Whacking Day in the Northern Territory?

This sounds a little familiar:

MORE than 500 people will take part in a giant toad-busting operation in Darwin, Palmerston and the rural area this week. The all-out community attack on cane toads will take part in at least 12 locations in a bid to stop the poisonous pest's march into Darwin.

Community and residential groups, LandCare groups, the Humpty Doo and Palmerston Golf Clubs, most Top End schools, MLAs and other people will be among those out collecting every toad they can find. Every school in the Top End has been sent toad forms for distribution to students to report the numbers of toads found in their local areas. The toad busts will begin tomorrow and hop right through up to and including next Sunday...

MLA's Matthew Bonson and Minister Chris Burns will lead toad-busts in the Rapid Creek area, while Palmerston MLA Terry Mills will head up a hunt at Marlow Lagoon. Other MLAs are expected to take part in their electorates.

Labor’s climate change blueprint: some analysis

Following on from Tuesday's post, here are some of my thoughts on the first few ideas in the opposition Climate Change Blueprint. I’ll try and deal with all the proposals in there eventually!

Ratifying the Kyoto protocol

A lot has been written about this elsewhere and this is just a restatement of an existing policy so I’m not going to do any sort of complete analysis of the pros and cons for Australia of ratifying the Protocol. I’ll just make a few comments relevant to Labor’s policy to ratify if elected at the next election:

The timing is awkward. The next federal election will take place sometime around the end of 2007. The first commitment period under the Protocol begins in 2008. Basically, the beginning of 2008 is not the best time to ratify – we’ll have to meet the targets but we won’t get much benefit of investment in carbon offset measures because these are happening now so they’re up and running in time for the commitment period. It’s also a bit awkward for the opposition to commit now to meeting Kyoto targets that it doesn’t have control over.

That said, it does seem that Australia is on track (PDF) to meet its generous Kyoto targets, and I certainly think ratification is better late than never. What’s really important is what happens after the first commitment period (which must really be deeper cuts plus some obligations on developing countries) and I think Australia’s position in the negotiations for this would be strengthened considerably if it’s shown some good faith by committing to cuts in the first round by ratifying Kyoto. I think that’s important and no-one seems to have talked about it.

Working towards 60% emissions cuts by 2050

A target is good. This target is ambitious but achievable, about what’s needed (for Australia to do its part). I guess the question is, what does committing to this figure mean? Governments will come and go between now and 2050 – who’s responsible? The South Australian government has recently committed to the same target – 60% reduction by 2050 – and to the Environment Minister reporting annually to Parliament on progress against this goal. I guess this is what is envisaged and it’s a good thing. In reality each successive government will blame its predecessor for not doing enough so I don’t know whether setting this target implies that it will be met, but it’s still good to enunciate a concrete long-term policy goal.

Establishing a national emissions trading system

Hm, this is a big one that really warrants a separate post. So all I’ll say for now is that my opinion for what it’s worth is that emissions trading is a good idea and a national system is obviously desirable. I think an effective national greenhouse strategy has to contain either a national carbon tax or a national emissions trading system.

Inserting a climate change trigger in the federal Environment Protection and Biodiversity Conservation Act

Currently, under the EPBC Act, projects and developments that have a significant effect on a matter on national environmental significance must be approved by the federal Environment Minister. This proposal would make climate change one of these matters of national environmental significance.

In practical terms, this would mean that large energy-intensive projects – such as power plants or desalination plants – would require federal government approval. The same would also probably apply to large projects that threaten carbon sinks (perhaps large-scale clearing or the damming of a forest valley?).

This idea has been kicking around for a while – my understanding is that it was first proposed by the Howard government in 2000 (via then Minister for Environment Senator Hill) but was knocked on the head by industry opposition.

I’m mildly supportive of the idea. The better way to deal with problems like greenhouse emissions that mostly come from a wide range of small sources is to implement broad policies such as a carbon tax or trading scheme. But in the absence of those schemes, or perhaps to complement them, it doesn’t hurt to have large sources subject to some environmental impact assessment.

As far as I know, the Minister has only refused consent for two projects in the 6 year history of the EPBC Act. But it has imposed conditions that reduce the adverse environmental impacts of many others. It seems to me that a ‘greenhouse trigger’ would be a good way to ensure that energy-intensive projects take all practical steps to minimise their greenhouse impacts. Its overall effect on Australia’s emissions, however, would be modest. In particular, this would only deal with new sources of emissions - not existing sources.

Labor’s climate change vision

Kim Beazley (Australian federal opposition leader) this afternoon released Labor’s Climate Change Blueprint (PDF) for the next election. From an initial reading, I think it’s very very good.

In summary, its key elements are:

• Ratifying the Kyoto Protocol,
  

• ‘Working towards’ 60% emission cuts by 2050,
  

• Establishing a national emissions trading system,
  

• Including a ‘climate change trigger’ in the federal Environment Protection and Biodiversity Conservation Act. (Currently, under the EPBC Act, projects and developments that have a significant effect on a matter on national environmental significance must be approved by the federal Environment Minister. This would make climate change such a matter of national environmental significance and, in practical terms, would mean that large energy-intensive projects – such as power plants or desalination plants – would require federal government approval),
  

• Increasing the national mandatory renewable energy target,
  

• Investment in clean coal and renewable technologies,
  

• No nuclear power,
  

• Reviewing incentives and disincentives in the tax system (including research and development and depreciation),
  

• ‘Rebuilding’ the national scientific research organisation CSIRO,
  

• Introducing additional first home owners grants for energy efficiency measures,
  

• ‘Assisting States and local governments’ to put in place mandatory energy efficiency ratings for new homes (these are already in place in NSW, Victoria and the ACT),
  

• Making all schools solar powered by earmarking capital works funding for solar and energy efficiency measures,
  

• Purchasing ‘green’ cars for the government fleet if and when there’s an Australian-made value-for-money option, and assisting State government and private fleets to do the same,
  

• Establishing a National Sustainability Council to oversee progress on the nation’s sustainability.

I’ll try and give a more detailed analysis of what these measures mean in the next couple of days, but on first view, this looks to me to be an excellent mix of policies: comprehensive, sensible, flexible, harnessing market forces, and likely in combination to be a reasonably effective response.

Manufacturing controversy

A great Doonesbury cartoon (via the RealClimate blog).

Should public transport be free?

An economist advocating free public transport, or even that we should be paying people to use it?

That’s what Professor Joshua Gans does in his blog. Professor Harry Clarke provides a response in his blog.

This debate was sparked by a front page article in Melbourne’s Age newspaper suggesting that Melbourne’s public transport could be made free at a cost of around $340 million a year, boosting usage by 30% and reducing pollution, greenhouse emissions, accidents and congestion in the city.

Interestingly enough, public transport advocates don’t necessarily support the idea, believing that the money could be better spent improving the service than making it free.

Update (Tues 7/3):

Joshua Gans has an op-ed piece on this in today's Age.

New ecological economics blog

I’m going to be a contributor to a new ecological economics blog. The idea of the blog is to present some alternative views to more conventional environmental economics blogs (notably the Environmental Economics Blog) which, I should say, themselves do a good job presenting alternative views to conventional economic blogs and free market blogs (such as the Commons Blog).

Ecological economics differs from environmental economics in its emphasis on the economic system operating within an ecological system and the need for multi-disciplinary approaches to the issues that this throws up. Environmental economics, on the other hand, is really a branch of conventional neoclassical economics and tends to take as a given the assumptions inherent in neoclassical economics – including seeing the environment as a source of goods and services, rather than a system within which the economy operates. There’s a lot of common ground between environmental and ecological economics but the different approaches come to a head when you examine macroeconomic issues such as physical limits to economic growth. Environmental economics tends to assume that economic growth can and should continue indefinitely. Ecological economics suggests that economic growth has finite limits because eventually you reach limits to natural capital that human capital can’t necessarily substitute for.

If you’re interested in this area, check out the International Society of Ecological Economics' online encyclopaedia, which has some interesting articles on these issues.

Does the US Endangered Species Act work?

