By Tina Perinotto
27 April 2012 – Property taxes, land use planning and building regulations are in the front line of the Productivity Commission report released today on how to deal with climate change.
The report, which focuses on removing the barriers to an organic response to climate change, both in economic and social terms, tackles policies that have for years sat on the wish-list backburners of economic rationalist thinkers. Stamp duty on property transactions for instance.
This slug on the cost of moving out of harm’s way is one of the key considerations in the report. It ties is with the economic rationalist notion that property owners should pay a land based tax rather than when they buy, or sell.
Insurance should not be subsidised for climate exposed property because it would be a disincentive to move to safer ground, the commission says. On the other hand, and perhaps a little contradictory to this market dominant approach, is a recommendation that insurers be made to offer flood cover, if the overall community cost-benefit analysis stacks up.
On land use, the document points to moves to restrict development in areas prone to the encroachment of the sea, such as Byron Bay and Lake Macquarie areas. It provides examples of what other jurisdictions overseas are doing.
Key conclusions of the report are:
- The weight of scientific evidence suggests that the climate is changing and will continue to do so for the foreseeable future.
- Australians would need to adapt to the impacts of a changing climate, notwithstanding current and future efforts to reduce global greenhouse gas emissions.
Highlights of adaptation action already underway include loosely grouped under key headings:
Building adaptive capacity
Australian governments should implement policies that help the community deal with the current climate by improving the flexibility of the economy. This would also build adaptive capacity for dealing with future climate change. This includes reforms to:
- taxes that influence the way resources are used, such as land tax exemptions and conveyancing duty, which could inhibit the mobility of labour, capital, or both
- government transfers that reduce incentives to adjust to changing circumstances, such as the reforms recommended in the Commission’s 2009 inquiry into drought support
- regulations that impose unnecessary costs or inhibit competition or flexibility and could impede climate change adaptation by reducing the ability of firms, households or other organisations to respond to changing circumstances, such as restrictions to water trading.
Replacement of inefficient taxes with less distortionary taxes, such as broadly based land taxes, would likely enhance economic performance, as well as the community’s ability to respond to a changing climate.
For instance, taxes on property transfers (stamp duties) can inhibit the movement of labour and capital and the efficient use of land, and state and territory insurance taxes and levies can distort the ways in which households and businesses manage the risks they face.
Less government support during drought reduces incentives for agricultural businesses to be self?reliant and impedes economic and social adjustment to changing circumstances
Governments should not subsidise premiums for household or business property insurance, whether directly or by underwriting risks. This would impose a barrier to effective adaptation to climate change.
The Australian Government should only proceed with reforms that require all household insurers to offer flood cover if it can be demonstrated that the benefits to the wider community would exceed the costs. These benefits and costs should be assessed, and any reforms implemented, after barriers to effective climate change adaptation in other policy areas are addressed.
Planning and building regulations
Land-use planning regulation in Australia has, until recently, been based on an assumption of a static climate and variable weather patterns. In recent years, as data have become more reliable, governments and regulators have begun to consider projected climate change impacts. However, the extent to which planning frameworks incorporate expected climate change impacts varies considerably by jurisdiction and type of hazard.
- facilitate a risk management approach
- incorporate transparent and rigorous community consultation processes and take into account the community’s acceptable levels of risk for different types of land use
- consider the full costs and benefits of land use from a community-wide perspective.
Some local governments are trialling “time-bound” or “trigger-bound” tools (where approval for development can be given for a specified time period only, or until an identified event occurs — a “trigger”) so that land-use planning decisions better reflect climate change risk as it develops.
National Construction Code
As a priority, the Building Ministers’ Forum should ensure that the National Construction Code and associated standards (including those developed by Standards Australia) take climate change impacts into account. As soon as practicable:
- the Building Ministers’ Forum should provide a formal response to the Australian Building Codes Board’s 2010 review of the Building Code of Australia under climate change
- the Australian Building Codes Board should develop a formal work program that outlines its approach to incorporating climate change in the National Construction Code over time. This work program should reflect any formal government response to the 2010 review of the Building Code of Australia.
