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Last week we hosted an international workshop here at the University of Sydney, which focused on theories and methods for measuring productivity and efficiency when environmental considerations are taken into account, and on including natural resources in economic accounting. The main aim of the workshop was to discuss some of the new ideas in this area of growing significance at the interface of environmental/resource economics and productivity analysis and national accounting.
The need to account for environmental impacts from various economic activities in human society is increasingly important as the environment and the ecosystem services it provides are significantly threatened by air pollution, land degradation, deterioration of water quality, and biodiversity losses. This raises a fundamental question of how to accommodate environmental effects into the standard practices for measuring productivity and efficiency, and in the accounting of overall economic activities.
One group of talks at the workshop focused on the treatment of negative environmental effects associated with productive activities, such as emissions of CO2, SO2, wastewater pollutants, and environmental degradation attributable to taking water from the environment. New approaches presented had to do with explicit treatment of an abatement technology, non-parametric estimation of abatement costs and shadow prices, and with the use of alternative reference frontiers when there is regional and technological heterogeneity among polluters. The point of considering the exposure to emissions when it comes to spatially-distributed pollutants, which has so far not been widely treated in this literature, was also made.
The other group of talks focused on accounting for natural resources, and on estimating productivity growth in agriculture under climate change. There were important new approaches presented in terms of deriving user costs for sub-soil assets (e.g. mineral resources), as well as making inroads in accounting for the contribution of natural resources (e.g. soil) to agricultural productivity.
Overall, it was an exciting workshop, and to be followed by an edited book based on presented papers, as well as on the work by colleagues who could not make it to the workshop. So, watch this space!

Australia should pride itself in having one of the most advanced and clever ways to secure environmental flows through the buy-back of water licenses by the Commonwealth Environmental Water Holder (see several previous posts on this blog explaining the CEWH). However, media recently reported some instances of disquiet with the way environmental water is managed by the agency. Some of these concerns have come from very wealthy individuals who have previously sold large amounts of water rights to the government. But, concerns also came from smaller irrigators who are tired by the endless bureaucratic processes in which they are asked to participate.
These are indications that problems start to emerge in allocating environmental water and in adequately engaging stakeholders in the Murray-Darling Basin (MDB). In terms of principles for allocating environmental water, a key is to attempt to allocate water where the benefits from it will be highest at the margin. Despite the inherent difficulties in evaluating benefits pertaining to environmental improvements, including provision of environmental water, one can usually sense when the benefits of feeding ever more water in a particular region are becoming small. This appears to be the economic reasoning behind the concern raised in relation to allocating large amounts of water to the Lower Lakes. In the same time, there seem to be other obvious areas where the allocation of water will yield greater benefit. In light of this, the CEWH should try to better target its environmental flows allocation, so as to maximise benefits to the whole community that pays for those flows (i.e. the Australian taxpayers).
In addition, the relevant agencies (CEWH, the Murray-Darling Basin Authority, and the state government departments and agencies) seem to be entangled in a never-ending process of consultation, evaluation, validation, etc. that on one hand alienates stakeholders, and on the other delays tackling the problem of optimal allocation of environmental water flows. I thought that one of the main points of the Murray-Darling Basin Plan was to centralise jurisdiction and the decision-making process, so as to improve the efficiency of basin management. However, it seems that the old habits of compartmentalised governance in the MDB have not completely dissipated, which makes things more complicated than they should be.
Securing water for the environment has been one of the big challenges in water management in the 21st Century. In Australia, we got the main principles right in that we have a mechanism to procure water for environmental purposes in an efficient way through market mechanisms. However, we are facing challenges in optimally allocating the environmental water flows that were secured in such an efficient way. Those challenges are to be expected, as we are dealing with complex problems. However, the early warning signs that something is not right should be taken seriously by the CEWH and MDBA, who should work towards improving allocation mechanism for environmental water and a more meaningful engagement with basin stakeholders!

