Sydney shuts the door on affordable average price

Australia is now at the top of the pack in terms of the shameful measure of housing affordability.  House price collapses in Britain and California mean Sydney has become the dearest place among major cities to buy an average house in relation to average family income.

And several smaller Australian cities -- Mandurah in Western Australia and Queensland's Sunshine Coast and Gold Coast -- are even further ahead of Sydney.  At the same time, only a handful of overseas cities are less affordable than Melbourne, Perth, Brisbane and Adelaide.

At the end of last year, house prices in 227 urban areas in North America, Britain, Ireland, New Zealand and Australia were examined by St Louis-based consultancy Demographia.  All major Australian cities were among the most unaffordable, primarily due to planning policies that ration housing land availability.

Among major cities, all those less affordable than Sydney were in California.  Those cities included Los Angeles, San Francisco and San Diego where there have been 40 per cent average declines in house prices over the past year.

Prices in other unaffordable overseas cities are also collapsing.  London is down 20 per cent on last year, Washington 18 per cent.  Even New York's upscale Hamptons, a familiar name to Seinfeld and Sex in the City fans, is down 17 per cent.

As yet, Australia's regulatory driven house price inflation has not buckled under the whiff of recession.

Though Sydney prices for both houses and units were off a tad in the June quarter, the city has seen nothing like the price carnage experienced in other urban areas across the world where planning restrictions have brought inflated prices.

Australian house prices are being buoyed by all the wrong reasons.  State governments have created a shortfall of available land that has ramped up prices.  This has choked off demand far more savagely than in other highly-regulated housing markets overseas.  The resulting supercharged prices have led to five consecutive years of falling new house starts across Australia.

Australian politicians at the state and local government levels are pinioned between two groups each with their own interest in stopping development.  First, there are those who want to funnel growth into high-density housing and allow no development on the urban fringe.  Second, there are those opposed to inner city redevelopments that may devalue their own property.

Sydney and other cities have building restrictions that comprise zoning rules, lengthy approval procedures, heritage restraints, environmental requirements and, of course, hefty taxes masquerading as "development levies".

The outcome is a chronic shortage of new developments and an escalating price of all housing.

The US cities without draconian controls on the supply of land for housing experienced neither the price boom nor the subsequent bust.  Moreover, those cities have much faster population growth than any Australian city, which nails the canard that it is demand pushing up Australian prices.

Australian major developers have expressed confidence we will not face a recession-induced price crunch.

They may be right but, as the holders of stocks of land and unsold housing, they would say that wouldn't they?

The lessons are being painfully learned.  Regulations that reduce the supply of housing not only bring price rises that prevent aspiring new home owners getting a foothold in the market.  They also nurture price bubbles.

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Tariffs, not patents, hurt low-carbon innovation

A hundred countries are meeting in Accra, Ghana, this week in negotiations for a new climate change agreement after the Kyoto Protocol expires in 2012.  Understandably, developing countries refuse to sacrifice growth to cut emissions, so they want new low-carbon technology.

India, China and a variety of pressure groups are campaigning for "compulsory licences" on low-carbon and renewable-energy technology, saying developed nations are to blame for climate change and should underwrite the alleged solutions.

"The developed countries should get off the backs of India and China.  Instead, they should help India and China move towards a low-carbon economy with technology and finance," Rajendra Pachauri, the Indian economist and environmental scientist who chairs the Intergovernmental Panel on Climate Change, said last month.

Shri Raja, the Indian environment minister, wants an agreement "paralleling" what he calls "the successful agreement on compulsory licensing of pharmaceuticals", which has undermined supply, quality and trade.

This will destroy any incentive for invention.  Developing countries should instead remove their tariffs and other barriers that increase prices dramatically.

Some even claim patents confer a monopoly that reduces competition and stops downward pressure on prices.  But patents are not a monopoly, they are an exclusive right over a specific product.  Patents on existing products do not in any way prevent the development of other inventions.

Without the property rights that patents confer, many inventions that cost millions of dollars to develop can be copied.  So, without patents, there are no incentives for investors and innovators to spend time and money researching and developing new technology.  This is especially counterproductive as low-carbon technology is in its infancy and requires high investment to take it to the next level.

The low-carbon or "renewable" inventions that would be undermined by removing patent rights include wind turbines, clean coal, solar panels and fluorescent lamps.

A UN Development Programme study last year found compulsory licensing of low-carbon technologies would directly reduce investment.  Similarly, a World Bank report found that weak intellectual property regimes act as a barrier to the transfer of   low-carbon technology.

Attacking patents is a distraction when there are policies that require greater attention.  For example, the top 15 greenhouse-gas-emitting developing countries impose hefty tariffs and other trade barriers that can drastically increase prices on "green" technology they claim is essential.

Zambia and Egypt have tariffs on solar panels at 30 per cent and 32 per cent, respectively.  In Nigeria, barriers against "clean coal" technology add 160 per cent to the final product cost.

In Egypt, the extra cost on fluorescent lamps is 87 per cent, in the Philippines, 93 per cent, in Brazil 96 per cent and 102 per cent in India.

The egregious extent of tariffs and other barriers on low-carbon technologies has prompted the United States and the European Union to propose an environmental goods and services agreement in the World Trade Organisation, to encourage the transfer of technology.  But, since the collapse of the Doha Round last month, that seems unlikely.

By ignoring these self-imposed barriers, the anti-patent campaign is gaining traction;  it is always more attractive to blame someone else.

That spells bad news for the poor.  Companies that invest in low-carbon technology are dependent on capital to develop new products.  If patents are waived, investors will not see returns and the funding for new technology will dry up.

Forget patents:  governments in poor countries can make newer, cheaper and more efficient low-carbon technology available by dropping their trade barriers.

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Attacking patents is a way to halt progress on climate accord

A hundred countries are meeting in Accra this week in negotiations for a new climate change agreement after the Kyoto Protocol expires in 2012.  Understandably, developing countries refuse to sacrifice economic growth in order to cut emissions, so they want new low-carbon technology.

