Cost of carbon cuts hidden in dark plume

REDUCING emissions of carbon dioxide (CO₂) presents the most difficult and costly task Australia has contemplated.

Most CO₂ is a by-product of fossil fuels -- coal, oil and gas.

Next week Ross Garnaut's climate change review is to deliver a draft report to the Federal Government.

The review's initial papers favour forcing lower emissions of CO₂ and other "greenhouse gases" using an auction-based tax.  This would allow the creation of tradeable carbon credits.  Garnaut opposes any free allocations to major existing energy producers.

The review recognises that reducing emissions means higher electricity prices.  One proposal is a get-out-of-jail-free card to reimburse "trade-exposed sectors" like aluminium smelters.  But this, like suggestions to exclude petrol, means other users pay more.

It is pointless to introduce an Australian carbon tax unless every country has a similar imposition.  Without that, industries discharging high levels of CO₂ would simply shift to countries with zero or low taxes.

Any international agreement would entail all countries being granted equal emissions per head of population.  To stabilise world emissions means adopting the world average of 4.5 tonnes of CO₂ per head.  Australia produces almost four times that much due to our prosperity and huge resource base.

It is virtually impossible to estimate the economic effect of measures that force lower CO₂ emissions.

We can confidently predict outcomes from taxes designed to bring about minor changes in supply of non-essential goods.  However, we are in uncharted waters in quantifying the costs of major reductions in carbon emissions.

This is because carbon emissions are intrinsic to energy production from fossil fuels, which are the backbone of our electricity supply and transport systems.  Nuclear power aside, no known technology can replace fossil fuels except at the margin.  And nuclear power was not even mentioned in the initial Garnaut Review papers.

Access Economics (AE) has analysed Australia's energy and income interactions in an attempt to estimate the costs of reducing CO₂ emissions.  AE examined reducing CO₂ by 11 per cent in 2020 -- an ask that's far short of the 70 per cent reduction necessary for CO₂ stabilisation at 4.5 tonnes per head.

AE's calculations used conservative assumptions, including a highly optimistic substitution of coal-based power by solar and wind.  These assumptions allowed a forecast of the electricity price increase of only 18 per cent.  Even so, they put the annual costs to the economy of this very limited step to reduce emissions at $18 billion -- almost $1000 per person.

Victoria faces a magnification of these costs.  Because the state's power supply is centred on brown coal, the tax rate necessary to bring about reduced emission levels hits Victoria with a higher cost.  A carbon tax means Victorian electricity suppliers pay 40 per cent more tax than those north of the Murray.

Outcomes of the impending new carbon regime are becoming evident.

Among these is the dismantling of the Latrobe Valley power industry.

Initial steps towards this are under way, with contracts for electricity beyond mid-2010 drying up.

This prevents any new investment and, if the process continues, will be followed by plant closures.

ADVERTISEMENT

A move towards certainty, please

Many reasons have been given for the closure of the Goodyear tyre factory with the loss of 600 jobs.  The strong dollar, high oil prices, and poor management were all to blame.  No doubt the dollar and oil prices exacerbated the problem.  Allegations of poor management miss the point.  Goodyear has been restructuring its global operations and these Australia-centric arguments do not explain what is happening.

Goodyear has made plain its desire to expand production of "high-value-added tyres in low-cost operations".  In other words, Goodyear can make better tyres for cheaper elsewhere.  This is the type of decision companies make every day -- how best to meet consumer demand and keep costs down.  The scale of the decision, of course, is not an everyday decision.  Yet over the past six months several high-profile plant closures have been announced in Australia.

These closures have been in manufacturing -- particularly the automotive industry.  This must be particularly troubling for the Rudd Government.  Kevin Rudd is committed to Australia having a manufacturing base and "making things".  To that end, the Federal Government has revived industry policy.  Industry policy, however, has a spectacular history of failure.

This latest setback gives reason to pause and reassess.  Inconsistent public policy is a source of uncertainty.

Any large-scale, energy-intensive production process operates under the shadow of the emissions trading system to be introduced in 2010.  Low-cost energy, which was a key competitive advantage for Australia, is receding into the sunset.

Australian manufacturing costs are already high and under current government policy the costs are only going to rise.

Industry policy fails in so many ways.  At the broader economic level, it fails because governments' ability to promote business is limited.  Goodyear has made it clear the closure is not related to any lack of government support.  If companies can produce higher-quality goods at lower cost by relocating from Australia, then consumers and shareholders are better off.  Taxpayers are better off when governments don't not try to delay the inevitable.

The real losers from industry policy failure are the employees.  It is here that the failures of industry policy are real, apparent and very human.  Though most employees at Goodyear would have generic skills, some would have industry-specific qualifications and skills in what are now dead-end jobs.  While most will get other jobs, some won't;  those who entered an industry that was buttressed by government industry policy should feel aggrieved.  They all, however, face the emotional costs of having lost their job, of having their career paths disrupted, and the angst of finding a new job.  Even when they do manage to replace the lost income, those emotional costs are likely to linger.

Some observers will criticise Goodyear for only thinking of the bottom line and trashing the local community.  They might suggest that companies have a social responsibility greater than merely earning a profit.  Some might even say we live in a society and not an economy.  These are popular complaints against business but they miss the mark.  Workers are only one interest group in society.  There is no reason why employment need be an act of charity.  As Adam Smith said:  "Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens."  Employment has a dignity far beyond begging.

So, what can government do?  First, government should have greater faith in the market.  Industry policy simply does not work economically, and the social and human costs of failure are enormous.

The Government should heed a less-trumpeted lesson of the Hawke-Keating era:  markets work better than government.  Though industry plans abounded, these masked a deregulation of the economy in which many protected jobs were lost.  Paul Keating was once asked what he had to say to those people.  His answer:  "How do you like your new job?"

ADVERTISEMENT

A good word for the ATO

The Tax Office is labouring to be helpful under a pile of complex legislation.

The Australian Taxation Office can be blamed for a lot.  Sometimes the blame is justified.  Everyone working through the weekend to prepare for the end of the financial year will be cursing the ATO for all manner of things.  But responsibility for the country's tax system doesn't rest entirely with the ATO.

Incomprehensible tax legislation, which even the tax commissioner admits most taxpayers have no hope of understanding, is as much a fault of politicians as of the ATO.  It's not the ATO's fault that "tax reform" is the slogan politicians utter when they have no intention of any such thing.

Sometimes the ATO gets things right.  On such occasions the ATO could not unreasonably hope to receive, if not congratulations, then at least an acknowledgement it was trying to be helpful.

However when it comes to public relations, the ATO can't seem to take a trick.  The ATO's recent efforts at trying to be a little more open and transparent resulted in it being abused by Australia's inveterate complainant, Dick Smith.

In March the tax commissioner, Michael D'Ascenzo, launched a booklet, Wealthy and Wise:  A tax guide for Australia's wealthiest people.  The booklet is a handy guide for the "highly wealthy" (the 1200 Australians worth more than $30 million).  It can be summarised into three key points.

First:  don't cheat on your tax.

Second:  if you do cheat on your tax there's a good chance you'll be caught.  The ATO helpfully points out that financial penalties and imprisonment are not the worst of the consequences that can befall convicted tax cheats.

"The greatest cost of non-compliance can be the damage done to the individual's reputation and standing in the eyes of the wider Australian community."

The ATO could have gone on to say, but didn't, that a mob of television cameramen camping out on the front lawn of the family home is not a pleasant experience.

Third:  regardless of anything your accountant tells you, you're still responsible if something goes wrong.

When Dick Smith received Wealthy and Wise in the mail he hit the roof.  His reaction made media headlines earlier this week.  He promised to consider becoming the "greatest legal tax minimiser in the history of Australia".  He didn't like being told that because he was "highly wealthy" his tax affairs were therefore subjected to closer scrutiny.

Smith made it sound as if minimising tax was a bad thing.  But as Wealthy and Wise explicitly says, every taxpayer has the right "to legally minimise their business costs, protect and maintain their wealth and build their businesses".

Nothing stops Smith making a voluntary donation to the government.

Smith was also angry that the government wastes his taxes.  It's a wonder it's taken this long for him to get angry about something that governments have been doing since time immemorial.  He claimed that a billion dollars of taxpayers' money had been lost on the Seasprite helicopters project.

This was money that could have been spent on building a new hospital.  This is true, but so what?  The ATO is a powerful organisation but it doesn't yet make decisions about defence procurement.

Much of what is in Wealthy and Wise is common sense and unobjectionable.  What's pleasing (and not a little surprising) is that it had something positive to say about the rich.

"Wealthy people are behind some of Australia's largest and most successful businesses.  They employ many Australians and significantly contribute to our economy and tax revenue.  Many take on a great deal of personal risk to build their businesses."

Maybe someone in the ATO has been reading the speeches of John Hutton, the British Minister for Enterprise.

A few months ago Hutton said some very un-Labour things.  "So rather than questioning whether high salaries are morally justified, we should celebrate the fact that people can be enormously successful in this country ... It would be a good thing for our country if there were more millionaires in Britain, not fewer."

