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!

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The discussion about ‘entitlements’ - in the sense of social welfare, employment benefits, and industry support - is raging high and wide on the Australian political scene. At the same time we get news from the USA that polluters are gearing towards a legal challenge of US EPAs involvement in cleaning up some of their most important estuaries. Polluters figure that success of clean up actions in the Chesapeake Bay will necessarily imply a need for such actions elsewhere – most notably on the Mississippi Delta – , which will prove enormously costly for the fertiliser, pesticide and other agricultural and non-agricultural related industries.

What is the relevance to the ‘entitlement’ debate in Australia, and to the Australian environmental protection activities? Firstly, it is well known in the economics literature that polluters will behave preemptively in order to protect their ‘entitlement’ to pollute. They would increase pollutant emissions or the rate of natural resource use when they face a prospect of future regulation. I wrote about this some years ago in the Australian Economic Papers (Ancev, 2006). When regulation comes in and forces them to cut back, polluters would still hold to their initial ‘entitlement’ despite the mandated reduction. The US example quoted above is just a case of a flagrant, ‘in your face’ preemptive behaviour of the same sort. Polluters feel that they have an ‘entitlement’ to pollute, and they are going to protect that ‘entitlement’ through legal action.

Secondly, the significance to Australia is in light of the current debate about allowing polluting activities to take place on the Great Barrier Reef. It makes one wonder whether allowing pollution of the reef now might entrust the sense of ‘entitlement’ to pollute within industry. And when we try to clean it up sometime in the future, we might face a legal action motivated by the need to protect those ‘entitlements’! We better get a good lawyer!

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The Commonwealth Water Holder has announced that they will be selling annual water allocations to the entitlements that they hold in the Gwydir Valley.

As discussed on this blog (Nov 2012 and Nov 2013) and elsewhere (a conference paper at AARES 2012, and a journal article about to be published) this is a reasonable move. There has been plenty of water in those parts of the country in the last few years, there have been good floods, and ecosystems are up and running. Sitting on the environmental water cannot do much good, so selling some annual allocations makes perfect sense.

Of course, this has to be done in a careful and prudent way, with constant monitoring of the situation on the ground. If done properly, it will be a good thing for the irrigators and their communities, without causing harm to the environment.

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Pretty quiet summer time here in Oz. Most of Australia is sizzling with temperatures into high 30’s and 40’s (no relation to climate change). Almost a perfect time to think and write about the recent developments with the Commonwealth Government’s ‘Direct Action Plan’ to deal with greenhouse gas emissions (GHGs).
Details of it have started emerging early in the New Year.

It will have two main components: 1). a funding pool - called the emissions reduction fund – comprising of some $1.55 billion within the first three years; and 2). an emissions baseline for each liable emitter set based on historical emissions: breaching this baseline will involve incurring as of yet undetermined penalty.

It is planned that the funding be distributed using auctions: emitters will bid for funding by offering certain quantity of abatement in exchange for receiving funds, which will mean that those who offer to abate more for less are going to be favorites for funding. Ultimately, this should lead to a desirable outcome that abatement is undertaken by lower abatement cost emitters.

However, this desirable design feature should not distract from the fact that it only ensures how to distribute the subsidy more effectively. That’s right: ‘the subsidy’! Because that’s exactly what the first component of the Government’s Direct Action Plan is: a big, fat subsidy to those who emit carbon dioxide and other GHGs in the atmosphere. This Government has insisted so much on using the term ‘Carbon tax’ for what previous government wanted to call ‘Carbon pricing’, that it is only fair to ask them to call their Direct Action Plan what it is: A Carbon Subsidy.

And anyone who studied a bit of economics would know that subsidies have pretty undesirable characteristics: for starters, they invite more entry into a polluting industry in the long-run, as the subsidy makes it on average less costly to operate. This is in direct contrast to a tax that increases the cost of operation for heavy polluters in the long-run and hence forces their exit from the industry. In addition, the subsidy empties state’s coffers, whereas a tax fills them.

So, no surprises here: the Direct Action Plan is as bad as the very idea of it has always been. But, please call it for what it really is: A Carbon Subsidy.

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The Federal Environment Minister recently approved several mining and mining related projects that involve dredging and general industrial development on the Great Barrier Reef (GBR) Coast.

This has rightly upset many environmental groups given the significance of the reef as an iconic and globally recognised environmental asset. One interesting premise on which the decision was made is that the conditions of the approved environmental licences entail offsetting the deterioration of water quality in the reef from these new projects by reducing water pollution attributable to agriculture. Agriculture has been long known to contribute to the water pollution problems in the reef.