Share performance based innovation
In its 2004 inquiry into building regulation, the Productivity Commission found that performance-based regulation and alternative solutions have led to significant cost savings and more modern and innovative designs (PC 2004c).
However, it did recommend that the ABCB establish a national repository or database of approved alternative solutions to reduce the costliness and time impost in utilising “alternative solutions”. In its submission to the Productivity Commission, the ABCB indicated agreement with this recommendation. However, it is yet to be implemented (ABCB, pers. comm., 29 February 2012).
The Australian Government should give consideration to the public funding requirements for the Australian Building Codes Board and Standards Australia to undertake this work.
It is not immediately clear how planning systems should respond to threats of climate change.
The Australian Climate Change Adaptation Research Network for Settlements and Infrastructure expressed concern that state planning policies were not effective or “strong enough” (sub. 19, p. 4). For example, they cite the Victorian State Planning Policy as being unable to prevent development occurring in vulnerable coastal areas, despite the inclusion of an erosion-prone-areas policy.
The Council of Capital City Lord Mayors (sub. 67, p. 4) argued that “currently developments and buildings are not always durable and adaptable to changes over time”. They advocated a focus on ensuring longer life-spans for developments. In particular, they noted that site cover and setback requirements need to be reviewed in order to ensure that neighbourhoods have adequate tree cover and sufficient space between buildings.
The Gippsland Coastal Board (Victoria) suggested that ‘numerous state and local government planning policies may need to be reconsidered in light of climate change’ (sub. 65, p. 7). It provided an example of ‘activity centres’ which promote growth and development in particular areas — which may be inappropriate where these areas are susceptible to climate change impacts
Victoria’s State Planning Provisions (section 13.01) outline principles for managing coastal inundation and erosion. These include planning for a sea-level rise of at least 0.8 metres by 2100, applying the precautionary principle to planning decisions when considering climate change risks, ensuring that new development is located and designed to take into account the impacts of climate change on coastal hazards, ensuring that land subject to coastal hazards is identified, and avoiding development in areas subject to inundation and erosion.
New South Wales’ Coastal Policy 1997 recommends that the precautionary principle be used when planning for climate change risks. In addition, the NSW Coastal Planning Guideline outlines six principles for coastal planning: assess and evaluate coastal risks, taking into account the NSW sea-level rise benchmark (as set out in the NSW sea-level rise statement 2009); advise the public of coastal risks; avoid intensifying land use in coastal risk areas; consider options to reduce land use in coastal areas; minimise the exposure of developments to coastal risks; and implement appropriate management responses and adaptation strategies.
Queensland’s State Planning Policy for Coastal Protection specifies that areas prone to coastal hazards are to be identified based on a benchmark of a sea-level rise of 0.8 metres and an increase in cyclone intensity of 10 per cent by 2100. The policy restricts development in these areas unless it is temporary or relocatable, or is development that cannot be easily located elsewhere. The policy also notes that beach nourishment is the preferred option for controlling erosion. Coastal protection works should only be considered where retreat from the location is not a feasible option.
Section 5.1 of the Sustainable Planning Act 2009 (Qld) requires local governments to apply the precautionary principle in planning decisions.
The third type of strategy available in hazard-prone areas is retreat. Retreat from a location may be considered where the cost of protect or accommodate strategies outweighs the value of the land protected.
A “managed retreat” policy involves active intervention by the government in the retreat process (Mornington Peninsula Shire, sub. 16). This may involve setting aside land for retreat or allowing developments in an area on the condition that they be removed once the sea level reaches a specified point. The Byron Shire Council (NSW) approach is an example of a managed retreat policy, and Port Macquarie?Hastings Council in New South Wales is considering the use of such a policy (box 8.17). The UK Government has also implemented a number of managed retreat policies, which generally involve the deliberate breaching of flood defences, with some defences rebuilt further back from the coast line.