Although the Rudd government has mimicked much of Britain's "New Labour", it's difficult to imagine any federal minister going quite as far as Hutton.  Our domestic politicians are far more comfortable castigating executives for being paid too much.

As bizarre as it sounds, maybe next time the issue of executive salaries comes up, our politicians could take a leaf out of the ATO's booklet and start talking about how fortunate Australia is to have so many wealthy people.

ADVERTISEMENT

Barrages Block Sense

Let's be honest:  a dry river is not necessarily an environmental catastrophe.  Last week we were warned that a leaked government report claims there is only six months to save the Murray-Darling Basin.

In response, the Federal Opposition leader, Brendan Nelson, called on the Prime Minister, Kelvin Rudd, to make a joint tour of the River Murray's lower lakes region.

Mr Nelson said he thought it was "very important that the leaders of this nation have a first-hand look at the environmental, economic and human catastrophe which is unfolding in the Lower Murray lakes".

The leaked report focused on the lower lakes, and as I have previously written (Acid Sulfate Blame Floating Upstream, The Land, May 15), a solution to many of the environmental problems at the Murray's mouth is to simply open the barrages and let the area flood with saltwater.

The barrages were built from the 1920s to keep the Southern Ocean out and to raise the lake level, including for boating.

These same barrages also facilitated the development of irrigated farming in this area, but they are unnatural.

If the barrages were now opened, irrigators dependent on freshwater from the lower lakes would need to be compensated.

But the alternative, continuing to send large quantities of water from the drought-drained reserves in the Hume and Dartmouth dams during this protracted big dry, is less viable.

Some argue that if a permanent weir was constructed just upstream of the lakes at Wellington and the barrages used under "an adaptive management regime", there could be water savings in the order of 750,000 megalitres a year.

Opening the barrages would take some pressure off the system, because less water would need to be allocated to South Australia, but the river could still run dry.

Indeed, it doesn't matter how many leaked government reports call for more water for environmental flows, if there's ongoing drought and the upstream dams runs dry, there will be simply no water for the river.

It would be an economic and human catastrophe for the many towns now dependent on the river for their water supply, but it would not necessarily be a catastrophe for the environment.

The River Murray in its natural state could be reduced to a chain of saline ponds.

Indeed, the idea that a river should be always brimming with freshwater is a very European concept -- in reality, alien to a land of drought and flooding rains.

So, let's be honest, many South Australians want to keep the barrages shut to the Southern Ocean and many Victorians and New South Welshmen want to keep the river full of water -- not to save the environment, but to avoid what Mr Nelson has described as a potential economic and social catastrophe.

ADVERTISEMENT

EU's cheese naming proposals are on the nose

It's almost enough to make you choke on your Aussiemade camembert.  The European Union is trying to use complex intellectual property rights rules to lock out Australia's dairy industry from export markets through the Doha round of World Trade Organisation negotiations.

Australia's dairy industry is valued at more than $3 billion at the farm gate, and $9.2 billion wholesale, of which more than $2.5 billion is earned in exports.

But under the EU's proposal, Australian cheese producers may no longer be able to use simple names like "parmesan" or "brie" in export markets.  Cheeses at risk also include mozzarella, fetta and many others.

At the start of the Doha round of WTO talks in 2001, participating governments committed to negotiate an international system of registration and notification for geographic indicators, or GIs.

GIs are a comparatively new -- and very questionable -- form of intellectual property.

GIs assign rights to names that indicate the geographic origin of a good, or a certain quality, reputation or characteristic linked to its origin.

The regularly cited example of a GI is "champagne" -- a word that can now be used to describe only sparkling wine from the Champagne region of France.

The negotiation for international registration of GIs was supposed to be limited to wines and spirits.  WTO members are required to prevent the registration of trademarks for GI-covered wines and spirits in their home country.

The EU is now trying to extend GIs to include all agricultural products, in particular cheese.  Under the proposal, countries would have to argue why a GI should not be registered and enforced in their territory.

The EU has deliberately designed the rules to place the burden of proof on the protesting country, not the applicant.

For Australia, there are incentives to fight most, if not all, applications on cheeses.  But for countries that do not produce or export cheeses, fighting a GI registration may be more effort than it is worth.

Japan, other parts of Asia, and North Africa all import cheese from Australia.  Yet it is doubtful they would bother fighting GIs on largely imported cheeses.  If they don't, Australian diary producers will no longer be able to export those cheeses under their consumer-recognised names.

The EU proposal is trying to claw back generic product names.  In doing so, they are also hoping to expand exports into markets where cheeses with generic names have become commonly used.

For example, parmesan cheese has become renowned across the world for a particular taste, not for its origins in Italy's Parma region.

The EU is trying to achieve its objective by negotiating GI extension as part of the final WTO agreement for the Doha round, which encompasses all areas for potential liberalisation.  By doing so, the EU is trying to use GI extension as part of the negotiation package for reducing its agriculture export subsidies.

The risk for Australian industry is that in the haste to get a broader agreement in the Doha round, Australian interests will be sold out.  The main event of these negotiations is reduction of European and American agriculture subsidies and developing country industrial tariffs.  GI extension is merely a side event.

Indeed, some developing countries are now supporting the EU's GI extension proposal in order to get support for their own amendments to WTO intellectual property rules.

The Australian government needs to take further, strong action now to oppose the EU's plans.  Not doing so will bring a short-term political cost.  But the long-term cost will be borne by a diminished Australian dairy industry.

ADVERTISEMENT

Petrol pricing by shifting the focus to loyalty schemes

The ACCC's FuelWatch scheme will place draconian limitations on price competition within the retail market for petrol.  But petrol stations will still compete and the ACCC will soon discover that FuelWatch makes petrol pricing less, rather than more, transparent.

At present petrol retailers compete on price and on promotions.  The dominant form of competition, however, is in the form of price competition.  That is likely to rapidly change to promotions.  This change in corporate behaviour is likely to result in less transparent pricing, increased transaction costs, and will increase the price of petrol sold to those individuals least able to fully participate in promotional schemes.

At present some supermarkets and retail outlets provide dockets allowing shoppers to redeem 4c a litre from a petrol purchase.  Some petrol retailers augment that 4c with an additional amount if the customer makes a trivial purchase at the petrol retailer.

All of these docket schemes require the customer to spend a predetermined amount at specific retailers before participating.  To the extent that petrol prices will now be fixed, these docket schemes will become more valuable.  As they become more valuable, the potential for them to be used as a method to increase product competitiveness also increases.

At present the docket scheme consists of a barcode printed at the end of a receipt.  But it is easy to imagine that supermarket chains could create full-blown loyalty programs with cards (much like the current "Fly-Buys" card system).  Indeed Woolworths has just completed a trial of petrol cards in NSW.  That scheme could be very easily extended.

Consumers could accumulate "petrol points" on their cards and subsequently redeem those points at their next petrol purchase.  At present a 4c docket is issued every time a customer spends more than $30 in a store.  A more sophisticated system, however, could easily evolve whereby points are accumulated according to the total spend.  The technology to introduce such a scheme already exists.

Given that high-income individuals spend more than low-income individuals, the impact of this change is likely to be regressive.  Low-income customers will have fewer points to redeem and so will face higher effective petrol prices.  Essentially the rich are more likely to get cheaper petrol at the expense of low-income earners.

Furthermore, there would be nothing to stop petrol retailers from offering a time-varying conversion rate for petrol points.  Those petrol retailers with high prices could offer a higher discount per petrol point.  Similarly, those retailers with low prices could lower the discount per petrol point (of course, they could also simply declare some or all of their pumps to be "out of order").  Uncertainty about petrol prices could transfer to a focus on uncertainty about petrol points and the discount to the consumer.

A national FuelWatch scheme would encourage the development of loyalty schemes that would tie individual customers to particular, and existing, retailers.  This is likely to increase any market power that those existing retailers already exercise.  It could also result in individual motorists being less willing to shop around for the cheapest petrol -- the loyalty scheme, as indicated, would be more valuable than the current docket scheme.  It is not clear that the ACCC has a brief to enhance the market power of existing firms.

Generally consumers would prefer firms to compete on price and not on loyalty schemes.  After all, the cost of loyalty schemes is factored into the price of products consumers buy.  The ACCC now argues that FuelWatch is only supposed to enhance price transparency, yet if non-price competition becomes dominant in the market price transparency will be obscured.

The FuelWatch scheme is likely to transfer competition from price to non-price considerations.  That reduces the transparency of the market and disadvantages those consumers who would prefer a lower price to an enhanced loyalty scheme.  The unintended consequences of the FuelWatch scheme will be to increase existing barriers to entry, increase market power of existing retailers and disadvantage those consumers who buy their petrol at the bottom of the pricing cycle.

In order to protect the "integrity" of the FuelWatch system, the ACCC would have to prohibit competition for petrol in both pricing and promotional terms.  This highlights the fundamental problem with FuelWatch.  In order to prevent petrol retailers from raising their prices the ACCC needs to prevent retailers selling cheap petrol.

