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


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!