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May 2013

Early last week a newspaper article reported that logging of native forests in NSW are loss making operations. This revelation comes in the face of calls by some political parties in the NSW Parliament to expand logging of native forests based on the argument that this will keep people in the logging industry on the job. Representatives of other parties in the parliament have quite rightly pointed out how ludicrous this proposition is.

This can be seen by looking at the very basic principles of resource economics. Natural assets (forests, fish, water, minerals, etc.) have values that are quite obvious, and can be very, very large, but do not have prices because they are given by the Nature. But, once these natural assets are transformed into marketable commodities (logs, fish fillets, saleable ore) they command a price. The difference between the revenue obtained for these marketable commodities and the costs – inclusive of all factors of production, and particularly inclusive of some ‘normal’ return on invested capital – , of putting them on the market is sometimes called a ‘shadow’ value, and reflects the value of these assets as represented by the Natural Resource Rent.

Now, what is the report of losses from native forest logging telling us? The implied Natural Resource Rent is negative, which translates into saying that these forests are not valuable at all, and in fact we, as society, should be paying for someone to cut them down! This clearly defies logic, as we all know that native forests are valuable not only for the timber and pulp that we get from them, but also for the numerous eco-system services that they provide: land and water protection, biodiversity conservation, and recreational and aesthetic services. So, if society does not get anything for something that it is so clearly valuable, we should immediately stop using the asset in the way we do. This means that logging of native forest in NSW should not proceed at all until that time when society can capture a positive and significant rent from this activity.

What’s more, the rent should be high enough to more than offset the loss of values of eco-system services that will eventuate as a result of the logging. Given the likely magnitude of those values, logging native forests should be very profitable to justify its existence. Stopping it when it is not profitable should be a no-brainer!

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Key interest of the week in Australia is the 2013 Federal Budget. There are many aspects of life affected by the annual budgeting ritual: health, education, employment, and … the environment. It is interesting how the Environment gets so little attention on the Budget night. The same is also true on the Election Day, a phenomenon known as ‘lack of saliency’. People seem to talk a lot about the Environment and seem to genuinely care, but when it comes to ‘serious’ things in life, like the Budget or the Election, the Environment does not get very high priority.

So, what is the verdict for the Environment in the 2013 Budget? The news is actually not bad at all. A nice summary of the Budget items relevant to environmental issues is provided by EnviroInfo.

The main points are that many of the subsidies and compensations to C02 emitters are scrapped. This is a welcome development, given that those subsidies and compensations were in their own right a distorting element in the whole concept of Carbon price. So, not only will scrapping those fill in few gaps in the Budget, it will also remove perverse incentives that subsidies carry along. All good there.

Further, there is a mention of what seems to be a very marginal adjustment to the Biodiversity fund, which will not change substantially the operation of this program.

On the agriculture side of things, there seem to be an enhancement of the Carbon Farming Futures Program. This is good news in its own right, but the success of this program is somewhat in doubt if judged by some of the interesting stories around funding decisions under the Filling the Research Gap initiative of the program.

Finally, funding to the tune of $1.8 billion over 10 years from 2014-2015 is committed to environmental water requirements in the Murray Darling basin. It seems that majority of this funding is going to be devoted to technical projects aimed at improving irrigation efficiency, which is really a form of a subsidy to the irrigation industry. It would have been better to devote more funding to the Commonwealth Environmental Water Holder for the purpose of buying-back entitlements. The announced additional $10 million that are going to be devoted to research about how to best use environmental water holdings just strengthens the case for more buy-backs.

Overall, the 2013 Budget is not bad when it comes to the Environment. Most of the announced changes make good sense, and will eliminate some unjustified subsidies to polluters. There are no new big environmental initiatives, so after all it is perhaps not overly surprising that the Environment has not featured prominently in the media coverage of the Budget.

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