Managed retreat could also be facilitated through the acquisition of land by governments, either voluntarily or through compulsory measures (though legal issues may arise in the compulsory acquisition of land) (Maddocks 2011).
A managed approach to retreat may offer some benefits.
However, managed retreat is also likely to have significant costs.
The Australian Government is currently in the process of developing guidelines for future flood mapping and is establishing a single portal, hosted by Geoscience Australia, to make all government-held flood maps (including those of state, territory and local governments) publicly available. This initiative should be expanded over time to cover other natural hazards.
Lake Macquarie City Council is currently updating its Waterway Flood Study, Flood Risk Management Study and Flood Risk Management Plan to incorporate recent flood events and the implications of climate change (all of which are required under the NSW Government’s flood policy) (WMA Water 2011).
The Council has embarked on a community consultation process before adopting a finalised Management Plan, which has included:
- correspondence with all affected property owners (approximately 7000)
- six community workshops with potentially flood-affected residents
- a survey of residents’ views relating to attributes of Lake Macquarie
- a survey of residents’ views on proposed flood risk management options
- other opportunities to provide feedback through online surveys and written submissions.
Through the Flood Risk Management Plan, the Council has identified three categories of flood risk. Proposed development restrictions in these areas include requirements for floor heights and setbacks from the lake. In the survey of residents’ views of flood management options, 94 per cent of respondents supported imposing development conditions such as raised floor heights and foreshore setbacks (Molino Stewart 2011).
Property certificates (section 149 certificates) are also utilised in Lake Macquarie and the intention is for these to continue to include a ‘lake flooding’ notation on foreshore properties below 3.0 metres Australian Height Datum, and a ‘sea-level rise’ notation on properties below 1.0 metre Australian Height Datum (Lake Macquarie City Council 2011). 83 per cent of survey respondents agreed with using section 149 certificates to notify owners about the risk of flooding and sea-level rise (Molino Stewart 2011)
United Kingdom – The UK Government has adopted an explicit legislative framework to support adaptation. Under the Climate Change Act (UK) 2008, the Government must assess climate change risks and implement strategies to manage these. The UK Climate Impacts Programme disseminates a range of information and guidance, and large utilities and their regulators are required to report on how they are addressing climate change risks. Further, an Adaptation Sub-Committee has been established to advise the UK Government on adaptation policy.
United States – At the federal level, the US Government provides climate-related research and information, and requires federal government agencies to implement strategies to manage climate change risks. In addition, some state and local governments have adopted adaptation frameworks and strategies, which often set out how climate change will be considered in infrastructure, planning and environmental decisions.
New Zealand – The New Zealand Government provides information to facilitate adaptation, including some guidance for local governments. At the national level, there is no formal legislative or policy framework for climate change adaptation
Should there be an explicit requirement to consider adaptation?
As noted in section 9.1, most jurisdictions do not impose an explicit requirement on infrastructure providers (government or private) to consider climate change risks in their investment. Some participants have suggested that this is a potential barrier to effective climate change adaptation. For example, the Australian Green Infrastructure Council (sub. 13) recommended expanding the Queensland requirement to consider adaptation in cabinet decisions to all jurisdictions. In addition, Redland City Council (sub. 36) suggested that legislation may be needed to ensure that infrastructure providers publicly plan for climate change. Internationally, the United Kingdom has some requirements to consider adaptation in infrastructure decisions (box 9.7).
The United Kingdom has some requirements that climate change be taken into account in infrastructure decision making and management.
- Government agencies must develop adaptation plans. This includes identifying risks to infrastructure, and implementing strategies to manage these risks.
- Some government-owned companies (and some private companies) must report on the impact of climate change on their business. This includes utilities and infrastructure operators.
- Major projects must undergo an economic assessment, following the ‘Green Book’. The Green Book contains guidance for dealing with the effects of climate change
The Investor Group on Climate Change (sub. 73), and Maddocks (2011) considered that inconsistent regulation across and within jurisdictions is a barrier to climate change adaptation within the infrastructure sector. For example, each state has its own approaches for managing the impacts of sea-level rise, and local governments incorporate these approaches into their frameworks in differing ways.
