Confused thinking on the environment at Catallaxy

A post over at Catallaxy suggests that policies of preventing the exploitation of oil and gas reserves near national parks in the US harm the poor (mainly blacks) and are therefore unacceptable - there is even the suggestion in the original news story* that such policies are racist . It is at best a partial story and in conceptual terms highly misleading.  The general intent by Catallaxy is to poke fun at the middle class affluent in a way reminiscent of populist left-wing attacks on reason.

The decision to limit exploitation of oil and gas reserves (or any other marketed good) because of conservation concerns (or concerns over any non-marketed good) is one that revolves around a social cost benefit analysis of the respective options.  Oil and gas products are marketed whereas conservation values are not so it is more difficult to get a feel for the present value of the latter types of outputs.

More effort is involved in valuing conservation assets but various indirect procedures can be used (advice from experts and scientists, travel cost method, contingent valuation and so on).  A premium should, of course, be added to the conservation values - a quasi-option value  - since the decision not to proceed with development of the oil and gas deposits is reversible while the decision to proceed with these developments is much less readily reversed to reinstate conservation values.  In addition, technical progress in the future will yield new sources of energy but not new conservation assets and, if you believe the environmental luxury good hypothesis, people's values switch toward conservation as they become more affluent. Environmental red necks tend to be working class.  Both of these factors intensify the case for taking care with the destruction of already over-exploited natural environments.

All this is basic resource economics and provides a rational basis for being conservative about certain natural resource destructions.

The cost benefit comparison proposed involves ignoring distributional impacts and is largely efficiency-based.   This is essentially the 'second theorem of welfare economics' - maximise the value of society's outputs first and then (if necessary**) make transfers to accommodate the specific interests of particular disadvantaged groups such as the poor.  One can raise qualifications about the general applicability of this result but it works well in the current setting.

If it is mainly middle class affluent people who seek conservation outcomes then, on this account alone, they should pay for those outcomes and transfers should be made to those suffering the costs. But this has nothing to do with the case for making the conservation versus development issue using efficiency-oriented cost-benefit analysis.

The point is to value things at their social worth something a libertarian blog like Catallaxy should understand.  Economics is, in my view, a discipline which sensibly protects the environment.

It is foolish to sling-off at environmental activists because they are middle class or rich and because some of those bearing the costs of development restrictions have lower incomes. To a very large extent environmental equity and efficiency issues are separable and those committed to free markets should always target efficiency leaving the tax and transfer mechanism to address distributional issues.

* It is a generally ignorant account which suggests that poor inner city blacks will suffer most the effects of higher energy prices if the deposits are not developed.  This fails to recognise that energy prices are globally determined with the local developments being discussed having only a limited, short-duration impact on prices. Both rich and poor are impacted on by any higher prices.

** The poor do not need to be compensated for every policy that runs against their interests if they already receive huge transfers from those more wealthy in order to effect general redistributive concerns. In the present setting specific benefits to the wealthy of conservation might be consider a payback for redistributive taxes. This is an important since it is generally not necessary to provide specific compensations for every project.

Update: In a comment Tim Lambert points out that the source of the claim that protecting conservation areas is racism is CORE (Congress on Racial Equality) which receives funding from ExxonMobil.  CORE has been an active supporter of climate change denialism and opposed (for example) the listing of polar bears as endangered species on the grounds that such protection damaged poor black Americans. 

Irreversible destruction of the Murray River's lower lakes

The imminent destruction of the freshwater ecology of the lower lakes of the Murray River on the grounds that upstream freshwater supplies are insufficient to flush them out and that stored water suppliesin the river system must be safeguarded for human consumption might well be justified on triage grounds but it is nevertheless an alarming policy failure. The present government can hardly be held entirely responsible for the current situation - this represents a policy failure by government that goes back decades. The claim by Greg Hunt that Penny Wong is behaving like Saddam Hussein in destroying Ramsar listed wetlands is completely over the top - the catastrophe that is emerging also implies culpability through the successive policy failures of Coalition governments. Of course Wong's claim that there are insufficient water resources should be thoroughly checked out but it seems likely to be an accurate summary of the current situation.

The inability of state and federal governments in Australia to reduce the excessive use of water in irrigation reflects a political failure of the Australian federal system. The only possible benefit from the destruction of these Ramsar-listed wetlands might be the impulse it provides governments in Australia to finally seek to address the environmental catastrophe emerging in the Murray-Darling as a consequence of excessive water use in agriculture. Labor is in power both federally and at state levels - it should now act to buy back excessive water use entitlements to prevent these types of situations recurring with the hope that the seemingly irreversible ecological effects of being forced to flood the lower lakes with saltwater can eventually be reversed.

Nibbling away at nature & amenity resources

I don't have strong views on the proposed use of the particular park in Kensington for Sir Ron Eddington's proposed tunnel to connect the eastern freeway with the western suburbs in Melbourne*. Public protests are being organised on this use of the park. However I am concerned at the propensity of governments at all levels to nibble away at public parks and nature reserves in meeting infrastructure and other developments within intensively settled urban areas.

These parks and reserves have significant social value both in terms of their use values (e.g. walking the dog, bicycling, enjoying the open air) and because of the implied amenity externalities that get crystallised into increased local property values. The extent of the use value generated can be measured by the consumer surplus triangle the presence of such areas generate - the triangle is large because the access costs of large numbers of people in urban areas to these resources is so low. (I always set out this idea to my environmental economics students as an application of Harold Hotelling's 'travel cost' method of valuing natural resources).