The US Center for Biological Diversity has just released an important study assessing the success of the US Endangered Species Act: the primary piece of legislation to protect biological diversity in the US.

As the report states, the purpose of the Act is "to prevent the extinction of America’s most imperiled plants and animals, increase their numbers, and eventually effect their full recovery and removal from the endangered list. Currently 1,312 species in the United States are entrusted to its protection".

The report goes on to point out that:

Opinions abound on whether and to what degree the Act has accomplished its goals. Most are politically driven, some are anecdotal, and a few attempt to wring long-term implications out of short-term data which are simply not adequate to answer the most basic questions about the effectiveness of the Endangered Species Act. Are species population numbers increasing or decreasing in response to being placed on the endangered list? Is progress toward recovery consistent with or slower than the recovery period outlined in federal recovery plans? … while the Endangered Species Act has existed for 32 years, long-term population trend data have never been systematically gatherer and analyzed for a large, unbiased sample of species.

The study attempts to rectify that by presenting population trend data and narrative accounts for all endangered species that historically or currently occur in eight northeastern states.

The study's timing is good as the future of the Act is being debated and critics seem to take it as a given that it hasn't achieved its aims.

Their results suggest that the Act has been successful in achieving its objectives:

• No species has become extinct after listing.
• Most species have improved since listing, with 93% of species increasing or maintaining a stable population since listing.
• Seven of the 11 species whose recovery plans aimed for recovery by 2005 had been delisted or at least ‘downlisted’ (ie, downgraded from ‘endangered’ to ‘threatened’).

One limitation of the study in my view is the lack of a control group with which to compare these species. It would be very interesting to see how the recovery of listed species compares with the recovery of species which, while threatened, have not been considered sufficiently endangered to warrant protection under the Act. This would go some way to assessing whether protection under the Act in itself aids recovery or whether, for example, general environmental improvement from other causes has been more important in the recovery of these species. Similarly, it would be interesting to see data on how these populations were progressing before they were listed (presumably they weren't preforming well if listing was required).

Of course, a control group would add its own difficulties in interpreting the results as measures stemming from recovery plans under the Act (eg, habitat protection) could have spillover benefits for other (non-listed) species. And data on species whose position is less precarious may be harder to come by as these species have not been the focus of conservation and research attention.

As far as I’m aware, no similar study has been done to assess the success of the similar threatened species legislation that exists in each of the Australian states and territories. There have been assessments but they’ve been more the type that the report describes as politically-driven, anecdotal or short term. Such a study would be of great value in Australia.

Physical limits to economic growth?

There's an excellent summary at Daniel O'Connor's Catallaxis blog of the physical limits to environmental growth debate. Daniel makes the often-overlooked point that economic growth can arise from physical or non-physical sources (for example, the consumption of more resources or the more efficient use of existing resources). So, to the extent that economists ignore physical limits to the consumption of resources, their analysis is is flawed. But equally, environmentalists who claim that sustainable growth is an oxymoron are not necessarily right because economic growth can occur without additional consumption of physical resources.

Anyway, Daniel explains it much more lucidly than me, so check it out.

What to do with toxic consumer products?

Something I’ve been concerned about for a while is the nasty toxic chemicals in lots of ordinary household electrical products that wind up in landfill. Pretty much anything with a rechargeable battery has these nasties and apparently 70% of the toxic heavy metals in landfill comes from electronic products.

There is very little being done about this problem in Australia as far as I’m aware, with responses limited to a few voluntary industry schemes. The mobile phone industry has a scheme where anyone can take old mobile phone batteries to any mobile phone retailer for recycling and apparently Sony recycles any household batteries if you take them in to their stores or offices).

Europe has always been the leader in this area with requirements that manufacturers take responsibility for dealing with the products they’ve produced when they’ve reached the end of their useful lives.

Now it seems California may leapfrog ahead of the game:

California would require manufacturers to phase out the use of hazardous materials in making cell phones, iPods and other electronic devices under a bill introduced by a state lawmaker.

The bill unveiled Thursday by Assembly Member Lori Saldana, a Democrat from San Diego, would apply to any electronic or battery-operated device. The bill, which was introduced Wednesday, would require manufacturers to stop using the substances in devices sold in California by 2008.

"We know that the manufacturers of these products are able to produce them without including harmful toxic materials," Saldana said in a written statement. "California deserves to be included among the markets that receive this cleaner stream of consumer electronics."

California already requires manufacturers of video displays in devices to phase out the use of toxic materials.

What’s the best way to deal with this issue? The European option has always seemed very sensible to me: make manufacturers responsible for taking back and dealing with what they produce. That way they can choose how best to deal with heavy metals – either not use these materials in the first place or use them and then re-use or recycle them at the end.

However, if consumers will inevitably dispose of these in household garbage anyway and if, as Saldana claims, manufacturers can make these products without harmful materials (at little extra cost?), then it makes more sense to simply ban these materials altogether.

It will be interesting to see if these laws pass and – if so – whether the so-called ‘California effect’ means that other countries get non-toxic iPods too. California is sufficiently wealthy and populous that consumer product companies cannot afford to ignore the market entirely so its regulations affect regulations elsewhere. So, if Apple wants to sell its iPods in California, it must decide whether to make two products – one for sale in California and one for the rest of the world – or to make all iPods comply with the new California law.

Car parking levies – do they reduce congestion?

Melbourne has this year introduced a levy on car parking spaces in the city centre and owners of car parks will have to cough up the first fee next week. The fee is a flat fee of $400 per space per year, doubling to $800 next year and then rising with inflation (indexed to CPI).

Essentially it applies to all commercial spaces. Residential spaces are exempt - as are visitor spaces, loading bays, disabled spaces, spaces provided free by bodies such as schools, hospitals and churches, and some others.

The stated aims of the levy include reducing peak hour traffic congestion, pollution and greenhouse gas emissions in Melbourne’s CBD and encouraging the use of public transport.

This got me thinking: Do car parking levies really work? Is this likely to make any real difference to Melbourne’s city traffic congestion?

It’s difficult to find any hard data on the effect of car parking levies – most of the information comes from self-serving submissions by car parking operators and property owners asserting that car parking fees make no difference to congestion and will make all businesses flee the city in terror, taking their jobs and money with them etc etc. I imagine it’s very hard to isolate the effect of car parking levies from the host of other influences on traffic in cities.

The relevant stats that I could uncover suggest the following:

• There is a response from commuters to higher car parking charges: a Vancouver study (PDF here) suggested that each $3 increase in parking fee reduced the probability of driving to work alone (as opposed to carpooling or using public transport) by about 10%. Another study from the University of California (Berkely) (PDF here) suggested an average price elasticity of demand for parking of –0.32 (which if my maths is right would suggest that a doubling in price would reduce demand by about a quarter). There must be some Australian studies on this surely?
• In Sydney, according to some figures, 7.7% of vehicles travelling through the City of Sydney each day use off-street parking (which would be affected by a levy - another 7.5% use on-street parking and 85% is through-traffic). This figure is probably higher now that the cross-city tunnel has diverted some of the through-traffic out of the city. Still, if we’re generous and say that parking levies are passed onto parking users and result in 25% of those users switching to other modes of transport, that still only reduces congestion by about 2% (although it might reduce peak hour congestion by substantially more than that because many more peak hour users are commuters who will require parking).
• Everyone agrees it’s a solid source of revenue. There’s some bickering about how fair it is, but taxing people who drive to work in the CBD of a large city seems intuitively a pretty progressive tax (many of my acquaintances work in the city and few of them drive to work – those who do are certainly the wealthier ones).

Here are my thoughts on its likely effects on congestion:

• Demand for parking is fairly inelastic – it will take a large increase to induce much change in behavour.
• A parking levy will mostly be passed through to consumers (because demand is inelastic).
  
• This increase in price will have a small impact on demand for parking, encouraging some drivers to use other modes of transport. (A very high fee would have a substaintially larger effect of course).
  
• If it is true that about 8% of city traffic uses off-street parking in the city (92% of city traffic is just through-traffic or uses on-street parking), a parking levy will have a very small impact on congestion overall. (We need other measures to catch these other drivers – tolls for driving through the city and obviously fees for on-street parking).
  
