EXECUTIVE SUMMARY
The environmental debate in Australia and overseas is cast in terms which often suggest that economic growth and environmental objectives are in conflict. Cross-country comparisons suggest, to the contrary, that economic growth and environmental enhancement go together. Increased income enables us to afford greater spending on environmental amenities. It is also clear that Eastern European and other poor countries have far inferior environmental conditions -- yet many, spurred on by the views of Dr Suzuki and other media commentators, continue to see economic growth as a major environmental problem.
Although trade-offs must inevitably be made, analysis of economic development in Australia also tells us that economic and ecological goals are mutually supporting. Income growth and environmental care go hand-in-hand. This is particularly so when sensible economic rules apply, and if valuable amenities are vested in owners with a "duty of care". The history of progress in Australia is very much the history of the use, re-development and re-use of a very wide range of natural resources, notably land, minerals and our oceans and other water resources. In the case of minerals, it is clearly possible to extract value, to generate a wide range of manufacturing and service activities, and subsequently to restore the land to attractive and even superior forms.
Australia has, despite its labour market and regulatory disadvantages, a competitive edge in a wide range of resource and land based projects. The resources sector, including agriculture and mining, accounted for between 65% and 73% of exports of goods and services over the 1980s. These primary sectors generated directly 9%-10% of GDP at factor cost over the 1980s. These areas oj competitive strength, in turn, sustain manufacturing and service activities on a large scale and generate a major share of community income.
Australia also has massive tourism potential, as we and the rest of the world seek to enjoy our abundant natural endowments. To capitalise on increased tourism often means engaging in development, but it can also mean preservation of what we have. If, despite these opportunities, there is a surge of opinion in favour of restraining growth and turning off major development projects, then Australia has every chance of becoming a nation unable to afford the good things in life, including clean air and water, and a wide range of attractive environmental amenities. Policies based on limiting economic growth are a real danger to sustaining and enriching the Australian way of life. Australia needs increased investment, higher savings, and an expansion of the quality and quantity of capital deployed.
CAPITALISM, PROPERTY RIGHTS AND MARKETS
The National Priorities Project argues that economic growth is part of the solution to the environmental challenge. Growth enables us to afford improved technologies to deal with water, air and congestion problems. The fundamentals of capitalism, such as the careful designation of property rights and obligations, the enforcement of common law, and the facilitation by government of trading in emissions quotas and so forth, are the essence of efficient solutions to the environmental challenges. The major failures in the environmental area, as seen in this book, stem not from the market or from economic growth, but from the failure, often of government, to facilitate market transactions over key parts of our economy in which environmental "bads" are produced.
As an example, emissions and effluent can, under certain designations of property rights, be well described as invasions of private property -- as people are tipping their garbage, if you like, into others' spaces. The difficulty is that property rights over the water, air and land which is invaded by unwelcome pollution, are usually poorly defined. Often this is because the cost of defining and monitoring makes a true vesting of such rights infeasible or technically difficult. There may also be a lack of common law access to compensation, such that the well meaning actions of free agents in the market place produce inferior outcomes to those which would arise with properly designated trading in environmental "bads".
The challenge for government, for bureaucrats and for the community at large, is to devise "rules of the game" to minimise these areas where it is not possible for individuals to express their own preference judgements. Individuals acting privately or in groups can best enhance their future and present opportunities. Self interest, rather than "command and control" strategies, are more reliable ways of generating improvements, whether economic or environmental. The literature on privatisation, and on the performance of capitalist versus collectivist economic systems in recent decades, tells us that well defined property rights, clear intelligible and properly enforced laws, and monitoring of behaviour, are the logical and central function of government. Our prosperity hinges quite crucially on a system in which property is privately owned or managed within the common law, and subject to the rules and covenants laid down by government. It is, therefore, unsurprising that the most polluting areas of the world happen to be in the communist countries where property rights are poorly defined.