ADVERTISEMENT

It's bad policy to play blame game

The Federal Government is in serious trouble;  blaming foreigners for domestic ills is the last refuge in politics.  The Government is blaming our neighbours' subsidised petrol prices for high prices in Australia.  We are invited to believe that Australian working families struggle to pay to fill the tank because Chinese and Indonesian working families are getting a handout.

The trouble for the Government began when Kevin Rudd promised to maintain downward pressure on petrol prices.  The promise of a petrol price commissioner was made at the ALP campaign launch -- the average petrol price that day was $1.291 a litre in Melbourne.  That policy has failed.  Plan B was FuelWatch.  The best the Australian Competition and Consumer Commission can say is that FuelWatch won't harm consumers.

By trying to remove foreign fuel subsidies, the Australian Government can claim to be promoting economic efficiency abroad and attempting to reduce petrol prices at home.

There are, however, three issues to consider.  First is the impact of fuel subsidies on world oil and petrol prices.  The Organisation of the Petroleum Exporting Countries forecasts that Chinese demand for oil will be 7.98 million barrels a day this year -- 9.2% of world demand.  In contrast, North America makes up 29.6% of world demand.  The demand price elasticity for oil and petrol is very low.  If we assume that China has a 20% subsidy for petrol, that implies excess petrol consumption of about 2%.

If China were to remove that subsidy, its oil demand might reduce by about 160,000 barrels a day (0.18% of daily world demand).  Assuming no changes in world supply, and an oil price of $US130 a barrel, that implies prices would fall by $US2.34 or about $0.02 to $0.03 a litre at the pump.  This sort of calculation shows that fuel subsidies in developing economies are unlikely to have a huge impact on world oil prices or Australian petrol prices.

Second, if subsidy drives prices down, taxation must drive prices up.  If the Australian Government wanted to reduce petrol prices and the apparent strain on working families, they could always lower the excise.  The electorate knows this, and 52% of voters want petrol taxes cut.  Many arguments can be made against cutting petrol excise, but none stand up to scrutiny.  It is argued, for example, that petrol taxes are good for the environment.  Maybe.  But an excise tax of $0.381 a litre is equal to a carbon price of $160 a tonne of carbon dioxide.

Finally, we should consider the wisdom of preaching to others about the inefficiency of subsidies.  After all, the Government paid $35 million to Toyota just last week and the bulk of the federal budget consists of subsidies and redistributions.

All up, The Government has a petrol price problem on its hands.  Blaming OPEC and our neighbours for our high prices is not good policy.  Lowering taxes is the only way petrol prices can be reduced in the short run and the only way the Government can assist "working families".

ADVERTISEMENT

Free trade will help the poor

TV chef Gordon Ramsay is like many other celebrities.  They think that because they can sing or dance, or kick a football, or, in Ramsay's case, cook, that their political opinions are worthy of attention.  But celebrity opinions are no more, or less, special than those of anyone else.  Despite this they get the chance to push their cause with prime ministers, presidents and popes.

Celebrities are listened to not because of what they say but because of who they are -- and occasionally they can be dangerous.  Gordon Ramsay's cause is dangerous.  He is opposed to free trade in food and he wants the British Government to ban the import of produce from foreign countries.  Last month he told British Prime Minister Gordon Brown that "fruit and veg should be seasonal ... chefs should be fined if they don't have ingredients in season on their menu.  I don't want to see asparagus on in the middle of December.  I don't want to see strawberries from Kenya in the middle of March.  I want to see it home-grown".  He believes prohibiting food imports will force people to eat healthy, locally produced food, and this will reduce the greenhouse gases caused by transporting food.

Ramsay displays the sort of hypocrisy that characterises much of the modern-day environmental movement.  He's an example of ambitious governments and self-appointed "experts" who want to control what we eat, what we drink and what we do.  He and those who think like him should be forced to confront the consequences of their opinions.

Of course, Ramsay doesn't practise what he preaches.  His chain of restaurants feature on their menus ingredients imported from all over the world.

Many European governments, in an effort to protect their inefficient and heavily subsidised farming sector, are now pushing for food to be labelled with the details of the greenhouse gases produced during its transportation.  The idea is that locally produced food has travelled less distance than food from overseas and, therefore, consumers who want to save the planet will buy domestic instead of foreign products.

The aim of such regulations is to stop farmers from countries like Australia and New Zealand getting access to European markets.  The most obvious problem with such regulations is that they don't take account of the greenhouse gases that result from the production of the food.  For example, growing an apple in New Zealand produces one-third the emissions that growing an apple in Britain does.  And even after transportation, New Zealand apples sold in Britain have produced fewer emissions than British apples sold in Britain.

A debate about Gordon Ramsay's personal ethics is interesting, but ultimately inconsequential.  What's more significant is the influence his ideas might have.  If developed countries adopted Ramsay's plan, the effect on the world's poor would be disastrous.

As Oxfam's head of research has said:  "I'm sure the millions of farmers in east Africa who rely on exporting their goods to scrape a living would see Gordon Ramsay's assertions as a recipe for disaster."

Despite what is taught in our universities, free trade is not a plot by US multinational companies to increase their profits.  Free trade is the best way to lift the world's poor out of their poverty.  If Western developed countries cut farm subsidies and opened their borders to overseas food, the need under-developed countries have for foreign aid would be reduced.  And trade develops self-sufficiency in a way that aid does not.

Ninety-five per cent of Britain's fruit and vegetables are imported.  Ramsay hasn't said where the British will get their bananas and oranges from if food imports are banned.  If Ramsay were serious about getting people to eat healthier food and consume more fruit, he'd be doing everything possible to encourage imports.

But the benefits of free trade aren't confined to food -- they also apply to motor cars.  If the Federal Government were serious about getting motorists to drive hybrid cars, it would eliminate the import tariffs on foreign-built hybrids instead of giving handouts to car companies to make them in Australia.  Imported hybrids would then be able to be sold to Australians more cheaply than the locally made alternative.

Gordon Ramsay and Kevin Rudd would both do well to learn these lessons.

ADVERTISEMENT

Horrendous price on the cards for greenhouse plan

The main game in emission policy awaits the Garnaut report and perhaps the "strategic review" of the Government's climate change policies being conducted by Citigroup consultant Roger Wilkins.  Timetables are being refined but by the end of the year the Government will have the advice it does not want to hear -- that achieving marked reductions in carbon-dioxide and other greenhouse gases will be possible only at horrendous economic costs.

A tax or an emission allocation that becomes tradeable is the means favoured to reduce the release into the atmosphere of carbon dioxide and other gases said to be contributing to global warming.  Muddled thinking on the part of the Government, which also wants to use emission reduction policy as a means of stimulating new industries, is complicating the matter.

On top of imposing a price on emissions, the Rudd Government has a 20% renewable energy target by 2020.  The Productivity Commission (PC), speaking for a unanimous view among economic literates, has shown that the various renewable schemes will not add one iota to emission reductions if they accompany a tax or tradeable rights regime.

The PC also demonstrated that renewable schemes on top of a tax or tradeable rights policy will ensure that any reduction path chosen would be far more costly than it need be.

In a series of meetings, Climate Change Minister Penny Wong has clashed with energy industry business leaders in her presentation of the Government's policies.  It was not the 20% renewable energy target by 2020 that worried the business leaders.  A 20% renewable target, if confined to electricity, would impose a cost on the economy of $15 billion a year, close to doubling the current defence budget.  Massively disruptive and needlessly costly though this would be, it is doable.

Of far greater concern are the implications of a tax or tradeable rights scheme aimed at bringing an abatement of carbon-dioxide emissions.  While a tax and tradeable right have different features, the Government is telegraphing that it will not be allocating emission rights to companies for free as has been the case in the European Union.  A policy of auctioning such rights would require companies to make up-front purchases of rights, a prospect that is focusing the minds of industry.

For a 1000 MW brown coal plant (and Victoria has 6500 MW) the cost of emission purchases in net present value terms would surpass the plant value at a tax or price equivalent of $20 a tonne of carbon dioxide.  Plants using black coal would be similarly placed at a price of under $30 a tonne.

And as prices of at least $100 a tonne are foreshadowed with the sort of emission reductions being considered, business leaders meeting with Senator Wong were seeing the value of their capital totally eliminated.  They were, understandably, irked.

For a business manager, the prospect of receiving a free allocation of emissions would, on the face of things, allow profitable market exit.  If the price were $30 a tonne of carbon dioxide, a forward sale of rights to a 1000 MW brown coal generator would be worth in excess of $2 billion -- significantly more than its present worth as a productive facility.

There is a theoretical possibility of carbon sequestration providing a way forward for coal-derived electricity but this, if feasible, is likely to treble electricity costs.  The other alternative is that the brown coal and black coal power stations will have to be closed down, raising electricity prices and devastating the economies of the Latrobe and Hunter valleys.

