The year draws to a close in December with all the festive time, and once every couple of years the time of releasing a new Star Wars movie. This year was a ‘new Star Wars movie’ year, which inspired me to the title of the current blog entry. However, the entry is not about the movie but rather about the convulsions through which fossil fuels are going in their way out. I have written before about the inevitability of the energy transition away from fossil fuels. The speed of this transition is very much dependent on how big businesses in the energy sector position themselves in the process. And this December we saw a clear message from one of the largest energy businesses (our own BHP) that sticking staunchly to the fossil fuel energy mantra is not the way of the future. BHP has threatened to quit the local and global coal lobby groups over their essentially ‘denialist’ stance on climate change and aggressive tactics against competing non-fossil fuel energy sources.

At least locally in Australia, the year that is just passing has seen some of the nastiest campaigning against renewable energy sources, inconspicuously backed by the coal industry (I recall an issue of the ‘The Australian’ sometime in September with ‘coal is good; renewables are bad’ slogans and articles all over it). The campaign against renewables has been particularly ferocious in the light of the so called ‘energy crisis’, blaming wind and solar for reducing the reliability of the electricity supply networks and for increasing electricity prices. However, there is no clear evidence that this is so, as the reliability and prices are influenced by many factors, and not solely by the generation mix. In fact, together with a group of international colleagues I have just been awarded a small grant by the Worldwide Universities Network to investigate the effect of renewables and the mix of renewable sources (i.e. wind vs. solar mix) on the reliability of the electricity system and on electricity prices.

The process of weaning-off fossil fuel powered society is well underway. But, it will last a long time and there will be numerous turns and twists along the way. 2017 has seen some important episodes of the ‘coal wars’. Let’s hope that 2018 will bring more resolute moves into the right direction. May the cleaner energy be with us! Happy New Year!

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A newspaper article couple of weeks ago caught my attention by headlining that offsets are found to bring large savings to those who use them. The article refers to a leaked report commissioned by the NSW government, presumably looking at the effects of the new Biodiversity Conservation Act 2016, whose practical implementation commenced in late August, 2017. The report itself is not publicly available, so it is a little hard to say just from the newspaper article what are exactly its findings.

The Biodiversity Conservation Act 2016 is about much more than just the Biodiversity offset scheme, which is the focus of the article. And the apparent outrage brought by that article is that the offset scheme under the new Act is likely to create savings to those who participate in the scheme. But, there is nothing surprising there. That’s exactly what an offsetting scheme should do: attain the desired environmental and conservation objectives at lower costs. There is no point in miners or other developers paying more to attain a given environmental objective. Unless of course we want to tax them more on their activity, which is a completely different issue and, which by the way I support.

So, the issue is not in the savings for developers, even though perhaps the media likes to present it that way in order to create a sensationalist effect. Rather, the issue is with the conservation objectives embedded in the Act. Those are the ones to be scrutinised and criticised. If they are too lax, we may be further endangering our flora and fauna, irrespective of which instrument to attain those objectives is chosen.

Offsets are not perfect instruments (see couple of previous posts on this blog). No instrument is. But blaming the offsets for doing their job, i.e. reducing the costs of meeting conservation objectives is not very constructive or helpful. Rather, the focus should be on examining the objectives themselves, while making sure that offsets deliver on their promised conservation effectiveness.

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An important report was released last week by the Productivity Commission. The report looks at the current and future factors that are, and will be affecting the productivity of the Australian economy, and draws recommendations for reform in a range of sectors.

The report has been a topic of commentary among journo-economists, most notably Jessica Irvine and Ross Gittins.

Both of those are generally positive about the report, and Gittins points out that this one, unlike some previous outputs of the Productivity Commission, is people-friendly rather than business-friendly. Irvine briefly touches on the problem of adequate (or, really currently inadequate) measurement of productivity.

The inadequacy is in that national accounting practices and productivity measurement methods have been structured at a time when manufacturing has dominated the economy. Given that the economy is continually moving more towards ‘softer’, service based sectors, there is a need for amending national accounting and productivity measurement practices to reflect that change.

Some of the shortcomings of the current productivity measurement practices relate to the incompleteness of the sets of inputs and outputs that are recognised and accounted for in the analysis. For example, the use of nature-provided inputs (e.g. water, ecosystem services) is typically ignored in the analysis. In addition, many outputs of the services sector of the economy (such as health care, education, scientific research, and information technology sector), as well as the services to society provided by other environmental assets are not well defined in terms of quantity, quality or both. This could lead to double counting, miscounting, omission, underestimation or overestimation problems in currently used productivity measuring frameworks. In addition, many inputs and outputs in these sectors do not have market prices in the traditional sense. And when prices do exist, they are often heavily regulated by the government, like in education or healthcare.