But every time a new road or development is proposed the prospect of resuming large numbers of private homes and business firms to provide land needed looks far too expensive compared to nibbling a bit of the local park or reserve and, of course, the externalities these resources give rise to get forgotten about. And the argument normally put is that the park is quite large and we are only taking a 'small' proportion of it. Repeated applications of this reasoning lead to death by one thousand cuts, to an impoverished amenity resource and a urban environment.

It is not always the public sector alone that is at fault here. Private developers stage protracted campaigns to get land in reserves rezoned to develop private housing and industry - private nibbling along most of the Yarra Parklands in Melbourne is close to an outrage despite the excellent efforts of Melbourne Water and other groups in restoring this land. Developers pester local governments for decades.

And at the time of each public or private sector 'nibble' the argument is sensible in terms of myopic development costs or of giving private agents the chance to 'enjoy nature'. It is just that the long-term outcome is not at all sensible.

In my view we ideally want far fewer private gardens and much more public land that can be assigned to provide amenity resources and nature conservation. There are economies of scale in providing both types of output. One advantage of private holdings however is that they are less susceptible to development pressures and nibbling. While they are much less efficient they are more resiliant in the face of relentless development pressures and the views of philistine public administrations.

* Of course I am strongly opposed to unending expansions of road and tunnel infrastructure when socially costly urban travel is unpriced. Supply decisions should be made in an environment where costly travel is priced.

Disappearing honey bees

Honey bees around the globe are disappearing and nobody knows why - maybe it is due to bloodsucking mite called varroa - pictured above. One-third of US honey bees were wiped out last year. Bees are crucial for the pollination of 90 major crops. Albert Einstein is claimed to have said that if honey bees disappeared the human race had 4 years until it to became extinct. Commenter AndrewT points out this may well be apocryphal.

In addition there is the possibility that wild bees may substitute as pollinators if honey bees disappear.

An intriguing story and the subject of a book.

Acid mud (= ‘sulfidic sediments’)

In many wetlands along the Murray and Darling Rivers, sediments flooded for decades by locks and weirs, are being exposed to air as drought-affected water levels fall. Inland sulfidic sediments have been found in NSW, Victoria, South Australia and Western Australia. Waterlogged soils often contain sulphides produced by bacteria decomposing organic matter, but if these sediments are allowed to build up and are then exposed to oxygen, they form sulphuric acid – hence the names ‘acid mud’ and ‘sulfidic sediments’. These are usually naturally occurring events but are worsened by human activities, particularly in inland aquatic ecosystems, and by sustained drought.

I will learn more about ‘sulphide sediments’ from colleagues at La Trobe University Albury-Wodonga Campus this week but, before this, I inspected the web to find some background facts and what follows are some notes. I would be interested if readers had links to further information.

For example Bottle Bend, near Mildura, was once a healthy wetland but it is now it’s a toxic waste site where nothing but micro-organisms can survive the acid water given its steel-eating pH of 1.6. This caused the death of all fish in the wetland and all the trees surrounding it. Thousands more wetlands – particularly those in the lower reaches of the Murray - could be brewing the same deadly formula and if the rivers again flow enough to re-flood the exposed acid mud, toxic baths will pose a major threat to towns and cities downstream. This slide show by the Murray-Darling Freshwater Research Centre was useful in getting an overall picture.

Constructed wetlands are potentially at more risk of producing sulfidic sediments than other wetlands because such wetlands are often designed to help improve water quality. The water, whether it is from storm water, treated sewage, industry or other sources is often of poor quality. If the levels of sulfate in the feed water is high (greater than about 10-20 mg S/l) then there is a real likelihood that the wetland will develop sulfidic sediments over time.

Not a lot is known about treating inland sulfidic sediment problems. Essentially they need to be first identified and then regularly flushed out. The flushing out required however impacts on water availability upstream from the sites of sulfidic sediment.

For example as pointed out by Kenneth Davidson, in Lake Alexandrina at the mouth of the Murray River, the soil in the lake is laced with sulphides that turn into sulphuric acid with prolonged contact with the air. The pH of the lake, which measures the acid/alkaline balance, is already bad enough to make it toxic to animals. Moreover, without flushing as a result of heavy rains upstream, the combination of salt and acid will move upstream and progressively contaminate the lower Murray. The danger is immediate. Murray Bridge, 38 km from the mouth of the Murray, is only two metres above sea level at the mouth of the river — a drop of less than 0.5 cm/km — which means that the salt and acid can move relatively easily upstream. The lower Murray is more akin to a series of interconnected ponds rather than a free-flowing river.

This is serious because Adelaide and South Australia's main provincial towns depend on the Murray for most of their water. Without flushing rains or 200 GLs from the Dartmouth Dam on the upper Murray, the water that Adelaide pipes from the Murray below Murray Bridge will be undrinkable. But if the water that is available from Dartmouth is allocated to the environment, it won't be available to irrigators further up the Murray.

According to Davidson, this is why the Brumby Government delayed for 15 months signing up to the Murray-Darling Basin Authority, which is supposed to give ultimate authority for allocation of the water to Federal Water Minister Penny Wong. Either the system must get well above average rainfall during the coming winter, sufficient to flush out the lower reaches of the Murray, supply Adelaide and keep irrigators alive or Wong will have to choose between Mildura and Adelaide as to who gets the 200 GL of water held in reserve in the Dartmouth dam. But there is no real choice. If the southern river Murray system dies, Mildura and the other irrigators along the southern Murray will die as well.

