Environmental Economics

Dependent on a perspective, Coal-Seam Gas (CSG) can be seen as a source of plentiful and cleaner energy. Its development promises economic growth in regional areas, revenues for governments, and improved energy security. However, it can have potentially devastating impact on agriculture and on the surrounding environment. In Australia, these concerns have led to fervent opposition to CSG development by landowners and environmentalists alike. As a result, the exploitation of CSG has significantly slowed down in recent years.
In the wake of the perceived energy crisis related to natural gas shortages for the domestic market, unlocking the CSG potential seems like a good idea. Consequently there have been calls for finding modalities that will up-ease landowners’ opposition to CSG. Specifically, and championed by the Deputy Prime Minister Barnaby Joyce, there is a proposal to follow the South Australian example and to share some of the revenue collected from CSG royalties with landowners.
On the face of it, this proposal makes sense. One of the key reasons for landowners’ opposition to CSG is that under Australian sub-surface (mineral) property rights laws, the host landowners are not entitled to any portion of the natural resource rent from sub-surface resources. As the royalty on minerals, including on CSG, payable to the state is one form (and not the best at that, either) to capture the natural resource rent, the recently floated proposal effectively suggests that some of that resource rent should go to the landowners, who are in turn expected to become more welcoming to CSG development on or around their land.
However, that proposal only looks at the surface, and offers a relatively simplistic approach to the problem. In particular, there are at least three considerations of critical importance that are absent from the proposal.
Firstly, under the existing laws the natural resource rent from all sub-surface and mineral assets should be entirely captured by the public as their rightful owner. However in practice, a large proportion of the recourse rent is captured by the companies who exploit the resource. This is due to the imperfections of the resource taxation system, and the resistance to changing it. In light of this, the current proposal suggests that the public should give up a further percentage of the resource rent in order to up-ease landowners, whereas those who exploit the resource are left with whatever proportion of the rent they can get away with under the current natural resource taxation regime. That does not seem right, and does not seem fair.
Secondly, the problem of CSG is not solely about the natural resource rent from CSG. It is also about the natural resource rent from the land (land rent) on which CSG is developed. As a result of CSG development, there are serious threats that land rent appropriable by landowners might significantly diminish over the long term. However, the extent of land rent reduction, its timing, and indeed its very occurrence, is highly uncertain. So, we can only talk about the expected reduction in land rent attributable to CSG. Consequently, the portion of the royalty from CSG to be shared with landowners should be over and above this expected reduction in land rent. Given that the reduction of the land rent is highly uncertain, finding out what proportion of the royalty should be offered to landowners in order to gain their acceptance of CSG development, is difficult, if not impossible task.
Thirdly, recent findings suggest that landowners are likely to value the reduction in land rent attributable to CSG more than the share of CSG rent they might receive, even if the two come in the same amount. This is not surprising in light of the notion of ‘loss aversion’, which is a well-known psychological and economic phenomenon that explains why people are much more devastated by, for example, a $1000 loss on the share market than they are satisfied with a $1000 gain. It suggests that even if landowners are offered a share of the rent from CSG, they are not likely to take it and stop opposing its development, because they value the potential loss of land rent more than the gain from the shared royalty.
While current proposal to open up CSG development by offering landowners a share of the royalty makes some sense at a first glance, it only really scratches the surface. There are several, not as obvious, but nevertheless critically important aspects of the social conundrum that is the CSG that have to be considered in any policy solution.