In Australia, as in other advanced industrial countries, the areas most problematic in terms of environmental pollution include vehicle emissions, toxic waste, pollution of oceans through sewage, and so forth. These are areas in which property rights are being abused -- or where entitlement is difficult to vest. Pollution is often a problem of failure to construct markets based on private property, rather than a failure of markets. The problem may be due to a failure of government to install proper incentive systems, or an unwillingness to create the basis for markets and trading in environmental products, or bi-products. Designating water, fishing, air, emissions, and noise rights, and then allowing trading in these rights is a logical function for government, often at the local level.
A further problem is that governments have, courtesy of taxpayers, rather deep pockets. Hence, the state enterprises such as those in transport, electricity, waste management and so forth, can be funded and their poor performance hidden for decades by the capacity of governments to over-charge for other services, or use taxes to fund deficits. There is rarely the incentive in such organisations to do what is most efficient, but rather an incentive to assist interest groups who happen to have political or other forms of power. Moreover, where government agencies violate environmental standards, it is unlikely that government will ever prosecute an offender if the offender is another arm of government. However, with properly defined property rights, with private agencies taking responsibility for water, land, ocean facilities, and so forth, and with legally accountable boards and chief executives, there are incentive mechanisms for holding accountable the polluters who violate standards and covenants.
Technology is also bringing the potential for additional rights to be brought within the market system. For example, recent research suggests that car emissions such as carbon monoxide and 862 can be monitored at minuscule cost per car using modern day technology involving computers and scanners. The location of cars can also be monitored electronically, at very small unit cost, thereby making it possible for "fast lane clubs", and for congestion taxes to be imposed on the owners of cars causing the problem. Taxes can, with appropriate technology, also be applied according to the volume and nature of the emissions.
Private ownership and market approaches can, then, be a powerful force enhancing environmental performance, once rules have been set. Capitalism is naturally a conserver of resources, and an enemy of waste. It is not therefore a question of less or more market activity, nor of big government or small government. It is not a debate between privatisation and state ownership. Rather, it is a debate about government doing what it is comparatively good at -- defining and enforcing the rules -- and withdrawing from what it is bad at -- managing and owning enterprises -- so that the private sector can profit from achieving goals within the government set rules.
ECOLOGICALLY SUSTAINABLE DEVELOPMENT
It is hard to imagine that anyone in Australia is in favour of unsustainable development. Yet there is now a major debate, replete with Prime Ministerial working parties, on a Government discussion paper entitled Ecologically Sustainable Development. The soothing verbal cocktail of "ecologically sustainable development" is at best a form of motherhood, and at worst a dangerous brew. In the hands of an anti-development brigade, "sustainability", to use the shorthand, could be used to stop or slow down key resource intensive projects, which are capable both of raising our standard of living and enabling us to afford enhanced environmental standards.
As an example of the ideas of this book, the debate on "ecologically sustainable development" is seen as an opportunity to demonstrate that economic growth, properly defined, and well constructed market systems, are compatible with the goal of providing future generations with resources and opportunities even more valuable than those enjoyed by current generations.
What we do not endorse, and what we fear may be endorsed by some advocates of "sustainability", is a policy of preventing any use of particular resources on the grounds that they are scarce. All resources are physically scarce, and many non-renewable resources are clearly in limited physical supply. But economic history has demonstrated that it is our intellectual resources, our human ingenuity, our capacity to create substitutes and alternative ways of doing things, which explains not merely that exhaustion of natural resources is not a particularly critical problem, but on the contrary, that the relative price of most of these natural resource based commodities has in fact fallen over the last century.
The real price of primary commodities fell on average by 0.5% per annum, from 1900 to 1986 (see Grilli and Yang, 1987) thanks to technical innovations and the discovery of widespread substitution possibilities. The Club of Rome, and other doomsdayers have been proven wrong by the capacity of intellectual resources -- and resulting technology -- to create effectively infinite substitution possibilities out of finite physical or primary resources. On current trends of mineral resource depletion, given the natural occurrence of minerals, there is no metal which would need to be wound back, so long as relative prices are allowed to rise, in some cases by a factor of four.