The Investor Group on Climate Change (sub. 73, p. 4) suggested as a result of this regulatory framework:
… property investors and developers are faced with understanding a variety of different approaches to managing sea-level rise and erosion, with variance across both state and local government jurisdictions. There is also uncertainty as to the status of existing property and infrastructure, particularly in relation to any obligation on councils to protect existing assets.
Brisbane Airport Corporation is considering climate change adaptation in its new parallel runway development. The runway site is potentially subject to inundation. In order to mitigate these risks, the corporation is raising the site for the development above the projected 1?in?100?year flood level and building a new seawall and tidal channels.
Sydney Water has implemented a Climate Change Adaptation Program which examines how climate change will affect Sydney Water’s infrastructure, operations and customers. This includes assessing exposure to a range of natural hazards and implementing adaptation responses
The Commission seeks views on individual, business and community preferences for managing the risks of climate change for existing settlements.
- What levels of climate change risk are appropriate for existing settlements? Does this differ for private and public assets?
- What approaches should governments take to ensure these levels of ‘acceptable’ risk are maintained?
- In what circumstances should governments use ‘protect’, ‘accommodate’ or ‘retreat’ options for managing climate change risks to existing settlements?
There are two property taxes in particular that, in their current form, have a distortionary effect on property decisions and as a consequence could impede climate change adaptation. These are conveyancing duty on property (imposed on the transfer of property ownership) and land tax exemptions (land tax is imposed annually on the value of land).
Conveyancing duty -Conveyancing duty imposes additional costs on property transactions. Duty is applied at a progressive rate scale and thresholds and rates differ between property types and states and territories. For example, on a $300,000 residential property conveyancing duty can range from around $7000 to $11 000 compared to around $38 000 to $55 000 for a $1 million property. This results in a lower level of property exchanges than would occur in the absence of the tax, which could affect climate change adaptation in a number of ways. By making housing transactions more expensive, conveyancing duty could cause some property owners to remain living in a property for longer than they otherwise would — the so called ‘lock in’ effect (PC 2004a).
For example, homeowners who desire to move out of areas at greater risk from extreme weather events may be discouraged from doing so due to conveyancing duty. This view was supported by the Council of Capital City Lord Mayors who stated that ‘state government transfer duty on land limits the mobility of communities to adapt to our changing climate by increasing the cost of any relocation’ (sub. 67, p. 5).
The ‘lock?in’ effect could also affect labour and capital mobility if it inhibits people from moving and changing jobs, or businesses from changing locations. This may be important for some types of adaptation strategies. Businesses also tend to be more mobile than consumers and face incentives to minimise their costs, including costs associated with transactions and investment in property (Treasury 2010a). Therefore, the ‘lock?in’ effect could prevent them from adjusting to market conditions and result in land being retained in less productive uses.
As conveyancing duty applies to the value of the whole property (land and buildings) it also taxes buildings and other capital improvements (SBTRC 2001; Treasury 2010a). This could affect adaptation if it deters property owners from undertaking improvements that protect their property from the effects of climate change.
While it is difficult to determine the precise influence conveyancing duty has on decisions it is clear that, in principle, conveyancing duty acts as an impediment to the mobility of labour and capital as well as the efficient use of land. This suggests that conveyancing duty could constitute a barrier to effective climate change adaptation.
Potential reform areas
The distortionary effects of conveyancing duty have led the Commission and others to urge state and territory governments to consider their removal, or significant reduction, with greater reliance on more efficient taxes, such as broad?based land taxes (discussed below) (Gabbitas and Eldridge 1998; IPART 2008; PC 2004a; SBTRC 2001; Treasury 2010a). Depending on the precise changes, such an approach could maintain the revenue base of the states and territories and have little effect on housing prices in the short term. This is because the increase in prices from the removal of conveyancing duty could be offset by increased obligations to pay ongoing land tax (PC 2004a).