ADVERTISEMENT

Governments cannot pick winners but losers can pick governments

To be fair new governments always make mistakes.  A combination of inexperienced ministers and opportunistic public servants are likely to generate an alcopops tax.  Rash election promises give rise to FuelWatch and GroceryWatch.  Industry policy, however, has no such excuse.  Government intervention in the microeconomy lies at the very heart of the federal government's economic policy.

When Kevin Rudd became leader of the opposition he made the point that he didn't want to be prime minister of a country that didn't "make things".  To that end he installed Senator Kim Carr as Industry Spokesman;  now Minister for Innovation, Industry, Science and Research.  At the time Carr was quoted as saying, "The Howard government ... believe that industry policy can be fixed by the market.  That sort of market fundamentalism is an old-fashioned view inconsistent with the facts".  Actually industry policy has not just been mugged by reality, it has been savaged.

The ALP released a comprehensive plan setting out its industry policy well before the election.  This plan can be summarised into three points;  pick winners, throw money at universities, and streamline government.  This was not just pre-election fluff;  both Rudd and Carr were serious.  That plan is now being put into operation.

Money is being spent from the Green Car Fund and yet another government think tank is being established.  Money is been thrown at universities.  While numerous inquiries are due to report in the second half of the year it is not entirely clear how government is to be streamlined.  The intention to "do something" is clear.

Early failure has not distracted nor deterred Carr from picking winners.  In February Mitsubishi Australia announced the closure of its Adelaide plant.  Just this month Holden announced it will discontinue production of four-cylinder engines.

The Australian automotive industry has been dying for decades.  This is not entirely due to tariff reductions.  Over time Australian road vehicle exports have risen while tariff protection has fallen.  Those parts of the automotive industry that are internationally competitive will survive despite government intervention.

The Productivity Commission estimates that the automotive industry received $1.1 billion of support in 2006-07 alone.  That money is ultimately paid by consumers and the taxpayer.  Of course, it isn't just consumers and taxpayers who lose out.  Workers are huge losers too.  Inefficient industries continue to attract employees who often develop specific skills that are not easily transferable.  When those jobs are lost some employees lose their invested human capital and while they often get other jobs their market value can be somewhat diminished.  Not to mention the emotional costs and stress of having lost their job.

The dangers of industry policy are obvious in the automotive industry but less obvious elsewhere.  The closure of manufacturing plants and the retrenchment of workers in protected industries are clear signs industry policy has failed.  Consumers and the market have moved on.

It is all very well saying that we need to think about consumer preferences in the future.  That is what entrepreneurs do, not government.  Government needs to concentrate of creating an environment where entrepreneurs and business can flourish and where consumers can dictate their preferences.

Having a minister for innovation and industry is antithetical to the notion of consumer choice and entrepreneurial risk taking.  On the other hand, it is ideal for rent-seeking.  It has been said that governments cannot pick winners but losers can pick governments.  This has long been obvious in the market for tangible goods but Carr is also minister for intangibles -- innovation and research.  Policy here is to give more money to university research, but not teaching.

Government intervention in innovation also does not work well.  In a recent US study it was found that privately funded research was more valuable over time than government funded research.  True the US government has fostered a lot of innovation but that is largely due to civilian application of military research and development and NASA.  Innovation does not require a large cadre of research-trained university graduates.  Better teaching at university, as opposed to more research, is likely to improve innovation outcomes.

The Rudd Government was elected to provide "new leadership" and "new ideas".  Yet it was well known that Kevin Rudd opposed "market fundamentalism" and supported "industry policy".  This is not new;  it is a return to the bad old days of big government and state intervention in the economy.

Sound economic policy is inconsistent with interventionalist government.  Government adds value by enforcing property rights and maintaining the rule of law.

If the Rudd government wants to directly add value to the economy they should lower personal and corporate taxes, reduce bureaucracy, and reign in the ACCC.  That is mundane hard work and not nearly as exciting as picking winners -- yet it would do more for "working families" than anything else.

ADVERTISEMENT

Logic evaporates in water solution

Water Minister Tim Holding recently leaked part of a report that his department had commissioned to update the cost of building new dams.

For a dam on the Mitchell, the previous $1 billion price tag was revised to $1.35 billion.

Having used the taxpayer funded report for political purposes, the government has refused to make it public.  All we have is the Minister's word that the report proved that dams are a bad option.

Bad for whom?

Earlier this year I undertook comparison of the different approaches to augmenting Melbourne's water supply.  The $1.35 billion capital cost update allows this to be revised.

Aside from a new dam, the alternatives for the water supply fall into four categories:

• FORCING consumers and industry to use less;
• RECYCLING water largely through treating sewage;
• SAVING water from the northern irrigation areas and piping it south; or
• BUILDING a desalination facility.

Forcing consumers and industry to use less water was the policy failure most closely associated with the former deputy premier John Thwaites.  Its shortcomings were exposed by the drought and the punitive water restrictions this has required.

The failure of Thwaites's policy forced the government to face reality and seek out new bulk water supplies.  This will be the first addition to existing sources in two decades, during which time the city's population grew 25 per cent.

Supplementing new bulk supply sources are regulations requiring backyard tanks, which provide an unreliable water supply at an extremely high cost.

Of the new supply options, recycling water turns out to be very expensive.  This is because it would be unacceptable to use the recycled water for human consumption.

Confining such water to garden and other non-drinking applications therefore requires a duplicated local pipe system.

Saving water by plugging leaks in the northern irrigation region and piping it south is the option the government is pursuing through the Sugarloaf pipeline scheme.

But, based on experience in other basins, the government is overestimating the water that will be saved.  This is causing considerable opposition from irrigators who envisage outcomes of forced sales and less water for farm use.

The government has put the capital outlay of its other strategy, the Wonthaggi desalination plant, at $3.1 billion.  And the facility's price tag involves building new pipelines and energy for its operations.

The following are the costs of the different options (per kilolitre):

• A new dam on the Mitchell:  67
• Eastern Treatment Plant recycling:  242
• The Sugarloaf scheme:  166
• The Wonthaggi Desal. plant:  301

An even cheaper option than a dam on the Mitchell would be one on the Macalister linked into the existing Thomson Dam.  In both cases the Gippsland solution provides a bonus of improved irrigation security and flood control for Gippsland towns.

Government ministers know that the best policy is a new dam.  They have whole departments to do the arithmetic for them.

Unfortunately, they have abandoned promotion of public interest to appease noisy interest groups, especially green activists who are opposed to any developments.

ADVERTISEMENT

Home truths for Henry

Facta non verba is a Latin motto that translates as "deeds not words".  It should be the motto of the federal Treasury for the rest of Kevin Rudd's first term.

Treasury has long enjoyed its reputation as the last bastion of economic common sense in Canberra, and Treasury secretary Ken Henry has spent the past few years lecturing politicians on their responsibilities.  Last year, in a now infamous speech, he complained that the then coalition government wasn't taking his advice.

Now Treasury has its chance.  It can prove it deserves its reputation.

There's hardly anything of significance that Henry is not a member of.  He's on the Reserve Bank of Australia board;  he's on the committee that will say how the government should spend the billions of dollars in its infrastructure slush fund;  and he's chairing the review of the tax system.

There's no shortage of bad decisions Henry should be attempting to get his political masters to reverse.  Stunts such as FuelWatch, and pork barrels like the future funds, should be anathema to any right-thinking Treasury official.  If Treasury is as influential as everyone imagines, and if it wants to get even more influence, then it needs to demonstrate it can convince the government just how bad these stunts and pork barrels are.

This week came the announcement of $35 million of federal funding to Toyota to build a hybrid car in Australia.  The announcement should have brought on bouts of apoplexy in Treasury.  Toyota was going to make the decision anyway -- with or without taxpayers' money.

Giving car companies subsidies to encourage them to make fuel-efficient cars is the equivalent of the government paying McDonald's to make salads instead of hamburgers.  No company should require a government handout for it to appreciate the realities of the marketplace.  If a company only responds to changing consumer preferences because it is being paid to do so by the government, then it's a company that taxpayers shouldn't be wasting their money on.

Many of Henry's criticisms of policymaking in Australia have been accurate.  The reform imperative did wane in the last term of the Howard government, and both sides of politics have been all too eager to spend the boom's proceeds for short-term electoral advantage.

However, criticism is easy.  Following Henry's lament that the coalition used its numbers in the Senate to block an increase in road user charges for trucks, Nationals senator Ron Boswell took the opportunity last week to point out some facts of life to the Treasury secretary.  As Boswell said, if Henry was so willing to tell politicians what to do, he could quit his job and try to become one.  Which is exactly what John Stone did.  Given Treasury's success (or lack thereof) at forecasting budget outcomes, politics rather than business might be a better option for Treasury officials seeking new careers.