If salt and sulphuric acid damage is limited to Lake Alexandrina, the irrigators and the towns along the southern Murray can be kept on life support until there is a permanent increase in the flow of water into the Murray system.

Among the groups studying sulfidic sediments one with very useful data and articles is CSIRO Land and Water.

Healthy small doses of poison & filth

I have long been interested in the phenomenon of hormesis and teach this topic to environmental economics students. This idea – developed by toxicologists – suggests that low concentrations of certain apparently dangerous substances (gamma rays, dioxins, even pesticides), may be good for your health. The health damage function is therefore J or U-shaped in levels of the toxin. Damages are high at zero concentrations of certain compounds and high (indeed higher) at high concentrations. But at small enough concentrations the damages are lower so that it is best from a health perspective if you are exposed to some of the compounds.

My intuitive reasons for being interested in this link is that kids seem increasingly vulnerable to allergies and asthma even though mum washes them and everything around them to be as spotlessly clean as Kevin Rudd's ear canals.

After a recent class where I talked about hormesis one of my students put me onto the related idea in a recent issue of New Scientist of ‘Fighting Cancer with Filth’. The gist of the article is that ‘researchers are starting to wonder whether the higher incidence of certain cancers in affluent populations - including breast cancer, lymphoma and melanoma - might also have something to do with sanitised, infection-free living’ so that ‘If we can understand exactly what it is about some germs that has a protective effect, we should be able to reduce people's risk of developing certain tumours later in life by exposing them to harmless microbes.’ ‘The simplest explanation is that exposure to viruses and bacteria - through infections, vaccinations or proteins such as endotoxin - stimulates the immune system and boosts its anticancer activity’. ‘As long ago as the 1970s it was noticed that workers in cotton factories have surprisingly low rates of lung and some other cancers. One explanation is that they owe the favour to cotton dust. This contains lots of endotoxin, a lipopolysaccharide found in the cell walls of many bacteria, which might keep the immune system on high alert.’ ‘The simplest explanation is that exposure to viruses and bacteria - through infections, vaccinations or proteins such as endotoxin - stimulates the immune system and boosts its anticancer activity. This makes sense, since we now know the immune system plays a bigger role in battling cancer than previously thought, destroying many tumours at an early stage or keeping them in check’.

There is even evidence that dairy workers who breathe in dried cow dung dust have a lower incidence of long cancer. There are even suggestions that injecting certain bacteria and viruses might cure cancer or even treat depression.

Hormesis arguments are hypotheses about behaviour but interesting ones. The implication of these ideas for the management of risk in relation to exposure to toxic substances, however, is huge. The dose-response relationship may need to be rethought in connection with the management of both dirt and toxins.

In addition the scorn conventional medicine has toward homeopathy may need to be rethought.

Water buybacks in the MDB

I posted recently on the water buybacks about to occur in the Murray-Darling Basin to provide increased environmental water flows. John Quiggin also made an post based on an AFR article he wrote. At the time I scouted around for a brief of the current state of play. This article by Asa Wahlquist in The Weekend Australian provides very useful background – the scale of purchases achieved and sought, opposition from farmer groups (mainly, that it will drive up water prices) and the response of water owners to planned purchases. Some quotes (I inserted hyperlinks and corrected some minor inaccuracies in names):

‘Under the Living Murray, the Murray states have agreed to return 500,000ML to the environment by 2009.

The $425 million Water for Rivers program, run by a corporation funded by the NSW, Victorian and federal governments, will deliver 158,000ML by July. It aims to put 282,000ML back down the Snowy and Murray rivers.

The acting CEO of Water for Rivers...says most of the water will be acquired through water efficiency savings. But the corporation did purchase 40,000ML sooner than they originally planned: "We have front-ended our purchases in anticipation of these other players coming into the market. We felt we would get in there, we would buy as much water as was available."

...The NSW Government program NSW Riverbank has $105 million to spend over five years on purchasing water for inland wetlands, as well as the $28.5 million Wetland Recovery program. Together they have purchased 27,500ML so far.

South Australia has purchased 17,000ML for its 35,000ML Living Murray target, and is still buying, while Victoria is concentrating on acquiring the water through efficiency savings. But the really big money on the table will come from the commonwealth.

Earlier this month, federal Minister for Water Penny Wong announced that the Government would spend $50 million buying back water. That is just a small part of the $3.5 billion committed to water buyback under the National Plan for Water Security.

Water economist Mike Young, from the University of Adelaide, points out that $3.5 billion effectively means spending well over $400 million a year for the five years from 2009-10.
"The value of water traded in permanent sales at the moment in the entire southern system is about $100 million," Young says. "You are talking about government buying four times the current size of the market. Doing that without increasing the price of water is going to be very, very difficult."

...the 500,000ML of the Living Murray is just the first step. Scientists such as Rod Oliver argue that the river needs more like 2000 GL. Oliver has been working on the CSIRO's Murray-Darling Environmental Water project, looking at submerged wetland vegetation, or macrophytes, and red gums along the Murray.

"If we wanted to maximise the diversity of macrophytes along the Murray - this is not to return it to what it was, just to maximise where we could - we would need of the order of 2000GL of water," Oliver says. "The modelling for the red gums to sustain them in good health was of the same order."

The past year has been the 10th year of drought along the Murray River, and the water market has been going gangbusters.

Brian Peadon runs the Waterexchange, an exchange service for water trades. He says that for the first six months of this financial year the temporary trade notched up $160 million. "That is just phenomenal turnover, because there have been phenomenal prices. At the peak of the season it was $1200 a megalitre, which is totally unsustainable."