Land tax exemptions
In comparison to conveyancing duty, land tax is efficient as it does not affect decisions on how land is used or how much land is used — land is immobile and in fixed supply. However, this depends on a broad taxation base, with no or few exemptions.
States and territories provide various land tax exemptions, most importantly for land used for owner?occupied housing and agricultural purposes (NSW Treasury 2011). These exemptions are often provided due to concerns about cash?flow difficulties for the ‘asset?rich income?poor’.
Exemptions can encourage land to be devoted to exempt activities (Gabbitas and Eldridge 1998; IPART 2008; Treasury 2010a). These activities may not be as highly valued from a national perspective, and as such, the community overall may be worse off. Exemptions could potentially impede climate change adaptation. For example, exemptions for agricultural land could encourage marginal farming businesses to continue using land (and associated labour and capital resources) for agricultural purposes rather than for more productive, non tax?exempt, activities. This is an inefficient use of land and is contrary to facilitating structural adjustment to climate change. Exemptions may also pose an impediment to biodiversity conservation if the exemption is lost when the land is converted to conservation (PC 2004b). (Other impediments to biodiversity conservation are discussed in chapter 10.)
The existence of tax?free thresholds may also encourage smaller holdings of land (Gabbitas and Eldridge 1998), as could higher taxes on aggregate land holdings (Treasury 2010a). (Tax?free thresholds range from $25 000 in Tasmania to $600 000 in Queensland. Tax rates range from 0.2 per cent to 2.25 per cent in Victoria and 0.5 per cent to 3.7 per cent in South Australia (NSW Treasury 2011).) This could restrain economies of scale and scope, and could potentially impede diversification that might be important for some adaptation decisions.
Potential reform areas
Reforms to land tax could improve incentives for efficient land use and at the same time be beneficial for adaptation. For instance, broadening the land tax base, combined with a lowering of the land tax rate, would improve the overall efficiency of the tax (Gabbitas and Eldridge 1998; IPART 2008; PC 2004a; SBTRC 2001). This would help facilitate adaptation as it would remove a potential impediment to structural change in the agricultural sector.
The extension of land tax to owner?occupied land, and to a lesser extent agricultural land, is a highly contentious area. The Commission’s 2004 inquiry into first home ownership discussed some of these issues at length. These principally related to payment difficulties for landowners who have high?value landholdings but limited cash flows (the ‘asset?rich income?poor’) but also included a number of implications for tax administration and compliance (PC 2004a). Australia’s Future Tax System Review outlined a number of instruments that could be used to address these issues, including loans, deferred tax liabilities, or reverse mortgage facilities.
Urban water sector reforms
Policy, governance and institutions — there is a need to establish clear objectives, clarify the roles and responsibilities of water?related institutions and to ensure that best?practice institutional and governance processes are adopted to make regulators, utilities and policymakers responsible and accountable for their actions.
- be achieved by governments removing ‘policy bans’ on supply augmentation from certain sources, such as rural–urban trade and water recycling. Employing a real options approach to selecting supply options would also assist in reducing costs to the community.
- Water restrictions and pricing — water restrictions are costly to the community and should only be used in emergency situations. Consumers should be offered a range of tariff/service options (based on the marginal opportunity cost of supply) that allow consumers to express preferences on security of supply and price stability.
Rural water sector reforms
- Removal of barriers to trade in the Murray–Darling Basin — annual caps on the trade of water entitlements out of an irrigation district distort trade and should be eliminated. In this context, the Commission endorses the trading rules set out in the proposed Murray–Darling Basin plan that allows water to be traded free of any restrictions.
Sea-level rise benchmarksa
|State/territory||2050 benchmark||2100 benchmark|
|New South Wales||40||90|
a The base year for the benchmarks is 1990, except for Western Australia, which uses 2000 as its base year. b The Queensland State Planning Policy Coastal Management also includes a benchmark of a 10 per cent increase in cyclone intensity by 2100. .. Not applicable.
Sources: NSW DECCW (2009); Queensland DERM (2012); SA DPLG (2011); Victorian Government (2008); WA Planning Commission (2003).