When it comes to arguing for good policy, it's been the Productivity Commission, not Treasury, that's done the heavy lifting in Canberra.  Whether the issue is banning plastic bags or the benefits of free trade, the Productivity Commission can usually be relied upon to provide recommendations based on sound principles.  And usually the Productivity Commission will suffer the opprobrium that comes with telling people things they don't want to hear.  Last week the commission released its submission to the Bracks inquiry into the motor vehicle industry.  The commission identified that taxpayers paid $300,000 a year for every car industry job "saved" by tariffs.  The result was that the commission was accused of being "out of touch", "passed its use-by date" and nothing more than "flat-earthers".  It's a testament to the commission's success that Rudd didn't have the courage to ask it to conduct the motor vehicle inquiry.  He knew the commission would tell the truth, regardless of the cost to its relationship with the government.  Instead Rudd got a Labor ex-politician to do the review.

Treasury, as a department under the direct control of a minister, is in a different situation to that of the Productivity Commission.  The commission is intended to be independent, the Treasury is not.  But Treasury and its secretary have a far greater capacity to directly shape policy.

Of course ministers can disregard departmental advice, and there's not much a department can do if a minister wants to pursue bad policy.  But ultimately departments and their secretaries aren't judged on the quality of the advice they give. They're judged on what their ministers do with it.

ADVERTISEMENT

Intellectual Property and the Australian economy

Occasional Paper

EXECUTIVE SUMMARY

Despite often being seen through the prism of the traditional industries of agriculture, manufacturing and resources, the Australian economy has reformed significantly over the last 20 years.  Australia's economy is now built on banks, financial services, telecommunications and food retailers.  These industries are heavily dependent on intellectual property for their creation, growth and ongoing sustainability.  Similarly, productivity and efficiency gains in traditional industries have developed as a result of the application of innovation underwritten by a strong IP regime.

Australia is an innovative economy.  Internationally it has a strong standing as one of the most innovative economies and has regularly ranked in the top 16 innovative economies of the world.  Underwriting Australia's innovative record is its IP regime.  Over recent years there has been a stalling of Australia's innovation ranking directly linked to weakening of its IP regime.

Australia's IP regime provides the property rights system necessary for intangible goods to be traded in the economy.  Despite popularly being recognised as benefiting large companies, registered rights (patents, trademarks and industrial designs) are heavily used by small and medium enterprises and individual innovators to protect their property rights.  They use IP for protection of their ideas, but also because it assists them in licensing their ideas for commercialisation.

Australia's IP regime also plays a vital role in securing government, domestic, industrial and foreign research and development funding.  International surveys show that protection of IP is one of the primary factors when deciding where to locate research and development activities.  And the benefits of R&D underwrite both the manufacturing and services sectors.

In the different streams of IP the use is significant.  The number of industrial designs (mostly registered by individuals) has doubled over the past ten years.  Similarly, the number of trademarks registered in Australia over the past ten years has more than doubled.  The volume of Australians pursuing patents outside of Australia for Australian inventions has seen steady growth;  as has Australian patents in the major consumer markets of the United States, Europe and Japan.  The willing use of IP is a good indicator of its importance and integration into Australia's economy.

As a non-registered right, copyright also makes an important contribution to the economy and has increased steadily as a percentage contribution to Australia's GDP and in real numbers through wholesale sales and royalties.  However, the music and audio visual sectors have been hard hit by piracy.  Despite growth in audio visual products, particularly DVDs, the industry is now in decline from the competition posed by internet and other transportable media-aided piracy.

Written works are also economically significant with the vast majority of books of Australian origin.

IP is well integrated into the Australian economy.  It is recognised by innovators and creators to be essential to the creation of intangible goods.

1 ABBREVIATIONS

AUD$ = Australian Dollars
AUSFTA = Australia United States Free Trade Agreement
EPO = European Patent Office
ICT = Information and Communications Technology
IPRIA = Intellectual Property Research Institute of Australia
JPO = Japan Patent Office
OECD = Organisation for Economic Co-Operation and Development
PCT = Patent Cooperation Treaty
PPP = Purchasing power parity
SME = Small and medium enterprise
TRIPS = Trade Related Aspects of Intellectual Property Rights
US = United States
USD$ = United States Dollar
USPTO = United States Patent and Trademark Office
WTO = World Trade Organisation

2 INTRODUCTION

Australia's economy is often misrepresented as dependent on the traditional industries of resources, agriculture and manufacturing.  Yet over the past twenty years major growth has occurred in the innovative services sector.  In particular banking and financial services has emerged as a new powerhouse industry.  Similarly, growth has occurred in resources, agriculture and manufacturing as technology and methods have been integrated to improve productivity and efficiencies.

This growth has been underwritten by many factors, including Australia's strong intellectual property infrastructure.  IP provides the property rights necessary to inventors and investors to conduct research and development into new inventions and methods to assist industry in improving efficiency and productivity.

IP is a vital component of the Australian economy to promote the productivity gains that drive economic growth.  Yet, it is often under-valued in its contribution.  There is a paucity of information and statistics available articulating the contribution of IP to the Australian economy.

This paper outlines the basic contribution IP adds as a framework to the Australian economy.  The paper also sources data on how IP is used by innovators and creators;  and its growing economic contribution.

3 AN INNOVATIVE ECONOMY

Australia is an innovative economy.  Its innovation system is rooted in inventions and their application to drive efficiencies and productivity.  The framework supporting Australia's innovation system is its intellectual property regime.

The Australian IP system has come a long way from the Jones review of the late 1980s.  The then Minster for Science, Customs and Small Business reformed Australia's patent regime to ensure Australia's IP system was working to promote R&D and innovation.

Australia's economy was still built on the foundations of resources, agriculture and manufacturing.  At the time the Government argued that "the economic costs of the patent system probably exceeded its benefits". ⁽¹⁾  Australia's ongoing commitment to IP related mostly to international obligations rather than a commitment to fostering innovative industries.

Since then there have been numerous reviews and amendments to IP law, notably in all areas of IP following the formation of the WTO and its TRIPs Agreement.  In the late 1990s and early 2000s there were also significant amendments to deal with copyright due to the development of digital media technology.  Further amendments to copyright followed the ratification of the AUSFTA.

Since the Jones review it is no longer possible to say IP is an economic cost to Australia.  Over the last 20 years Australia's economy has transformed into an innovative economy.  At the beginning of 1980 Australia was an economy dominated by mining or resource based companies.  They made up eight of the top 10 companies, by 1987 that number had dropped to four, by 1998 that number had dropped to a mere two. ⁽²⁾

Australia's traditional industries were built on its unique abundance of resources, competitive advantage in agriculture and protection to develop a local manufacturing industry.

Today Australia's top companies are dominated by "banks, financial services companies, a telecoms group and food retailers". ⁽³⁾  The large growth has come from service-based industries.  One of the core reasons for the change in the structure of Australia's economy and the significant growth of service-based industries was the strengthening of IP.  Strengthening IP promoted Australia as a centre that was conducive and supportive of research and development investment capital. ⁽⁴⁾  The total value of Australia's IP is currently estimated at AUD$30 billion. ⁽⁵⁾

Australia's innovative capacity is often overlooked because of the prominence of the resources and manufacturing industries.  But innovation is more than just innovating new technologies.  Innovation also comes from applying technology.  Many of Australia's innovative service industries have developed as a result of the application of technology, not the creation of it.

Technological innovation has the capacity to boost productivity through the invention of new technologies or processes.  IP matters because it drives the innovation that provides the productivity gains and efficiencies to promote economic growth in developed countries, like Australia. ⁽⁶⁾  Economic growth is in large part driven by productivity gains through increased output from decreased inputs.

As Gans and Stern argue, there is no such thing as low technology industries, only industries that fail to use technology sufficiently.  While some industries are entirely driven by the use of technology, ie software writing on computers, technology is also used in every other industry to boost productivity. ⁽⁷⁾

The Australian wine industry has achieved enormous success by utilising new technology and processes.  Australia's agriculture industry is successful in export markets "in no small part to the development and application of advanced technologies specific to the agricultural sector, including farming techniques guided by computers and agricultural biotechnology". ⁽⁸⁾

While the necessity for forms of IP varies from industry to industry, IP plays a vital role to promote innovation. ⁽⁹⁾  IP provides the incentive to investors and inventors to commit resources to research and development and allow for the commercialisation of the output with certainty. ⁽¹⁰⁾  Australia's innovative culture is strongly rooted in its IP regime.

3.1 AUSTRALIA'S GLOBAL STANDING

There are two major international studies that have assessed the strength of IP regimes and a country's innovation capacity.  On both studies Australia's IP regime ranks highly in its own right and as a contributor to innovation.  However there is room for improvement.

In the most recent International Property Rights Index, Australia ranks equal eleventh in the world with Luxembourg for protection of property rights.  The Property Rights Index is a ranking based on a combination of the legal and political environment, physical property rights and IP rights.

