Environmental Economics

The most recent episode in the on-going saga around CSG development in NSW is the suspension of the AGL’s Gloucester project due to detection of BTEX (benzene, toluene, ethylbenzene and xylenes) chemicals in the flowback water in some of the wells that are used for gas extraction by hydraulic fracturing.
The provenance of these chemicals is not quite clear and there is currently an investigation to determine just that. More worrying are the indications that AGL has not been upfront and transparent about this issue. There have been allegations of cover-ups, withholding information and delaying communication. All this creates great distrust, even among people who would otherwise be up for a rational discussion on CSG.
Relatively straightforward economic modelling (described in a paper that I will be presenting at the upcoming AARES conference) shows that it is in the best interest of all involved parties that any information about the effects of CSG on the surrounding environment, including aquifers and agricultural land, is transparent and readily and imminently shared. There is no benefit for the CSG developers in withholding any information, as this creates distrust and further strengthens the opposition to the CSG. So, it’s a trust thing, and until and unless the developers understand that, and are prepared to be honest and credible about the information that they have, they hold no hope of overcoming the obstacles to their CSG development proposals.

Last week’s tragic events at Sydney’s Martin Place took all of our attention, and clouded two important environmental developments in NSW. The first is that the NSW Parliament was set to debate a proposed container deposit scheme exactly on the day of the siege. This was understandably delayed, but it remains on the Parliament’s agenda, and as expected creates a lot of animosity within the beverage industry.
The economics of beverage container deposit is a good example of a missing market. Within the market for beverages, a deposit scheme increases the costs and creates inconvenience for producers, consumers and retailers. So, only considering that market, a deposit scheme is not a good idea. However, in the absence of a deposit scheme, a lot of containers are likely to find their way into the environment and thereby cause significant environmental costs (pollution, damage to wildlife, damage to infrastructure,…). But as there is no market where these environmental costs would manifest, there is no real way to contrast these costs with the benefits of the convenience of operating without a deposit scheme.
If it is quite likely, as it probably is, that the environmental costs from dumped containers outweigh the costs of imposing a deposit scheme, then the NSW Parliament will be right going ahead with the legislation to introduce the scheme. Whether it will happen – in the light of the upcoming state election, and the pressure from the beverage industry –, remains to be seen in the New Year.
The second piece of news worth mentioning is the release of the report from the review of Biodiversity Laws in NSW. I wrote about the review on this blog few months back.
The report has now been released and has generated an angry response from environmental groups, and at the same time a welcoming response from the farming community.
This is not surprising, as the key recommendations from the review are that much of the current legislation governing native vegetation and biodiversity protection be abolished, and that clearing native vegetation on farms should be managed at a local scale, giving a lot more power to local farming communities. This will effectively mean very little protection of native vegetation and biodiversity. Not a great outcome!
The public demands protection of native vegetation, but those demands have so far been met by putting strong regulatory pressure on farmers without just compensation, which was not right. The review report is simply shifting the regulatory onus away from the farmers, but does not explicitly articulate how will protection and conservation be ensured in order to satisfy the demands from the wider public. It seems to me that the review has missed an opportunity to propose a more fundamental and balanced change that would have resulted with protected native vegetation in NSW and with just outcomes for the farmers. This is a bit disappointing, but given the last week’s tragic events and the upcoming holiday season, the review will probably escape the full scrutiny that it deserves.
Anyway, this is the last post for this year. Looking forward for new interesting topics to write about in 2015!
Merry Christmas and a Happy New Year to all!