The debate on the obesity epidemic and its relationship to the food choices made by consumers has been high on the public agenda over recent weeks.
Much of the problem (but not all of it!) can be attributed to food choices that we make. This include choices about types of food we buy, quantities that we buy and consume, the health attributes of food (e.g. sugar, fat, salt content), and where we purchase food .
It seems that the problem lies in a ‘market failure’ in the food supply chain where prices of food do not reflect the possible private and public health costs associated with certain food choices. Some people might be making food choices that are largely driven by disposable income considerations and the prices of those foods, ignoring the possible long-term negative health consequences of those choices. Those particular food choices maybe harming the health of those who choose them, but the food prices do not reflect that harm. This is the basis of the argument for imposing a tax on potentially unhealthy food attributes such as sugars, fats and salts.
Of course, there are many counterarguments to unhealthy food taxation (even though they do not seem very convincing when they come from the Head of the Australian Beverage Council!). At any rate, the focus of this post is not on the ways society could address this market failure problem, but rather on the implications for agriculture and environment.
Agriculture is at the source of the food supply chain, and it carries a lot of responsibility for the types and healthiness of the food that is being offered to consumers. Given that foods with high sugar contents have been pointed out as some of the key culprits for the obesity epidemic it is perhaps interesting to look at the sugar crops agricultural sector. It is one of the agricultural sectors most subject to protectionism throughout the world. This is true in the US, the EU and in Australia. It is also one of the agricultural sectors with the highest environmental footprint, which has been especially significant in Australia, given the effects from sugar cane farming on the Great Barrier Reef.
So, one may imagine that dropping the protectionist policies would result in producing a bit less of the sugar crops, which would be a good thing for the health of the population, and for the environment. It will raise the price of sugar, which should discourage manufacturing of high sugar content foods and drinks, as well as their consumption.
But beyond the sugar crops sector, the long-term implications of the obesity debate for agriculture are that we will need to come up with ways of producing less crops that are high in sugar and starch content, and switch to crops with greater protein, and minerals and vitamin contents. Currently the key crops being grown globally are all sugary and starchy in nature: take rice, wheat, and corn as examples (and combine them with sugar cane and sugar beet to get the top five crops globally by tonnage harvested!). Perhaps it is no wonder that we are having the obesity epidemic given that our agriculture is so much biased towards growing crops that are high in sugar and starch content! In addition, the environmental effects associated with some of these crops are very significant.
In summary, something will have to be done about the obesity epidemic. It will more then likely involve implementing policies that will address the ‘market failure’ in the food supply chain, so that the prices that we pay for food better reflect the healthy or unhealthy attributes of that food. This will likely put in train significant changes to the global agricultural industry, steering it away from starchy and sugary crops, which have been its mainstay for too long. It will be a good outcome for human and environmental health!

As the year is drawing to a close, I reflect on one of the final political frictions of the year in Canberra, which was across the headlines in early December. It started by the environment minister announcing a review within his Department to do with possible alternatives for Australia to meet its GHG emission commitments. A possibility of proposing an emissions trading scheme (of sorts) for the electricity sector was flagged.
This created massive disdain within Government’s own ranks leading the prime minister to publicly reject any notion of ‘carbon pricing’ or a ‘carbon tax’.
It is just another reminder of how politically dangerous these words have become in Australia, making it practically impossible to use two of the most valuable economic instruments of environmental policy. It is like shooting oneself in a foot! We know that those policy instruments work, but we can’t use them because we made them a political anathema!
In the meantime, Australian GHG emissions kept increasing. A final letdown in a year to forget for the Government on all fronts, and certainty on environmental front!
And, yes: Happy New Year! Hopefully a better one!

