Environmental Economics

Summer in Australia is about beach, cricket, BBQ, tennis and … bushfires! Indeed, the beginning of 2013 has been marked with series of very serious bushfires, destroying a lot of property, but thankfully not taking many lives.
And this is far from the end: the summer is long and hot!
What do economics in general, and environmental economics in particular have to say about bushfires? A quick search of the literature shows that there is limited published work on this general topic, with notable exception of the more specifically focused papers on e.g. economics of prescribed burning (e.g. a recent nice work by colleagues from WA)
The notion of environmental economics in relation to bushfires is even more limited to fires as a cause of air pollution, and to economic valuation studies that look into fires (and smoke) as reducing the values of property or reduction in benefits that hikers, bikers and campers suffer as a result.
I could not find anything that looks into bushfires as environmental event in their own right: naturally occurring fires have always existed and have an important role to play in the overall ecosystem. So, preventing and avoiding bushfires certainly saves on cost of damage (to property, human life and health, and recreational benefits), but does it impose costs in addition to the usual costs of abatement (i.e. costs of prevention: like prescribed burning)? What are the damages to the ecosystem (perhaps altered populations of pests and weeds, changed hydrological balance, etc.) that is associated with bushfire prevention?
These are some of the questions that await to be answered. And until we answer them, we will not have a good sense about how much bushfire prevention should be done. We have ventured so deep in the environment, that we now think that everything that the nature does, which annoys us, should be prevented. One of the first lessons learnt in environmental economics is that zero pollution is almost never optimal or desired by society. Does the same hold for bushfires?

One key issue around all environmental problems is transparency. If those affected, or those who believe that might be affected by some form of pollution or other environmental degradation are not able to access the full information about the real state of the problem, it is very likely that the gravity of the situation is going to be exaggerated. On the other hand, government environmental departments and industry tend to keep information under a closed lid, apparently for the very reason to prevent exaggeration of the actual situation. This behavior than simply promotes guess work, conspiracy theories, alarmism, and defensiveness on the part of industry.
There are few examples where these problems of transparency are successfully resolved, typically by involving the public directly in monitoring environmental conditions. Surface water quality is a prime example, as it can be monitored easily and cheaply by members of the public (e.g. high school students), who go and take samples, and report results on the main water quality parameters. There are programs like this throughout the world, including one in Sydney called Streamwatch.
This program is funded by the main water supply utility, Sydney Water. Since 1990, this program involved 170 local schools, whose students took part in testing water quality in waterways. However, Sydney Water recently decided to revamp this program, and shift it away from direct public involvement, and into administration of the Australian Museum. The main reasons cited are costs savings (only about $100,000 a year, really peanuts), and potential risks to collectors of samples (I have not heard any reports of any accidents ever happening). So, not very compelling reasons.
While I am sure that the Museum is going to do a good job in testing and reporting water quality with utmost integrity, tarnishing of transparency by cutting the direct involvement of the public is going to be detrimental. People are already starting to ask: Who and why wants to mud the waters?

The debate about the introduction of smart metering for electricity consumers has recently gained momentum with several news stories raising suspicions about this supposedly revolutionary way we consume electricity, and consequently emit green house gasses. It seems that governments in Australia (both state and federal) are keen to press on with the rollover of smart meters, and some of the commentators suggest that this may be under the influence of the concerned corporate sector. The main idea behind smart metering is to bridge the gap between consumers of electricity and its producers. If consumers had a way to know the real cost of producing electricity at a time of consumption—and prices serve to provide this information—they may be able to respond by curtailing their ‘discretionary’ consumption at times when costs (and prices) are high. This should in theory result with less consumption overall, and importantly less consumption in critical times, reducing the risk of blackouts, and therefore the need to ‘gold plate’ the electricity supply system, which has been widely identified as the main reason for recent rises in electricity prices.
The arguments of the critics of smart metering are reasonable: this shifts the price risk (at least in short-term) from producers and distributors to consumers, and imposes extra non-monetary burden on consumers, who have to worry on the daily basis about the price of electricity, on top of all other things.
However, some evidence from recent experimental economics work that we conducted, shows that consumer are willing to respond to changes in prices in real-time, if that means that they can fare better in monetary terms. My own experience with time-of-use (ToU) pricing (peak, off-peak, shoulder) in our family house is that it is not overly difficult to shift electricity consumption around in response to electricity prices. Since we have been on ToU pricing, my family and I have managed to drive the peak period consumption (2 pm – 8 pm; the price at peak times is about 4 times the price of off-peak) to a minimum. Our electricity bill has actually decreased, even though our consumption of power has somewhat increased.
Now, what does it all mean for green house gas emissions? Smart metering and pricing of electricity are likely to significantly reduce demand in peak periods, but probably increase the electricity use in off-peak periods. Given that peak electricity is supplied typically by either less carbon intensive generators (i.e. gas fired turbines) or by renewable sources (e.g. solar, wind) it is likely that the moving around electricity consumption will mean a slight shift towards more carbon intensive, off-peak sources (e.g. coal fired turbines). This short-run effect however will amount to a very small, if any, increase in emissions, as the off-peak electricity generators are running their turbines irrespective of the demand (can’t shut a coal fired station over night and fire it up again in the morning). In the long run, the ability to curtail peak consumption as a result of smart metering will mean that the need to build new power stations will abate, as the existing generation portfolio will be more efficiently utilized. In turn, this means potentially significant savings in green house gas emissions by avoiding building new large power stations that, at least in Australia under current economic conditions, are likely to be coal-fired.
So smart metering, while having its downsides, also has positives in terms of reducing the need for investing in poles and wires to meet few short hours of extreme peak demand, and also reducing the need to build new power stations to cater to that demand. It has some good prospects to save us some money on the electricity bill, and while perhaps not showing reduction of emissions on individual bills, certainly avoiding new increase in overall emissions over a period of time.