Specifically on IP rights, Australia ranks equal tenth with New Zealand, the US, Austria and Belgium.  Not surprisingly the countries with the highest rankings for IP rights include many of those who have the most significant innovation industries, including Finland, Germany, the UK, Japan, Denmark and Switzerland.  Equally, those with poor IP rights rankings also have economies not driven by innovation industries. ⁽¹¹⁾

The University of Melbourne's Intellectual Property Research Institute of Australia (IPRIA) compiles an innovation index of economies.  Since its creation, Australia has always ranked in the top 16 innovative economies of the world. ⁽¹²⁾  As Table 1 shows, while Australia is in the top ranking of countries overall its standing has wavered over the last 10 years and has only seen subtle improvements in the past few years specifically.

Table 1:  Australia's Global Innovation Ranking

1975	1980	1985	1990	1995	2000	2004	2005
11th	16th	15th	15th	14th	16th	16th	15th

Source:  Gans, J. & Hayes, R., "Assessing Australia's Innovative Capacity:  2006 Update", Melbourne Business School and Intellectual Property Research Institute of Australia, University of Melbourne, 18/12/2006

In compiling their index, the authors identify IP as one of the most important foundations for an innovative economy.  The authors also identify that one of the reasons for recent stagnation in Australia's innovative capacity includes a "decline in IP protection". ⁽¹³⁾  Having a strong and well regulated IP regime is vital to ensure the Australian economy remains innovative.

3.2 INNOVATORS EMBRACE INTELLECTUAL PROPERTY

The benefits of an IP regime are not lost on the innovators.  Innovators, both individual and businesses, utilise IP because of the certainty it provides.  Innovators use patents to protect new technologies and methods, particularly those that require high, upfront capital investment and are easily replicable.  Innovators use trademarks to assist in the marketing of their goods and develop brand identity in the marketplace.  Innovators use copyright to protect their artistic creations from reproduction.  And designers use industrial designs to provide short-term protection for their innovative aesthetics.

Often IP, like property rights generally, is purveyed as primarily serving the interests of big business.  The process of registration can be expensive, prohibitive and time consuming.  The challenges of registration are exacerbated when a registered right is sought internationally, particularly patents which require patentability registrations in each registered country.

But even with the cost of registering an IP right, it needn't mean that IP is solely within the domain of the rich or large companies.

An IPRIA study found that SMEs strongly utilise certain forms of IP.  The paper found "SMEs apply for patents and trademarks at the same rate, given their innovative potential, as large enterprises ... imply(ing) that the size of a firm's resources may not be as critical to the(ir) patenting and trade marking decision". ⁽¹⁴⁾

The high use of IP rights by SMEs should not come as a surprise.  SMEs have a real incentive to use IP protection because they are likely to license and build strategic alliances with other companies, both large and small.  IP rights confer certainty in business transactions and make these arrangements easier. ⁽¹⁵⁾

But the statistics show that some forms of IP are used significantly by individuals.  The increased use of IP has partly been driven by the changed structure of Australia's dominant industries as well as the recognised value of IP. ⁽¹⁶⁾  Table 2 breaks down the primary users of the registered forms of IP -- patents, trademarks and designs -- based on organisational-style.  While companies use patents the most, individual innovators use them to a considerable degree.  Similarly, industrial designs are primarily used by individuals.

The only registered rights that are overwhelming used by companies are trademarks.  It is logical that companies would use trademarks as they are most likely to be mass-marketing products that heavily rely on consumer awareness and market differentiation which trademarks afford.

Table 2:  Utilisers of intellectual property, per cent

IP Right	Large enterprises	Company		Total	Individuals
		SMEs	Not matched
Patents	21.3	12.0	21.3	53.2	46.8
Trademarks	24.1	20.0	34.5	78.9	21.1
Designs	13.2	13.4	22.5	46.1	53.9

Source:  Hensen, P. & Webster, E., "SMEs and their use of Intellectual Property Rights in Australia", Intellectual Property Research Institute of Australia, Working Paper n09/04, 08/04, p13

IP also works for SMEs and individuals because it may remove the need to source investment capital to commercialise their invention.  IP provides a tangible property right that can then be licensed by individuals and SMEs to investors and larger businesses with the capacity to commercialise the invention. ⁽¹⁷⁾  Licensing enables inventions to reach the marketplace.  The latest OECD Science, Technology and Industry Outlook came to this conclusion:

"Licensing has become an increasingly important channel for diffusing inventions -- and the knowledge embedded in them -- and facilitating follow-on innovation.  Licensing can increase the efficiency of innovation processes by putting inventions in the hands of those best capable of commercialising them" ⁽¹⁸⁾

From an export perspective, licensing also provides opportunities for Australian companies to license out their invention to foreign businesses to commercialise in foreign markets.  Australian companies then collect a licensing fee with minimal capital expense.

Usage of IP rights varies from industry to industry.  For example the highest users of patents in Australia are the pharmaceutical and cosmetics industry.  The lowest is the nuclear engineering industry. ⁽¹⁹⁾  This is both reflective of the structure of Australia's economy, as well as the replicable nature of the inventions developed by each industry.  Nuclear engineering's output is highly sophisticated and unlikely to be readily reproduced.

3.3 INTELLECTUAL PROPERTY SECURES RESEARCH AND DEVELOPMENT

The benefits of IP are not just limited to enabling businesses to commercialise their inventions.  IP is also important for underwriting the justification for domestic research and development funding and particularly important for securing foreign direct investment (FDI) and research and development funding.

There is strong evidence that in the absence of IP protection private investors shy away from spending on research and development. ⁽²⁰⁾  In an international survey IP has been cited as a very important factor in decisions locating R&D in developed countries.  As Table 3 shows, on a five point scale on whether participants agreed that IP was a factor in locating R&D and the degree of its importance, IP protection nearly topped the ranks of surveyed participants.  IP was considered exceptionally important.  In the survey the only category that received higher rankings as a factor and degree of importance was the in-country availability of qualified R&D personnel.

For the Australian private sector R&D is vital, and hence so is the IP that supports it.  As Table 4 shows, Industry is responsible for nearly half of all R&D expenditure.  R&D capital is also spread across industry sectors.  Table 5 demonstrates that R&D is important for both the manufacturing and services sector.

Industry is not the only one who recognises the benefit of R&D supported by IP rights.  Governments are conscious of the role IP rights play through licensing to promote commercialisation, particularly between the public and private sectors. ⁽²¹⁾  This is important in Australia considering more 40 per cent of R&D is funded by Government. ⁽²²⁾

Table 3:  IP Protection as a factor in locating R&D activities in developed countries on a five point scale, 5 = strongly agree, 1 = strongly disagree

Agree	Importance
4.3 out of 5	4.15 out of 5

Source:  OECD, "OECD Science, Technology and Industry Outlook", 2006, p139

Table 4:  2004 Australian Gross Domestic Expenditure on Research and Development, in PPP USD$

Industry	Government	Total
$4,688,996,800	4,074,046,400	$9,608,600,000

Source:  Adapted from OECD, "OECD Science, Technology and Industry Outlook", 2006, p208

Table 5:  Business R&D expenditures by sector, 2002

Manufacturing	Services
47.3%	42.2%

Source:  Adapted from OECD, "OECD Science, Technology and Industry Outlook", 2006, p245

IPRs are important to ensure Australia remains an attractive destination for foreign research and development capital.  Australia's R&D competitors -- such as China and India -- have both strengthened their IP regimes to boost the innovative capacity of local industry, but also to become more attractive for foreign development R&D capital.

Australia currently competes for R&D foreign capital.  To do so it needs a strong IP regime.  The cost of not doing so would be significant.  As Table 6 demonstrates, currently more than 40 per cent of Australian R&D is conducted by foreign affiliates under foreign control. ⁽²³⁾

Table 6:  Research and development expenditure of foreign affiliates in Australia as a percentage of R&D expenditure of enterprises

1998	2000
31%	42%

Source:  OECD AFA database, June 2006

The United States remains Australia's most important foreign investor.  Hence US capital bolsters R&D conducted in Australia.  As Table 7 demonstrates, US-owned subsidiaries have spent more than US$420 million on R&D in Australia and the value is growing. ⁽²⁴⁾

Table 7:  R&D expenditures of affiliates of US parent companies abroad in Australia, USD$ millions

1995	2000	2003
289.4	347.8	424

Source:  Adapted from OECD, "OECD Science, Technology and Industry Outlook", 2006, p133

As a total net importer of investment capital, much of which is dedicated to R&D, Australia cannot afford to undermine its IP regime.  For domestic government and industry, as well as foreign industry, IP is recognised as a major factor in allocating R&D capital.

4 INVENTORS ARE USING THE IP SYSTEM

Differing forms of IP protection reflect their usefulness to inventors.  Because copyright is conferred automatically statistics ascertaining the volume of use are limited.  However, there is data available for registered rights and the data demonstrates that the use of IP by inventors is significant and growing.

4.1 INDUSTRIAL DESIGNS

Industrial designs are an IP right granted for "the visual appearance of the product but not how the product works". ⁽²⁵⁾  Industrial designs do not include the technical aspects of a product, which is covered by patents, nor the name of a product, which is covered by trademarks.