There is a frenzy in the media about US President Barack Obama’s comment on the Great Barrier Reef (GBR) during his speech at the UQ, at the margins of the G20 summit the other day in Brisbane, and Australia’s Foreign Minister Julie Bishop’s response to these comments.
But I think both Julie Bishop and the media are getting it wrong. Translated in environmental economics speak, Obama was saying: ‘I put a very high passive use value on the GBR. This is composed of bequest value (the mention of children and grandchildren), option value (I have not yet visited but I would like to have the option to) and existence values (I value the GBR just because it is there)’. He was also suggesting that he is not alone, and probably represents the views of many Americans, but also many other citizens of the world. So, it is very likely that the global passive use values for the GBR run in many tens, and maybe hundreds, of billions of dollars.
This is because the GBR is such an iconic environmental asset, recognizable throughout the world, which implies that its protection (or otherwise) should not be exclusively left to Australia, and certainly not left just to the QLD government alone. The whole world should contribute to the preservation of the GBR, simply because the values that are placed on it are global, which is precisely why a global agreement on climate change is so important. President Obama made an important step in that direction at the APEC summit preceding the G20.
The fact that the Australian government is defensive about the issue just further points to the uneasy position in which the government finds itself, and particularly on the international scene. Australia should be more active on reaching a global climate deal, not the least because we are the custodians of some of the world’s most iconic environmental assets, such as the GBR. But this is in stark contrast with the political rhetoric of the government at home, which is bordering on climate change denialism.
So, rather than trying to explain to the world that the QLD and Commonwealth governments are doing something about the reef (which they do, but probably not enough), the Australian government should take a significant part in a global climate deal. This will be to the benefit of the GBR and other iconic environmental assets around the world, but also to the benefit of Australia’s international reputation.

Recent announcement by ANU that it has dumped some of its holdings of shares in resource and fossil fuel intensive companies has created a lot of media attention. Even the PM himself stood up to brand this decision as being ‘stupid’. In response, ANU’s VC published a comment, defending his University’s action.
ANUs move is a really a part of a global movement to divest in shares of businesses that are seen as fossil fuel intensive.
While there are significant ethical principles that underpin this divestment drive, to which I am personally strongly sympathetic, it is important to understand the economic/finance workings to assess how effective the divestment might be. There are in general two types of sources of finance for big businesses: debt (i.e. borrowing from the banks, or issuing corporate debt instruments) and equity (i.e. issuing shares). The divestment campaign directly targets the latter, but the resource businesses have been increasingly relying on the former (for some actual numbers refer to PwC’s Mine 2014 publication). That’s not surprising given that debt is cheap in the current economic conditions. Those conditions have already lasted for several years now, and will likely last for several more. There is cheap credit everywhere, and companies like BHP or Exxon do not have any trouble borrowing funds at very low rates.
So, the divestment in shares by few Universities around the world, of which not many in Australia,
is not going to do much harm to the finances of corporations operating in resource and fossil fuel sectors. The whole campaign might provide a warm fuzzy feeling for the students and academics in those Universities who divest, but unfortunately, it is not going to make that much of a difference.

Review of a new book that appeared in the newspapers caught my attention over the weekend. Judging by the review, this book explores and explains the international struggles surrounding commercial whaling. It must be an interesting read.
Also, not long ago I saw an article about the recovery of blue whale populations in the Pacific, which is strongly linked to the moratorium on whale hunting. This latter article provides empirical evidence that the moratorium on whaling works.
Despite this evidence, Japan, Norway and Iceland, remain the only three countries that keep insisting on continuing with commercial whaling. It is pretty clear that the global Willingness-to-Pay for complete moratorium on whaling far outweighs any benefits that commercial whalers from these three countries might derive from continuing whale hunts. Why then such stubbornness? The answer may have something to do with the domestic political pressure that whalers are able to put on their governments. And those governments are susceptible to yielding to special interests related to primary industries. Take for instance agricultural subsidies. Japan, Norway and Iceland are in the top five countries with highest agricultural subsidies in the OECD, and effectively in the world.
So, it seems that what happens to the whale populations on this planet is held hostage by a very small number of people that have vested interest in commercial whaling, and are able to lobby their governments to defy international whaling agreements. The rest of us, a vast, vast majority of us, who consider whales to be some of the most significant living treasures on this planet, can just sit on the sidelines and watch! What an unfair world!