In this light, the need for more integrated and better indicators of productivity has been widely recognised. We need to be able to jointly consider the multiple problems that exist in productivity measurement and to come up with an integrated approach that accounts for a broader set of inputs and outputs into productivity measurement, including things like environmental impacts, natural capital use, and differences in quality of human capital. This will give us a ‘real’ productivity metric, one fit for the twenty-first century!

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October is nearly here, but we just had the driest September for Sydney on record!
And this is on back of a very dry August. It has basically not rained at all for a while!

This has meant that the volume of water stored in Sydney’s main drinking water supply source – Warragamba Dam, has been falling rapidly over the last couple of months. The Dam is currently some 88.5 % full, which is still good, but this percentage is dropping rapidly, at some 0.5% per week. If dry conditions continue, we are going to see the percentages dropping to 70% and 60%, and that’s when the Sydney desalination plant starts to kick in. Current operating rules for the plant stipulate that it will start operating when the level of the water stored in the dam falls below 60% and continue until the level climbs back over 70% again. These numbers used to be 70% and 80% respectively, but were changed recently with the 2017 Metropolitan Water Plan. A good change!

On the other hand, the same 2017 Metropolitan Water Plan puts in place new rules for environmental flow releases downstream from the Warragamba dam into the Hawkesbury river. While having more environmental flows is clearly beneficial and will provide significant improvement of river health, the full cost of providing those flows seem not to have been considered in the plan. In particular, there are ‘shadow’ costs of environmental flows in terms of speeding up the lowering of the water volume in the dam, and thereby speeding up the breaching of the threshold that will trigger the operation of the desalination plant. Now, the cost of the water supplied from the desalination plant is substantially (2-3 times) higher than the cost of supplying water from the dam. So, the sooner the desal is activated, and the longer it operates over a given time horizon, the higher the costs to municipal water users. Environmental flow releases contribute to these higher costs. Some simulations that we ran show that the extra costs from activating the desalination plant and having it operate for longer as a result of environmental flow releases are quite high.

In addition, we ran some optimization scenarios, where we used dynamic optimization methods that allow us to account for the ‘shadow’ costs of environmental flows, and to determine economically optimal quantity of environmental flows. The results show that combined net benefits of environmental flows and net benefits to municipal water users are significantly higher (about $15.3 million higher on average per annum) under optimized environmental flows that take into account the shadow cost, compared to the current environmental flow rules.

Environmental flows sent downstream from the dam are good. However, some of the costs at which they come are ‘hidden’, or not immediately apparent. These costs ought to be considered if benefits to whole society are to be maximized!

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I have been quiet over the last couple of winter months (Australian winter) on this blog. I have been traveling a bit, but have also been thinking and working on how to properly account for natural capital at a level of dis-aggregated production activities. Farming is a good example: the local farm level, or even field level, is where management of natural capital stock matters the most. Yet, there is currently no mechanism for accounting for natural capital at a farm level. There have been significant improvements in accounting for natural capital at the level of national economies through the implementation of the System of Environmental Economic Accounting. The Australian Bureau of Statistics has been one of the early adopters. While these efforts are to be praised, the level of aggregation at which they operate does not reflect the spatial scale at which humans make decisions about the management of natural capital. Like in farming.

For this reason devising ways of accounting for natural capital on farms has been of great interest. I spoke about our work (joint work with Samad Azad) in this area to several fora over the last few months: the OECD network on Agricultural TFP and the Environment, and seminars at the Australian Studies Centre at Universidad ORT Uruguay, Facultad de Agronomia Universidad de Buenos Aires, and the Institute of Environment, Energy and Sustainability at the Chinese University of Hong Kong.

A key point from our work is that evaluation of what is happening with natural capital on farms can be based on the observed changes in the contribution that natural capital is making to agricultural productive activity. The idea is to track the productivity of a farm over time and account for all inputs and other contributing factors that determine that productivity. After all factors are controlled for, the remaining variability of productivity over time can be related to the variability of natural capital. In this way, we can characterise the dynamics of natural capital on farms over time. Obviously, there are many complicating factors (like technology, adequate time frames, and the types of natural capital and their measurement), which we are considering in detail in the research. This is explained in the research outputs that are to follow. For the time being, we have just been excited to present the preliminary empirical findings from our work, which showcase the developed metric for soil natural capital at a field level that has been tested using actual field level data from commercial farms. The results show a variation in the dynamics of soil natural capital between fields and farms over several periods of time: while we find improved soil natural capital dynamics on some fields and farms, we find degradation in others, and not much change in the rest. These are some very promising results that give us confidence in the adequacy of the modelling approach that we are using.

