emissions and nature repair at no cost to taxpayers. That's quite something.
Before developing this world-leading scheme, however, there's a smaller first step available to us right now, and that is to cease the continuing uncommercial destruction of the native forest estate. Ending native forest logging, managing the forests instead for carbon, biodiversity enhancement, and bushfire resilience would generate a new revenue stream from ACCUs created under the proposed Improved Native Forest Management, INFM carbon method, that is presently under consideration by government.

For example, other analysis commissioned by the ACBF estimates that ending native forest logging in New South Wales would generate between 1 and $2.7 billion in revenue from carbon credit sales over the next 15 years. That compares with the $29 million loss incurred by the Forestry Corporation in New South Wales last financial year, in logging those same forests. If the New South Wales government chose to reinvest that revenue in on-ground management, to restore environmental condition, manage fire risks, and protect endangered species, and in some associated activities, that would support around 1,700 forestry-related jobs across regional New South Wales.

Let me conclude. Round about 20 years ago, it was common to hear policy people in Australia talking about the importance of hard heads and soft hearts. Many of you will recall the hardening of hearts that was a feature of that time, especially in respect of the treatment of asylum seekers. There was a risk of head softening too, in part because of extraordinary buoyancy in Commonwealth budget revenues. For the most part, the hard-headed economic rationalists who had led the development of the late 20th century economic reforms regarded environmental issues as matters of the heart.

An exception was climate policy. Global agreements to place quantitative limits on national emissions stimulated hard-headed interest in policies that would secure least cost abatement. But the hard heads of the time largely assumed that the ongoing degradation of the natural environment posed no risk to economic and financial performance, and that it could continue to be ignored.

We now know this to be madness. Environmental issues were never merely matters of the heart. They have always been foundational, and our treating them as anything less passes a large cost on to future generations. We can avoid that outcome. We have the tools to integrate both carbon abatement and the repair of nature into the ordinary functioning of our market economy. It would be hard-headed to do so, and it would be hard-hearted not to. Thank you.

Dr Marie-Louise Ayres: Thank you. Thank you very much, Dr Henry for that thought-provoking lecture. While I was listening to you, I was thinking about how much Angus, Ann's nephew, you would agree, would have really enjoyed the way that you set out a kind of, you're not an historian, but you've set out an historical picture for us.

Dr Ken Henry: I've just lived long enough.

Dr Marie-Louise Ayres: There you go, you've lived long enough. And I suppose that the idea of a big idea, you've also posed some real challenges, particularly to those of our generation, those who've done really well, where it does seem that our population is both credulous, perhaps willing to believe in very simple solutions to complex problems, and also cynical as to actually what might be able to bring together two things, that is climate policy and nature repair, into a bundle that, if collectively, we decided, "Let's go for it, for our children," we might be able to get there. So we've got that, I think credulous and cynicism going off in the same time in our community.

We do have time for a few questions. And because the presentation is being live streamed, I'll just remind you that if you've got a question, please raise your hand, and we'll bring you a microphone, please don't start speaking before it comes to you.

I'd also just like to acknowledge that, in the audience tonight, we also have Mr Stephen McCutcheon. And Stephen, I'm just going to get you to stand up for a moment, if that's okay, and turn around. Stephen is chair of the Nature Repair Committee, and this committee plays an important role in establishing the nature repair market, the biodiversity market, supporting the integrity of your market and advising the Minister for the Environment and Water on biodiversity methods.The reason I've asked you to stand up is that if you want to talk to Stephen afterwards, you should do so.

And similarly, we also have two colleagues here from the Department of Climate Change, Energy, the Environment and Water, I think I got it in the right order. And I'll get you two to stand up as well, including Kate, who's a departmental representative on the Emissions Reduction Assurance Committee, which supports the integrity of the Australian Carbon Credit Union, the ACCU scheme that Ken was speaking around. So again, I reckon over drinks, you've got these people to corner.

Now, we do have time for only a very few questions, but we've got one here in the middle of the audience. If you just wait for a microphone, please, and if you are thinking about a question, put your hand up now, because there's another one, we'll bring your mic so we're ready. Thank you.

Audience member 1: Hello. Thank you, Ken, for your talk. Melissa Coade from The Mandarin. You referenced the positive thinking of some of the public service leaders over the decades, but as we sort of move towards a political atmosphere where the pub test matters more than anything else, how do public policy or experts on these issues combat the sort of political fervour to find a path to common sense?

Dr Ken Henry: Yeah, no, that's a really good question, and it's a question that I asked myself on many occasions when I was in the public service, when I was a public service leader. And the view I came to is that, you know what, there really is no choice. You got to stick to what you know to be right. There's no gain in entertaining activity that you know to be wrong. There's no gain in that. No job is worth it, no amount of income is worth it. Maybe you might think it is at the time. In retirement, let me tell you, you wouldn't think that.
It's shocking, the things you recall in the early hours of the morning when you've left senior positions. You don't want to be waking in the early hours of the morning with regret, so there's no alternative. The other thing I would say is that invest in developing a framework in your mind and in your soul that you are comfortable with. Test it with colleagues. Test it, test it, test it with colleagues. Talk to others across the public service. Don't live in your own ivory tower, but test it. Don't test it in the political domain.

