Speech to the University of Sydney - Celebrating 100 years of Economics

Dr Steven Kennedy PSM
Secretary to the Treasury

The Australian Public Service and Academia[*]

I would like to acknowledge the Gadigal people of the Eora Nation who are the Traditional Custodians of the Land where we are meeting today. I would like to pay my respects to their Elders – past, present, and emerging – and extend my respect to any Indigenous Australians who are with us today.

Thank you for the opportunity to address you tonight as part of the celebration of 100 years of economics at the University of Sydney.

I would like to thank Professor Garry Barrett for inviting me to give this address. I first met Garry when I was studying for my PhD at the ANU Research School of Social Sciences.

Garry was one of the markers of my PhD and he provided some excellent feedback on one of the chapters that examined the relationship between education and health. Garry suggested that with further refinements the chapter might make a good journal article.

Sadly, I’m still considering that feedback some 22 years later given that in the years following I became distracted by a career in the public service. Nevertheless, I remain hopeful of returning to the topic.

I did manage to publish a few journal articles including with colleagues of Garry’s such as Professors Jeff Borland, Ted McDonald, and Tom Crossley and contribute to a book edited by Sydney University Professor Deborah Cobb‑Clark (who was then at the ANU).

As my career progressed in the public service, I found I had less and less time to devote to research.

While I haven’t been able to undertake the calibre of research taken on by Garry, Deborah, and their colleagues here at the School of Economics, taking an economics degree at Sydney University and post graduate studies at the ANU benefitted me enormously in my career in the public sector.

In the first instance I had exposure to high‑quality analysis and researchers.

And that exposure gave me the confidence that I could advise governments effectively if I remained open to new ideas, kept abreast of the latest research, maintained the practice of openly and vigorously testing propositions, and surrounded myself with capable people with good policy frameworks.

One of the central roles of public servants in serving governments is decoding and translating ideas and research, then encouraging their adoption in public policy. This requires people with good research training who can effectively engage with academic experts.

Other roles public servants undertake include advising Ministers, administering the law, implementing programs, and delivering services. I have worked in all these areas although the bulk of my career has involved advising Ministers.

I’ve been fortunate to have worked closely with Prime Ministers Rudd, Gillard, Turnbull, Morrison and now Prime Minister Anthony Albanese. And with Treasurers Costello, Swan, Frydenberg and now Treasurer Jim Chalmers. And with more than 20 Cabinet Ministers.

As a senior public servant, I advised and worked with these parliamentarians on responses to record terms of trade – now twice, the global financial crisis, competition and consumer policy, climate change, the end of car manufacturing in Australia, innovation, Antarctica, energy and resources, infrastructure investment, regional development, cities, tax, financial markets and more recently developing responses to the pandemic, among many other policies and issues.

It has been a lot of fun!

It is rewarding and a great privilege to contribute, even in a small way, to government decision making in important areas of policy.

It can be a little frustrating to see what you consider to be good ideas fail to win the day and underpin policy. However, closely observing the sharp end of Australia’s governments of both complexions, I remain optimistic that good ideas ultimately win through, even if sometimes it may take a little longer than we might hope.

It’s also worth remembering that sifting out the bad ideas is just as important, if not more so, than adopting the good ideas.  

Tonight, I thought I would briefly discuss one area of policy I have had the good fortune to work on to illustrate the interaction of policy making and academic thought, and the challenges of policy making more broadly.

I first worked on climate change policy when I was an economic adviser in Prime Minister Kevin Rudd’s office in 2008. In this period a talented group of public servants led by one of my predecessors as Secretary of Treasury, Martin Parkinson, began developing a policy that would become known as the carbon pollution reduction scheme. This was an emissions trading scheme that had been first sketched out by a taskforce put in place by Prime Minister John Howard.  

At the same time, Professor Ross Garnaut undertook his first independent review of climate change policy, supported by a wide‑ranging mix of government agencies and academic research centres. This included the Federal Treasury, state treasuries, CSIRO, ABARES, the Australian Bureau of Statistics, the Bureau of Meteorology, the Productivity Commission, the Centre of Policy Studies then at Monash University and the Melbourne Institute – a remarkable collaborative effort. In my view, Ross’s review remains a foundational document for climate change policy in Australia.