The great social debate about climate change that has been taking place over the last twenty odd years has been plagued with controversy, disagreement, and confrontation. However, one notion coming out of this debate seems to be gaining almost universal acceptance. It is the notion that the future lies in a ‘decarbonised’ economy much less reliant on fossil fuels for its energy needs. It is slowly but surely gaining wide acceptance by governments, by some of the world’s largest corporations, and by individuals.
But, the process of ‘decarbonisation’ has just started, and it will be a long and challenging process that will be implemented in a very uneven way across the globe. So, don’t hold your breadth for the Paris conference that starts in a few days.
Besides all the sensationalist build-up of expectations, it is hard to believe that any major international treaty on climate change will be brokered in Paris. And perhaps that’s not as bad as it sounds. If the CoP 21 manages to deliver a strong message that will further support the nascent process of ‘decarbonisation’ by encouraging technological and institutional innovation, it would be a good outcome.
Human society has already embarked on a journey towards a future world much less reliant on fossil fuels. Single events, like the one in Paris, can speed up or slow down the journey, but cannot reverse its course. Nevertheless, at this early stage, it is important that such events fan some wind in the sails, and I hope the CoP 21 does exactly that!

A recent report by the Climate Council grabbed the headlines with the claim that the new type of batteries designed for use with solar panels, such as Telsa’s Powerwall, will revolutionise the way Australian households generate and use electricity. The new batteries are better, cheaper, nicer looking and more reliable than what has been available thus far.
To really understand what is at stake here, one needs to remember that the extraordinary uptake of solar by individual houseowners came as a result of extraordinarily generous feed-in-tariffs that were heavily subsidised by governments. After realising that these subsidies were an enormous drain to the budget, governments decided to scale them back dramatically. At the moment, the low rates of feed-in-tariffs make solar panels on your roof not such a profitable proposition. But, here come the batteries!
Their effect is to replace the incentives that were offered by the high feed-in-tariffs. The point is that roof solar panels produce most electricity when it cannot be used by the household, i.e. during daytime. If there are no batteries, the unused generated electricity has to go to the grid, and households are paid a feed-in-tariff for generating that electricity. Given that these tariffs have been reduced dramatically over the last 5-6 years, and at the moment are lower than the lowest tariff from the grid, the benefit to solar panel owners is minimal. By installing the batteries, the owner will increase the value of the electricity produced by the panels that it is not used in the household, and will bring that value equal to the retail electricity price. Given the current differences between feed-in-tariffs and retail prices, the installation of batteries might increase the value of the electricity generated but not used by up to ten times (e.g. feed-in-tariffs currently range between 5.1 and 12 cents per kWh, and the peak load electricity retail price can be as high as 60 cents per kWh). So, the decision whether to install the batteries should be made based on balancing the cost of batteries (including installation and maintenance) with the benefits obtained from raising the value of the generated electricity that would have otherwise gone to the grid at a very low feed-in-tariff.
The actual calculation that a homeowner should do is not going to be simple, as it will require an hour-by-hour electricity consumption as well as electricity generation information. Next, the difference between generated and consumed electricity will need to be calculated. When this difference is positive, the extra energy will be accumulated in the batteries. When it is negative it will be drawn from the batteries, or from the grid. In all cases the electricity will be valued at the applicable retail electricity price.
The uptake of the new type of batteries will be dependent on this type of calculation for the existing solar panel users, and an even more complicated one for new users as they will also need to factor in the cost of installing the panels themselves. The new batteries combined with solar panels are a very exciting development, but the numbers will have to stack up before we can expect a large and quick uptake!

One big change in the new Turnbull ministry that affects the environment and natural resources is that the Water portfolio has been split between the Department of Agriculture (DoA) and the Department of Environment (DoE). Previously, this portfolio was entirely in the DoE, but after the change the ‘environmental part’ i.e. the Commonwealth Environmental Water Holder (CEWH) remains in DoE, while all other parts of the portfolio move to DoA.
Nationals and some Liberals are highly in favour of moving Water to Agriculture – with some of them showing clear dissatisfaction that even a part of the former portfolio is left with the Environment. Labor, on the other hand, doesn’t accept the move at all and will not represent it in its shadow ministry.
These positions are representative of the stark differences in paradigms about water in Australian politics. On one side we’ve got Nationals who see water as another input into agricultural production that should be used to the benefit of farmers. On the other side, the Greens and Labor see water as mainly valued for its role in the environment and water dependent eco-systems.
However, there is a thinking that these paradigms should probably come closer together rather than move further apart. Recent work (e.g. Ancev 2015 in AJARE, and a forthcoming article in Water Economics and Policy (WEP)) is showing that it is very beneficial from society’s point of view to allow interaction between ‘environmental’ and ‘agricultural’ water in the water market. That way we get more water for the environment when it is most valuable to it, and more water for agriculture when there is less need for ‘environmental’ water. This can also help both the environment and the farmers to better adapt to climate change.
So, separating the ‘agricultural’ from ‘environmental’ water in an administrative sense is not a good move. It will reinforce the separation between the two to the detriment of farmers and the environment. A disappointing first move by an otherwise very welcomed new government!