• However, it might have a higher impact on peak hour congestion, as a greater proportion of peak hour users are commuters who will park their cars all day in off-street parking.
  
• It is a solid source of revenue. It is progressive, targeting relatively wealthy individuals, it is relatively non-distorting (because it targets a product the demand for which is inelastic) and any ‘distortions’ probably act to counteract market failure due to the unpriced public good of driving in the city. It’s easy to administer. It also has a ‘polluter pays’ effect which gives me a nice warm feeling (though I acknowledge that there are probably better ways of targeting the polluters here).
  
• If car park levy revenues are used to improve public transport, that is something that could have a substantial effect on congestion. Part of the reason for the inelasticity of demand for parking is that public transport is not a perfect substitute for car travel but if its reliability, speed, comfort and convenience are improved, it becomes a better substitute.

In summary, car parking levies seem a good source of revenue to direct towards public transport but on their own are probably a relatively ineffective method of reducing inner city traffic congestion.

Spooky monetary economics

Here at Oikos we like to go easy on the analysis and focus on the big issues.

The latest post at Institutional Economics talks about the Reserve Bank of Australia's recent statement on monetary policy. I'm sure there was some insightful analysis there (something about relative valuation levels coming back down to earth or something) but I missed it because I was fixated by the above graph of the ratio of Sydney house prices to house prices in other Australian capital cities over the last 12 years.

Has anyone else noticed the top half looks just like a map of the top half of Australia??

SPOOKY!

Happiness and wellbeing in Australia: some dodgy analysis

There was a bit of a flurry in the media and the Aussie blogosphere yesterday with the publication of the latest "Australian Wellbeing Index", which for the first time compares happiness across Australian federal electorates.

Comparing anything between geographical areas always brings out our latent tribalism, parochialism and schadenfreude.

The (Melbourne based) Age crowed:

VICTORIA is the happiest state in Australia and some of its most contented people live in Melbourne's wealthiest suburbs.

while the Sydney Morning Herald lamented:

IS IT aircraft noise, John Howard's long reign, or being overworked and underpaid that makes the so-called chardonnay socialists of Sydney's inner west the most disgruntled people in Australia?

A new survey that compares the wellbeing of people in all 150 federal electorates reveals the safe Labor seat of Grayndler… tops the national list for all-round unhappiness.

Here’s my guess: it’s not aircraft noise, John Howard or being overworked. In fact, I doubt whether Sydney residents are disgruntled at all – it’s just the way the survey is compiled. Here’s a clue in the SMH article:

The scorecard, known as the Australian Unity Wellbeing Index, is based on how satisfied people feel with seven areas of their life - standard of living, health, relationships, what they are achieving in life, safety, community connection and future security.

It shows the happiest electorates tend to have a lower population density, a high proportion of people over 55, more females, more married people and less income inequality. Importantly, they have a strong sense of "connection to their community".

Hm. An index that rates people’s happiness based partly on ‘community connection’ then finds that happy people tend to have a strong sense of ‘connection to their community’.

If we actually have a look at the report on the index itself, we see why that might be.

Subjective wellbeing is measured by the Personal Wellbeing Index. This comprises seven questions that ask "How satisfied are you with ------>?" The specific items people rate are their standard of living, health, relationships, what they are achieving in life, safety, community connection, and future security. The numerical rating scale offers 11 choices from 0 (completely dissatisfied) to 10 (completely satisfied). The PWI is the average rating across the seven items (domains).

There’s the rub. The index arbitrarily decides the 7 things that makes us happy and weights them equally. So there’s a big danger of circular reasoning: we decide that community connection contributes to 1/7th people’s happiness, so we ask them about how happy they are with their level of community connection. Then we tally up the results and, wow, people who rate their levels of community connection satisfaction low tend to be 1/7th less happy.

Here’s a suggestion. People in the inner city of Sydney don’t care too much about connection with community, at least in the traditional sense of having a chat to your neighbours over the back fence. If they did, they wouldn’t live in a fairly anonymous city of 5 million people. But the study decides that, for everyone in the country, community connection makes up one-seventh of our happiness.

Further, if you look at the results across different geographical areas, they’re actually all reasonably close together. Grayndler, the lowest in the country, scores 69.43 and Wide Bay, the highest, scores 78.55. Here’s another thing: because happiness with health and relationships are fairly randomly distributed across electorates (with some notable exceptions), these don’t contribute much to differences in the index. Which just increases the emphasis in the index on things that do differ, like ‘community connection’ and ‘safety’. Satisfaction with safety contributes another 1/7th to one’s subjective happiness, according to the survey. And, again, perceptions of safety are naturally going to be lower in ‘the big city’.

Now it may very well be that community connection does correlate well with happiness on other measures – but this study can’t tell us that, because it starts out with that assumption embedded in it. So drawing the conclusion from this study - as the Age and SMH do - that connection to community is an 'important' contributor to our happiness is completely invalid. It contributes exactly 1/7th to our happiness - because the survey decides at the outset that it does.

Now, I think surveys like this that move away from our obsession with GDP are a good thing, and I think this survey makes an important contribution to our understanding of happiness and wellbeing. The survey report contains some really interesting analysis of things that are correlated with this particular measurement of happiness.

But you also have to recognise its limitations and the most important one is that when you have a survey that has arbitrarily chosen questions, categories and weightings, you introduce arbitrary biases and you have to be very cautious of how you interpret the results.

No doubt the researchers are aware of this. But the media pundits who want to use it as a geographical scorecard aren’t. So let’s also be very cautious of their analysis.

Australian government censoring climate scientists?

Why does Australia always seem to follow everything the US does?

A few weeks ago there was furore in the US about allegations that the Bush administration censored leading NASA climate scientist James Hansen.

Now, ABC online reports that three CSIRO scientists have accused the Australian Government of trying to censor their public comments about climate change.

One says he was asked not to write in a government publication about the potential for millions of people to be displaced by climate change. Another says he was told not to make any comments indicating he disagreed with government policy on emissions. A third says that government censorship "happens all the time" and that he was recently told by his corporate centre that the Prime Minister's department had requested the CSIRO "not say anything about ethanol".

The Environment Minister denies these claims and says he'd welcome a CSIRO investigation into them. The story is on Four Corners tonight and should be interesting viewing.

It all reminds me of the cartoon above, which I saw on the US Environmental Economics blog.


**Update**

Well I watched the show last night and, I don't know, it seemed like a bit of a beat up. What seemed to clear to me from the show was:

1. CSIRO is petrified that if it annoys government, it might lose funding.
2. CSIRO management tells its scientists what they can and can't talk about when they're representing CSIRO (eg, presenting at conferences on behalf of CSIRO). It may be that scientists also feel they can't make any adverse comments in their personal capacity, but there was no evidence of that in the show.
3. The form of those restrictions seems to be that they can talk about science but not government policy. For example, they can talk about the impact of emissions and the need to reduce them but shouldn't comment on what the government should do to reduce them.
4. It wasn't clear from the show what the case was where the science is part of the policy debate. For example, it's one thing to tell scientists (as was alleged in the show) not to advocate carbon trading - that's not really a scientific debate (although there are scientific issues involved). It's a different thing to tell them not to talk about the pros and cons of ethanol from a scientific point of view (which was also alleged) - this is a policy debate but the science is right at the centre of it.

Now, I don't think what CSIRO is doing is a good thing at all - I think the organisation should be big enough to handle its scientists expressing their professional views about policy options. But it's not really a scandal. There was never any suggestion in the show that scientists were ever asked not to talk about the results of their climate research. Nor was there any evidence that these directions came from government or indeed from outside the organisation itself. This is quite different from what was going on in NASA.

In my view, we should be very worried if the government or CSIRO is censoring the science but there are enough groups running with the policy debate to not be too worried if CSIRO scientists aren't participating in it. CSIRO really needs to sort out, however, what their apparent policy of "talk about science but not policy" means when the science is central to the policy.