Industrial designs apply to products from furniture, packaging and containers to household goods.  An industrial design must be "new" and "distinctive" to be awarded protection. ⁽²⁶⁾  Both two and three dimensional products are covered by industrial designs. ⁽²⁷⁾

Table 8:  Registered industrial designs in Australia

1995/96	2000/01	2004/05	2006/07
3,287	3,203	4,615	7,273

Source:  IP Australia, "IP Statistics".

As demonstrated by Table 8, the volume of industrial designs registered each year is rising, and has more than doubled in the past ten years.  The majority of industrial designs are registered by individuals and strong growth suggests both a strong awareness of the importance of utilising IP by individual artists.

4.2 PATENTS

Patents are a registered right for a "device, substance, method or process". ⁽²⁸⁾  Patents provide the property right necessary to promote innovation for new inventions, particularly where significant capital is necessary for research and development and the output is easily replicable.  Patents allow a patent holder to prevent others from commercial use of a patented invention without the owner's consent. ⁽²⁹⁾

To secure patent protection an application must be registered in each country that the patent is sought.  Because of burdensome domestic patent examination processes, governments negotiated the Patent Cooperation Treaty (PCT).  PCT provides an international mechanism to seek patent protection through a central application process.  However, PCT applications are still expensive and are only applied for when an invention has significant commercial potential.

The volume of PCT applications are a good indicator of the number of patented inventions that have a large commercial potential coming from a country.  Table 9 demonstrates that the number of PCT applications Australians make each year is large, and steadily growing.

Table 9:  Australian PCT Applications

2000	2002	2004	2006	2007
1,576	1,759	1,837	2,002	2,052

Source:  World Intellectual Property Organisation, "PCT filings by country of origin"

Of particular importance are triadic patents.  Triadic patents are patents registered with the three domestic competent IP agencies with the largest commercial markets -- the United States, the European Union and Japan.  Their IP offices are the United States Patent and Trademark Office, the European Patent Office and the Japan Patent Office.  The number of triadic patents tends to demonstrate the volume and growth of consumer-targeted inventions.  Table 10 demonstrates that there has been strong growth in triadic patents.

Table 10:  Australian Triadic patents registered

1997	2000	2003
252	360	431

Source:  Adapted from OECD, "OECD Science, Technology and Industry Outlook", 2006, p237

Separate to the PCT application process, individual applications can be made for patents to IP Australia.  The volume of patent applications in Australia is significant.  Table 11 shows that there are large numbers of non-PCT patents registered in Australia.

But not all non-PCT patent applications are submitted by Australians.  The vast majority of patents registered in Australia come from foreign patent applicants who recognise Australia as a potential market to protect their invention.  However, despite only having around 10 per cent of all patents registered by Australians, it is actually a significant achievement.  Globally Australia only completes about one per cent of the world's R&D. ⁽³⁰⁾

Table 11:  Non-PCT patent applications in Australia

2000/01	2004/05	2006/07
6,418	5,985	5,856

Source:  IP Australia, "IP Statistics".

Having patented inventions registered in Australia by foreign applicants can also be beneficial.  There is strong evidence that patent holders are more likely to license their technology into a market where it receives patent protection.  Similarly, patent holders are more likely to invest in FDI when there is a strong IP regime. ⁽³¹⁾

4.3 TRADEMARKS

Trademarks are a registered right and traditionally take the form of a symbol or word that is identifiable with a good or service.  The recent advent of the internet has resulted in trademarks being expanded to domain names as well.

Table 12:  Trademarks registered in Australia

1995/96	2000/01	2004/05	2006/07
16,756	26,720	35,164	40,552

Source:  IP Australia, "IP Statistics".

Trademarks assist individuals and businesses by providing them with an identifiable mark that they can use to trade their goods and services in the marketplace.  The intent is that over time the mark will become sufficiently recognisable by consumers that they will identify the mark with that product. ⁽³²⁾  Because trademarks assist consumers through brand identification, increases in trademark registration tend to demonstrate growth in inter and intra-consumer product variety.  As Table 12 shows, since 1995/96 the number of trademarks registered in Australia has more than doubled.

4.4 COPYRIGHT

Copyright traditionally refers to the exclusive right of a creator (literary, musical or artistic) of a work from the point that it is produced in a tangible form.  However, the evolution of digital technology has resulted in the significant broadening of copyright to "deal with particular forms of creativity, concerned primarily with mass communication". ⁽³³⁾

As a form of IP, copyright is necessary to promote commercial incentive and a market for creators of copyrightable material.  In the absence of copyright there would be no incentive for authors or artists to produce works, as it provides them with a property right to trade their creation which is ultimately how they make their livelihood.

Statistics on the value of copyright are scarce.  As a non-registered right the volume of copyright in Australia is voluminous and incapable of being calculated.  What is known is the financial value of copyright to Australia's economy.  As a contributor to GDP copyright is significant.  As Table 13 demonstrates, it increased in its economic importance by nearly 50 per cent between 1980 and 2000.  While appearing to be a minor contributor to Australia's overall GDP, copyright industries are also major employers.  In June 2000 copyright-dependent industries employed the equivalent personnel as government administration and defence. ⁽³⁴⁾

Table 13:  Copyright industries' value add contribution as a percentage of Australia's GDP

Years	Per cent
1980/81	2.2
1985/86	2.6
1992/93	2.9
1995/96	3.0
1999/2000	3.3

Source:  Allen Consulting Group, Australian Copyright Council & Centre for Copyright Studies, "The economic contribution of Australia's copyright industries", 2001, p7

The income from copyrighted goods is not just sourced from original products.  Income is also sourced from royalties paid over time which accumulate until the expiry of copyright.  Table 14 demonstrates that there is a strong trend of increased royalties.  Similarly, copyright is an export industry.  Table 15 outlines the progressive growth of the different copyright industries.

Table 14:  Income from copyright royalties, AUD$ million

1995/96	1996/97	1997/98	1998/99	1999/00
260	268	307	370	444

Source:  Adapted from Allen Consulting Group, Australian Copyright Council & Centre for Copyright Studies, "The economic contribution of Australia's copyright industries", 2001, p13

Table 15:  Exports of copyright goods and services, AUD$ millions

Year	Core copyright industries	Partial copyright industries	Distribution copyright industries	Total Value
1995/96	582	293	4	879
1996/97	618	319	7	944
1997/98	659	321	10	990
1998/99	783	302	13	1,100
1999/00	839	342	16	1,200

NOTES:

Core copyright industries:  Newspaper printing or publishing;  free to air TV;  data processing services;  television services;  film and video production;  creative arts;  book and other publishing;  other periodical publishing;  radio services;  recorded media manufacturing;  music & theatre production;  commercial art and display services;  photographic studios;  Internet service providers;  pay TV and sound recording studios

Partial copyright industries:  Printing;  architectural services;  paper stationery manufacturing;  surveying services;  advertising services;  services to printing and toy and sport good manufacturing.

Copyright distribution industries:  Newspaper, book and stationary retailing;  paper product wholesaling;  libraries;  motion picture exhibition;  photographic film processing;  book and magazine wholesaling;  film and video distribution;  computer and software retailing;  museums;  video hire outlets;  performing arts venues;  information storage and retrieval services;  recorded music retailing;  photography equipment wholesaling;  toy and sporting good wholesaling;  services to the arts and toy and game retailing.

Source:  Adapted from Allen Consulting Group, Australian Copyright Council & Centre for Copyright Studies, "The economic contribution of Australia's copyright industries", 2001, p11

Copyright is particularly important for creators of works that can be easily replicable.  Music and the audio visual sector are vulnerable to piracy because of the internet and transportable media.  Table 16 demonstrates the decline in sales caused by piracy since 1998 and the cost to the Australian economy.  The growth in the audio visual sector can be attributed to the growth in DVD sales.  But DVD sales are already declining due to the cost of piracy.

Books do not share the same risk as music and the audio visual sector.  Copyright provides the protection necessary to authors to ensure that their product can be commercialised.  As Table 17 demonstrates, copyright in books primarily benefits local producers, not importers.  Book royalties also deliver economic gains.  The total income from book royalties and sale of rights in 2003-04 was $18.9 million. ⁽³⁵⁾

Table 16:  Australian sales at wholesale value, 000s AUD$

	1998	2000	2002	2004	2006	2007
Singles	45,803	44,664	37,523	26,745	12,126	6,804
Albums	509,756	538,460	535,082	513,313	422,597	362,413
Audio Visual	11,513	10,610	36,929	66,912	49,192	53,030

Source:  Adapted from statistics provided by the Australian Recording Industry Association, cited on 30/03/2008.

Table 17:  2003-04 Sales of Books, AUD$ millions

Australian Books			Imported Books
General	Education	Total	General	Education	Total
468.5	343.4	811.9	355.1	186.2	541.3

Source:  Adapted from Australian Bureau of Statistics, "Book Publishers", 1363.0, 17/08/2005

Table 18:  Domestic and export sales of books, AUD$ millions

	Education	Hardback	General		Total	All books
			Trade paperback	Mass- market paperback
Domestic sales	452.0	209.8	235.4	258.3	703.5	1155.5
Export and re-export sales	74.1	28.9	71.9	15.3	116.1	190.2
Total	526.1	238.6	307.3	273.7	819.6	1345.7

Source:  Adapted from Australian Bureau of Statistics, "Book Publishers", 1363.0, 17/08/2005, p13

Books are also an export earner.  While not voluminous, it still contributes AUD$190 million to the Australian economy.