Dr Marie-Louise Ayres: Sorry, we've got somebody who... yes, you are, great.

Audience member 2: I've got a microphone in front of me. That was such an amazing discussion today, and I've come from a day spent with health colleagues, I'm a cardiologist, and I've spent today talking about the health impacts of heat. In the first five minutes you have spoken I thought extraordinarily on the reasons why we need to act on climate change and that extraordinary resonance around extinction. So thank you so much for the way in which you framed both the policy history and the need to act now.

And then, we come to economics, and well and truly outside my area of expertise, it's just I'm a cardiologist, I look after people, but there's a relationship, as far as I understand it, between carbon pollution and GDP. And we seem to come back in our models and the way in which we're addressing our climate crisis or our need to improve the quality of nature and to prioritise this, we're coming back to metrics that are reliant on consumption. I wondered, as you put forward the first thing that we must do, whether you're attempting to decouple between carbon pollution and GDP, and I'd also love to hear your thoughts on whether these notions of productivity, and efficiency, and gross domestic product as a primary metric, is this how we define the best future?

Dr Ken Henry: Yeah, wow. So thank you for the statement, the two questions. Yeah, like wow. So second question, yes, absolutely, we must decouple. We absolutely must decouple, and the renewable energy transition in particular is designed to do precisely that. We have to do a lot more, but that's an instance of how we need to decouple, to cut our reliance on fossil fuels, coal, gas in particular.

And as to whether GDP provides a satisfactory measure of human development, absolutely not. As a matter of fact, I had the opportunity to address a seminar of the United Nations Statistical Commission on that very question just a couple of weeks ago, and that was my point. No, it does not. And you might be interested to know that the United Nations Statistical Commission, who are the keepers of the System of National Accounts, these are the people who tell national statisticians all over the world how to go about measuring gross domestic product, they will be publishing a new system of national accounts this year, 2025 SNA, that will make that very point. And will go into an exploration of what needs to be done to make the system of national accounts relevant to contemporary policy debate, and most particularly, to the discussion that we've been having here this evening, what are the matters that I raised in my lecture here this evening. Natural capital and what's happening to natural capital is front and centre of the SNA 2025.

Dr Marie-Louise Ayres: Oh, we have one more question. I think we've already, tes, okay, here.

Audience member 3: I'm hiding behind the post here.

Dr Ken Henry: Ah.

Audience member 3: How do we present the economic argument to landholders who are the ones that we actually require to provide land for the land-based environmental rehabilitation, and trading of biodiversity credits, and carbon credits in the future? In my experience, that is where we have failed in the past, so we've had schemes for biodiversity credits, and for agroforestry and farm forestry, some of which was for biodiversity benefits. Landholders couldn't see a reliable long-term stream, even though some were interested in participating.

Dr Ken Henry: Yeah, yeah. No, this is a really good question. Okay, so I'm a rational economist. I believe that supply curves slope upward, left to right. That is to say if you offer people enough money, they'll do almost anything, and that includes farmers. But it's also important that people who take the decisions that you're talking about, which are really decisions of how they're going to use their land, whether they're going to use it for continuing for dairy operations, or beef cattle farming, or cropping, and whether they should convert it to environmental plantings, for example, which is, that's a big call, right? Because they're going to have to maintain, or somebody's going to have to maintain those environmental plantings for a century. That is a big call, right?

And so not only do they need to have the right price, but they also need to have confidence that that will be sustained, and that there will be willing buyers of what they're doing and of their property when it comes time for them to offload their property. And that's why it's really important that we now take the opportunity to think about the market design, right? How we design the markets in such a way that they provide information to landholders, including farmers, or especially farmers, that gives them enough confidence to make these big changes.

But as I said in the modelling that we've done of the nature-positive ACCUs scheme, we're very confident that average farm incomes would be lifted by 10%, that's the average. Some would do really, really well, others not so well, because their land's just not capable of generating nature-positive ACCUs, but some would do incredibly well, and the average would be 10%. It's a pretty significant uplift, and if we can provide the confidence that that's a sustained enhancement in profitability, that it's not just a one-off, then I reckon we'll get massive change.

Dr Marie-Louise Ayres: Thank you very much, Ken. We have run out of time now, but I'm not sure if it would be true to say you've enjoyed tonight's lecture, it's going to be more that it will have provoked many thoughts. You'll have new ideas to consider and ruminate in the days ahead. I've got a new part of my vocabulary, a nature-positive ACCU. I didn't know that before tonight. And also, for those of us in the public service, just thinking about what we don't want to wake up and worry about in 15 years' time that we could've done and didn't, or did and shouldn't have done.

If you'd like to watch Dr Henry's talk again or share with friends and colleagues, you can access it through our website or our YouTube channel, and please do share it widely. So as we bring formal proceedings to a close, please join me in thanking Dr Ken Henry for his timely and very thought-provoking lecture, and once again in acknowledging the generous bequest from the late Dr Ann Moyal and her estate, which has made tonight possible. I know she would've loved tonight's lecture. Now, please join us in the foyer for some light refreshments. Thank you again for coming tonight, and we hope to welcome you back to the Library in the future. Thank you.