The Murray Darling Basin Authority released the final MDBP few days ago. Dubbing it as ‘a plan that is a century late, but hopefully just in time…’ the minister signed it into law. It can be found here: http://www.mdba.gov.au/basin-plan . For the first time, the plan provides legislative basis for the environmental requirements related to water management in the Basin. Overall, it is welcomed and, as much as possible for Plans like this, a balanced act. The Plan will help improve management of the Basin, and will hopefully result in minimisation of instances where the existence of critical environmental assets within the Basin is seriously threatened due to mismanagement of water resources.
One thing that caught my eye was the ‘Guidelines for the method to determine priorities for applying environmental water’ http://download.mdba.gov.au/Basin-Plan/Statutory-Guideline-Nov-2012.pdf
The guidelines specify current and preceding (they used a fancier word ‘antecedent’ which has the same meaning) hydro-climatological conditions to determine the state of the water resources – called resource availability scenarios (RSA) – in the Basin. For example, if current surface water availability is between 0 and 15 percentile, and the preceding availability was between 0 and 45 percentile, the state in the Basin is termed ‘very dry’. Likewise, if current availability is between 46 and 60 percentile, and previous availability was between 61 and 100 percentile the state in the Basin is termed ‘wet’. There are total of five possible states identified that the Basin can be in: ‘very dry’, ‘dry’, ‘moderate’, ‘wet’ and ‘very wet’. These states of the Basin are then linked to environmental management outcomes, which stipulate the objectives of management in each state. Not surprisingly, the wording associated with dry states includes terms like ‘maintain’ and ‘support’, whereas wording corresponding with wetter states includes terms like ‘improve’ and ‘promote’.
This is consistent with the thinking that there is not much point in trying to throw a lot of water at the system in dry times. When times are tough, the environmental objectives should be ones of survival, which could be supported with relatively little water. Thankfully, it seems that the water-dependent ecosystems in the Basin are quite resilient, and can sustain dry conditions on very little ‘life support’ for some time, but not forever. That is why it is really important to provide as much environmental water as possible when the state of the Basin is better, i.e. in wetter years. That way, the ecosystems can recover from dry periods, and can build up the resilience to sustain dry periods in the future.
Obviously, my specific interest in all this is in the economics of it. If the mechanisms explained above are roughly right, and they seem to be based on the published Guidelines, the implications for the holder of environmental water in the Basin (Commonwealth Environmental Water – CEW www.environment.gov.au/ewater/index.html ) are very significant. This outfit now holds about 15% of all water entitlements in the MDB, and it has been asking itself how to best manage these holdings. While the holdings are obviously there for environmental purposes, the mechanisms above suggest that the environment does not need the same amount of water under all water resource scenarios in the basin. The question then is whether the CEW should be actively participating in the water market in annual allocations: sell some of the water in dry conditions, provided that sufficient amounts are held for the designated management outcomes under these conditions; and buy water from other water holders in wet periods to further enhance the resurgence and growth of the ecosystems.
While this question is not addressed in the Plan, it has been raised by the CEW in a discussion paper published a year ago: http://www.environment.gov.au/ewater/publications/water-trade-discussion-paper.html
I am currently working on providing some answers to this question, and preliminary results show that indeed it would be beneficial to let the CEW be active in the annual allocation market. Stay tuned for updates, and hopefully a paper on this topic.