It will be interesting to see the outcome of a court hearing about the effects of a proposed coal mine on the local koala population that starts today at the Land&Environment Court.
Not surprisingly, environmentalists are pointing to the possible dangers from relocating some 260 koalas from the site of the proposed mine to another habitat. On the other hand, the mining company is pointing that providing offset areas and additional land preservation areas adequately addresses any environmental concerns.
The issue here is the environmental effectiveness of offsetting, which is an incentive based environmental policy instrument. Using the context of the example at hand, offsets effectively allow that destruction of the koala habitat for the purposes of mining be permitted, provided that similar habitat is secured elsewhere. There are examples of successful offsetting schemes, for instance, the Minnesota Wetland Banking scheme where the environmental effects of drying out wetlands can be offset by purchasing credits that are created by establishing wetlands somewhere else.
There have also been examples of successful offsetting programs involving coal mines in NSW: e.g. the salinity offsetting by the Ulan Coal Mine. This program was reviewed in a recent chapter on evaluation of salinity offsets in Australia that appeared in an edited volume.
However, there are also concerns about the effectiveness of offsetting programs, as discussed on this blog some time ago, and in a recent paper in the Journal of Regulatory Economics.
So, a pretty tough job in front of the judge at the Land&Environment Court. Let’s see what lawyers think of offsetting!

I have been spending some time in Hong Kong this June, visiting the Chinese University of Hong Kong. I have been regularly reading the local English language newspapers, and an article in the South China Morning Post draw my attention. The Chinese government has drafted legislation for environmental taxation, targeting a wide range of water and air pollutants. It is proposed that a Pigouvian tax (a tax per unit of pollutant emission) is levied at various marginal tax rates, dependent on the pollutant. This sounds similar to the Load Based Licensing (LBL) in NSW.
By all means, this new environmental law is an excellent development. It shows that the Chinese government is serious about addressing the growing concerns that Chinese people have about terrible air and water pollution problems that they have to live with. However, the similarity between the new Chinese law and the LBL in NSW points to the need to be only cautiously optimistic when it comes to the expected outcomes from environmental taxation. This is particularly linked to the magnitude of the marginal tax rates. As shown in some of our previous work (see a previous entry on this blog and this journal article), LBL in NSW has not resulted with marked reductions of air pollutants that can be attributed to the implementation of the environmental taxation policy. The main reason is that marginal tax rates were set too low to trigger major abatement activities by emitters. The same danger exists in China. It is very hard to say whether the proposed marginal tax rates are adequate by just looking at the numbers for some of the pollutants that were published in the media. Admittedly, some of the rates look pretty low, and consequently might not do too much in terms of cutting emissions. The Chinese government should seriously consider the environmental effectiveness of the proposed taxation laws, and should not shy away from increasing the marginal tax rates so as to achieve the desired outcomes.
Environmental taxation is needed in China. However, the government should not succumb to the well known mantra of political convenience: impose low and ineffective taxes, claim that you are doing something for the environment, and at the same time collect a nice revenue! The Chinese people are demanding better environmental quality. Simply imposing taxes is not going to deliver that, if the tax rates are not set right. The Chinese government should carefully consider where should those rates stand!