But he says not much is happening now in the permanent trade, "because the expectation for the sellers has been raised. If you have got four government departments competing with each other for the same resource, it is a seller's market, so why would you be selling now. What will the price get to?" Peadon says the price is certainly rising "but not dramatically at this point, purely because there is not much actually selling".

In July last year, the MDB Commission launched a pilot program to buy 20,000ML for the Living Murray. It was supposed to run for 11 weeks, but MDBC chief executive Wendy Craik says it had acquired enough water and closed at the end of four weeks.

"Given that other people got better offers than we were prepared to pay, I don't think we pushed the price up," Craik says. "The prices offered ranged from $790/ML to $3500/ML. The top price went up to $6000." A final report, with the prices paid, has not yet been released’.

Plenty of oil?

This oil industry spokesman, Mr Nansen G. Saleri, argues the world has plenty of oil to the end of the century and that $100 barrel prices will stimulate the types of innovations that will bring new supplies on board.

I don’t have enough oil industry knowledge to evaluate these claims - they seem to depend on the viability of improving extraction technologies and utilising alternative sources of fuel such as tar sands. Some claim alternatively that the point of peak oil production has already been reached. But I am intrigued that Exxon-Mobil – the largest Fortune 500 company – is terrified of a collapse in fuel prices and is sticking to oil as a core product. It is not diversifying into other energy resources. The Economist in 2006 made similar claims to Saleri as did very knowledgeable economists with good information about the oil industry such as Morris Adelman in 2004.

Supposing Saleri and the other 'optimists' are right, the case for investing in renewable and nuclear power will need to be much more firmly based on carbon emission issues. Carbon taxes on liquid fuels will need to be huge to cut carbon emissions from this source. There will also presumably be many red faces (and much red ink!) in the public and private sector components of the 'alternative fuels' market. Oil depletion will not act as a natural constraint on liquid-fuel-induced carbon emissions and the imperative to switch towards coal-fired electricity generation will be weaker. It will be a very different world.

Water resource problems - more politics than economics?

The Rudd Government’s decision to purchase by tender $50 million worth of water rights from irrigators in the Murray Darling Basin is sensible policy. The Howard government agreed only to purchase water that resulted from technology-induced water savings, a policy that was never going to get far. According to much of the press the current government’s initial purchases should secure at least 20 GL - my rough calculations suggest that, at realistic water prices, they should be able to do much better than that.

Buying back over-allocated permanent water rights from owners of these rights at the minimum cost to the purchaser is the most cost-efficient and fairest way of eliminating the problems of excess water allocations in the MDB. It provides compensation to the owners at a price that leaves them better-off than retaining and possibly using the water and, subject to this fairness constraint, minimises the cost of achieving an important environmental objective.

John Quiggin (AFR, 28th February, subscription required) estimates that in the absence of drought the long-term price of a permanent water allocation is likely to be around $1000/ML so for $500 million one could buy back 500 GL thus reaching the target for environmental flows in the National Water Initiative of 2004. Quiggin argues however that, even before the current drought, expert evidence suggested that a cut of 1500 GL would be needed to restore the heath of the MDB.

Indeed the CSIRO’s Sustainable Yields Project suggests that, with severe enough climate change, average runoff in certain parts of the MDB could decline by as much as 50%. If this is the case then buybacks might not be sufficient to address the problem.

I’d be interested in checking out the validity of these figures with those who have more expertise in water resource management than I do. Even if prices of water rose substantially in response to high levels of buyback it would seem these cutback objectives could be realised at the cost of the Howard Government’s $10 billion water plan. All but $3 billion dollars of money in this plan was to be spent on ill-advised technology handouts to farmers that might not be particularly effective. Thus there might be gains in reallocating the money intended for technological fixes towards buybacks. On the face of it solving this major resource problems in the MDB looks like a political problem not one involving economic feasibility.

Maybe my arithmetic is wrong here or I am overlooking something fundamental - I’d appreciate advice to that effect.

By the way the relevant act driving these policies is the Water Act 2007 which relates specifically to the management of the MDB from the viewpoint of economic, social and environmental perspectives is discussed here.

The Federal Opposition spokesperson on the environment, Dr. Sharmon Stone, expressed opposition to the plan on the grounds that it will increase water prices and that farmers in the MDB will be disadvantaged. I was dismayed by these comments as with those of various farming lobby groups. In relation to the Rudd Government’s Plan, according to the Age:

‘But Victorian Farmers Federation president Simon Ramsay attacked the plan, saying government involvement threatened to distort the market.

"Farmers are already stressed; the temptation to sell water, which has been allocated for agricultural use, will prove too great for some to the detriment of farming properties and Australian food production," Mr Ramsay said.

Victorian Opposition spokesman for Country Water Peter Walsh said the policy was to the detriment of agriculture along the river and could prompt water prices to rise.

This foolishness suggests that farmers in stressful economic situations will be somehow made worse off by being given the option to sell their water. Given that water resources have been over-allocated, an increase in prices will help to shift water consumption into higher-valued uses which is exactly what is called for. It is true that those farmers who seek to purchase water in a market with increased demands will have to pay higher prices but that is just a consequence of the shortage in sustainable supplies.

Moreover, resolution of these water supply issues is in the long-term interests of farmers who, because of climate change, will face increasing water shortages and increased variability of water supplies.