Contrary to the popular wisdom espoused by many of the less rational environmentalists, our scarce minerals have been falling in price for centuries, and even oil has fallen in price relative to manufactures apart from times of politically induced shortage. Designated oil reserves always seem to be scheduled to fall a few decades hence, yet three decades later it turns out that yet further discoveries have taken place, making those forecasts turn out to be quite wrong.
What happens is that expected scarcities and higher relative prices subsequently generate exploration, new technologies and so an upward revision in the supply of substitutes for exhaustible resources. Temporary price rises create incentives to find substitutes, to explore new areas, and generally to economise on the use of a particular resource. When it comes to energy resources in general, and oil in particular, the abundance of coal in Australia and the world, the capacity to use solar energy, the availability of nuclear alternatives and many other technological opportunities will continue, we suggest, to ensure that the supply of oil is far from being a fundamental problem. While it is true that liquid fuels sell at a premium because of their portability, and while short-term shortages, due to the crisis of the moment, can create temporary problems, this is more a matter of proper inventory management, and of international political and economic strategy than it is of fundamental resource scarcity.
LOOKING AFTER FUTURE GENERATIONS
A healthy and wealthy Australia will also choose to reserve for the future similar, but not identical, endowments to those we have inherited. Such natural human tendencies ensure that future generations have at least as many options as those that exist today. However, we should not cast economic development in concrete -- nor seek to impose a fixed plan or seek to further rigidity the Australian economy. The essence of economic progress is that opportunities and tastes change, ideas develop and technology advances. Men and women are dynamic learning-oriented individuals, particularly when incentives and opportunities are in place. What is optimal today may be an irrelevant alternative tomorrow, as mankind finds new and better ways of achieving an improved quality of life.
One sure thing about our future is that we do not know it in detail, but we do know that we need incentives to discover and adapt to new information, and not an obligation to conform to predetermined stereotypes. What we wish to achieve is a preservation of options, and the key to this is the sustained and efficient development of our human, physical and intellectual resources.
Our concern for future generations suggests, at least to this set of authors, that labour market reform, tax reform, monetary discipline and a smaller role for government in enterprises and regulation, are the real key to future prosperity. And most importantly, a more prosperous Australia will also be able to afford a higher level of environmental amenities, superior devices for monitoring and controlling emissions, and will have the capacity, for example, to convert waste water into fertiliser or process further out to sea, rather than polluting our beaches with effluent.
THE QUESTION OF RISK
To some, the possibility of greenhouse effects, holes in the ozone layer, depletion of oil resources and so forth, all mean that we are placing our grandchildren at risk in continuing down the current development path. But the risk analysis goes both ways. Any strategy which would stop Australia's major mineral and agricultural projects, hold up pulp and paper processing, prevent logging in a sustainable and economically efficient fashion, is more likely to so lower our standards of living. Such a strategy would limit the economic opportunities for our grandchildren, so that Australia would indeed become the poor white nation of the Pacific, as well as a country with lower environmental standards. Furthermore, an Australia racked by social division, and an Australia doing poorly relative to other countries in the world, is unlikely to be a country free of major social and political risks.
THE CHAPTERS IN BRIEF
In what follows we summarise briefly the issues at the heart of the chapters which follow. Readers with more time, may prefer to proceed at this point to the chapters themselves, rather than suffer the over simplifications inherent in these summaries of summaries!
Chapter 2 brings together the key economic issues relating to environmental issues, and this constitutes an overview of the analytical framework which underlies the book. These issues have been summarised above, and generally suggest that a property rights approach is, in general, preferred to "command and control" strategies if the twin objectives of economic growth and environmental enhancement are to be placed in a reasonable balance.