India, China and a variety of pressure groups are campaigning for "compulsory licenses" on low-carbon and renewable-energy technology, saying the developed countries are to blame for climate change and should underwrite the alleged solutions.

"The developed countries should get off the backs of India and China.  Instead, they should help India and China move towards a low carbon economy with technology and finance," said Rajendra Pachauri, the (Indian) head of the Intergovernmental Panel on Climate Change in July this year.

Shri Raja, the Indian Environment Minister, wants an agreement "paralleling" what he calls "the successful agreement on compulsory licensing of pharmaceuticals," which has undermined supply, quality and trade.

This will destroy any incentive to develop new inventions.  Developing countries should instead remove the tariffs and other barriers that they impose on their own people and that increase prices dramatically.

Some even claim patents confer a monopoly that reduces competition and stops downward pressure on prices.  But patents are not a monopoly on a market, they are an exclusive right over a specific product.  Patents on existing products do not in any way prevent the development of other inventions.

Without the property rights that patents confer, many inventions that cost millions of dollars to develop can be copied.  So without patents there are no incentives for investors and innovators to spend time and money researching and developing new technology.  This is especially counter-productive as low-carbon technology is still in its infancy and requires high investment for the next level of innovation.

The low-carbon or "renewable" inventions that would be undermined by removing patent rights include wind turbines, clean coal, solar panels and fluorescent lamps.

A 2007 United Nations Development Program study found compulsory licensing of low-carbon technologies would directly reduce investment.  Similarly, a World Bank report from the same year found that weak Intellectual Property regimes act as a barrier to the transfer of low-carbon technology, meaning that patent owners are reluctant to transfer their technology to countries that do not respect patents and other property rights.

Attacking patents is a distraction when there are policies that require greater attention.  For example, the top 15 greenhouse-gas-emitting developing countries impose hefty tariffs and other trade barriers that can drastically increase prices on "green" technology they claim is essential.

Zambia and Egypt have tariffs on solar panels at 30% and 32% respectively.  In Nigeria, barriers against "clean coal" technology add 160% to the final product cost.  In Egypt, the extra cost on fluorescent lamps is 87%, in the Philippines 93%, in Brazil 96% and a staggering 102% in India.

The egregious extent of tariffs and other barriers on low-carbon technologies has prompted the United States and the European Union to propose an Environmental Goods and Services Agreement in the World Trade Organization, to encourage the transfer of technology.  But since the collapse of the Doha Round last month that seems unlikely.

By ignoring these self-imposed barriers, the anti-patent campaign is gaining traction because it is always more attractive to blame someone else.  That spells bad news for the poor.  Companies that invest in low-carbon technology are dependent on capital to develop new products.  If patents are waived investors will not see returns and the funding for new technology will dry up.

Forget patents:  Governments in poor countries can make newer, cheaper and more efficient low-carbon technology available now by dropping their self-harming trade barriers.

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A reform agenda for Western Australia

A POSITIVE REFORM GUIDE TO THE 2008 ELECTION

1) State taxes should be reduced to encourage growth.

2) Western Australia's urban planning policies need to be reformed around the importance of home ownership.  This involves releasing land for housing, sale and construction, and also relieving restraints on infill land use.

3) Western Australia needs to retain students longer.  The key to doing so is to increase the levels of competition between schools, levels of competition between teachers, increase accountability and ensure that teacher salaries are nationally attractive.

4) Western Australia's rail network should be privatised in 2009.  A tender would specify the level of subsidy, and the performance benchmarks necessary to meet that subsidy.

5) WA needs a dedicated reform movement to par back some of these outdated and onerous regulations.  It also should set up formal agencies dedicated to regulatory review, and mandate that each new regulation is subject to a regulatory impact statement before implementation.

6) The Western Australian government should restrain the regulatory appropriation of land under the Western Australian Environmental Protection Act, and compensate landowners for future appropriations.

7) Western Australia should set up a voluntary electronic patient record system, and provide online performance indicators, to empower patients and increase the value of the Western Australian health system for Western Australians.

8) The Western Australian government needs to implement a broad range of initiatives to reduce unnecessary spending.

9) With the wealth created by the resources boom, Perth could easily be a cultural capital of Australia.  But doing so requires a widespread deregulatory reform movement, focused on making the city appealing to both cultural producers and to cultural consumers.

10) Western Australian electricity generation, distribution and transmission should be privatised.  Regulation affecting gas networks needs to be liberalised to facilitate further network expansion.

TEN PROBLEMS, TEN NEEDED REFORMS

WESTERN AUSTRALIA HAS SOME OF THE HIGHEST TAXES IN THE NATION

Western Australia now has some of the highest per capita taxes in the nation.  Part of this is a consequence of WA's rapidly growing wealth, but it is also a consequence of a lack of enthusiasm for tax reform.  That Western Australia is a wealthy state does not excuse or necessitate high tax burdens -- times of economic success are the times when states are best able to reduce their tax burden with minimal disruption.  Reducing taxes would also add to the economic prosperity of the state, and further help it weather any future international downturn.  Western Australia cannot hope to be both the wealthiest state in the country and the highest taxed for too long.

State taxes should be reduced to encourage growth.

HOUSING IS TOO EXPENSIVE

Western Australia, like many other housing markets across the country, is suffering from artificially inflated house prices caused by government planning processes.  Urban house prices are skyrocketing as a direct consequence of thirty years of planning orthodoxy that prioritised density over affordability.  That the cost of housing is artificially high can be demonstrated by comparing Perth with an analogous city that is not restrained by restrictive land release policies, in this case Houston.

And as house prices are going up, home ownership is going down, with younger and poorer families bearing the brunt of this effect.

Western Australia's urban planning policies need to be reformed around the importance of home ownership.  This involves releasing land for housing, sale and construction, and also relieving restraints on infill land use.