The recent tragic events near Moree, NSW have brought the focus of the public eye on the problem of native vegetation clearing in NSW. The tensions between farmers and environmental authorities have been running high for a long time, and there were initiatives aimed at relaxing those tensions announced not that long ago (see this blog’s entry from June, 2013). It had to come to a shocking eruption of violence for the NSW government to commit to seriously consider the issue. Their first step was the establishment of a Biodiversity legislation review.
The terms of reference and the composition of the review panel promise that an in-depth analysis and understanding of the problem will emerge out of the review, together with recommendations for regulatory and policy changes. Perhaps more fundamentally, the review should be looking at clarifying several key questions. For instance, what are the forces at play that drive society’s demand for native vegetation conservation; and conversely, what are the forces that determine landowners’ attitudes towards clearing native vegetation? Looking into these questions is likely to identify possibilities to reconcile the demand for conservation with the objectives of those who can supply it, the landholders. This will also help pinpointing possible regulatory and policy levers that could change behaviour of the affected parties in ways that are more sophisticated than what is the case under current regulation.
The review should also look at the question of just compensation of landholders for providing conservation of native vegetation. As discussed previously on this blog, and throughout economics and legal literature on regulatory takings, the problem is largely dependent on the ability to determine under what set of circumstances is compensation justified, and what should be the type and magnitude of compensation.
At any rate, establishing the review is a good, if belated initiative. Let’s hope that it will be able to produce its findings quickly, so that we can move on with regulatory reform and avoid further tragic consequences for communities and for the environment!

Below is the annoucnment of an open letter on carbon pricing addressed to the Australian Parliament, signed by some 60 economists.
Economists: Price and limit on carbon pollution needed now
Media release, Monday 7 July 2014
Fifty-nine leading economists united today (Monday) in support of a price and limit on carbon pollution.
In an open letter they urge all Members of Parliament and Senators to work towards lasting agreement on a fair, economically efficient and environmentally effective policy to price and limit carbon emissions.
The group of Australian business and academic economists includes former Liberal Party leader Dr John Hewson, financial sector economist Geoff Weir and Australian professors from universities across the globe.
Dr John Hewson said it is important to get the economics right.
“Australia needs to take substantive, urgent and apolitical action on carbon pricing for the sake of our economy and our environment,” Dr Hewson said.
“The failure of our generation to act will cost future generations dearly.”
Former hedge fund strategist Geoff Weir said all major political parties are on record as accepting the need to reduce carbon emissions, with the debate now being about how best to achieve it.
“Relying on Government advisers and officials to pick the best emerging new technologies is guaranteed to be substantially less efficient, less effective and less equitable than relying on a carbon price to alter incentives,” Mr Weir said.
“Both economic theory and Australia’s earlier experience with industry assistance confirm that view.”
Kellie Caught of WWF-Australia said a polluter pays scheme, that puts a price and limit on carbon pollution is the best way for Australia to meet its international commitment to cut emissions by 5-25% by 2020.
“The economics are clear and many of our major trading partners are already pricing carbon, or moving in that direction,” Ms Caught said.
“Australia needs to move forwards, not backwards.”
The text of the letter, and the list of signatories is below:
Download file

Recently released reports have sounded the alarm on the serious health effects from air pollution in Australia. First, the newspaper coverage of the release of an OECD report was pointing to Australia trailing behind its OECD peers on yet another statistic, and this time a really deadly one: the mortality from air pollution. OECD reckons that Australia is one of the few OECD countries where air quality related mortality has increased in recent years. They pointed specifically to the air quality impacts of road transport.
This should come as no surprise, as Australia is heavily reliant on road transport. In addition, fuel efficiency of vehicles used in road transport is low, and the emissions standards for heavy vehicles are not particularly strict nor strictly enforced. Also, there seems to be reluctance among the public to embrace newer, cleaner technologies, such as hybrid or fully electric vehicles.
Another report released almost at the same time by the Environment Justice Australia asserts that: ‘Air pollution in Australia is inadequately regulated, monitored and enforced’.
This is also not surprising, as the environmental ineffectiveness of some of the most prominent air pollution regulations in Australia, such as the Load Based Licensing in NSW has been documented in the environmental economics literature (most recently an article by Contreras, Ancev and Betz, in the Economics of Energy and Environmental Policy)
So, air pollution is gaining on us, and it is time that we revised the regulation and start seeing some real improvements. I am doubtful that this will happen though, given the current government’s aversion to tighter environmental regulation. So, happy on-going asphyxiation everyone!