Recent reports in the newspapers say that the owners of the Supertrawler ‘Able Tasman’ are seriously considering mounting a court case against the Australian Commonwealth Government, demanding compensation for being unlawfully stripped away the legal right (quota) to fish in Australian waters. For those who are not familiar with the case, this truly gigantic trawler had perfectly legal quotas for finishing, but was stood down by the Federal Environment minister on the grounds that it is simply, too big!
This decision was taken under enormous pressure mounted by environmental activists and campaigners. Their argument was that this ship is so big, that it effectively cleans up the ocean of all things living, and leaves an underwater desert behind it. Marine scientists were pointing out that this is not the case. In fact, it seems that the environmental and ecosystem effects – such as bycatch and discard – associated with catching the quantity of fish specified under the quota by Able Tasman are likely to be smaller than if the same quantity of fish was caught by many smaller vessels.
Fishery economists were pointing to the elementary findings that fewer boats catching a given quantity of fish is less costly to society, and therefore more efficient than catching the same quantity with many smaller boats. It is also a well known result from fishery economics that a fleet of numerous, small and inefficient boats is far more dangerous for fish populations in the long run, as the owners of these small operations will have a tendency to drive the fish stocks down in a quest for their own economic survival. All these arguments to no avail.
The minister buckled under pressure and took the extremely short term, populist route. The damages from this are going to be multiple. The quota held by Able Tasman is likely to be sold to two, three or several smaller operators. The fish are still going to be taken from the sea, but this time there will be more discard and bycatch. The costs of catching the fish are going to be greater. On top of all that, the taxpayer is going to pay compensation to Able Tasman! What a sweet deal we are having. Thanks Minister!

Just the other day an honors student in our Department talked about economics of Coal Seam Gas (CSG) and was referring to possible coexistence between farming and CSG operations. For those who are not familiar with the situation in Australia, there is currently a heated public debate about whether to allow CSG development, especially in highly productive agricultural areas. There are reasonable fears that CSG developments might cause serious and long-lasting (if not permanent) negative effects on farming land, mostly interfering with the groundwater hydrology and water quality. The argument goes that the evident and substantial benefits from CSG developments might impose less evident, but perhaps even more substantial long-term costs by reducing agricultural productive capacity.
Now, my attention was drawn by the word ‘coexistence’ as I am familiar with its use in the literature dealing with Genetically Modified (GM) crops in relation to conventional, non-GM crops. In that context, coexistence is enforced by regulatory prescription of separation distances between GM and non-GM crops, so that cross pollination is prevented. The economics research in that area (e.g, Gray et al. 2011, Ecol. Econ. 70: 2486–2493) examined the outcomes of alternative initial allocation of property rights (non-GM have the explicit right to be free from GM, or vice versa) in a Coasean bargaining setting. Findings from this literature suggest that clustering across the landscape is likely to emerge, so that areas planted exclusively with GM crops are likely to be grouped together, and be separated from the non-GM crops in a least costly way.
Can this also work for CSG? Can an effective way to ensure coexistence between CSG and farming be found by devising a policy mechanism that will encourage CSG to cluster in areas where the potential damages to agriculture are lowest? And what is the right policy mechanism to use in this context?
Another student talked about ‘Good neighbor agreements’ that CSG companies offer to owners of land on which exploration for CSG is undertaken. In the actual legislation, these are defined as ‘Access Agreements’. These are negotiated agreements between the CSG company and the landholder specifying the conditions under which access to land is granted, and the compensation involved. An important feature of these agreements is that they are voluntary, and so a group of landholders could in theory prevent any CSG development in their whole area (surface or groundwater catchment or watershed) by concerted refusal to sign these agreements. This could ensure preservation of that particular area. However, if one or few of the landholders in the area signs the agreement, the probability of future damage affecting the whole area will increase, thereby diminishing the incentives for the other landholders to withhold their agreement. Consequently, the whole area might be subject to CSG development, and its capacity for agricultural production in the long-run might be significantly undermined.
So, there are some inherent possibilities for emergence of clusters across landscape when it comes to CSG. The question remains how can society ensure that CSG is clustered in those areas that stand to lose the least from such development, and prime agricultural areas are left undisturbed. Just from scratching on the surface it is apparent that this is a complex coordination problem, and that the access agreements have only limited capacity to guide the clustering process to socially desirable outcome. Some further policy refinements should be put in place if we can have any hope of coexistence between farming and CSG.