SECONDARY EDUCATION NEEDS TO BE ATTRACTIVE RELATIVE TO EMPLOYMENT

Western Australia enjoys high quality education relative to other Australian states and relative to the rest of the world.  Its spending on public education is the highest of the states, but it gets good value for money for its education system -- Western Australian students are among the top performers internationally in science, reading and maths.

However, Western Australia faces two challenges unique to the state.  It has a high proportion of indigenous and remote students which present particular pedagogical and resource challenges.  Furthermore, it has a lower than average year 12 completion rate, a rate which has begun to slip backwards in recent years.

A major reason for this lower completion rate is the attractiveness of work in WA.  However, failing to complete year twelve places students at a disadvantage for future employment, particularly if the boom slows.

Western Australia needs to retain students longer.  The key to doing so is to increase the levels of competition between schools, levels of competition between teachers, increase accountability and ensure that teacher salaries are nationally attractive.

PUBLIC TRANSPORT UNDERPERFORMS COMPARED TO ITS POTENTIAL

Perth's metropolitan rail network -- and the many users of public transport who rely on it each day -- would benefit enormously from the introduction of a user-centric transport network that would be brought about through privatisation.  Public transport privatisation has many precedents within and without the state.  The Transperth bus network and the Swan River ferry service are now privately operated, and much of the facilities management and cleaning of the rail network has been effectively privatised through contracting arrangements.

Analogous privatisations in other states have shown how privatisation can increase flexibility and punctuality, convenience, and most importantly, patronage.  And crucially, any privatisation process can rely on the experience of others across the country.

Western Australia's rail network should be privatised in 2009.  A tender would specify the level of subsidy, and the performance benchmarks necessary to meet that subsidy.

STATE REGULATION IS GROWING AND IS POORLY DESIGNED

Western Australia's regulatory burden is increasing.  The increase in regulation and legislation over the last few decades is diverting resources away from productive work, restricting entrepreneurial activity, and ultimately depressing the Western Australian economy.  In many cases, Western Australia has been a pioneer at forging new areas for regulation, while in other cases the state has failed to deregulate areas which have been successfully liberalised across the country.

Furthermore, the administrative mechanisms by which regulations are made are among the worst in the country.  Proposed regulations are subject to little internal or external scrutiny, and subject to less consultation with affected industries than in other states.

WA needs a dedicated reform movement to par back some of these outdated and onerous regulations.  It also should set up formal agencies dedicated to regulatory review, and mandate that each new regulation is subject to a regulatory impact statement before implementation.

ENVIRONMENTAL PROTECTION LAWS ARE UNDERMINING WESTERN AUSTRALIAN AGRICULTURE

Over the last few decades, there have been fundamental changes in the way Western Australian property owners have been able to use their land.  These changes have come about from the introduction of mostly well-meaning environmental legislation that effectively nationalises private property, removing it from productive use.  By utilising provisions in the Western Australian Environmental Protection Act, the government is able to designate certain areas of farmland as of high conservation value area, preventing their use by the owner.

The government is under no obligation to compensate landowners for regulatory appropriation, which both depresses economic development, and encourages the over-classification of land as conservation area.

The Western Australian government should restrain the regulatory appropriation of land under the Western Australian Environmental Protection Act, and compensate landowners for future appropriations.

HEALTH PERFORMANCE INDICATORS NEED TO BE TRANSPARENT AND ACCESSIBLE

Western Australia is a leader in the use of private hospitals to service public patients.  While Western Australia spends slightly more on health than the national average, the use of private provision has served to reduce the cost of hospital services, without sacrificing treatment efficacy.

However, one clear area for reform is in patient empowerment.  While Western Australia provides a number of patient information services and performance indicators, without a dedicated online service, patients are unable to easily access this information, and therefore less able to assess the quality of hospital service.  Furthermore, patients and providers suffer from patient records which are inconsistent and incomplete, largely inaccessible to the health care providers which require them.

Western Australia should introduce a voluntary electronic patient record system, and provide online performance indicators, to empower patients and increase the value of the health system for Western Australians.

SPENDING IS UNRESTRAINED

Government spending can have perverse consequences which are unintended by policy makers.  Western Australia's nationally high spending in many areas, in particular recreation, can crowd out private provision of services and cost tax-payers more than their value.  Furthermore, government spending has the effect of locking in high -- and increasing -- levels of taxation, slowing growth.

The WA government, as with all Australian governments, has allowed its spending to increase in line with increases in revenue.  This has the perverse effect of seeing government expand at the same time as the economy is booming.  This spending increase indicates that government is allowing increased revenue to delay making tough reform choices.

The Western Australian government needs to implement a broad range of initiatives to reduce unnecessary spending.

CULTURAL POLICY

The levels of economic growth experienced by Western Australia should bring significant cultural and social dividends.  But a mix of regulations and laws which restrain cultural production are hampering WA's significant potential in this area.  Restrictive land policy makes it hard for cultural producers to find and construct artistic venues.  Restrictive liquor licenses make it hard for venues to subsidise artistic events.  Restrictive trading policies -- particularly WA's regressive shop trading hours -- prevent urban areas from the vibrancy that is necessary to build a cultural capital.  Limited taxi licenses make late-night travel unappealing, as at least 10 per cent of travelers fail to order taxis successfully.

With the wealth created by the resources boom, Perth could easily be a cultural capital of Australia.  But doing so requires a widespread deregulatory reform movement, focused on making the city appealing to both cultural producers and to cultural consumers.

ENERGY IS UNRELIABLE AND OVER-REGULATED

Western Australia's electricity markedly underperforms compared to the eastern states.  Electricity generation is notably less reliable.  The minutes of electricity lost through transmission exceeds all the other states combined.  Outages in local distribution are regularly the highest in the country.

Based on the experience of other states, privatisation, accompanied by splitting the state generator into two firms, provides an effective remedy for these sorts of issues.  Privatisation gives energy firms the flexibility and incentive to perform better.

Furthermore, the expansion of gas pipelines is held back by regulatory control which takes pricing decisions away from entrepreneurial pipeline owners.