Anyway, the full transcripts of the interviews are online at the Four Corners website, so have a look and decide for yourself.

Biodiversity trading

Photo montage: UniServe Science

I've been meaning to write about biodiversity trading and banking schemes for some time now, because such a scheme is being proposed in New South Wales.

Anyway, I will be writing about this lots over the coming months because it's a concept that really pushes the boundary of what trading schemes can achieve - people are justifiably sceptical of the very idea of 'trading' biodiversity - which means that it's both exciting and controversial.

For now I'll just flag it and point you to the NSW Department of Environment and Conservation website which contains an interesting background paper on the concept and a discussion paper outlining the current proposal.

Enjoy your weekend!

Public transport - some good news from Melbourne

Beth reports that Melbourne City Council last night released its draft transport strategy and it contains some good news for public transport in the city centre.

Picture credit: City of Melbourne

Conservation vs logging: Battle of the dollars Part II

As I reported earlier, the Tasmanian Land Conservancy has purchased a large tract of land in Recherche Bay from its private owners, saving it from logging. What would environmental economics say about this development?

The ‘Coase theorem’ represents the traditional economic solution to environmental conflicts. Coase argued that if property rights are well-defined and enforced, bargaining between parties ensures that the optimal outcome is achieved, regardless of who holds the rights. According to one description of the theorem:

Many disputes over resources stem from the fact that no one owns them. Or -- nearly as bad -- everyone owns them, as in the case of public property. However, these disputes could be resolved if the unclaimed resources were divided up as private property. Now if someone wants to use your property, you could charge them a fee. Or if they abuse your property, you can sue them. Assigning property rights greatly enhances the ability to resolve disputes over the use and abuse of resources.

The Recherche Bay deal is perhaps an example of how this idea might work, sort of: environmentalists have gotten together money to buy an area of Tasmania’s historic Recherche Bay to protect it from logging by the notorious Gunns company. I’ve been following this story for a couple of months now and it’s been interesting. (Check out the reports in the weeks leading up to the deal on ABC news online.

I’m excited it’s succeeded but is it a triumph for free-market environmentalism? I’m not so sure. In my view, it’s succeeded despite the barriers to an optimal solution that a ‘free’ market throws in its way: a playing field that in this case is tilted against private conservation.

Here are some of those barriers.

Transaction costs

It’s a big deal for conservation groups to raise money from thousands of people to buy such an area. They need to advertise and lobby and beg and cajole to get it, they need to collect the money and hold it safely and issue thousands of receipts. They need to set up a trust to buy the land, work out how to manage it in perpetuity, work out who will negotiate with the landowner and so on.

Free-riders

If conservationists buy and save this area, who pays and who benefits? The generous benefactors pay, all sorts of other people benefit. I’ll benefit because I’d like to visit there one day and I’d like it there to be trees there when I do. I’ll benefit just from the warm inner glow I get knowing that a special place won’t be logged. Neighbouring residents benefit from. Historians and people of French and Australian heritage benefit from being able to visit or perhaps just watch a documentary about an unusual place where the French explored and almost made a decision to colonise Australia.

But will all these people pitch in their $5 or $10 or $100 to save the area? Not likely. Many of the beneficiaries may not even be aware of the benefits they receive. So it could well be that preserving this area is worth well in excess of the amount that conservation groups can raise.

Tax treatment

Tax treatment for conservation in Australia is complicated. It is improving, but there are many aspects of buying land for conservation that are not tax deductible. Donations to the trust that buys it will be, but payment for the land won’t (I think) nor the ongoing cost of managing the land for conservation.

So a group of conservationists face high transaction costs, free rider problems and difficult tax issues. On the other hand, where one logging company wants to buy the land to log it, it faces much lower transaction costs (only one party to organise and negotiate), very few free riders (it pays but also keeps the profits) and using land for primary production attracts very concessional tax treatment.

The property rights solution works sometimes but usually there’s too many embedded biases for it to produce an optimal outcome on its own.

In a later post I’ll talk about ways we can reduce some of the barriers to private conservation.

Conservation vs logging: battle of the dollars

Environmental economists’ ears prick up when they hear about conservationists buying out areas of land to protect them from logging or mining. In an economist’s ideal world, resources are used best when they go to those who will value them most, which means the highest bidder.

So it's interesting (and exciting as an environmentalist!) to hear about the purchase by Tasmanian Land Conservancy of the stunning Recherche Bay in Tasmania, which was due to be logged this year.

I've been following this story for a while and it's been full of political intrigue.

Stay tuned for some thoughts from an economic perspective.

Moving beyond Kyoto?

Nicholas Gruen has a nice piece at Club Troppo on the economics of climate change, the politics of Kyoto and the idea of an international agreement to impose domestic carbon taxes as an alternative to targets and international emissions trading.

Hooray, there’s uranium in our water!

It’s a funny world. ABC news online last week reported on an ‘exciting’ accidental discovery of high levels of uranium in groundwater in Western Australia’s wheatbelt and two days later reported that high levels of uranium in water near Alice Springs is suspected of contributing to kidney damage in the local Aboriginal community:

A group carrying out research into salinity in the Western Australian wheatbelt has stumbled on unusually high concentrations of uranium in the local groundwater.

The Cooperative Research Centre for Landscape Environments and Mineral Exploration made the discovery and has now received financial support from two hopeful junior exploration companies. The centre's chief executive officer, Steve Rogers, says while uranium mining remains under a State Government ban, mining companies are still keen for clues to potential deposits.

Dr Rogers says apart from the mining potential, the find has broken new scientific ground."We compared them to a database from the United States Geological Survey and the concentrations we see are higher than anything that anybody has ever seen in the United States, remembering that these are concentrations of uranium that are actually dissolved in water," he said. "So this is very exciting from our point of view."

My questions:

• The Cooperative Research Centre for Landscape Environments and Mineral Exploration is established, regulated and mostly funded by government. Why is public money going towards exploring for a mineral that would be illegal to mine?
• How is finding high levels of a highly toxic radioactive substance in water in an important agricultural area that produces a lot of our food ‘exciting’? Particularly when that substance is suspected of causing renal damage when dissolved in water sources.
• What does the excitement and funding from exploration companies say about the attitude of the mining companies and government bodies that make up the CRC to Australia’s laws? Is their attitude that those laws can be changed to suit them if the right pressure is applied?

Illegal fishing in the southern seas

My friend Doug has an interesting post today about the difficulties of policing illegal fishing of patagonian toothfish in the southern seas.

Solar powered backpack

I want one!

The Kyoto vacuum: markets step in

It's been disheartening to say the least to witness the attitudes of the US and Australia to action on global warming.

The failure to commit to the Kyoto Protocol might not be so bad if these countries had some other realistic suggestions for global action. Judge for yourself, but in my view the Asia-Pacific Partnership on Clean Development and Climate is not a realistic alternative. Its focus on a few technological fixes is either naive or dishonest (let's face it, it's dishonest).

We need governments to commit to regulating their industries to reduce emissions sharply and fairly quickly. Industry isn't going to do it on its own.

Nevertheless, it's been encouraging to see alternatives emerging to fill the vacuum of political leadership that we're suffering at a national level. Lefties would call it people power, righties would call it the market, but however you see it, consumers or citizens are stepping up to the challenge and demanding change - and businesses are starting to respond.

Two developments this week have caught my eye.

Yesterday, the Carbon Disclosure Project entered its 4th stage - and it's much bigger than the last one.

The Carbon Disclosure Project or CDP is an initiative on behalf of fund managers who together manage more than $30 trillion. That's a lot of cash. They've written to 1,933 of the world's biggest companies (up from 500 last year) requesting detailed information on their activities and policies with respect to climate change.

Why are fund managers interested in this? Because climate change is going to be big business - it's effects are going to threaten some businesses, the demand for emission reductions are going to threaten others, while demand for clean energy and carbon offsets is going to present enormous business opportunities.

According to Reuters:

"There are business risks and opportunities (from climate change) that have implications for the value of investments in corporations worldwide," said Paul Dickinson, CDP project coordinator.