My role was limited but I did have an opportunity to advise Prime Minister Rudd on the workings of the scheme and draw out some of its features. Features such as how the scheme would change relative prices to lower emissions and how revenue from the auctioning of permits could be recycled to reduce the loss of income that was entailed in this change.

As is well known, for a variety of reasons, this policy did not proceed.

In 2010, I was asked to become Head of a Secretariat that would support Ross in an update to his review of climate change. This update confirmed many of the propositions from his earlier review and contributed to the thinking behind what would become the Gillard Government’s Clean Energy Plan.  

As Ross’s review wrapped up, I took up a role as Deputy Secretary in the Department of Climate Change and Energy Efficiency. The department was expertly led by Blair Comley, serving the then Minister for Climate Change and Energy Efficiency Greg Combet.

One of the defining features of this department was its active engagement with academics including Professor Will Steffen as science adviser to the department.

I felt privileged and somewhat overawed to join this department to work on the Clean Energy Plan that the then government legislated in 2011.

The emissions trading scheme that was introduced as part of the Clean Energy Plan was a significant achievement. It reflected an enormous amount of work from public servants and ministers. They were able to balance the importance of putting in place an economy wide price signal to reduce emissions with the practicalities of support for emissions‑intensive, trade‑exposed businesses and political realities.

I was involved in successfully negotiating the linking of the new Australian scheme to the existing European emissions trading scheme.

The link between the Australian and European schemes would have seen the emergence of an international price on carbon across continents.

In the Australian scheme, the revenue raised from the auctioning of permits was used to cut taxes with a focus on preserving the incomes of the less well‑off while maintaining the incentive to reduce emissions.

The scheme ran for two years. It was well supported by high‑quality institutional arrangements, and close to 100 per cent of entities covered by the scheme complied with their obligations.

In many ways it was a textbook‑perfect example of what academics would recommend in addressing the externality of climate change. It did contain some compromises. In particular, the fixed‑price start to the scheme which came about because agreement could not be found on emission targets. This compromise would later prove to be one of the key aspects of the scheme that contributed to its political demise.

As an aside, when I was in the Department of Industry, we undertook econometric analysis of data linking the National Greenhouse Energy Reporting Scheme with program data from the Gillard Government’s Clean Technology Investment (Grant) Program. This work found a uniform reduction in emissions in manufacturing businesses of the order of 10 per cent independent of participation in the grant program, which can only be inferred as attributable to the emissions trading scheme. It also found that there was no additionality in emissions reductions in those businesses receiving government grants.

The Government changed in late 2013 and part of its election platform was to repeal the emissions trading scheme.

The group I led as a Deputy Secretary in the Environment Department advised on the repeal.

The Government accepted our advice not to repeal the scheme midway through a compliance year given how disruptive this would have been to entities covered by the scheme. The scheme was wound up in June 2014.

My team advising the Government did an excellent job in ensuring the scheme was wound up with little disruption.

At the same time, we began work on the new Government’s Emissions Reduction Fund. The Emissions Reduction Fund contains essentially two elements. The first is a crediting mechanism where entities that undertake activities to reduce their emissions will be paid for those activities. It was built very much on the Carbon Farming Initiative, a crediting scheme introduced by the previous Government as part of the Clean Energy Plan.

In this first element of the scheme the Government would run auctions for participants to bid their activities to reduce emissions. As you can see it was designed to change the price of activities in a similar way to the Emissions Trading Scheme, but through a different pricing policy.

The second element of the scheme was the safeguard mechanism. Here the Government set emissions baselines for entities that make up most of Australia’s emissions beyond which they could not emit, or they had to account for. This was to give the community confidence that while their taxes were paying for activities to reduce emissions in one sector, another was not increasing its emissions in an unfettered way.

This second element of the scheme provided an opportunity for the Government to lower emissions directly over time and lesson the call on the budget from the first element.

The previous Government had chosen not to use the second element of the scheme to reduce emissions.

The current Government has indicated a willingness to actively use this element by lowering the initial baseline over time in a way consistent with Australia meeting its nationally declared commitment to reduce net emissions to zero by 2050. This will also significantly reduce the call on the budget.