Western Australian electricity generation, distribution and transmission should be privatised.  Regulation affecting gas networks needs to be liberalised to facilitate further network expansion.

INTRODUCTION:  THE OUTLOOK FOR WESTERN AUSTRALIA

In 1993, we published Reform and Recovery:  An Agenda for the New Western Australian Government, a landmark study that concluded that despite moderate economic success, the Western Australian government had failed to capitalise on its opportunity to undertake, broad-based economic reform that would lock in that prosperity.

The same could be said now in 2008.  The government has been living off the economic prosperity caused by the mining boom without committing to the low tax rates and low regulatory burdens that are the prerequisite for independent long term growth.  Without broad based reform, Western Australia is vulnerable to economic downturn.  It is our view that Western Australia needs to reform in the good times, rather than wait to be compelled to do so either by slowing economic growth or federal interference.

This chapter provides an overview and outlook for the Western Australian economy, and outlines the key policy challenges that lay ahead for the next state government, regardless of which political party wins the next election.  As this chapter points out, the Western Australian economic boom has been prolonged and deep.  But with great success comes constraints.  There are many troubling signs on the economic horizon.  Labour productivity is declining, yet wage pressure is intensifying.  Taxation and spending policies have failed to adjust to the boom.  Regulation is increasing exponentially, and regulation making is well below best practice.  Energy, which has rightly dominated much political discussion, is less reliable than in any other state, and increasingly so.

Western Australia faces unique policy challenges.  This reform document provides practical, concrete measures for Western Australia to face those challenges and further capitalise on its economic success.

THE IMPACT OF THE BOOM

Since its proclamation as a self-governing colony in 1890, Western Australia has been renowned globally for its natural attractions, extensive mineral wealth, technologically advanced industries and highly skilled workforce.  It is with these comparative advantages that the state has forged a reputation for economic success.

And over the past ten years, Western Australia has become an "engine room" of the Australian economy.  This development has been attributable to a host of favourable international and domestic economic conditions.

INTERNATIONAL CONDITIONS

Since the Asian financial crisis of the late 1990s, global economic growth has rebounded to average 3 per cent over the course of this decade (Table 1). ⁽¹⁾  This trend appears to be broadly based across the advanced economies.

Table 1:  International economic growth (GDP, annual percentage change, constant prices)

	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008 (est.)
Global aggregates
World	3.5	2.1	3.1	4.1	1.5	1.9	2.6	4.0	3.4	3.9	3.7	2.6
Advanced economies
United States*	4.5	4.2	4.5	3.7	0.8	1.6	2.5	3.6	3.1	2.9	2.2	0.5
United Kingdom*	3.1	3.4	3.0	3.8	2.4	2.1	2.8	3.3	1.8	2.9	3.1	1.6
Euro area (15 countries)	2.6	2.8	3.0	3.8	1.9	0.9	0.8	2.1	1.6	2.8	2.6	1.4
Japan*	1.6	-2.0	-0.1	2.9	0.2	0.3	1.4	2.7	1.9	2.4	2.1	1.4
Newly industrialised economies
Korea (Republic of)*	4.7	-6.9	9.5	8.5	3.8	7.0	3.1	4.7	4.2	5.1	5.0	4.2
Singapore*	8.3	-1.4	7.2	10.1	-2.4	4.2	3.5	9.0	7.3	8.2	7.7	4.0
Taiwan	6.6	4.5	5.7	5.8	-2.2	4.6	3.5	6.2	4.2	4.9	5.7	3.4
Emerging market & developing economies
China*	9.3	7.8	7.6	8.4	8.3	9.1	10.0	10.1	10.4	11.0	11.4	9.3
India*	4.7	6.0	7.1	5.5	3.9	4.6	6.9	7.9	9.1	9.7	9.2	7.9
Indonesia*	4.7	-13.1	0.8	5.4	3.6	4.5	4.8	5.0	5.7	5.5	6.3	6.1
Malaysia	7.3	-7.4	6.1	8.7	0.5	5.4	5.8	6.8	5.0	5.9	6.3	5.0
Thailand*	-1.4	-10.5	4.4	4.8	2.2	5.3	7.1	6.3	4.5	5.1	4.8	5.3
United Arab Emirates*	7.9	0.1	3.1	12.4	1.7	2.6	11.9	9.7	8.2	9.4	7.4	6.3

Note:  Countries labelled with an asterisk are major trading partners of Western Australia.

Source:  IMF World Economic Outlook Database, April 2008.

There has also been exceptionally strong growth recorded in the emerging markets of China and India.  The performance of these "Asian tigers", and the recovery of Organisation for Economic Co-operation and Development economies, has created an unprecedented surge in demand for, and the prices of, mineral commodities (Figure 1).

Figure 1:  Global commodity metals price indexSource:  IMF World Economic Outlook Database, April 2008.

This resources boom has been pivotal in explaining the robustness of Western Australia's external sector in recent years.  Not only has the state's terms of trade improved, ⁽²⁾ but there has also been an upswing in merchandise exports -- from $1.7 billion in mid‑1997 to $6.4 billion in mid‑2008.

DOMESTIC CONDITIONS

The economic benefits of global economic growth and the resources boom have extended beyond the traded sectors, to positively influence almost every aspect of the Western Australian economy.

ECONOMIC GROWTH AND INCOMES

According to Australian Bureau of Statistics State Accounts data, Western Australia has averaged an economic growth rate of 4.3 per cent over the decade to 2006‑07.  By comparison, the Australian economy has grown by about 3.6 per cent over the period.  This has been particularly obvious since 2003, when growth in Western Australia accelerated above that of Australia as a whole.  (Figure 2)

Figure 2:  Annual output growth, 1996-2007Source:  ABS, Australian National Accounts:  State Accounts, Cat. no. 5220.0.

As a consequence, after accounting for population, Western Australia had the highest gross state product per capita of all the states and territories in 2006‑07 (Figure 3).  Western Australia's output per head of population exceeded that of NSW and Victoria by about 30 per cent, which is illustrative of a "two‑speed economy" effect across Australia.