The investors have demanded disclosure on companies' risk from extreme weather events, often associated with climate change, and about their emission of carbon dioxide... and for their strategies to cut emissions.

Detailed information on emissions is seen even more key this year given high energy prices, increasing the attractiveness of companies which are less carbon and energy intensive, or which have active programs in this direction.

"It's a question of institutional investors taking a well-informed view of the profitability of companies based on energy consumption and (carbon) emission performance," said Dickinson. "You could take a view that climate change will be good for green technology companies... [while] unprepared companies could find themselves in the firing line of policy as political demands harden on the need for CO2 cuts [and] a blase attitude to climate change could also risk reputational damage.

And earlier this week came news from the US of the first State-based emissions trading scheme (in Illinois). It's voluntary (I'll leave it to you whether that's good or bad) and basically allows farmers and other landowners to earn credits by adopting various conservation measures. These can then be sold to companies and organisations who have committed to reducing their greenhouse impact by offsetting their emissions.

Essentially the scheme just represents a credible certification program and a sort of clearing house for funding of conservation projects. It's being overseen by the Chicago Climate Exchange which already runs a similar national program (I think the novelty of the Illinois one is that it has government sponsorship and involvement).

There's a growing number of these sort of initiatives (I'll research and report on the Australian ones in the next few weeks) and I find it very encouraging. I don't think it's a substitute for national political leadership but I think it will be a precursor to political action, once our pollies wake up and see that there is a political will for this, that business can do it and that there are feasible mechanisms. Then just watch them claim these initiatives as their own.

The real environmental vandals: accountants

It seems to me that many environmental problems are caused by accountants.

Ross Gittins has a piece in today's Sydney Morning Herald about the running down of our public infrastructure. It's been fairly easy to observe in Australia in recent years what he describes:

WHAT happens when politicians keep promising the electorate new and better government services, but also reinforce the belief that we're already overtaxed - and, for good measure, adopt the attitude that it's a terrible thing for governments to borrow? The short answer is, something's got to give. To make that inconsistent trio of propositions add up, there's got to be something somewhere that's being squeezed. Something that's not terribly noticeable. A path of least resistance.

For some time now, the more alert among us have suspected that the meat in the sandwich may be public works. That the politicians may be making heroes of themselves and proving they can do the impossible by quietly running down the quality and adequacy of public infrastructure.

Well, maybe the more alert among us - or maybe just anyone who's caught a bus or train in the past few years.

Gittins describes how a lot of public infrastructure, particularly at local government level, is being quietly run down to save money. These assets are depreciating at a rate of $1 billion a year but Councils are only setting aside half this amount for their repair and replacement.

The situation is "akin to a family that doesn't make sufficient provision for replacing worn-out parts, let alone saving enough to buy a new car when it reaches the end of its economic life" - which is the point where repairing the car is more expensive than replacing it. And the present backlog of $6 billion to bring assets up to a satisfactory standard is "equivalent to driving a vehicle with serious structural and mechanical problems that have not been attended to".

This raises the question, why?

Because, although in some cases it may be obvious to the public that council assets are run-down or even dangerous, for the most part the problem is hidden.

The issue has been easy to ignore because infrastructure typically has a life of 50 to 60 years and only a small proportion has required renewal so far. Councils have been able to fund the operation and routine maintenance of assets, with a limited amount of renewal. The crunch is still some years off. "By the time infrastructure condition is at such a bad state as to be noticeable to the community, it will long have passed the optimal time for renewal".

It seems to me there's something much bigger than public infrastructure that's being squeezed right now. Something big and not very noticeable and harder than infrastructure to account for.

It's assets that we take for granted because, unlike a sewer or a dam or a road or a railway line, they don't have a monetary value ascribed to them. But they have an enormous value.

These assets are rivers, forests, catchments, oceans, ecosystems. All over the world they're becoming seriously degraded. I think people notice it and think it's a bit of a shame. But what policy makers, governments and business are not really noticing is the huge drain on our wealth that it represents. These ecosystems are not just nice to look at and visit, they provide our resources and absorb our garbage. Eventually they'll get to the stage where we have to spend massive amounts of money repairing and replacing them. If we can do so at all.

But right now, they're just quietly being run down.

This is one reason why environmental economics is important. Putting a dollar value on a forest or river is kind of gross. But putting a dollar value on the economic services they provide is the only way to realise how much wealth we're squandering by running the level of those services down.

Which brings me back to accountants. It's not really their fault of course. But if a company tried to count the profits from selling stuff they manufactured while leaving out the hidden costs of depreciation of the equipment they used to manufacture it, their auditors would jump on them. Companies account for depreciation of their assets.

So where are the environment's auditors? When are we going to start accounting for the environment, for our natural assets?

Environmental protection doesn’t cost jobs

There’s an excellent summary just posted by Paul Norton at the Larvatus Prodeo blog of an important work published in 1999 by US environmental economist Eban Goodstein. The Trade-Off Myth explodes a number of "green policies cost jobs" myths.

Some highlights:

Goodstein's survey of the available economic literature and research found that there was no [jobs versus economy] tradeoff at a macroeconomic level. The effects of environmental protection and regulation were minor compared to other factors including the monetary and fiscal policies of the state. On balance they were found to produce a slight employment benefit and economic stimulus due to the effects of public expenditure on environmental protection, corporate investment in abatement measures and accelerated technological innovation, the stimulus to the environmental protection industry, and the adoption of more labour-intensive production processes.

And in response to the familiar cry by big business that 'If we have to comply with new regulations we'll move overseas and take the jobs with us':

There were few examples of relocation of US plants to pollution havens... This was because: the cost of environmental regulation was small compared to overall business costs (especially wages); costs were only one factor in relocation decisions; modern production technology obviates environmental compliance costs by incorporating pollution control devices to begin with; and environmental compliance could yield benefits outweighing the costs.

Well worth a read.

Australia's national parks

I haven't talked much about national parks here but some blogs that have good discussion on national parks issues (particularly from an economic perspective) are the Environmental Economics blog (this recent post on park user fees is an interesting one), Neo Commons (written by a retired US Park ranger) and the Commons Blog. If you're interested in national parks and other conservation areas, check them out.

If you're concerned about Australia's national parks and reserves, you should also consider making a submission to the current Australian Senate Inquiry into Australia's national parks, conservation reserves and marine protected areas.

The Inquiry will examine the funding and resources available to meet the objectives of Australia's national parks, other conservation reserves and marine protected areas, with particular reference to:

• the values and objectives of Australia's national parks, other conservation reserves and marine protected areas;
• whether governments are providing sufficient resources to meet those objectives and their management requirements;
• any threats to the objectives and management of our national parks, other conservation reserves and marine protected areas;
• the responsibilities of governments with regard to the creation and management of national parks, other conservation reserves and marine protected areas, with particular reference to long-term plans; and
• the record of governments with regard to the creation and management of national parks, other conservation reserves and marine protected areas.

Submissions close on 1 March. There's already a few submissions up on the Inquiry website.

Why regulate the environment?

The NSW Independent Pricing and Regulatory Tribunal has been asked by the Premier to undertake a breathtakingly wide-ranging review of regulation in the State:

Review of the burden of existing regulation in New South Wales, identification of priority areas where regulatory reform could provide significant immediate gains to business and the community, and development of recommendations to improve the efficiency of Government regulation.

According to the terms of reference:

Well designed and targeted regulation is one of the central tools used by Government to deliver the social, environmental and economic goals of business and the broader community. However, regulation should only be used where it is needed, and efforts should be made to avoid inefficient regulation and minimise that which may be unnecessarily costly, excessive, or overly complex. Regulations that impose unnecessary burdens can impede competition, productivity, investment and innovation.

The purpose of the review is to:
1. identify areas of NSW Government regulation which are imposing a significant, unnecessary regulatory burden on business and the community; and indicate priority areas in which regulatory reforms could provide significant immediate gains to business and the community; and
2. develop recommendations for Government action to significantly improve the efficiency of regulation and reduce unnecessary regulatory burden on business and the community, including consideration of non-regulatory or incentive-based options for achieving this outcome.