Chapter 3 sets out the broad historical context, including the evolution of our settlement policies, which led to the clearing of land in Australia, under varying patterns of ownership and regulation of land use by government. We note that the enhancement of the lives of all Australians has clearly involved a dramatic transformation of the Australian landscape. Our city and rural areas, once wild scrub, became quite magnificent places in which to live. While mistakes were made, and while land degradation and salination have been a problem in specific instances, usually these difficulties resulted from inadequate, wrong, or costly information. Typically the problem was the nature of the incentives at the time, rather than any intrinsic tendency amongst the early settlers and farmers, for example, to act in an ecologically unsound manner.
Mineral development has also been a major source of wealth in Australia, with a relatively minor impact on the environment. This is not to say that particular mines have not occasionally had negative impacts. The issue ultimately relates to property rights, incentives and the ways in which the wealth generated is applied to restoration of mine sites and to other activities which enhance our lives. There is nothing intrinsic in mining which harms the environment -- on the contrary. History has clearly demonstrated the capacity of mineral and agricultural activity to dramatically increase Australian living standards, broadly defined.
A century ago, when Australia very much rode on the sheep's back, with major assistance from mineral activities, we were arguably the richest country in the world per capita, and could no doubt afford environmental standards second to none. While subsequently our tariff, taxation, labour market, and other policies have caused Australia to fall behind in the economic growth stakes, and have marginally reduced our capacity to afford high environmental standards, such as clean beaches, we nevertheless continue to be a country better able than most to afford world class environmental amenities.
LAND DEGRADATION
The clearing of forests to create pastures and urban developments on former agricultural land, are both examples of the sort of environmental transformation which has, by some, been labelled "land degradation". We argue, to the contrary, that when faced with the relevant information regarding erosion, acidification and soil fertility, the Australian farm sector has had a spectacularly good record, both in productivity terms and in maintaining an attractive rustic environment. By and large, the incentives facing farmers encourage them to conserve and enhance the land. While it is true that some soil erosion has taken place, typically the costs of erosion have been borne, or at least shared, by the individual farmer. It is nomadic farming, with no rights to ownership of land, which tends to lead to rape of the land, and create erosion. Nomads extract value and move onto the next field, rather than clearing, fertilising, maintaining and indeed, enhancing the productive capacity of the land.
Fundamental to reducing land degradation in Australia is the proper designation of property rights to land, with squatting, and then leasehold and freehold land creating the incentives necessary for sustainable development.
When it comes to irrigation, the key, again, is the careful designation of property rights, in this case for water usage rights, with failure properly to designate entitlements having the capacity both to waste water and to create salinity problems through excessive extraction of water from the rivers. A large part of the difficulty, in the case of irrigation, stems from the failure of government to allow tradeable quotas in water rights. In bur view while land degradation and irrigation have been problem areas, the problem has been too little, rather than too great, a use of markets.
WOOD, WILDLIFE AND WILDERNESS
Just as poorly designated land and water rights can create problems of land degradation and salinity, so too can political ownership of forests and recreational areas inadvertently create patterns of logging, use and abuse of recreational facilities which are far from satisfactory. It is the burden of Chapter 5 of this book that allowing the owners of forest resources to include private parties, including environmental groups, possibly subject to government covenants and other restrictions, will enable more appropriate trade offs between competitive forests uses. These would include timber and use of forests for the environmental amenities provided.
All state governments in Australia have, from late in the 19th Century, pursued a policy of public ownership and management of native forests. Originally driven by fears of timber shortages, 73% of Australia's native forests are now managed by state departments and forestry commissions, yet these enterprises are typically returning inadequate value to their owners, by logging and pricing in ways which do not reflect scarcity values.
These commercial failures of the state forestry enterprises are also associated with perceived failures on the environmental front. In the pursuit off their environmental objectives, environmental groups have blockaded logging operations and demanded complete withdrawal of timber interests from state forests.