A recent newspaper article about the increasing costs of natural disasters in NSW caught my attention. This made me think about the possible link between the increased incidence and severity of weather related natural disasters and climate change.
Let’s for a moment assume that we are indeed likely to witness more severe floods, fires, and hurricanes, and more of them, and that this is due to changes in climate that are, at least in part, human induced.
However, as the newspaper article points out, the cost of these more frequent and more severe disasters is socialised: we all pay for it in the form of tighter state and commonwealth budgets, slashing of government social programs, and inevitably, higher taxes in the future. So, if the current Commonwealth government is right in saying that they got a mandate at last years’ election to get rid of the carbon tax, it means that the majority of Australian voting public voted to avoid bearing the cost of climate change mitigation privately (e.g. through higher electricity prices), and prefers to bear the socialised cost of the consequences (e.g. through increased disaster relief expenditures from the Commonwealth and State budgets).
Is this rational? And, is it right? From a pure economics standpoint it could probably be shown that this is rational, but it doesn’t sound right. For one, the private cost of mitigation is likely to be much smaller than the per capita socialised cost of disaster relief, which has already grown pretty rapidly, as the article quoted above shows. Secondly, I suspect that the motivation behind preferring socialising the cost is not particularly ethical: some may think that they will be able to ‘free ride’ and will not be liable to contribute towards meeting the socialised costs of disaster damage due to future climate change. In other words, people are hoping for an easy way out! I am not sure that this can work with a wicked, global problem, such as climate change.

Just last weekend I spent few days in Tasmania, in and around Hobart and Launceston. Marvelous sceneries, beautiful nature and good museums. Couple of things that I saw in the Tasmanian Museum and Art Gallery made me think about some of the conundrums of nature conservation. The first one was a small exhibition about the Thylacine, or better known as the Tasmanian tiger. As is widely known, this marvelous creature was extinct some 90 years ago. The reasons for the extinction are still debated. Whatever the reasons, I felt an enormous regret that the creature is not around any more, and if asked, I would have probably stated substantial willingness-to-pay for preventing its extinction, had this been somehow possible.
The second was an even smaller exhibition about whaling in the Derwent River Estuary. The exhibition stated that whales were once so abundant in the Estuary that residents complained about the noise they were making. Similarly to the Thylacine, whales have been extinct from the Estuary. This again caused emotions of sorrow and regret, as well as likely high willingness-to-pay (WTP) to prevent it, had it been in some way possible.
The point is that while we might have very high WTP for conserving nature ex-post, all the decisions that are made about conservation are, at best, based on ex-ante WTP. Indeed, the extinction of species in Tasmania was not based on any assessment of societal preferences, but even if it were, the stated WTP for preserving the species at that time would be minimal, or even negative.
And what does this mean for some of the current dilemmas that we face: e.g. climate change? While current generations might have relatively low WTP for preventing climate change, it may turn out that future generations will feel enormous regret for us not doing enough about it. This will be translated in very high WTP on their behalf to prevent climate change that is happening now. Unfortunately, with the current state of knowledge and modeling techniques it is not possible to take into account the ex-post WTP in conducting ex-ante benefit-cost analyses that inform current decisions. But, this is something that should be taken into account at policy level. Let’s be wise now, to prevent large regret in the future!