The use of IP by innovators and creators is significant.  The property rights afforded by IP provides incentives for individuals and businesses to create new inventions and works, and assist them in their commercialisation.  While most industries have seen steady growth for IP protection, reflecting the level of its integration, copyright protection is a concern.  Copyright is becoming increasingly important to the music and audio visual sector who face competition from internet and transportable media-aided piracy.

5 CONCLUSION

IP plays a vital role in the Australian economy.  The popular perception that Australia is a country dependent on the traditional industries of resources, manufacturing and agriculture is false.

Much of the growth in the Australian economy has stemmed specifically from IP-dependent industries.  Similarly, efficiency gains and productivity improvements in Australia's traditional industries have stemmed from innovation.

IP is vital in providing an economic framework to promote innovation.  By providing a property right to intangible goods IP creates incentives for inventors and investors.  It also enables the commercialisation, trading and licensing of technologies that promotes diffusion and economic returns.

IP is also well utilised throughout the community.  Despite suggestions that IP favours large companies;  SMEs and individuals are frequent users of IP.  In particular they use IP as a means to commercialise technologies they may not otherwise be able to working with larger companies.

Perhaps most importantly, the available data suggests that the IP system is well utilised by innovators.  A well utilised system suggests that it is well integrated in Australia's economic fabric.  And the available data suggests that IP-dependent industries contribute significantly as a share of and to the Australian economy.

6 REFERENCE LIST

Allen Consulting Group, Australian Copyright Council & Centre for Copyright Studies, "The economic contribution of Australia's copyright industries", 2001

Australian Bureau of Statistics, "Book Publishers", 1363.0, 17/08/2005

Australian Recording Industry Association, "Statistics", cited on 30/03/2008.

Daley, J., "The intangible economy and Australia", Australian Journal of Management, Australian Graduate School of Management, v26, 08/2001

Department of Foreign Affairs and Trade, "Intellectual Property", Fact Sheet, Commonwealth of Australia, 2008, cited on 01/03/2008

Forbes.com, "Australia's top companies", ninemsn.com.au, 11/2006, cited on 29/04/2008.

IP Australia, "What is a Patent?" , Commonwealth of Australia, 2008, cited on 20/03/2008

Gans, J. & Stern, S., "Assessing Australia's Innovative Capacity in the 21st Century", Intellectual Property Research Institute of Australia, University of Melbourne, 27/06/2003

Gans, J. & Hayes, R., "Assessing Australia's Innovative Capacity:  2006 Update", Melbourne Business School and Intellectual Property Research Institute of Australia, University of Melbourne, 18/12/2006

Gruen, N., Bruce, I. & Prior, G., "Extending Patent Life:  Is it in Australia's Economic Interests?", Industry Commission, Staff Information Paper, 06/1996

Guthrie, J. & Petty, R., "Intellectual Capital:  Australian annual reporting practices", Journal of Intellectual Capital, v1, n3, 2000, pp241-251

Harcourt, T., "Innovation not a question of old or new economies", The Age (Business), 01/06/2007

Hensen, P. & Webster, E., "SMEs and their use of Intellectual Property Rights in Australia", Intellectual Property Research Institute of Australia, Working Paper n09/04, 08/04

IP Australia, "Designs", Commonwealth of Australia, 2008, cited on 20/03/2008

IP Australia, "IP Statistics".

IP Australia, "What is a Design?" , Commonwealth of Australia, 2008 cited on 20/03/2008

Jones, B., "Patents Bill:  Second Reading", Speech, House of Representatives, Parliament of Australia, 01/06/1989

Maskus, K., Doughtery, S. & Mertha, A., "Intellectual property rights and economic development in China" Fink, C. & Maskus, K., "Intellectual Property and Development:  Lessons from Economic Research", World Bank, 2005, pp325-327, cited on 01/02/2008

OECD, "OECD Science, Technology and Industry Outlook", 2006

Productivity Commission, "Public Support for Science and Innovation", 09/03/2007

Sala-i-Martin, X., Blanke, J., Hanouz, M.D., Geiger, T., Mia, I. & Paua, F., "The Global Competitiveness Index:  Measuring the productive potential of nations", The Global Competitiveness Report, World Economic Forum, 2007

Tahllam, S., "International Property Rights Index:  2008 Report", Property Rights Alliance

World Intellectual Property Organisation, "Fields of Intellectual Property Protection", Chapter 2 of the "World Intellectual Property Organisation Intellectual Property Handbook:  Policy, Law and Use", e2, 2004, p40, cited on 01/03/2008

World Intellectual Property Organisation, "PCT filings by country of origin", www.wipo.

Wood, R.J., "Intellectual Property Matters", Backgrounder, 25/04/2008

---

ENDNOTES

1.  Jones, B., "Patents Bill:  Second Reading", Speech, House of Representatives, Parliament of Australia, 01/06/1989

2.  Guthrie, J. & Petty, R., "Intellectual Capital:  Australian annual reporting practices", Journal of Intellectual Capital, v1, n3, 2000, p242

3.  Forbes.com, "Australia’s top companies", ninemsn.com.au, 11/2006, cited on 29/04/2008

4.  Gans, J. & Stern, S., "Assessing Australia’s Innovative Capacity in the 21st Century", Intellectual Property Research Institute of Australia, University of Melbourne, 27/06/2003, p36

5.  Department of Foreign Affairs and Trade, "Intellectual Property", Fact Sheet, Commonwealth of Australia, 2008, cited on 01/03/2008

6.  Ibid., 2003, p3

7.  Ibid., 2003

8.  Ibid., 2003, p7

9.  Ibid., 2003, p14

10.  Harcourt, T., "Innovation not a question of old or new economies", The Age (Business), 01/06/2007 & Sala-i-Martin, X., Blanke, J., Hanouz, M.D., Geiger, T., Mia, I. & Paua, F., "The Global Competitiveness Index:  Measuring the productive potential of nations", The Global Competitiveness Report, World Economic Forum, 2007, p3

11.  Tahllam, S., "International Property Rights Index:  2008 Report", Property Rights Alliance

12.  Ibid., 2003, p14

13.  Gans, J. & Hayes, R., "Assessing Australia’s Innovative Capacity:  2006 Update", Melbourne Business School and Intellectual Property Research Institute of Australia, University of Melbourne, 18/12/2006, p9

14.  Hensen, P. & Webster, E., "SMEs and their use of Intellectual Property Rights in Australia", Intellectual Property Research Institute of Australia, Working Paper n09/04, 08/04, p21

15.  Productivity Commission, "Public Support for Science and Innovation", 09/03/2007, p205

16.  Daley, J., "The intangible economy and Australia", Australian Journal of Management, Australian Graduate School of Management, v26, 08/2001, p12

17.  OECD, "OECD Science, Technology and Industry Outlook", 2006, p156

18.  Ibid., 2006, p16

19.  Productivity Commission, "Public Support for Science and Innovation", 09/03/2007, p767

20.  Maskus, K., Doughtery, S. & Mertha, A., "Intellectual property rights and economic development in China" Fink, C. & Maskus, K., "Intellectual Property and Development:  Lessons from Economic Research", World Bank, 2005, pp325-327, cited on 01/02/2008

21.  OECD, 2006, p65

22.  Ibid., 2006, p208

23.  Ibid., 2006, p125

24.  Ibid., 2006, p45

25.  IP Australia, "Designs", Commonwealth of Australia, 2008, cited on 20/03/2008

26.  IP Australia, "What is a Design?" , Commonwealth of Australia, 2008 cited on 20/03/2008

27.  Wood, R.J., "Intellectual Property Matters", Backgrounder, 25/04/2008

28.  IP Australia, "What is a Patent?" , Commonwealth of Australia, 2008, cited on 20/03/2008

29.  Wood, R.J., "Intellectual Property Matters", Backgrounder, 25/04/2008

30.  Gruen, N., Bruce, I. & Prior, G., "Extending Patent Life:  Is it in Australia’s Economic Interests?", Industry Commission, Staff Information Paper, 06/1996, p12

31.  Maskus et al., 2005, pp325-327

32.  Wood, 2008

33.  World Intellectual Property Organisation, "Fields of Intellectual Property Protection", Chapter 2 of the "World Intellectual Property Organisation Intellectual Property Handbook:  Policy, Law and Use", e2, 2004, p40, cited on 01/03/2008

34.  Allen Consulting Group, Australian Copyright Council & Centre for Copyright Studies, "The economic contribution of Australia’s copyright industries", 2001, piii

35.  Australian Bureau of Statistics, "Book Publishers", 1363.0, 17/08/2005, p9