Accounting for natural capital in agriculture is also a topic of one of the chapters (Ch. 7 by Carl Obst and Mark Eigenraam) in a book recently published by Edward Elgar that I co-edited. This book project was galvanised by the workshop on Environmentally Adjusted Productivity and Efficiency Measurement at the University of Sydney last year.

So, overall pretty busy couple of months. The winter is nearly over (complaining about Sydney winter, listen to me!), and the semester is in full swing. Hopefully, there will be more blog posts in the weeks and months to come!

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As all news outlets reported widely over the last few days, the US president Donald Trump has signed an executive order suspending US participation in the Paris Agreement on Climate Change negotiated in late 2015. This comes as a no surprise. It was very clear, even prior to the US elections in November 2016 that if Trump were elected, pulling out of the Paris Agreement would be one of the things he would do that are bad for the environment.

The question remains how bad this move really is? US is the second largest GHG emitter in the world, so at face value, it pulling out of the global effort to curb GHGs seems pretty serious. However, much of the US programs for reduction of GHG emissions are not federally sponsored, but are rather run by individual or groups of states, and by some of the major cities. So, despite Trump pulling out of Paris Agreement, significant reduction of emissions, at least in some parts of the US is going to continue.

Anyway, the Paris Agreement was never about binding emission reduction targets, but about general commitment to move away from fossil fuels, and to embark on a journey towards alternative, much less emissions intensive sources of energy. The US pullout from the Paris Agreement is just a hiccup, which will only marginally slow down the process of ‘de-carbonisation’ of economies that has already started and is inevitably going to continue, and in the US too.

This pullout from the Paris Agreement is mostly bad for the US itself. The US was strongest when it was successful in conquering the hearts and minds of people worldwide, by championing good causes. Pulling out of the Paris Agreement doesn’t win the US any friends. It further speaks to the emerging thesis that the US has lost the capacity for global leadership, and that it is almost handing it out to China. And China has gladly accepted to be seen as a good citizen on climate, which does win them some hearts and minds.

So, the deal-man Trump has stricken a really bad, but not such a big deal!

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Natural gas and its taxation seems to remain under the spotlight of the media over recent months. Following last month’s post on this blog about the proposal to share part of the tax revenue from CGS with landowners, I continued to be intrigued with the news on couple of reports on the operation of the Petroleum Resource Rent Tax (PRRT). This is the taxation mechanism for offshore petroleum resources administered directly by the federal government (note that taxation of the mineral resources on shore, including petroleum resources, such as CSG are under state government jurisdiction).

First came the news about the report commissioned by the McKell Institute, which found that the PRRT is not adequate and recommended that it should be replaced by a royalty. I was surprised to read this, given that one of the report’s authors is an academic economist. Resource economists have typically held a favorable view of the resource rent taxes (RRT) as they directly target the resource rent, whereas royalties are a much more blunt taxation instrument with many potential distortionary effects. In a published article by Ross Garnaut, an expert on mineral taxation, mixed taxation instruments are suggested, with all of the suggested mixes including the RRT, and none including royalties.

Just over the recent days came the news about another review of the PRRT, this time by a former treasury economist. The views on the report in the media were varied, depending on the outlet. This report also identified serious issues with the PRRT, but did not recommend scrapping it as a key taxation instrument for offshore petroleum resource.

In my own view, the problem is not with the PRRT in principle, but with the various deductions, offsets, and write-offs that are allowed under the current tax accounting practices in Australia. This is evidenced with the recent court case involving Chevron, the largest natural gas miner in Australia. Like the other multinationals (including Apple, Google, etc.) the big energy companies are doing everything they are allowed to do under the current accounting practices to minimize any taxes, including taxes designed to recover the natural resource rent on behalf of its rightful owner: the public. The PRRT offers more opportunities for tax avoidance accounting than do the royalties, but that doesn’t make it an inferior tax instrument. It just means that accounting practices should be tightened up and the various allowances be scaled back. So, if society is willing to fix the tax accounting standards and practices, we would be better off with the PRRT then with the royalty.

Putting the debate about the tax instrument aside, the fact remains that Australian public is not recovering its natural resource rent from the minerals that are extracted on and off its shores. So, something has to change. The change needed is more complex than simply switching from one tax instrument to another. We need a fundamental change of the tax laws and the associated accounting practices. If we get it right, we should still be using the tax instruments that are known to be more efficient.

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