The issues paper (PDF) contains some interesting discussion about the rationale for government regulation. The big ones:

• Monopolies: Counter tendency to raise prices and lower output.
• Natural monopolies: Facilitate competition, while harnessing benefits of economies of scale, by providing third party access to natural monopoly infrastructure.
• Externalities: Compel producer or consumer to bear full costs of production or consumption rather than pass on to third parties or society.
• Open-access externalities: Create property rights to promote conservation of scarce natural resources.
• Information inadequacies: Advise consumers to allow informed decisions (and hence the efficient functioning of the market).
• Continuity and availability of service: Ensure socially desired level of ‘essential’ service.
• Anti-competitive behaviour (eg, predatory pricing, collusion): Prevent anti-competitive behaviour and protect consumers from the ill-effects of market domination.
• Unequal bargaining power: Protect vulnerable interests where markets fail to provide for equal bargaining power.
• Scarcity and rationing: Public interest allocation of scarce resources.
  Distributional justice and social policy: Distribute according to public interest; prevent undesirable behaviour.
• Planning: Protect interests of future generations; coordinate altruistic intentions.

There's also some discussion of the impacts of regulation 'heavy-handed' and 'light-handed' regulation and alternatives to regulation, with some focus on market based instruments for environmental protection.

Well worth a read and if you've got something to say, you can make a submission up until 24 February. There'll be a draft report out at the end of March and a final report end of June.

The economic costs of bad public transport

Today’s Sydney Morning Herald has a couple of decent articles on the economic costs of Sydney’s worsening transport system, based on an economic analysis commissioned by the newspaper.

Among the impacts of worsening congestion are lower wages, investment and household consumption and higher inflation. The cause, according to the report, is too many cars and the solution lies in better pricing of public versus private transport:

If these predictions are to be avoided, a big shift in public attitudes on at least two issues is required: public transport and taxation. The city is relying less on public transport and more on cars, and the best way to reverse this trend is with prices.

The report says motorists now get "heavy subsidies" for using the road. They are receiving what economists call an inappropriate price signal - that is, the true cost of the activity is not being felt by the user. The cost of using a car needs to reflect the full social and economic cost of driving. If this is done, public transport should gain a big price advantage over cars and therefore more people will be encouraged to use it. But embedded cultural expectations - especially the growing emphasis on comfort and convenience - count against public transport. The centre's modelling suggests that in the future motorists will have to pay much, much more for the privilege of driving. Attitudes to taxation and government debt will have to shift.

The full report will be available soon from the Centre of International Economics website and should make interesting (if familiar) reading.

Debunking dodgy data

The New Economist blog has drawn my attention to an upcoming book that sounds fascinating, if a little esoteric. Beautiful Evidence is, as far as I can tell from the author’s website, about presenting data and information, especially in graphic form.

The chapters on “corrupt techniques in evidence presentations - what alert members of an audience or readers of a report should look for in assessing the credibility of the presenter” are online (in draft form) and should be particularly useful for anyone who needs to critically analyse industry or government (or other) spin – like, say, Sydney Water’s Environmental Impact Statement on the proposed desalination plant at Kurnell.

The Larry Emdur Institute for Behavioural Economics?

If anyone else out there has a preoccupation with reality TV and game shows ranging from Temptation to Temptation Island and justifies it on the basis of the insights it can offer into social psychology and behavioural economics (anyone?)… you’ll appreciate this article in the Wall Street Journal titled Why Game Shows Have Economists Glued to Their TVs.

Especially cool are the links to academic game show research available on the web.

Perhaps this could be a career move for Larry Emdur after the canning of the Australian Price is Right last October.

The Asia Pacific Climate Summit: Big business as usual

Seeing as I live in Sydney and write about environmental economics, you could be forgiven for asking why I haven’t written anything about last week’s Asia Pacific Climate Summit in Sydney. That's the meeting of the Kyoto naysayers – Australia, the US, China, Japan, India and South Korea.

Well, the truth is that nothing much happened. Really.

But here are some quotes to give you a flavour of the meeting, made in response to journalists' questions about whether we should really just leave climate change solutions up to the private sector:

From US Energy Secretary, Samuel Bodman:

The people who run the private sector, who run these companies, also have children and grandchildren, and they too live and breathe in the world and would like [climate change] dealt with effectively.

From Australia's Minister for Foreign Affairs, Alexander Downer:

The corporate world increasingly realises it has to be responsible. We are not trying to run some kind of police state. We don't support targets. We don't support that system.

So, business as usual then?

Some interesting sites

The Ecosystem Marketplace, run by the 'Katoomba Group' (comprising government agencies, non-profit groups, businesses and academic institutions) is a source of information on markets and payment schemes for ecosystem services - services such as water quality, carbon sequestration and biodiversity. Their idea is that by providing solid information on prices, regulation, science, and other market-relevant issues, markets for ecosystem services will one day become a fundamental part of our economic and environmental system, helping give value to environmental services that have, for too long, been taken for granted.

Imagining Australia is a blog about Australian public policy, with an emphasis on economic policy.

The New Economist blog has some interesting pieces about global economic issues, from a London-based macroeconomist.

How lawyers are like crack cocaine dealers

It’s Friday afternoon so let’s take a little break from environmental issues. I’ve been reading the entertaining Freakonomics: A rogue economist explores the hidden side of everything which included a chapter explaining why most cocaine dealers in the US live at home with their ‘Moms’.

The authors of the book stumbled on a treasure chest of data on crack cocaine gangs’ business operations in the ‘projects’ in Chicago. A young academic economist befriended (sort of) a gang and followed their activities. The gang leader, unusually, had gone to business school and was a business manager before deciding he could make more money heading up a gang. And he had kept meticulous books on the gang’s revenue and expenditure, something that is unusual for gang leaders to do. One of the gang members gave the books to the economist just before he was murdered by the gang and the books provide a unique insight – it’s not often that you can run your ruler over the accounts of a drug dealing business.

He found that the business model was a fairly typical pyramid structure. At the top was a group of men who were called, appropriately, the Board of Directors. They oversaw all operations in an area. They took about 20% of the revenue of each gang. At the top of each gang (which was like a franchise) was a leader, who earned about $100,000 (tax free of course). Under him were 3 deputies who earned vastly less – about $700 a month. The authors reckon this is about $7 an hour – or roughly minimum wage. Under them were about 25 – 75 actual dealers - called ‘footsoldiers’ - and they made about $3 an hour (which is why they live at home). Much less than minimum wage for an unpleasant and dangerous job.

Call me weird, but as I read through the chapter the thing that struck me was the parallels in the structure and business model and players to a large law firm.

Maybe that’s not much of an insight – after all, many large businesses have a similar pyramidal structure. But I wondered how many of the specific observations about the incentives and behaviour of the different players in a gang might shed light on the incentives and behaviour of different players in a law firm.

I’ll explore that in the next post and look at what the parallels between drug gangs and law firms might tell us about:

• whether partners really want their workplace to promote a ‘work-life balance’,
• why the biggest threat to a partner is young lawyers who don’t want to be partners,
• why graduates spend vast amounts of time doing tasks like discovery and due diligence that don’t require legal skills and could be done more efficiently by someone else, and
• why the pressure to work huge hours might be driven as much from below as from above.

Hunting feral animals on public land

The New South Wales Government is planning to open four state forests for the hunting of feral animals, at first on a trial basis. According to the Daily Telegraph:

Recreational hunters using rifles, crossbows and dogs will be allowed to kill feral animals in state forests and on public lands in a controversial trial next month. Licensed huntsmen will be allowed to hunt feral cats, dogs, deer, goats, pigs and foxes after the State Government approved the two-day trial in four public locations from February 4. However, a declaration published in the NSW Government Gazette on Friday reveals the four state forests have already been designated as the first official, full-scale hunting grounds. The proposed order allows hunting for five years in these areas, with hundreds more to follow in March.

My understanding is that private operators already do some feral animal control on public land, but under close government supervision – quite different to opening the areas up for hunting.

This is an interesting one for environmental economics as it’s an example of harnessing private self-interest to further public goals.