A colleague suggested to me yesterday that a Coalition Government in Australia is unlikely to regain power federally for at least two terms of office. One thought is for the Liberal Party to split from the Nationals now in an attempt to build a party that can be more rational than one which is plagued with National Party stupidity.

The Nationals overall have very low electoral appeal and have policy attitudes that seem parochial and self-interested but which, in fact, also disadvantage both the nation as a whole and farmers - the constituency the Nationals are supposed to represent. A split now would get rid of a corrosive force and give the Liberals a chance to re-group. This is something I will think about.

Development with environmental destruction

One of the interesting things about revisiting a place you did know very well is that the developmental changes stand out clearly. I have not visited my former home in Thailand for just over 10 years and the changes are massive throughout the Bangkok area. Evidence of strong economic growth is everywhere. Rice paddies and forests have become shopping centres, shop-houses, homes and restaurants. The flow of traffic is now jamming roads 50 kilometres from the ‘centre’ of Bangkok.

The dark side of economic development in Thailand is the massive associated environmental destruction. Every residual fragment of nature in the country seems to be under attack both from rapacious developers and from poor people just trying to get by encroaching onto every inch of non-private land. I cannot help thinking that future generations of Thais will regret what is currently happening to their country. The political leaderships seem myopic and demagogic.

It is not all bad – there is evidence of enhanced environmental consciousness – but there just isn’t much of the natural environment left. The few remaining fragments of nature are subject to constant encroachment and to perverse treatment which turns native vegetation into garden with many introduced species.

I wandered around a wetland at Asian Institute of Technology today and did see the following 40 identified bird species: Little grebe; Chinese pond heron; Javan pond heron; Little egret; Great egret; Little cormorant; Great egret; Asian openbill; White breasted waterhen; Red wattled lapwing; Common kingfisher; White-throated kingfisher; Rock pigeon; Red turtle dove; Spotted dove; Ashy wood-swallow; Zebra dove; Lesser coucal; Greater coucal; Indian roller; Green bee-eater; Hoopoe; Common flameback; Barn swallow; Small mininvet; Brown-throated sunbird; Lineated barbet; Asian palm swift; Red-throated pipit; White wagtail; Black drongo; Oriental magpie robin; Artic warbler; Great reed warbler; Plain prinya; Zitting cisticola; Common tailorbird; Pied fantail; White-vented myna; Common myna plus at least another thirty or so that I could not identify.

Not a bad haul. But half the wetland has been wiped out in 10 years via encroachment and conversion of pristine wetland into rubbish dumps. It is my former environmental playground disappearing. Am I being selfish to say I feel regret?

Growling frogs & barking owls

I head back to work today after nearly 4 weeks off. I finished my holidays with a week of golf and bird-watching- yesterday playing at the magnificent, links-style, Growling Frog Golf Course (it is named after this). Then in the evening I went with zoologist Dr. Bob Anderson and his friend Jan to Puckapunyal in search of a Barking owl – finally getting one in the Graytown military base area at about 11pm – my first ever sighting of this bird and success after numerous previous failed attempts. For 20 minutes we ‘woofed’ at the owl and it ‘woofed’ back. An amazing experience that I won’t forget.

By the way, the Growing Frog Golf Course is working hard to conserve both the frog and a legless lizard. Puckapunyal is a military base also seeking to conserve a sustainable environment. There are environmental compromises with reality which can work.

In praise of high petrol prices: Why not higher electricity prices also?

Mr Rudd's foolish mutterings during the election campaign to manage petrol prices may come back to haunt him. He didn't say 'control' but he did suggest that something needed to be done about them - the impression was unmistakeable. Mr Rudd's concern was to win a few votes from disgruntled consumers but this message was both misleading and inappropriate. He cannot do anything about petrol prices and, anyway, should not try.

The ACCC have again reported that nothing can be done about these prices - they reflect international marginal costs. While the local wholesaling industry that imports most of the fuels we use is highly concentrated there is no evidence of significant collusion. Margins are around only 4 cents per litre and, compared to other countries, government taxes are relatively low.

In one respect the ACCC findings are unusual. The findings did identify the unique Australian weekly cycle in petrol prices with trough prices being experienced on Tuesdays and peak prices on Thursdays. The difference between peak and trough prices is often 10 cents per litre - it is a large range with the majors adding about 8.7 cents per litre to prices each Wednesday.

These price cycle differences are so regular and so long standing that one might suspect a measure of collusion is occurring. One wonders for example why enterprising service stations don't corner the market on Thursdays by selling at a discount and having a relaxed Tuesday by charging premium prices then. I don't know the reason this does not occur and nor does the ACCC - the issue is a mystery. But the ACCC is convinced they do not reflect wholesaler collusion.

Like every other motorist I grimace at my monthly petrol bills and try to fill up my tank each Tuesday. But these high prices are steering things in the right direction - even if, by themselves they are less than completely adequate. We do need to develop alternatives to petroleum-driven transport and these are being developed in response to higher prices. We also need to make practical steps in our everyday lives to reduce greenhouse gas emissions. The prospect of 'peak oil' and an efficiently functioning forward-looking liquid fuels market is helping net to address climate change issues - even though by raising costs it reduces resources available to address climate change. The same cannot be said of coal use in electricity generation where scarcity is not an issue and where carbon taxes must be introduced to cut associated greenhouse gas and other pollution externalities.

I have an aging vehicle that is a petrol-guzzling hunk of rubbish - when it expires I will replace it with a more fuel efficient vehicle partly because of the financial incentives that drive my behaviour. This is as it should be.