Figure 3:  Gross state product per capita, states and territories (chain volume measures, 2006‑07, $)Source:  ABS, Australian National Accounts:  State Accounts, Cat. no. 5220.0.

Growth was recorded across all expenditure components of GSP (Table 2).  The main drivers of growth were business investment (up $18 billion or 158 per cent) and household consumption (up $19 billion or 53 per cent), while dwelling investment also made a significant contribution.

Table 2:  Western Australia GSP, expenditure components ($ million)

	1996-97	2006-07	Increase ($m)	Increase (%)
Household consumption	36,027	55,121	19,094	53.0
Business investment	11,487	29,674	18,187	158.3
Dwelling investment	7,080	10,817	3,737	52.8
Government spending	14,328	20,578	6,250	43.6
Net exports	26,853	32,949	6,096	22.7
Balancing item	-12,880	-21,364	-8,484	65.9
Gross State Product	82,905	127,775	44,870	54.1
Gross State Product per capita	46,565	61,490	14,925	32.1

Note:  Business investment data for 1996‑97 excludes purchase of second hand assets.  Dwelling investment totals include ownership transfer costs.  Balancing item implicitly comprises changes in inventories, total net interstate trade and balancing item discrepancy.  Subtotals may not sum to total due to statistical discrepancies or rounding errors.

Source:  ABS, Australian National Accounts:  State Accounts, Cat. no. 5220.0.

EMPLOYMENT AND EARNINGS

Western Australia's strong macroeconomic performance has flowed through to the labour market (Table 3).  Excluding the Australian Capital Territory and Northern Territory, Western Australia had the highest participation rate and lowest unemployment rate of all jurisdictions in 2007‑08.

Table 3:  Selected labour market indicators (trend series)

	1997‑98			2007‑08
	Employment ('000)	Participation rate (%)	Unemployment rate (%)	Employment ('000)	Participation rate (%)	Unemployment rate (%)
NSW	2,834	61.5	7.4	3,398	63.5	4.6
Vic	2,136	63.2	8.2	2,627	65.0	4.5
Qld	1,586	64.9	8.7	2,159	67.1	3.7
WA	874	66.2	6.8	1,125	68.3	3.3
SA	650	60.7	9.6	772	62.8	4.8
Tas	195	59.0	10.5	231	60.9	4.9
ACT	154	71.3	7.3	190	72.5	2.6
NT	90	70.3	4.9	109	72.9	4.4
Australia	8,519	63.1	8.0	10,611	65.2	4.2

Source:  ABS Labour Force, Australia, Spreadsheets, Cat. no. 6202.0.55.001;  Moore 2006.

While the growth in state wages has closely tracked the national trend for much of the past ten years, wage pressures have recently intensified.  This is reflected in the growing gap between the state and national wage price indexes (Figure 4).

Figure 4:  Wage price index (ordinary time hourly rates excluding bonuses, all sectors and occupations)Source:  ABS Labour Price Index, Australia, Cat. no. 6345.0.

PRODUCTIVITY

Productivity is a measure of the rate at which goods and services are produced per unit of input (such as labour or capital).  Growth in productivity is an important indicator of the capacity of an economy to generate higher incomes and thus sustain improvements in living standards.

The available evidence suggests that Western Australia has recorded relatively strong productivity growth over the long term.  It has been estimated that the average annual labour productivity growth rate for Western Australia was about 2 per cent (the equal highest of all states) from 1993‑94 to 2005‑06. ⁽³⁾  The state's multifactor productivity growth was estimated at 1.3 per cent for the same period (behind Queensland's growth of 1.6 per cent). ⁽⁴⁾

A detailed analysis of a recent productivity cycle (1998‑99 to 2003‑04) found that Western Australia shared the highest average annual growth of labour productivity (with Queensland) of 2.8 per cent over the period.  However, in 2004‑05, the state's labour productivity growth fell by 3 per cent compared to the previous year. ⁽⁵⁾  Western Australia's labour productivity growth was generally flat in recent years. ⁽⁶⁾

WESTERN AUSTRALIA'S POSITION IS UNCERTAIN
IN A GLOOMY INTERNATIONAL ECONOMIC OUTLOOK

Given the overall strength of Western Australia's economic performance, it would be easy to conclude that the good times will carry on indefinitely.  However, the current economic climate has brought with it challenges which could threaten the medium to long term outlook for the state economy.

There are more uncertainties in the global economic outlook than at any other time over the past few years.  The global "credit crunch" is still unfolding and, although its direct effect on the Western Australian economy has been modest to date, higher interest rates and a lack of liquidity in credit markets may place downward pressures on state household consumption, business investment and the housing market.  Business and consumer confidence in the economic outlook have also softened in recent months.

There is also the risk that a greater‑than‑expected downturn in the US, Europe and Japan could hinder growth for WA's major trading partners in the emerging markets of Asia.  This could, in turn, lead to a reduction in demand and prices for commodity exports -- and, hence, curtail the resources boom that has underpinned the state's economic prosperity.

A more pressing concern appears to be increasing wage and input costs due to tight labour market conditions and capacity constraints.  According to the state's Chamber of Commerce and Industry:

"the most critical challenge that is facing Western Australia is the emergence of critical and widespread labour shortages.  Since the current phase of economic expansion started six years ago, almost 200,000 jobs have been created in the WA economy.  However, these additional people employed throughout the WA economy have not been sufficient to meet demand, with labour shortages becoming a key limiting factor to additional growth in this state". ⁽⁷⁾

Indeed, growth in wage and other costs are nearing record levels, signalling a build‑up in inflationary pressures for the broader state economy.  Apart from their effect on costs, the continuation of capacity constraints could also lead to the delay or deferral of major investment projects.

One of the more serious threats to the state's economic outlook, over the long run, is the prospect of stalled or declining productivity growth.  To some extent, the flat growth rate of labour productivity in recent years could be explained by the absorption of additional workers (that require training) by Western Australian businesses, or business investment activities that have not yielded output to date.