It will be interesting to see the public response to this – in theory it could achieve important environmental objectives but it also raises animal welfare issues (will the animals be killed humanely?) and the idea of opening up public land to hunters is not one that would appeal to many environmentalists.

Green groups are suspicious and suggest that native animals are likely also to become targets. Some suggest that the plan will encourage hunters to deliberately stock public lands with young feral animals to hunt at a later stage. Other possible problems include danger to other users of these areas and environmental damage caused by hunters and their vehicles and hunting dogs. Apparently hunting dogs also escape and become destructive feral animals themselves.

What do you think? Is this plan a fox in wallaby’s clothing?

Tasmania's wild rivers - mighty, free and full of poo?

Happy New Year!

My girlfriend and I have just returned from a great break in Tasmania. We stayed in Hobart most of the time with some side-trips across to the West Coast and down to the Huon Valley. We walked through the signature rainforests – huon pine, celery-top pine, sassafras and huge cool climate eucalypts such as the swamp gum – and crossed or travelled up the Huon, Franklin, Derwent and Gordon rivers and the huge Macquarie Harbour. Most of these rivers are a dark cola brown from the tannins from buttongrass on the highland plains at the rivers’ sources.

A little tragically, I was on the lookout for a hot environmental issue to write about here. Given Tasmania’s reputation for pristine wilderness and clean mighty rivers, it surprised me that the big issue in the news at the time was not old-growth logging or the cancer decimating Tasmanian devil population, but the fact that Tasmania’s main river – the Derwent – is not safe for swimming:

Public health authorities have welcomed efforts by the Hobart City Council to pinpoint what has polluted a popular swimming spot on the River Derwent. People are being advised not to swim at the Sandy Bay beach until further notice, because of faecal contamination.

Director of public health, Roscoe Taylor, says people risk contracting gastroenteritis, skin infections or respiratory disorders if they swim at the city end of Nutgrove Beach. He says it is hoped the beach will be safe by next summer but other beaches on the Derwent are more problematic. "It's very doubtful that Cornelian Bay will be up to swimming standard for quite a long time," he said.

The UN’s Atlas of the Oceans has this to say about the Derwent river estuary:

Named after the Celtic word 'clear water' in 1794 the Derwent estuary population has since grown substantially and now boasts 40% of Tasmania's population along its periphery. The estuary is an important and productive area with a variety of habitats including areas of wetlands, intertidal flats, kelp beds, seagrasses and rocky reefs that support a wide range of species, including black swans, oyster catchers, migratory bird species, penguins, dolphins and seals, platypus and seadragons [and] the critically endangered Spotted handfish...

As with many estuaries, local population growth has occurred resulting in estuary waters being used more and more for recreation, industry and marine transport. The upstream Derwent river provides the majority of the regions drinking water and is a source of energy via hydroelectric power stations. However these activities take their toll. Sedimentation has increased, there is heavy metal contamination, sewage problems, which together have lowered the oxygen level is some areas as nutrients have increased. Scallop dredging has destroyed seagrass and kelp beds, and kelp has been overharvested… large wetland areas in the upper estuary have also suffered recent degradation.

I reckon the health of rivers is one of the most widespread and intractable environmental challenges around the world. It’s something that environmental economics should be ideally placed to address because it’s about resolving conflicts over a common resource.

But what solutions does environmental economics offer to this? Is there any scope to create markets for river use? Is this something better left to planning law? Or is it something that should be looked after by government? How and who should decide what mix of uses a river should be put to? How do you resolve the competing claims on a river for drinking water, hydro power, irrigation, transport, recreation (swimming, fishing, boating), the protection of natural ecosystems, urban uses, industry, agriculture, forestry and so on?

Any ideas?

My holiday reading

OK, I haven’t got around to putting in links in my site yet. I’m sure it’s all very easy and everything.

In the meantime, here is my list of recommended blogs for holiday reading:

Environmental economics

Environmental economics blog – the best envionmental eco blog on the web – regular, informative, entertaining.

Urban and environmental economics – the full text of fascinating articles with an environmental economics angle.

Law and politics

Courting disaster – Diary of an international law PhD student at Cambridge.

Envirotalk – Australian environmental forum.

Fun

Fridaysixpm – pop culture and a smattering of politics.

Lynscreens – sporadic but spot-on film reviews and discussion.


Have a great holiday!

Productivity Commission Inquiries: Waste and Water

Most people know the Productivity Commission as an Australian icon of economic rationalism. Somewhat surprisingly, its also one of the more environmentally astute and (environmentally) progressive agencies in the (conservative) Australian government.

In some ways that shouldn’t be so surprising because, despite the misperception of green ideals as ‘standing in the way of progress’, most are actually about using our scarce resources efficiently. Woodchipping old growth forests in Tasmania is as much an economic outrage as an environmental one.

The Productivity Commission has conducted a number of often influential inquiries into environmental or environmentally-related issues. Its latest is an inquiry into Waste Generation and Resource Efficiency and a copy of the Issues Paper hit my desk yesterday.

Waste used to be the big environmental issue but it’s gone a bit quiet lately, overshadowed by climate change, water and biodiversity in particular.

The Terms of Reference state the issue:

Non-optimal levels of waste represent lost value and opportunities, while imposing undesirable economic and environmental costs on society. The objective of this inquiry is to identify policies that will enable Australia to address market failures and externalities associated with the generation and disposal of waste, including opportunities for resource use efficiency and recovery throughout the product life-cycle.

Some of the environmental and market issues to be examined are:

• Institutional, regulatory and other factors which impede optimal resource efficiency, recovery and optimal waste management;
• The adequacy of current data on material flows;
• The impact of international trade and trade agreements on the level and disposal of waste in Australia;
• Strategies that could be adopted by government and industry to encourage resource efficiency and recovery;
• The effect of government and commercial procurement practices; and
• The impacts of government support to production and recovery industries.

Some of the issues identified in the issues paper are:

• Arguments for government intervention (market failure – externalities, natural monopolies, public goods and market power issues);
• Recycling markets and policies that affect them;
• Energy recovery from waste;
• Pricing measures;
• Producer responsibility for waste.

Public submissions are invited and due by 8 February 2006. The Commission will also undertake public hearings in February and release a draft report in May.

Rural Water Use and the Environment: The Role of Market Mechanisms

At the same time, the Federal Treasurer has commissioned the Productivity Commission to undertake a study to assist State governments in meeting their obligations under the National Water Initiative. The Terms of Reference were released last week. The study will assess the feasibility of establishing workable market mechanisms:

• to provide practical incentives for investment in rural water-use efficiency and water related farm management strategies; and
• for dealing with rural water-management related environmental externalities

The study will look at take into account relevant practical experiences in other areas, such as with establishing tradeable salinity and pollution credits.

The Commission will report on the study in June 2006.

Both should provide some interesting material for anyone interested in the practical application of environmental economic policy.

Economists should stick to economics

A growing trend in economics is economists extending their analysis to social issues. I’d like to look at two quite different manifestations of this trend and suggest that economists should steer clear of using economic theory to look at non-economic issues.

1. Applying economic methods

The first manifestation of this trend is applying statistical methods developed in economics to examine social trends. An example of this is examining empirically whether the death penalty might contribute to lower murder rates in an area.

This isn’t really economic analysis in any sense – it’s just taking statistical methods that happen to have been developed for economic analysis and using them in sociological analysis. And this is an area in which economists can make a positive contribution – more and reliable data always helps us make more informed decisions.

(A caveat is that you should be very wary in listening to economists discuss the moral implications of their findings. For example, in the death penalty article above, the authors reckon that each execution for a murder leads to about 18 fewer murders and therefore suggest we are morally required to execute murderers. We should think very carefully before taking that conclusion at face value, even if we could believe the data (which are suspect)).

2. Applying economic theory

Much more problematic for me is when economists start applying economic theory or models of economic behaviour to social situations.

A classic example is the economics of marriage, surprisingly well-trodden ground which tends to produce studies that are dazzling both for the sophistication of their mathematical models and the simplistic stupidity of the assumptions about human behaviour on which they’re based.