I should, in fact, be facing the same incentives to change my use of greenhouse gas emitting electric power. We should accept the need for higher energy prices and the case for a conservation ethos.

Gasoline now costs less as fraction of net worth

Mark Perry’s blog (Hat Tip Greg Mankiw) graphs gasoline prices compared to average US household net worth 1947-2007. As a percentage of net worth, consuming 1000 gallons of gasoline in the US these days costs less than at any time prior to 1985. I assume, the same story for Australians. Rising wealth is insulating us from the prospects of reduced oil availability.

A discussant on Mark's blog points out that the decline in effective expense would be greater if improvements in full use efficiency were accounted for.

Economics, ecology & policy

I’ve been rather disappointed by the European Conference on Ecological Modelling. Partly because many of the ecological models are numerically-oriented and computer-based (there is a minor component that uses dynamic modelling and game theory that is more interesting) without a lot of emphasis on qualitative insight. There is a strong preference for ‘black box’ modelling – indeed conclusions are often presented without explicit reference to any model.

Most of all however is the obvious disconnect between ecologists and policy issues. The ecological models of the effects of climate change on plant and marine communities are complex, in terms of their science, yet many do not allow for interspecies competition or even for relocation mechanisms such as seed dispersal. In some cases new forests are supposed to emerge in disconnected areas of landscape because climatic patterns alone would make this feasible.

But the key challenges of climate change analysis with respect to biodiversity are how such changes might actually come about in fragmented landscapes over the short-term horizons of 100 years or so over which we expect significant climate change to occur.

I asked ecologists and biologists here about this and they said they were not trained to do (or interested in doing) policy exercises. That’s a pity it leaves people such as myself - without a scientific background - to try to do such things. Economics is often accused of being imperialistic but is that partly because of this gap? Things are happening in the natural world as a consequence of climate change and governments are spending dollars trying to deal with the problems. Someone has to try to work out where the dollars will be spent. Don't they?

It is a good question I will think about further. There are no market signals out there to provide guidance and economists have only general insights. They might well get it wrong.

By the way, there are several Aussies at the ‘Conference from CSIRO and other groups. Their papers seemed conspicuously good – I modestly, of course, exclude my own effort. These papers were, moreover, more immune to the polemical remarks above than many other contributions I listened to.

European Congress on Ecological Modelling

I am attending the European Congress on Ecological Modelling and presenting a modified version of my paper ‘Conserving Biodiversity in the Face of Climate Change’ (published here, preprint here).

The modifications involve an approach to thinking about modelling climate change that use classical decision theory to analyse adaptations. This paper also reflects applied work I have done with graduate students on climate change in the Murray-Darling Basin and South-West Western Australia.

I am keen to get feedback on this latter paper.

Abstract: One approach to rationalising policies for addressing potentially catastrophic climate change when such policies may prove unnecessary is to suppose the policies provide a form of social insurance even in the presence of pure uncertainty. Then, provided the policies are effective when needed, such insurance can be justified as a minimax or precautionary response. Even if the policies are potentially ineffective, intervention can be justified by minimax regret considerations. This reasoning extends to justify ‘all weather’ policies provided such policies always act to reduce policy costs. If, however, policy decisions provide ‘all weather’ benefits in only certain states of the world, this rationale breaks down. Minimax regret can establish a case for ‘mixed’ policy responses provided that adopting a policy mix precludes the chance that intervention will fail altogether. Minimax and minimax regret policies are computed for a simple, dynamic, adaptive climate change planning problem and sufficient conditions for policy maker pessimism provided.

The Conference itself contains a fair bit of hard science and there are only a few economics presentations – the program is here. I am hoping to gain some ecological knowledge that will help my work. I’ll try to summarise what I learn in posts over the next few days and use these insights to develop my views.

River red gums at risk from cowardly Labor environmental policies

From The Age on the tragic fate of Victorian River red gum forests. 70% of these forests in the Murray-Darling Basin are in decline. I have already posted on the need to boost environmental water flows to these forests – they need a decent drenching every few years - but Victorian Premier Mr Brumby has declined to agree to this. It is hard to deal with farmer support for environmental destruction in the midst of a drought.

Farmers are calling for increased support during the drought when what they should be doing is facing up to is higher water costs.

Nest Egg

I spent today around Albury-Wodonga getting informed about an interesting trial of a new auction system for purchasing conservation land from farmers. It is called Nest Egg.

The idea is that conservation scientists do a careful tabulation of the conservation benefits achievable from sites nominated by farmers (the farmer is not told this value) and farmers then bid, via a sealed bid auction, to supply conservation services. Sites are selected according to the highest ratio of benefits/bid subject to the conservation authority budget. In this latter respect the approach is similar to the BushTender scheme practised in Victoria. Both schemes are largely based on encouraging the provision of conservation inputs (e.g. fencing, feral proofing) but Nest Egg alone provides bonuses if conservation objectives and species appearances are achieved. It thus targets outputs as well as inputs.

Although I was sceptical of the scheme initially I came away impressed with its possibilities. Farmers with land that is highly biodiversity productive effectively get paid a stewardship payment for maintaining that biodiversity. Those areas which have with land that can be converted to becoming a biodiversity rich resource at low opportunity cost are also supported. Conservation programs that maintain or enhance biodiversity at minimum cost are thereby realised.