Numerous newspaper and other media stories emerged over the last couple of weeks reporting on the dispute between South Australian Government and the rest of the MDB partners (VIC, NSW and QLD state governments, plus the Federal government) over environmental flows to be delivered under the MDB plan signed in 2012.
I wrote early this year about the problems with environmental flows and it seems that the situation is escalating further.
The current dispute is about two related, but independent issues: one is the reneging on the MDB plan’s conditional provision (one has to question the wisdom of agreeing to a condition of ‘not being detrimental to river communities’ in the first place!) of additional 450 GL for environmental flows by 2024, which are in addition to the provisioned and likely to be delivered 2750 GL (the CEWH already holds entitlements for nearly 2500 GL); the second is about a proposal by the MDB Authority to reduce recovery of water for environmental purposes in the Northern Basin from the earlier planned 390 GL to 320 GL.
So, overall we talk about a reduction of 520 GL of environmental water: not peanuts, but also not a catastrophe as some present it, when you compare it to nearly 2500 GL that are already there for environmental flows.
However, a key point seems to be missed here: the stipulation of the MDB plan is that the additional 450 GL have to come from willing sellers or from state government infrastructure projects that will improve irrigation efficiency and thus reduce the irrigation demand for water, allowing the 450 GL to go to the environment. NSW, VIC and QLD are reckoning that this second option is too expensive for them, and are not going ahead with it. And they are probably right: as has been argued many times by economists, investing in improving irrigation efficiency is not the most cost-effective way to secure water for the environment.
On the other hand, the Commonwealth is worried about the ‘willing sellers’ bit. Not that there are no willing sellers – there will always be for the right price–, but that’s exactly what the Feds are worried about: they don’t want to let the CEWH bump up the price at which they are buying back water. The extra 450 GL could be secured from willing sellers and delivered for environmental flows, but it might be at a price that is very high, which the Commonwealth does not want to pay under the current fiscal situation.
So, at the end it is all about inter state and federal politics, and very little about the environment or about economics! Why am I not surprised! It has been the way of dealing with Murray-Darling since irrigation first started in Australia, and it unfortunately seems to continue that way!

As the second Tuesday of November is getting closer, all eyes are turning to the US, where presidential elections of unprecedented significance are about to take place. In Australia, the main concern around the election outcome has been the implication that it may have on the US-Australia strategic alliance, predominantly around national defense issues.
Not much attention has been given to the possible effects that US presidential election outcome might have on the environment, globally and in Australia. The positions of the two candidates on the environment are quite clear, and clearly reflecting the predominant views of the respective constituencies.
In particular, possible Trump presidency is seen as a big threat to global climate negotiations and treaties. This is in sharp contrast to Clinton, who is likely to continue the path that Obama’s presidency has set, although perhaps treading more cautiously in light of the possible opposition at home.
What does this all mean for Australia?
Barrack Obama subtly criticised the Australian government for not doing enough on climate change and for not putting sufficient safeguards to preserve the Great Barrier Reef. A Clinton administration is likely to continue with looking for a global leadership on dealing with climate change, and is likely to put some pressure on Australia to follow suit.
In contrast, a win for Trump is going to resonate strongly with the skeptical views on climate change in Australia, which are alive and well, and indeed well represented in our Parliament. The implication is likely to be that policy will move further away from economically effective mechanisms for pricing carbon, which have been strongly advocated by the economics profession.
So, those of us who believe that something needs to be done about carbon emissions, and that the right way to go about it is by adequately pricing them, are going to be hoping for the outcome of the US presidential election that it seems most of the world is hoping for. But, will the US voters play to those hopes? I am really not so sure about it any more! Sort of dreading the news that is about to hit us this week!

I am writing from Padova, Italy where there were several events and conferences last week to mark the signing of the Memorandum of Understanding between the University of Padova and University of Sydney. At the end of the week, I participated at a round table that was a part of the Open Innovation Days in Padova. The title of the round table was: “Australia vs Italy – Renewable Energy: who’s gaining? Economics of Change”
Around the same time back in Australia, the enormous storm that hit South Australia (SA) and left the state in a blackout generated a stormy debate around the role of renewables in that state’s electricity generation portfolio. This followed a similarly heated public debate earlier this year, about which I wrote in a recent post.
Interestingly, one of the participants at the round table in Padova was making an argument that we will have to rely on localised energy production and use in the future, giving an example of households generating their own electricity. I noticed that a similar argument is sort of being made in the case of the SA blackout. The blackout was caused by switching off the interconnector from Victoria, and an argument has been made that if SA had a reliable source of base load in-state, there would have been no blackouts. By extension, the blame was again thrown on the renewables, as it is claimed that the ambitious renewable energy policy in SA has crowded-out fossil fuel based generators that could have provided the in-state base load.
So, these two arguments hitting me around the same time made me think again about a point that I was making in the recent post that greater interconnectedness is a way forward, which will help us resolve the problem of intermittency of renewables. Are we really looking at an interconnected energy future, or is the future much more localised, where each state, each municipality, building, or household generates its own energy and doesn’t depend much on what others do?
It didn’t take me too long to reassure myself that a localised energy future cannot be a viable way forward. The very human history is all about getting away from localisms, and about connecting with other people on ever-larger scales. There are fundamental reasons for this, which essentially lie in the heterogeneity among people, places and environments. That heterogeneity is the source of wealth on this planet!
We are witnessing the way the economy is currently developing, resulting into a much greater interconnectedness across many dimensions, and at a global scale. It is a world of a sharing economy. Energy cannot be an exception! I still believe that we should be looking at how to better connect, and not at how to attain energy self-sufficiency. Making sure that the electricity interconnectors among Australian states remain active irrespective of circumstances is a much better way forward than replacing the renewable energy capacity in SA with old-fashioned fossil fuel capacity!