We argue that the goal of forest management should not be an "all or nothing" approach, but rather aim at a balance of competitive uses of forests. This balance can be achieved by allowing community valuations of timber to be reflected fully in timber prices, and for mixed leisure, mineral and timber uses of forest lands, possibly subject to covenants reflecting environmental objectives laid down by Parliament.
The strategies and policies evaluated in this Chapter include:
- traditional "sustained yield -- even flow management", as commonly practised by the forests services;
- economic management for timber production alone;
- "scientific" multiple use management with public ownership;
- vesting of private rights to forests in conservation groups and the timber industry, and the use of market based prices.
We argue that research demonstrates that proper economic management of privately owned forests, subject to government covenants, would tend to lead to fewer forests being logged, with the forests being managed more productively, both in terms of timber use and provision of environmental amenities.
MINING AND THE ENVIRONMENT
Australia is a world leader in energy and resources, with minerals and processed mining products accounting for roughly 50% of Australia's exports. Australian mining industry output has grown eight-fold over the last quarter of a century and accounts for a good deal of the standard of living of Australians.
Whether it be mineral sands, uranium, diamonds, coal or iron, mining neither creates nor destroys resources, but it does transform what is often barren territory into commodities of considerable value. While there are mining sites, like farm areas, which have been less than perfectly restored or maintained, proper specification of rights, obligations and "the duty of care" is capable of giving us both the economic fruits of mineral development and the enhanced environment which can flow naturally from a wealthier and healthier community.
MARKETS AND SEWERAGE
The sewerage industry has a written down asset value of $18 billion (Industry Commission, 1990) making it one of our largest industry sectors. The capital sums involved in providing sewerage services together with actual and potential environmental problems associated with the industry, make it imperative that this be one of the more efficient and well managed industries in the country. Regrettably, the "waste water industry", has, in conjunction with the water supply industry, been a state monopoly, with little attempt to price services or to allow private sector competition in waste processing. That said, natural monopoly and externality arguments make a case for government involvement -- the question is how to achieve private sector efficiencies without allowing the abuse of the monopoly powers that might arise owing to the existence of a natural monopoly over the pipes and associated infrastructure.
There have been a number of innovations in recent years, for example, in the US private companies have been installing waste treatment plants in competition with the state sector. In France, while municipalities have continued to own the pipe networks, the provision of water and waste water services has been through competitive franchising, with the terms and conditions of the franchise being designed to achieve both competitive outcomes and maintenance networks.
In the UK, in 1988, the water and waste water industry was privatised with assets being sold into separate PLCs which, nevertheless, have geographical monopolies based on the river basins. Attempts to protect consumers against monopoly power have led to very detailed licensing arrangements and, at the time of writing, there is a question mark as to whether private monopolies and centralised regulation are delivering an improved quality of service.
FISHING AND PROPERTY RIGHTS
A good example of the application of property rights concepts in the environmental debate relates to the problem of "over-fishing". Over-fishing is not intrinsically a problem of private enterprise, but a consequence of common ownership -- or more precisely lack of ownership -- of the fish resource. In this chapter we explore the notion that government should issue and enforce ceiling quotas of fishing rights, with fishermen competing to purchase quotas, which are set such that the size of the resource is sustained, not undermined.
Our particular case study comes from the Chatham Islands in NZ. These islands, like other fishing areas, have, over the last century, experienced spectacular booms and busts in relation to seals, whales, cod, and most notoriously, rock lobster. Absence of defined rights to fish in these and other areas causes rapid depletion of the resource. In 1987 abalone (paua) fishermen were presented with individual transferable quotas (ITQs) that allow the taking of a specific tonnage of fish per annum. What the study reveals is that the careful designation of rights to fish facilitated profitable management of a valuable resource, while sustaining the resource.
AIR POLLUTION
Casual reading of the popular press and much localised experience, has convinced many that air pollution has been a general and growing problem in Western countries. However, there is much evidence of the successful resolution of air pollution problems. Today the air of most developed countries is much cleaner than it was a century ago, not withstanding traffic growth and increased energy consumption. Whereas influenza, pneumonia and tuberculosis -- all largely attributable to pollution -- accounted for about 25% of the deaths at the end of the 19th Century, they now account for less than 5% in a population in which life expectancy has increased by 50%.