However, state government fiscal and regulatory settings that impede economic development could dampen Western Australia's productivity outlook.

WESTERN AUSTRALIA HAS SOME OF THE
HIGHEST TAX BURDENS IN THE NATION

In 2006-07, the Western Australian government collected $5.7 billion in tax revenue.  That is up an astonishing 98 per cent from the 2000-01 tax take.  Further, the tax burden has increased dramatically over the past decade.  According to Australian Bureau of Statistics data, the per capita tax burden has increased from $2,079 in 1998-99 to $3,229 in 2006-07.  That figure, however, understates the increase in Western Australian state taxation because it does not take the GST reforms into account.  In 2000-01, the per capita state taxation take was a mere $1,870.  Since 2003-04 Western Australia has had an above average taxation tax take compared to the other states and territories, and after 2005-06, Western Australia has had the highest per capita level of state taxation within Australia.  The most obvious explanation for this growth in taxation is the overall economic growth of WA.  It is important to note, however, that the tax take has increased far more than the size of the Western Australia economy.

Figure 5 shows the growth in Western Australian taxation per capita compared to the growth in per capita taxation for the Commonwealth and also for New South Wales and Victoria.  An index is created for each series with the values in 2000-01 = 100.

Figure 5:  Relative Taxation

The growth in per capita Western Australia taxation has far exceeded that of New South Wales, Victoria and the Commonwealth.

The largest sources of increased tax revenue come from payroll tax (growth of 93 per cent since 2000-01) comprising 28 per cent of state revenue, and stamp duty (growth of 246 per cent since 2000-01) comprising 38 per cent of state revenue.  Increases of this magnitude for those sorts of taxes are entirely consistent with WA's status as a high growth state.  It is entirely unsurprising that taxation revenue in these categories has increased to the extent that it has.  It is also the case that the Western Australian government has shown little initiative to either increase the tax rates, or to decrease the tax rates.  In other words, the massive increase in tax revenue is simply due to improved economic conditions in WA.  The government has been a passive recipient of all of this tax revenue.

BUSINESS TAXATION

Using our State Business Tax Calculator, it is possible to examine the business taxation environment of Western Australia and compare that to other states. ⁽⁸⁾

The state business tax burden has fallen in Victoria, New South Wales and Western Australia from 2007 to 2008.  The decline in Western Australia's business tax burden is about 4.5 per cent -- similar to that of Victoria.  Given the economic growth that Western Australia has experienced, it is clear that more can be done in this regard.

Despite a record tax take, there has been no movement towards tax reform or initiatives to restrain spending.

GOVERNMENT SPENDING IS UNRESTRAINED

Figure 6 compares the expenditure choices of the Western Australia government to those made by other Australian state and territory governments.  In many respects, those choices are very similar and given the constraints and incentives facing the various states and territories, we are not surprised to find similarities at the broader level.  At the aggregate level, Western Australia does appear to spend a greater proportion of its budget on public order and safety, housing and community amenities, and also recreation and culture.  At this level of analysis, Western Australia appears to spend less of its budget on general public services and social security and welfare.

Figure 6:  State ExpenditureSource:  ABS Statistics.  Cat. 5512.0 (2006-07 data)

Within those broader categories there are additional choices that the government has made that can be highlighted.  For example, the overall budget spend on education is broadly similar to the other states, yet the Western Australian government has increased spending on primary and secondary schooling while cutting expenditure on post-secondary schooling.  Similarly with health, the government has spent a lot less on acute health institutions while spending much more on recreational facilities and services.

Similarly, we are able to investigate the growth in spending across various categories.  Figure 7 shows the growth in spending between 2000-01 and 2006-07.  The priorities of the Western Australian government in some areas have been very different to those of the other state and territory governments.  For example, the growth in spending in public order and safety has been very large, while general public services spending has fallen dramatically.

Figure 7:  Growth in Spending 2000-01 to 2006-07Source:  ABS Statistics.  Cat. 5512.0

WESTERN AUSTRALIA'S REGULATORY
BURDEN IS HEAVY AND INCREASING

The Western Australian government has been imposing a steady legislative and regulatory burden upon the Western Australian economy and society.  Figure 8 shows the significant increase in pages of legislation passed -- a standard proxy for changes in the relative regulatory burden -- over the last half century. ⁽⁹⁾

Figure 8:  Pages of legislation passed per year, Western Australia, 1959-2006

Comparing the regulatory burden between states is difficult.  Nevertheless, evidence suggests that Western Australia is a particularly heavily regulated state.  The Chamber of Commerce and Industry Western Australia surveyed its members and found that regulatory compliance impacted business particularly heavily. ⁽¹⁰⁾  These businesses nominated the pace of regulatory change as a distinct issue.  Small businesses reported that they spent up to 18.5 hours each week complying with existing regulations, researching new and amended laws and changing internal systems and business processes to cope with regulatory changes.  For medium sized businesses, that figure increased to 26.4 hours, and large firms spent on average 70.3 hours on regulatory issues each working week.

The CCIWA estimate that the average compliance costs for small businesses were $24,500, ranging up to $525,421 for large firms.  They further estimates that this yielded a total cost of regulatory compliance of $2.1 billion across the state, or almost 2 per cent of GSP.

As these figures reveal, a large consequence of a high regulatory burden is the complexity it adds to business processes.  This is particularly pronounced in the resources and agricultural sectors.  The Western Australian Farmers Federation has shown that farmers in 2007 had to comply with 30 state Acts and 86 state regulations. ⁽¹¹⁾  Compounding this are the many federal Acts and regulations, and local government rules which apply to their industry.  Federal legislation and regulation is, if anything, increasing at a more significant pace than its Western Australian equivalent, and Western Australian businesses have to comply with all levels of government.