Electricity prices have been very high and volatile during the months of June and July in parts of Australia, and specifically in South Australia (SA). One of the reasons, of course, is that the electricity demand has been high and fluctuating due to some serious cold-snaps in SA over that time.
Some of the media were hasty in blaming the electricity price spikes on the large share of renewables, especially wind farms, in the SA energy generation mix.
This was met with rebukes from other media outlets, which pointed to many of the other reasons why electricity prices have spiked in SA over the period.
So, what to make of all this? Firstly, it is worth noting that the observed price spikes in SA are not unique or unprecedented in the Australian context. We usually get similarly high price spikes in the summer months in Queensland .
Secondly, a thing to bear in mind is that the extremely high price spikes last for short periods of time, say an hour or two.
The reasons for electricity price spikes are multiple. The local electricity generation mix is only one of the contributing factors. Other factors that are as, or probably more important are: availability of supply from other regions, the length and severity of the particular hot or cold weather snap, as well as speculation on the National Electricity Market (NEM), which is rife at times of great electricity price volatility.
Another point to note, which has not been mentioned in the media, is that the spot prices observed at NEM are only counting for a relatively small proportion of the electricity actually traded among market participants. This is because most participants in the electricity market take part in an incredibly active market for derivative contracts for electricity (e.g. electricity futures, options and swaps), which they use to hedge their positions. So in reality, the enormous price spikes have relatively little actual bearing on the players in the market.
At any rate, the argument that renewables are exclusively to blame for the situation in SA does not really hold. This was acknowledged by the new federal energy minister. The intermittency of supply that plagues renewable energy sources is well known, but that doesn’t mean that renewables do not have a place in the electricity generation mix.
The fundamental problem is the interconnectedness of electricity networks. Given that Australia is an isolated / island continent, and that electricity networks in Australia itself are not entirely interconnected, we have difficulties to meet a surging local demand at critical times. High prices on the NEM reflect those difficulties. Building a better connected energy networks within Australia, and ideally, linking with the Asian electricity markets in the future would reduce the chances of price spikes.
In fact, a wider (and possibly in the future, a global) electricity network connectedness combined with improvements in transmission efficiency would be best possible ways to overcome the intermittency of renewable energy supply. The sun is always shining somewhere on this planet, and the wind is always blowing somewhere!

May in Sydney was absolutely gorgeous! Bar these last few days, the weather was dry, warm and sunny. It was one of the warmest Mays in history! Ideal for lazy weekends enjoying the sun, going for a walk, or indeed going to the beach.
However, the glory of several of these weekends in May was spoiled by the smoke coming from the back-burning activities in the numerous national parks and forested areas in and around Sydney. The air quality was extremely poor, and in fact in parts of Sydney it was a health hazard to be outdoors.
The cause of the smoke was that the Rural Fire Service (RFS) took advantage of the nice weather conditions to conduct back-burning of lose vegetation (dead leaves, branches, etc.) to reduce fuel that could result in bushfires in the spring or summer. And they are doing this on the weekends, presumably because there are volunteer fire-fighters who can join on the weekends.
While the benefits of back-burning are indisputable, the question remains of whether or not they can be conducted in a way that minimises the negative effects on the public. If it is to be judged by the extent of the area affected and the duration of the episodes, it seems that RFS may not be taking into account the full cost of conducting the back-burning. There are significant health costs imposed on the wider public as a result of increased incidence or respiratory and cardio-vascular diseases due to poor air quality. In addition, there are significant costs resulting from diminished recreational and site-seeing benefits imposed on a very large number of Sydney residents and visitors. They cannot enjoy being outdoors, being at the beach, or sightseeing. Environmental economics has shown that the losses of these benefits can be very large when expressed in monetary terms.
Back-burning is an important activity for bushfire prevention. However, taking into account the health effects and diminished recreational and site-seeing benefits warrants that RFS takes a much more prudent approach to it. And, the sheer importance of back-burning should not be used as a trumping argument against calls for minimising its negative air quality effects!