Air pollution in Australia has also decreased to a surprising degree in many areas over recent years, for example, sulphur dioxide levels have trended downwards and in 1988 were less than 50% of the government designated maximum acceptable peak. While emissions problems are far from trivial, we suggest in Chapter 9, that new technologies responding to tradeable emissions quotas, registration charges which reflect emissions and other market-based charges, have a capacity significantly to reduce environmental pollution.
The abatement of urban air pollution levels has been achieved by "command and control" regulation. Where markets do not automatically equilibrate supply and demand because of monitoring difficulties, total permitted supply could be specified by a government authority, with companies acquiring and trading quotas to the limited emissions. Such quasi-market approaches will pay dividends when applied to some sources; however continuation of "command and control" approaches seems to be inevitable in the case of domestic and, perhaps, automotive emissions. In a strict sense, therefore, the achievement of efficiency largely turns on the nature of the regulation. In Chapter 9 we argue that if market mechanisms are employed to allow polluters flexibility in meeting the levels desired, then we can achieve the same emissions standards at a reduced cost.
THE ENHANCED GREENHOUSE EFFECT
In Chapter 10 we explore issues related to global warming, associated with the enhanced greenhouse effect. There is no dispute that increased concentrations of the gases which act as a blanket around the earth, and which modify its energy balance, can have significant climatic effects. In this chapter we query, however, some of the evidence as to the likely consequences of the greenhouse effect, while in no way disputing the need for policies targeted on effective reductions in emissions which, in any case, may be environmental sensible. Our discussion is in terms of three dimensions to the greenhouse, emissions and global warming debate; they are:
- determining the facts -- which are in dispute;
- measuring or predicting the likely quantitative effect of the enhanced greenhouse effect, and the alternative scenarios; and
- setting out appropriate policies and options.
Our conclusion, in brief, is that while there is a case for expecting global warming, there is not conclusive evidence that temperatures will rise significantly. The statistical models used are simply not robust, or capable of fine predictions. Without such evidence the prediction of significant global warming remains no more plausible than theories of the impending "Ice Age" previously being predicted by some climatologists.
We note also that significant global warming could have both positive and negative effects, for example, increased concentrations of carbon dioxide can be beneficial through accelerating plant growth and lowering the water requirements for crops. If the greenhouse phenomenon proves well founded, both the positive and negative implications need to be assessed before concluding that the greenhouse effect poses a potential problem.
On the assumption that greenhouse gases are a problem, our preferred approach is one which favours reduced emissions through tradeable emissions quotas, possible carbon or emissions taxes, and other incentives to change behaviour. Policy decisions should be influenced by assessments of costs and benefits of different levels of increased greenhouse gas emissions under alternative policy assumptions. Furthermore, there is a general presumption that market mechanisms should be used in preference to "command and control" strategies, since they are more effective devices than legislating the obligation to use particular technologies. If what we care about is emissions then we need incentives for firms to devise new and improved technologies, rather than impose known and no doubt dated and costly technologies.
CONCLUSION
The debate on environmental policy should focus on ways of bringing market based incentives to the fore in the environmental area. Our real priority, both for current and future generations, concerns the chronic failure of other economic policy settings to generate sustained economic progress. Government policies should, therefore, focus on removing inflation, getting interest rates to international levels, and generally promoting efficient use of resources through sensible taxation systems. In combination with the proper internalisation of external environmental costs, such an economic strategy has the capacity to make Australia healthy, wealthy, and environmental attractive.
REFERENCES
Grillli, E.R. and Yang, M.C. (1987) "Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows", The World Bank Economic Review, Vol. 2, No. 1.
Industry Commission, (1990) Measuring the Performance of Selected Government Business Enterprises, Canberra, August.
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