I was particularly interested in variants of the scheme which emphasise connectedness and developing corridors for species to relocate in response to climate change. Locally these can assist attitudinal relocations as temperatures increase. In an interesting two-stage auction design, farmers are initially asked to bid to supply land areas. Once these bids are made, a map of candidate areas is re-presented to the farmers who are then encouraged to form connected habitat corridors and the bid process begins anew. It is very neat.

The species being targeted in NSW are the Plains Wanderer, the Bush Stone Curlew (above) and the Brolga. The Plains Wanderer is a unique species that faces very severe threats. A nice touch to the afternoon was seeing a Bush Stone Curlew in a remnant patch of vegetation north of Albury. These are quite common birds in north eastern Australia but very rare down south. These are flagship species but the intention is to conserve environmental systems as a whole using these as indicators and as a means of gaining publicity and public acceptance.

There are questions about the application of these auctioning systems. Does putting a price on conservation reduce supply by cutting into ‘good citizenship’ motives for conservation? This is analogous to the argument that pricing blood supplies can reduce not increase such supplies because benevolent motivations for donating are destroyed. Also the contracts awarded to farmers last only three years – what happens when they end? Will farmers fail to exercise care of resources they are used to being paid to maintain? Do payments corrupt moral incentives?

My guess is that these problems are minor and that the auction systems developed will play a small, though important, part in maintaining Australia’s threatened biodiversity. I think we still need to drastically expand our public reserve system.

I am in the process of getting informed about these sorts of auction systems – in Victoria they are almost old hat so I am a bit behind the times – and I will post again when I am better informed.

Liberal Party & the environment

To state the blindingly obvious - the Liberal Party does not promote its concern for the environment well. The current spat between Malcolm Turnbull and Geoffrey Cousins over the Minister’s approval of the Tasmanian pulp mill project could have been better handled. Turnbull could have been more conciliatory and listened harder. The Liberal Party does not seem to get the message that Australians are concerned about preserving the quality of the natural environment. The pulp mill is not only a Tasmanian issue – it affects the voting intentions of environmentally-concerned voter perceptions nationally.

By the way, my old mate (and very good economist) Graeme Wells reckons that the mill might impose net costs on Tasmania – a $3.3b drain. I have not read his detailed report but I would be surprised if it did not make a lot of sense.

Moreover, the recent decision by a majority of Coalition MPs on a Senate committee to sign their names to a minority report that denied the reality of anthropogenic climate change was stupid in terms of the feeble-minded science it endorsed. And publishing this report was not sympathetic to the mood of the nation which is very concerned with climate change. It suggests the Coalition’s policies on climate change are half-hearted. I hope that is not true.

Meeting with a bunch of Liberals the other evening I asked a prominent senator why the party was performing so poorly in the polls given the glowing state of the Australian economy - low unemployment, low inflation and high economic growth. His response was that the public had begun to take the good times for granted. A 'spat' had developed between the Liberal Party and its close friends, the 'Australian public'.

My alternative interpretation is that, in some respects, the party is out of touch with community sentiment. On environmental issues and climate change I believe this is so. The environmental pledges that are made often seem to lack conviction – the community has a more refined attitude to environmental issues than many Coalition (and to be fair Labor) parliamentarians.

I believe the Coalition can be returned as the Federal Government later this year but, if it does, its attitude to environmental issues will not have helped it.

The Liberal Party claims it is the only political party in Australia that represents the interests of all Australians. Given the National Party’s focus on rural areas and the dominant role in the Labor Party of unrepresentative trade unions this is probably correct. But there are various ways you can split up the ‘representativeness’ issue. The only way the Coalition can honour its claims to be 'in touch' is to recognises the reality and strength of legitimate environmental concerns in the community.

The days when ‘jobs are all’ have gone - tradeoffs must be entertained. Business is not always right!

Moreover, concerned environmentalists should join the Coalition parties to push a non-socialist environmental agenda. The Greens too should return to having a focus primarily on environment and stop acting like a bunch of lowbrow, adolescent socialists. They should become a genuine environmental pressure group party that goads both major parties to pay more attention to the environment.

Fatal car accidents & car speed

Tim Blair criticises the idea that small reductions in speed can greatly reduce the probability of a car accident. I think on this occasion he is incorrect.

I forget much of my high school physics but isn’t it true that impact is proportional to mass and speed squared? Thus increasing speed from 60 to 65 km per hour - by about 8% - increases the collision impact by 17%. This is quite apart from difficulties of stopping a faster car, problems with lower reaction times and so on. Taking all these into account it has been found that increasing speed as suggested does in fact double the accident probability.

The impact of speed on accidents is discussed here. Their suggestion is that reducing a car’s speed from 60 to 50 km per hour reduces the probability of killing a hit pedestrian by half although you are still almost certain to injure them. A more ccomplete bibliography is here.

Of course reducing car speeds to zero would reduce traffic accidents to zero. The question then is what are appropriate speeds from the perspective of trading off reduced travel times against reduced accident risks. There is quite a literature on this (see here for example) . My understanding is that current speed limits on urban residential streets get it about right.

The carbon emissions ‘cap and trade’ scheme – a second read

I reported earlier on press releases describing the carbon trading report here. I have now had a chance to go through some of the actual report (here) myself. This is my second read – I’ll probably end up making a third and a fourth. The report (and particularly its chapter 7) interest me. I think it is a very important and well-reasoned document.

Some of the reactions by the Coalition’s foes to the proposed ‘cap and trade’ scheme have been predictable – John Quiggin argues that the ‘main implication of this report is that we should have got started on all this ten years ago (or at least, back in 2003 when he states Howard killed the idea) and that we’ll now have a more costly adjustment path than if we had acted sooner’. Well, maybe, but at least a decent proposal is on the table.