You can pick up the flavour from this one, about marriage causing the gender wage gap:

Although economic considerations are not always deciding factors when men and women fall in love, they do play an important role in the decision to marry, according to Elul and Volij, assistant professor of economics.

Men… begin saving their earnings in hopes of attracting a wife. "If the men do not save enough they will not have much to offer," said Volij.

In the model, if a woman is proposed to by a suitable man living in the same city, she will certainly accept the proposal. But if a woman is proposed to by a man living in a different city that is not as advantageous to her earning potential as the one in which she lives, she faces a dilemma: She could marry, move and earn less, or she could reject the offer. "Her choice will depend on the terms of the husband's offer (that is, his savings) as well as other factors like wages and interest rates," the authors wrote. In most cases, the model shows that women will accept the offer of marriage if the savings of the men are significant. As a result, women often sacrifice their earnings by following their husbands, leading to a gender wage gap.

In the paper, individuals are utility maximizers, choosing to marry when it is in their self-interest.

Women are assumed to control the bargaining and hence:

they are going to be able to extract more benefits of marriage for themselves. As a result, the women feel less pressure to work. In fact, they are able to work for lesser pay and yet extract better benefits since they are in control of the bargaining...

So this model brilliantly explains the gender gap – as long as you assume a myriad of things that are unproven and go against everything common sense tells you to be the case: women choose husbands according to their savings and the general level of wages and interest rates, everyone enters marriage to extract an economic benefit (economists generally and rather old-fashionedly assume this to be the man’s income for women and the woman’s labour for men).

The problem with all these sort of analyses is that they take as their starting point standard assumptions which are necessary for basic supply and demand models to work – most notably that everyone acts in their own self-interest. These assumptions are pretty reasonable when you’re looking at consumer behaviour in supermarkets or how firms price goods or choose suppliers or make investment decisions. They’re completely wrong when you’re looking at social behaviour.

Amazingly enough, most husbands don’t want to spend all their money enjoying the good life so they can leave their widows destitute. In fact, any empirical economic study shows that many wealthy older people live relatively frugally so they can leave money to their families. Husbands and wives in functional relationships don’t try to extract the maximum economic benefit from the other: their relationship is about providing love and support to the other.

Economists first assumption is that people are rational. Yet they abandon this assumption as soon as they look at social behaviour. Entering relationships solely from the point of view of what you can get out of them would leave you a miserable and lonely person. And that’s just not rational.

Sydney’s proposed desalination plant

Probably the major environmental issue in Sydney right now is the proposed desalination plant. Sydney’s catchment has been in drought for some time and Sydney’s water supply is at relatively low levels. Various solutions for a secure water supply have been proposed but the big ticket item is a desalination plant.

Some of the issues are:

• It’s a very expensive way to produce clean water;

• It’s a very energy intensive way to produce clean water and that also means lots of greenhouse gas emissions;
  

• The proposed site (and its surrounds) is environmentally sensitive and contains a number of unique and endangered ecological communities;

• The political environment is interesting as the government has been criticised for its handling of other recent large infrastructure projects, in particular effectively granting a large degree of control over public services to private entities.

I’ll look at some of the issues surrounding the desal plant over the next few weeks but, if you’re interested, the environmental impact statement and other documents are on Sydney Water’s website. You can comment on the proposal until 3 February 2006 and I’d encourage you to do so.

Unintended consequences

Economics makes a useful contribution to policy in demonstrating that when you start interfering in markets (if they’re working), you can not only get nasty side effects, you also often get the opposite of what you were intending to do. For example, putting price caps on products makes investing in producing those products unprofitable, cutting off the innovation that could bring down the prices of the products in the long run.

However, as we saw in the previous post (below), that is only the case if markets are working (and they often don’t). So – for example - economists say that we should remove the minimum wage, which would encourage firms to hire people, bringing down unemployment, boosting productivity, increasing profits and making products cheaper for everyone. Yay! In theory that might work, but because there’s so many other gremlins in the labour market, it’s unlikely to work that way in practice. One example: because of the way the tax and welfare systems are structured (essentially the working poor pay more tax than they should), if you reduce the minimum wage in Australia any further, people will earn less – after tax – than they would on the dole. So cutting the minimum wage would only make these people poorer and discourage people from working. So the real outcome is likely to be more poverty, more unemployment and more stress on the public purse.

A nasty example of this in an environmental context was reported in the last issue of New Scientist and it concerns using ‘biofuels’, renewable fuels made from such things as sugar (ethanol), palm oil or soybean (oil) that can replace diesel. According to the article:

THE drive for "green energy" in the developed world is having the perverse effect of encouraging the destruction of tropical rainforests. From the orang-utan reserves of Borneo to the Brazilian Amazon, virgin forest is being razed to grow palm oil and soybeans to fuel cars and power stations in Europe and North America. And surging prices are likely to accelerate the destruction.

The rush to make energy from vegetable oils is being driven in part by European Union laws requiring conventional fuels to be blended with biofuels, and by subsidies equivalent to 20 pence a litre. Last week, the British government announced a target for biofuels to make up 5 per cent of transport fuels by 2010. The aim is to help meet Kyoto protocol targets for reducing greenhouse-gas emissions.

Rising demand for green energy has led to a surge in the international price of palm oil, with potentially damaging consequences. "The expansion of palm oil production is one of the leading causes of rainforest destruction in south-east Asia. It is one of the most environmentally damaging commodities on the planet," says Simon Counsell, director of the UK-based Rainforest Foundation. "Once again it appears we are trying to solve our environmental problems by dumping them in developing countries, where they have devastating effects on local people."

Pretty depressing, considering the good intentions behind these laws. I guess the message is that in a world with globalised markets, you need to be even more careful when you use economic measures to help solve environmental problems. Economic measures can be powerful things.

Making things even worse

One of the most powerful concepts I’ve learnt about in environmental economics is known as “the theory of second best”. It’s one of those concepts that’s completely obvious to everyone except economists.

What it says is that in an economic system that’s pervaded by inefficiencies, fixing one source of inefficiency may actually make the system as a whole even more inefficient. In other words, in the real world - where the simplifying assumptions of economists don’t necessarily hold – taking the standard advice of Treasury boffins and other economic policy-makers and instituting microeconomic reform in one industry can actually make everything worse. I think the “second best” comes from the idea that it’s not a perfect world – and a second best world may require second best solutions.

An example is water trading. A big problem with rural water entitlements, say economists, is that traditionally they haven’t been able to be traded. Once you allow trading, the entitlements have a value, because you can sell them. This gives you an incentive to conserve as much water as you can, because you can sell any you don’t use. It also ensures that the water goes to its most highly valued use. The very profitable vineyard or, say, cotton farm that didn’t have enough water to expand can now buy that water from, say, the sheep farmer who was using it to grow grass in a very unprofitable paddock. The vineyard makes more money with its new water, the farmer makes more money because it’s more profitable to sell his water than use it for sheep, and we conserve more water overall. Hey presto, we’re all better off.

The trouble is, there’s all sorts of wacky goings on in the real world that complicate things. The most notable in this context is that there’s a whole lot of water entitlements that were given out years ago that farmers don’t use – because they don’t need them or because, for example, it’s more expensive to pump the water up from the river than it’s worth to the farm. These dormant entitlements are often called ‘sleeper licences’.

If you allow trading and there’s lots of sleeper licences around (which, in Australia, there are), what happens? Well, these licences suddenly have a value, and they’re not being used, so the farmers sell them. Others buy them and use them. Suddenly, a whole lot more water is being extracted from the rivers than before. Creeks dry up, the water doesn’t get to downstream users at all, salinity problems increase, the environment loses. Hey presto, we’re all worse off.

All pretty obvious, but just another reason why we need to be careful before we adopt economists’ magical market solutions. And this isn’t to defame economists too much either – they realise this stuff too and that’s why when water trading has been established recently in several Australian states, it’s been complicated and it’s been done slowly and carefully. It still hasn’t always worked.

Next post: A particularly horrific example of the theory of second best: European efforts to stop global warming devastate forests in developing countries.