Just few days ago Australian Federal Treasury revealed that the much contested, debated, and politically charged Mineral Resources Rent Tax (MRRT) netted exactly zero in government revenue in the first three months of its operation. This is to no surprise given the many concessions to the tax legislation that mining industry won prior to the enactment, and given the recent softness in profitability of the mining operations as a result of sliding prices of key commodities – iron ore and coal. The MRRT is genuinely a tax with desirable characteristics: it is profit based, which is why tax take will be low in times of low profits; it targets the very thing that society should aim for in minerals taxation – the resource rent; and it has good properties in terms of neutrality, risk distribution, and implementation. The problem is that the parameters of this reasonable taxation instrument were tweaked too much under the huge political pressure from the mining sector. The pressure came by propounding alarmist arguments to which the public, and ultimately the government surrendered. These were of the following description: mining tax will cost jobs, it will destroy the thriving mining communicates, mining investment will move elsewhere where costs are lower and there are no taxes, it is simply a robbery of the poor mining magnates by a greedy government. The result is a much diluted MRRT, which exists on paper, but not really in practice.
And this is neither the first, nor the last time we see that natural resource or environmental taxes do not achieve the objectives by which they were originally motivated. A recent study that colleagues and I completed (Ancev, Betz and Contreras, Ecol. Econ, 80:70-78) shows that an environmental taxation scheme in NSW has not resulted with significant reduction in emissions of nitrous oxides that could be attributed to the effects of the tax. Possible reason is that the marginal tax rates were set too low, most likely again under pressure from industry, and based on scary arguments that the tax will wipe the industry away. At least this tax, unlike the MRRT, brings revenue to the NSW government!

Last week I was invited to take part on a panel helping to launch a new report titled ‘Health and Social Harms of Coal Mining in Local Communities’. The report itself was fine. It consisted of four parts: a literature review of studies conducted internationally (as in, not in Australia) finding significant health effects from coal mining; literature review of studies pertinent to the Hunter Valley, NSW (the focus of the report), which were very few and did not suggest that there is current evidence for health effects associated with coal mining in the Hunter Valley; literature review of studies conducted internationally finding significant social effects from coal mining; and literature review of studies pertinent to the Hunter Valley finding that there are significant negative social effects associated with coal-mining. The latter, however, was heavily reliant on a series of studies conducted by a single research group.
My view of the report was as follows: there is evidence elsewhere in the world that there are significant health costs associated with coal mining. This may (or may not) be the case in the Hunter Valley. Given the significance of the possible costs, it is certainly worthwhile taking precautionary measures, and investigating further and establishing the facts. Only then we will be able to credibly influence policy to undertake meaningful change.
This view was shared by some of the panel members, who spoke about the need for ‘balance’ and ‘the best advocacy being evidence based’. Not so by the audience, who were self-selected, featuring many individuals with strong environmental views. Many of them didn’t seem to have come to hear what the report was about – they already knew, they were already convinced. And so, you might imagine how the proceedings unfolded: a barrage of industry / business / economics bashing, a lot of emotions about lost idyllic appearance of Hunter Valley, and calls for immediate and unconditional stop of any new coal mining. There was no place for argument about any benefits that society derives from coal mining and the associated industries, and indeed how these benefits could and should be weighed against the costs imposed on health and social wellbeing of the affected communities. The sentiment and the messages sent were clear: we don’t like coal mining and you should help us get rid of it immediately.
And this is really what bothers me. I think that there are serious issues at stake here involving significant tradeoffs between economic prosperity and environmental quality. These issues can only be resolved through a rational, evidence based investigation that informs society in its decision making, and helps formulate policy. Indiscriminate calls against either side of these tradeoffs are simply not credible, and can cause politicians to undermine the raised issues on the very grounds of that lack of credibility.

Welcome to the Environmental.Economics blog at University of Sydney!
As many other blogs I suppose, this blog was born out of frustration. This time the frustration is with situations when well intended scientific discourse about all things environmental is quickly turned up-side-down in public debates through the sheer feel of anger, disempowerment, denial and dismissal. Put differently, the environmental debate is so often turning into visceral and emotional affair on both sides of the political spectrum, pushing aside rational thinking about environmental problems, and banishing it from public discourse. This directly leads to misinformed policy reaction, or indeed lack of policy action, based on credibility deficit of emotionally charged environmental stance.
So, this blog is about how society should make RATIONAL choices (Economics = Applying reason to choice) about the environment and natural resources. Only a rational debate based on the best state of knowledge can and will influence policy so that we can actually make this planet, a cleaner, greener and better place to live!