The Parliament of NSW has launched an inquiry into the water supply for rural and regional NSW.
I am guessing that the word ‘augmentation’ was deliberately put in the title of the inquiry, even though the word ‘management’ might have been more appropriate. The term ‘augmentation’ explicitly implies that current supply is not enough, and that greater water supply is needed for rural and regional areas of NSW. This is in response to the acute water crisis experienced in the Far Western NSW earlier this year.
Economists have known at least since the early 1980’s that augmenting water supply in what is called ‘a mature water economy’ is going to be increasingly difficult (see a paper by Alan Randall in AJARE from 1981). This is due to increasing social cost of capital for new water infrastructure, increasing costs of maintenance of existing infrastructure, and greater environmental concerns about new water impoundments, among other things.
Despite this strong economic argument, governments and politicians tend to panic in times of acute water crises, and talk about ‘proofing’, as in ‘drought-proofing’, ‘flood-proofing’, ‘future-proofing’…
We have already seen the failure of that approach in Sydney, where a 3 billion dollar desalination plant was built to supposedly ‘augment’ the water supply at the time when Warragamba Dam was only 37% full. The plant was build, the costs incurred, but it has practically never operated. At least some local politicians in Far Western NSW are being reasonable and oppose the panic reaction that calls for costly quick fixes.
On top of these economic concerns, the inquiry has also been criticized for not taking climate change explicitly into consideration.
Water use and management in NSW should be in the public eye, and the fact that NSW Parliament is taking water issues seriously is encouraging. However, the terms of reference of the current inquiry seem to have missed some important points about economic feasibility of water supply augmentation, and the likely effects of climate change. Let’s hope amends could be made in the course of the inquiry itself.

Recent newspaper report alerted me to the fact that the latest edition of the NSW State of the Environment has come out.
The newspaper article highlights a figure from the report that emissions of green house gasses (GHGs) in NSW have only fallen by 1% since 1990 (1990 being a benchmark year under the Kyoto Protocol, and in fact Australia as a nation had an agreed increase in emissions from that 1990 benchmark).
Looking at the report a bit more carefully unpacks some of the reasons for it. Electricity demand, which is one of the largest factors determining GHG emissions, has been falling over the last six years. This is paralleled with a significant change in composition of electricity generating capacity, with no new coal-fired plants, and significant addition of new gas, wind and solar capacity. Surely, this should result in significant reduction in total state GHG emissions, right?
Well, not exactly, because as the report states, the energy consumption in the NSW transportation sector has experienced strong, stable and sustained growth, which is predicted to continue in the future. In the same time, we have not seen major changes in emission efficiency of the NSW vehicle fleet. While there is some penetration of electric and hybrid vehicles this is still very, very small. As a result, transportation is now the single largest GHG emitting sector of the NSW economy.
And it doesn’t look like improvement can be expected any time soon. Trucks and cars are cheap (nominal prices have barely changed over the last 10-15 years, which makes real prices low in relative terms), petrol is cheap (cheapest that I have seen certainly over the last ten years, and again I am talking nominal prices), and public transport is expensive (catch a bus and a train to and from pretty much anywhere in Sydney, and it will be at least $10 on your Opal).
So, we will keep driving, ‘enjoying’ the traffic jams in Sydney, and sending GHGs in the atmosphere. Well done NSW!