I have been recently thinking about the possibilities that crowdfunding might be offering in an environmental context. This came out of discussions around how could farmers get paid for doing the right thing by the environment. For instance, a change in farming practice (e.g. lowering the fertilization rate) or reserving part of the farmland for native bush to act as a buffer preventing pollutants entering waterways could have significant positive environmental effects, but are costly to farmers. Unless farmers are able to recoup those costs, they are not going to undertake these environmentally beneficial activities. Governments could run programs that can provide incentives to farmers, but in the absence of such programs, or if programs are abolished, there is nothing to drive the change. This is where crowdfunding can possibly come in. Farmers can list environmental improvement projects on crowdfunding platforms, and attract in this way the funds that will help them finance those projects.
I found an interesting example of crowdfunding in an environmental context reported in a recent news article. The article also reports that the number of crowdfunding campaigns for environmental and conservation projects has grown significantly over the recent months. So, if crowdfunding can be used for variety of environmental and conservation projects, why not consider it as a viable option in the context of helping reduce agricultural pollution? There are several important issues that will need to be addressed to facilitate crowdfunding for on-farm environmental improvement projects, not the least being the certification of actual actions taken on farm. In other words, the crowdfunding donors will have to be assured that the environmental outcome that has been promised has indeed been delivered. This is not an easy ask, given the complexity of processes involved and difficulties of on-farm monitoring, but various new technologies associated with ‘big data’ might be helpful in this respect.
In addition, there will have to be some mechanism for justifying the costs of undertaking environmental improvement projects that farmers are claiming. Put differently, there should be a way to differentiate among environmental improvement projects across farms based on their cost-effectiveness.
These are obviously important questions that need answering, but I think the very concept of crowdfunding for environmental improvement projects is very promising. Let’s hope that the new digital technologies that facilitate funding and sharing of information can find their way towards helping improve environmental management on farms!

Last week we learned the outcome of the first round of ‘auction’ for the funds that the government pays to entities that commit to reducing GHG emissions.
Firstly, let me say that the use of the term ‘auction’ here is slightly misleading. We are talking about a reverse auction, where the entities do not bid to pay for something (as is usual in auctions), but rather put bids for the payment that they require to do something: in this case, to reduce or to avoid GHG emissions. One should make no mistake that we are still talking about subsides: the taxpayers are paying the emitters to reduce their emissions, even though the term ‘auction’ is used.
Secondly, the only price information that was made publicly available is that the average price of the accepted bids was some $14/tonne of CO2 equivalent. The government seems to be overly happy with this result, making a point that this price of $14/tonne is much lower than what would have the marginal tax rate been, had we continued with the Carbon Pricing Mechanism. However, this comparison is meaningless, as we are talking about two different instruments, as well as different quantities of emission reductions. In addition, the $14/tonne on average sends a signal that the actual cost of abatement in Australia is not particularly low, especially when taking into account that most of the projects that participated in the ‘auction’ are supposed to be low-abatement cost projects.
Thirdly, it is instructive to look into the list of the winning bids.There is a clear dominance of native forest protection projects, and perhaps more worrying, a dominance of few companies that have won contracts. While forestry carbon sequestration projects are potentially useful (even though one has to ask what would have happened to these forests had there not been for the subsidy: would they have all been cut down!?), the ability to actually measure and verify the extent of sequestration is limited. In other words, the uncertainty about actual emission reduction is very high for this type of projects, compared for instance, to emission reductions in electricity generation (which were dominant under the Carbon tax) that can be measured very precisely in real time.
So overall, I am much less enthusiastic about this result than the government is. We have just spent more than $660 million of our taxpayers’ money that are very scarce at the moment as per government’s own admission, on subsidising, what appear to be, special interests!

I was going to write about something else (the recently exposed further evidence of the problems with the subsidies on solar panels) when I saw this article in today’s paper about the suspected effects of fracking on increased seismic activity in Oklahoma, US.
Now, I lived in Oklahoma for few years, and I know we were worried about tornadoes, but earthquakes… Naah! However, the number of tremors that can be felt in that state has apparently increased significantly since the start of the CSG (or shale gas, as they call it over there) boom 5-6 years ago. Scientists think that this is to do with the disposal of the excess water from gas drilling, which in the US is allowed to be pumped under pressure back into the underground aquifers. This water is believed to act as a lubricant along fault lines, and causing increased incidence of tremors. Apart from the nuisance from these smaller tremors, people in OK are worried about the possibility that a ‘big one’ comes, with devastating consequences.
Perhaps this worry about increased seismic activity due to CSG development is less significant in NSW, as the excess water is not pumped back underground. However, the possibility that CSG technologies could result with events that are very unlikely, but can bring possibly devastating consequences springs to mind when reading about the quakes in the US. These catastrophic events are even subject to ambiguity, i.e. we don’t know what these events might exactly be, and we are not able to characterize the probability of them occurring. Nevertheless, they should be taken into account in the CSG debate. Otherwise, we may be overlooking some possibly devastating consequences to the whole society!
Note: More on economics of catastrophic events in articles by Chichilnisky, and Weitzman