While some have cautioned that such offsetting of the effects from mining and mining related projects by reducing pollution from agriculture may be flawed, in principle offsetting could make good sense if there are big differences in marginal ‘benefits’ from pollution between mining and farming.

One could imagine mining operators paying farmers to undertake measures on their farms that will minimise nutrient runoff (e.g. eliminating fertiliser application, putting in large buffer strips, etc.) if the cost of this type of ‘abatement’ is comparably low in relation to the benefits derived from mining operations. Reducing nutrient and sediment runoff is likely to improve water quality in the reef, and perhaps to offset the deterioration caused by new mining activities.

While this can be appealing to both farmers and miners, society needs to ensure that comparisons are being made on like terms. Offsetting might help with reduction of nutrient concentration in the reef, which is beneficial, but dredging and other mining development might create other water quality problems (e.g. heavy metals) that will not be offset, and will cause a long term contamination that is very difficult to rectify.

Offsets are all well and good, but due diligence is called upon, especially when it comes to a place like the GBR.

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Recent announcement by the − still fairly new − Federal Government that the planned buy-back of water entitlements will be capped at 1500 GL went largely unnoticed. Not surprisingly, farmers have endorsed this decision, but we have not heard many complaints from the environmentalist groups.

I was more worried with the intention to divert the money planned for buying-back entitlements towards funding infrastructure activities, than with the very fact that buying-back is slowing down and being capped. We know that subsidising irrigation infrastructure is a much less efficient way of securing water for the environment than buying-back entitlements (see the penultimate paragraph of the article in The Australian, link above).

But again, this Government seems to be generally in favour of direct regulation and action, rather than using market-based policy instruments, which is rather inconsistent with its supposed political colours (see a previous post on climate change)

Apart from this, slowing down the buy-back of water entitlements might not be as problematic as it may seem. The Commonwealth Environmental Water Holder already sits on quite a lot of entitlements, and doesn’t seem quite sure what to do with them, especially in times when there is plenty of water around.

So, not biting any further on entitlements might not be such a bad idea, especially if the Government can stand ready to play in the annual water allocation market, if and when adequate opportunities to buy and sell exist. Having a functioning water market will enable compensating for the possible shortfall in entitlements by buying annual allocations at times when the environment needs the water the most. This will be a much better use of the money saved on buy-backs!

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OK, let’s get this right. Trying to pinpoint the cause of last week’s bushfires in the Blue Mountains near Sydney to climate change is really barking up the wrong tree.

The main source of the problem is not that it has become marginally hotter, and drier, and earlier in the year. The problem is that too many of us are leaving in places that are prone to natural disasters, including bushfires. Climate change is likely to cause favorable conditions for development of large fires more frequently in the future. But with or without climate change, human societies are more exposed than ever to disasters. We build residences on flood plains, near the coast, and into the bush, which makes us vulnerable to floods, see level rise and hurricanes, as well as to bushfires.

The incentives to do so are all there: these are environmentally appealing areas often away enough from large metropolitan centers to be affordable, yet close enough to allow commuting. In addition, local councils have for many years encouraged development driven by own incentives to increase rate-paying base. Changing climate is going to increase the risk to these communities, but even without climate change, we are already under extraordinarily large risks in these natural-disaster prone areas. These risks pertain to life and wellbeing of an ever-increasing number of people living in such areas. But also, and notably so, there is heightened risk to property whose value seems to be ever-increasing. Both of those have systemic impacts throughout the economy in the form of the cost of disaster relief and sharply increasing insurance premiums across the board.

The solution to this problem is not going to coincide with the solution to the problem of climate change. Society needs to find ways to limit exposure to natural disaster risk. One way is to be very, very careful when approving residential developments in areas that are prone to such risks. For instance, the Blue Mountains Council recognizes this, and has therefore limited the population growth forecast, specifically citing bushfire hazard as a limiting factor. Other councils should follow suit. In addition, measures should be taken to alleviate exposure in the existing communities. Such measures should be wide ranging, and should include physical and engineering works, but also should consider the possibility of ‘buying-back’ or ‘retiring’ residential developments that are most exposed to natural hazards. The cost of these preventive measures will be lower than the cost sustained when natural disasters hit.

It is tempting to link last week’s fires to climate change. While climate change is likely to worsen society’s increased exposure to natural disasters, it is not the original source of the problem. Unless we find ways how to stop the residential sprawl in disaster prone areas, and to alleviate risks in existing residential developments, we will continue to be at high danger from natural disasters, with or without climate change.

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