The Labor Party itself argues that the plan is discredited because Howard is ‘poll driven’ – this is a particularly foolish example of the motives fallacy. This issue is whether the plan is a good one or not.

Finally, The Age points out that the plan will increase energy prices – well, yes, that is what it is trying to do given that most of our energy supplies are carbon-based. It is trying to increase prices so people will use less of such fuels and energy suppliers will have incentives to search for less carbon-intensive technologies.

For all the hyperbole about John Howard’s restricted vision on climate change, Australia has committed to restrain its emissions to 108% of its 1990 levels to 2012. Because of much reduced land clearing it is one of the few countries likely to meet its Kyoto target.

I think there is a lot in the emissions trading plan that is very good and that the cynicism of many commentators is unwarranted.

It is a very broadly-based carbon trading system that is better than the defect-ridden European trading scheme and the less useful schemes advanced by State governments in Australia. All the big polluters (900 power stations, aluminium smelters, oil refineries, large factories) are captured. Paul Kelly describes it as an innovative scheme that other countries should imitate. The breadth of the scheme reduces the cost to the economy of meeting specific emission targets.

The scheme would cover 80% of total emissions and 55% of emissions outside of agriculture and waste disposal which would not be covered.

It moves toward taking action before the rest of the world does so – a decisive advance. It also sets up a debate between the inept heavy-handed State-based schemes which see centralized government promotion of renewable technologies such as wind and solar replaced by a market-driven approach which provides incentives for energy-entrepreneurs and energy-consumers to come up with economically efficient solutions. The plodders in the Victorian Government (particularly Thwaites) with their irrational policies are criticizing the scheme – their sensitivity is justified because they will be well and truly caught with their pants around their ankles. The comments of the ACF on the need for an a priori commitment to renewables are foolish.

The plan has been criticized for moving slowly. This is difficult to understand since the targets will not be decided until next year. Given the resource-orientation of our exports and the likelihood that carbon-intensive industries will immediately just move offshore if Australia makes unilateral large cuts I think caution here is warranted. It is pointless to destroy our major industries if the only effect is to drive such industries to countries where they will not be subject to emission controls. Moreover the case for being cautious is strengthened by the broad base of the scheme.

Features of the report:

1. Unlike the Labor Party posturing it recognizes the real costs of the measures to be adopted. It recognizes the need to cut carbon emissions and that this will cost us. It therefore stresses the need for a cautious response at least initially.

Australia’s economy is built on extractive natural resource industries. We need deeper emissions cuts with time but should be careful, not cavalier, with these.

2. The report takes it as a premise that we need to create a more certain policy environment where we spell out what we will do. Currently many investments are being deferred because of lack of certainty. The issue is to address the uncertainty concerns of the power sector and other areas of industry. This is one of the reasons for needing to act now.

Thus we need forward projections of desired emissions cutbacks and a forward carbon price that will help business plans.

3. Unlike other approaches (e.g. the State Labor governments) this is a market-driven approach not one that involves picking future energy sector winners. Markets will decide the energy sector winners (not governments) and markets will determine a market for offsets such as forest plantations.

Picking winners will impose unnecessary economic costs if market-based procedures can select the cost-minimizing ways of reducing emissions targets.

4. The last point raises the issue of offsets generally. Australia creates 1.2% of the world’s emissions but has vast biodiversity resources which offset these omissions. This is an important contrast to Europe, China and Japan.

5. Our emissions-intensive exporters should not lose business to overseas competitors who face no emissions control. This would hurt us and achieve nothing in improving the global environment. Indeed given that our own emissions-intensive industries are world’s best practice, off-shoring these activities might lead to a deterioration in the global environment.

6. Exploring new technologies and seeking greater international co-operation on climate change should continue to be central, auxiliary policies.

7. The greatest efficiency in reducing the costs of emissions cutbacks would occur through international emissions trading schemes. This seems a long way off however. Our scheme should be flexible enough to integrate with a future global scheme.

8. Agriculture and waste disposal would initially be exempted but should be brought into the scheme as soon as ambiguities in computing emission levels and in measuring the sector’s contributions to carbon offsets is clarified. It is important that agriculture be rapidly brought into the scheme since it can contribute to the market for offsets. It can already operate in the offsets market.

9. After setting long-term emission goals and desired emissions trajectories, some emissions permits would be distributed in 2012 as an initial once off free distribution providing compensations to existing businesses which suffer asset value losses (this is essentially the BCA plan) as a consequence of emissions trading. Additional contracts would be auctioned. This is sensible and improves political acceptability. The free permits would be dated and would last for 10 years or more. Other permits would be issued for 5 years.

A ‘safety valve’ emissions fee will allow accommodation of unexpected costs during the first few years of the scheme. This fee would be set a bit higher than the expected price of a traded permit and would apply to firms emitting more than their quota to encourage compliance with the quota. This fee would prevent unforeseen demands for quotas driving emission costs to levels that would damage industry.

10. Quotas could be ‘banked’ or carried forward but quotas could not be borrowed to meet current commitments. This promotes efficiency and flexibility.

11. Revenues from auctioned quotas and emission fees would be channeled in low emissions R&D and to address market failures which limit the uptake of improved energy efficiency technologies. So there is hypothecation provided the revenues are not wasted.

There are a host of other interesting details such as seeking efficient markets. The nitty-gritty details of the scheme are presented here. A very good read.