Of course, these sorts of analyses of regulatory impact necessarily focus on the compliance cost of regulation, which is a small portion of the total cost of regulation.  As Productivity Commission Chairman Gary Banks has pointed out, "regulations not only create paperwork, they can distort decisions about inputs, stifle entrepreneurship and innovation, divert managers from their core business, prolong decision making and reduce flexibility." ⁽¹²⁾  It is the economic activities that regulations prevent, rather than the compliance costs of regulation, that constitute the biggest impact of over-regulation.

The design and implementation of regulation in Western Australia is also well-below national best practice.  The Business Council of Australia has rated Western Australia's regulation making "poor" -- the only state in the country to receive that distinction -- largely to do with the state's lack of formal regulatory impact statement requirements, its relative lack of regulatory review processes, and the absence of an independent regulatory oversight agency.  The BCA points out that this means that regulation making in Western Australia is far less transparent, and less consultative than other states. ⁽¹³⁾

ENERGY

Western Australia has vast supplies of natural gas and limited supplies of coal.  The gas is, in the main, poorly located for the domestic market while the coal is relatively poor quality compared to that in the eastern states.

But nevertheless, the vast majority of the problems facing the Western Australian energy sector have been created by government policy, not any natural circumstances.

Considerable intervention within energy policy has led to a situation where, compared with the eastern states, the supply is high cost, vulnerable to sudden shortages and generally subject to excessive outages.  These matters have been exacerbated by the government's ambitious emission reduction policy.

ELECTRICITY SUPPLY

The integrated electricity industry has been split into separate generation, transmission distribution and retail businesses.

At the time of reforming the previously integrated Western Power, the government opted to retain the generation assets under a single structure (Verve Energy) though capping the amount of electricity capacity the business could own so as to allow room for new suppliers.  The market itself is composed of bilateral contracts with any residual needs/surpluses being available on a spot basis.  Though different in structure from the National Energy Market, the outcome is not markedly different since NEM operates largely on a de facto contract basis.

Western Australia's generation system (South West Interconnected System only) has long performed more poorly than that of the eastern states.  In terms of the measure of their ability to be ready to supply (the "Availability Factor") the generation units lagged those of all other state systems in 2006/7, a pattern that is generally observed in earlier years.

Figure 9:  Equivalent availability

Verve has by far the largest market share with over 3000 MW of coal and gas capacity (as well as some wind).  New capacity has become available through Babcock and Brown and Transfield owned facilities.  Even so, competition is limited and it would have been preferable to break Verve into at least two businesses centred around the major facilities of Muja, Kwinana, Pinjar, Collie, Cockburn and Mungarra.  Such a process could still be effected and would offer a better road forward than the very gradual attrition of Verve's monopoly supply that will otherwise take place.

Generation of electricity has no reason to be publically owned.  Electricity generators are factories and operate like many other such facilities.  Interstate and international experience has demonstrated considerable efficiencies resulting from it being moved into private ownership.  Private ownership is better able to act in pursuit of profitable opportunities -- to seek alliances with other firms, synergies through diversifications, to sell off aspects of the business that are underperforming and to contract for labour and other inputs without any political oversight.

We would also expect that a privatised Verve -- especially one split into rivalrous businesses -- would find improved operating arrangements, rather like the elderly Hazelwood plant in Victoria has.

The relatively poor performance in generation is also seen in other areas of the supply system.

In transmission, the minutes lost in Western Australia in 2006-07 exceeded those of all other states combined.  Outages in local distribution are also high by the standards of the rest of Australia.  They were the second highest in 2006-07 and 2005-06 and the highest in 2004-05.

In this case too, privatisation should be the approach.  The Victorian and South Australian privately owned networks have shown considerable improvement in service while operating profitably and avoiding "gold plating" the facilities.

Privatisation does not endanger the performance of any public policy roles, nor does it allow consumer exploitation since the natural monopoly components, as is the case now, would remain regulated.

GAS

Gas policy in Western Australia has been dominated by the Dampier to Bunbury Natural Gas Pipeline (DBNGP).  Having been originally built in 1984 with the assistance of government, even when it was later sold it remained the subject of regulatory controversy.  Among the difficult outcomes of this has been shortages in capacity especially in 2003 and 2004 due to disputes between the owners and the regulator as to the appropriate pricing of this.

While the issue of capacity pricing has abated somewhat, it remains a potent source of disputation.  The ability of the pipeline to expand and its owners to receive an acceptable return from this has depended upon a coalition of users to agree on the terms of the expansion.  There is no possibility of the owner acting entrepreneurially to expand capacity, since to do so would leave its pricing strategy in the hands of the regulator.  Regulatory arrangements that allow commercial matters to be determined at greater arms length from the regulatory structure should be developed.

More recently, gas issues have been dominated by the Varanus explosion that has cut supply and caused more enduring shortages as a result of inabilities to contract on terms sought by retailers and other users.  Gas in Western Australia has already confronted issues likely to be faced generally as a result of the price here being lower than the international price and the options owners have to sell gas overseas.  These matters are likely to bring increased gas prices, and the regulatory approach of requiring gas to be sold domestically at a discount is one that will result in reduced benefits to Australia generally.

Gas reticulation, with the sale of Alinta and subsequent ownership changes, is in private hands and operates highly efficiently.

WESTERN AUSTRALIA'S FUTURE DEPENDS HEAVILY
ON THE GOVERNMENT'S POLICY DIRECTION

Despite the dominance of the Commonwealth government over national economic affairs, the states retain policy levers over "the formation of both physical and human capital, and therefore economic growth and productivity". ⁽¹⁴⁾  The key question going forward is what state policymakers choose to do with these levers, given the economic opportunities and challenges facing Western Australia.

In essence, there are two policy options open to the Western Australian government:

• It can continue on its current course -- by largely keeping its hands off the productivity policy levers -- and risk the economic and fiscal consequences of a terms of trade "crunch" when the resources boom fades;  or
• It can act now and invoke forward‑looking reforms to boost the productive potential of the state economy and so ensure that it continues on a sustained growth path, irrespective of the future outlook for commodity markets.

