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.

0 comments |

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!

0 comments |

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!

0 comments |

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

0 comments |

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!

0 comments |

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.

0 comments |

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!

0 comments |