This might be sounding like an emissions trading scheme by another means to many of you.

It is not though an emissions trading scheme: it does not, for example, ask entities to pay for every tonne of CO2 they emit. It is instead a baseline and credit scheme that provides an incentive to reduce emissions at the margin.

Baseline and credit schemes are seen in many textbooks and when operated effectively they can reduce emissions in an economically efficient way.

Australia has had a baseline credit scheme running for a couple of decades that is, the Renewable Energy Target (RET). It has operated as a market mechanism and been successful in assisting with energy transformation, and interestingly supported technologies which were not the technologies that were expected when the scheme was originally proposed and modelled. 

In Australia we have put in place a number of arrangements to reduce emissions, including: regulation, subsidies, emissions trading schemes and baseline and credit schemes. The one thing they all have in common is that they all aim to provide an incentive to reduce emissions by changing relative prices.

I think we can see how influential, even in a highly contested debate such as climate change, economic principles and academic research have been.

Policy making is difficult. Climate change is perhaps Australia’s best recent example of how difficult it can be. It is especially difficult when many forces are arranged against the best outcome for the community. In the early examples of climate change policy that I outlined many business groups resisted fiercely.

These groups represented the interests of their members in ways you would expect. They are, after all, advocates for their members interests. I don’t see anything wrong with this, it is part of our democracy. But it is important to understand that using policy primarily to strike a balance among different sectional interests is not the same as pursuing the national interest.

The more recent change of heart among business groups is because the world has moved in such a way that it is now in the financial interests of their members to no longer resist. Markets have begun to price in diminishing use of fossil fuels, banks and investors are baulking at, or charging a premium for, new fossil fuel investments, and most fundamentally renewable energy sources are now plainly cheaper than using coal or gas.

We have seen other examples in Australia where good policy has taken decades to proceed through politically fraught processes. Medicare is a good example, which took nearly 20 years to become bipartisan policy, despite the obvious advantages it has delivered. Another example is the GST, between it being canvassed as Option C at the 1985 Tax Summit to its eventual introduction in 2000, and then sometime after that before it became bipartisan.

There is one group with whom public servants are well aligned in independently developing policy for government that maximises the welfare of current and future generations and that is academics.

At times, throughout these policy debates the academic community has been helpful in pointing out the pros and cons of various policies. And because in many cases the balance of pros and cons is essentially an empirical issue, their research is crucial to getting the right balance.

We have seen many great examples of research institutes that have played such a role. Nevertheless, I wonder whether there is sufficient strategic use of research funding to support such initiatives.

Movements of people between the public service and academia can further support collaboration and development of good policy, and there are some good signs here.

The Sir Roland Wilson Foundation, named after Australia’s longest serving Treasury Secretary, established a program at the ANU over a decade ago that supports mid‑level public servants to undertake postgraduate study.  

Sixty‑four scholarships have been granted to public servants across 23 agencies, and 26 people have now completed their study and are actively lifting capability in the public service.

At Treasury, we recently saw the value of this investment in capability during the pandemic. Our staff were able to draw on their academic training to make use of real‑time microdata to understand the evolution of economic circumstances of the pandemic, notably in the two published reviews of the JobKeeper Payment.

Improved access to data is underpinning many of the opportunities to connect public policy research and the academic community. Many have played important roles here over a long period of time including Garry, Deborah, Bruce Chapman, and the current Australian Statistician David Gruen.

And there is more we can do to encourage collaboration between academia and the public service.

For example, at Treasury we are establishing a visiting fellows’ program for academics to spend their sabbatical working with Treasury analysts.

Further, we intend to establish an annual policy research conference, building on the highly successful model run for many years by the RBA.

These developments leave me optimistic about the future for policy making and advising.

The capacity of the public service has never been stronger and more diverse.

I very much appreciate the opportunity to speak to you about links between academia and the public service and their importance.

I have been very fortunate to work with the best of both – in the public service and academia.

And it all started here at the University of Sydney Economics Department.

Congratulations on 100 years.

Thank you for your time this evening.

[*] I would like to express my appreciation to Mark Cully for his assistance in preparing this address.