It is against these choices that we have produced Project Western Australia.  The Project illustrates that the pursuit of a unilateral "productivity‑plus" reform agenda by the Western Australian government could yield potentially significant benefits for all residents of the state.

Indeed, the 2008 election comes at a critical juncture in the state's economic history.  By taking the "high road" of a comprehensive economic reform agenda, the next Western Australian government has a unique opportunity to propel the brash, vibrant jewel of the West towards a new plane of economic excellence.

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ENDNOTES

1.  Includes estimates for growth for 2008.

2.  According to ANZ Economics, Western Australia's terms of trade has increased by about 35 per cent over the past five years.  ANZ Bank Economics Group, 2008, "Western Australia:  Boom continues, but some doing it tougher", ANZ States and Territories Economic Update, July.

3.  From 1984‑85 to 2005‑06, Western Australia's average annual labour productivity growth rate was 2 per cent -- the highest for all jurisdictions.  Over half of this growth was accounted for by capital deepening -- or an increase in the capital to labour ratio.

4.  Multifactor productivity (or MFP) measures the changes in output per unit of combined inputs.

5.  Des Moore, The Role of Government in Queensland, Report to Commerce Queensland, May 2006.

6.  Gudrun Meyer-Boehm, "Economic Output and Productivity Performance of the Australian States", Productivity Commission, Productivity Perspectives Conference, December 2007.

7.  Chamber of Commerce and Industry of Western Australia (CCIWA), 2007, 2008-09 Pre Budget Submission to the Western Australia Government, November.

8.  Our State Business Tax Calculator determines the tax burden of a virtual company operating within various Australian states.  As that company goes about its business, it will be liable for a range of state business taxes.  We simulate that business behaviour and then calculate the tax burden the company would bear were it to operate in a specific Australian state or territory.

9.  The validity of this measure is discussed in Richard J. Wood, The Growth of Australia's Regulatory State:  Ideology, Accountability and the Mega-Regulators, 2008

10.  Regulation and compliance:  A Discussion Paper, Chamber of Commerce and Industry Western Australia, Business Leader Series, November 2006

11.  Western Australian Farmers Federation, Submission to the Productivity Commission Annual Review of Regulatory Burdens On Business -- Primary Sector, June 2007.

12.  Gary Banks, "The Good, the Bad and the Ugly:  Economic Perspectives on Regulation in Australia" Address to the Conference of Economists, Business Symposium, Hyatt Hotel, Canberra, 2 October 2003.

13.  Business Council of Australia, A Scorecard of Red Tape Reform, May 2007.

14.  Crossman, Peter, 2000, "Drivers of Queensland's Economic Growth", Paper presented to Annual Conference of Economists, July.

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CHAPTER 1

FIXING THE CRISIS:  A FAIR DEAL FOR HOMEBUYERS IN WA

CHAPTER 2

MOVING IN THE RIGHT DIRECTION:  TRANSPORT REFORM IN WESTERN AUSTRALIA

CHAPTER 3

CREATING A LIVEABLE CITY:  HOW PERTH CAN CAPITALISE ON THE RESOURCES BOOM

CHAPTER 4

RESHAPING THE LANDSCAPE:  THE QUIET EROSION OF PROPERTY RIGHTS IN WESTERN AUSTRALIA

CHAPTER 5

TOP OF THE CLASS:  MAKING THE MOST OF WESTERN AUSTRALIA'S SCHOOL SYSTEM

CHAPTER 6

TAKING THE PULSE:  REFORM INITIATIVES FOR THE WA HEALTH SYSTEM

Throwing more money into the glove box

Mr Bracks must have considerable wisdom.  He has examined the car manufacturing industry, had a damn good natter with its workers, managers and shareholders and concluded that more support is necessary.

Currently the industry has taxpayer subsidies valued at $4 billion between 2006 and 2015.  In addition, it has tariff protection which increases import costs by 10 per cent.

Together, these measures are worth the equivalent of more than $20,000 annually per automotive industry worker.

Mr Bracks recommends increasing the direct subsidy by a further $1.5 billion, re-orientating it towards green cars and extending it to 2020.  Tariff assistance is scheduled to be cut to 5 per cent and he supports this.

Lower protection in recent years has brought a more competitive auto industry.  This includes Holden "muscle" cars, the Ford Territory and the general excellence of Toyota's build.  We have also seen the components sector reaching out to overseas markets.

But Bracks' proposed enlarged and extended assistance places the industry on permanent cardiac support.

Justifying additional support, Steve Bracks' patron, Industry Minister Kim Carr, said:  "This industry is a major exporter.  It is a major source of research and development.  It's strategically vital for the rest of manufacturing.  It provides the skills formation base for so many other industries, from plastics to aerospace."

But wait a minute.  Is that not what every industry claims?  All activities have solid links with promising growth areas like electronics, plastics and new materials.

Many would argue that pharmaceuticals, medical technologies and precision instruments offer better prospects of tapping into such potential.

Industry support does not come out of thin air.  Somehow, Mr Bracks has calculated that the support for the car industry will pay richer dividends than support for other industries.

Moreover, in opting for additional car industry subsidies, Mr Bracks is saying this is better than consumers themselves retaining the $1.5 billion.

And he is also saying $1.5 billion is better spent on supporting the car industry than on hospitals, global warming programs, higher pensions or any other measures governments are pressured to support.

Mr Bracks has his share of smarts but does not, of course, have the extraordinary wisdom that requires such judgments.  He does, however, recognise what gels with his sponsors -- the Federal Government.

Many within the Rudd Government have considerable faith in their abilities to pick winner industries.  They consider that a bit more help to "strategic" industries will allow us to build world excellence in promising fields where we would otherwise be laggards.

The green car is the latest in a long line of such hopes.  We have just emerged from the failed investment in a wind power industry which was to catapult Victoria into the position of leading supplier in the region.

Previous failures in picking areas as the crucible of manufacturing growth have been the clothing industry, whitegoods, agricultural equipment and earlier versions of the car industry.

None of these have ever been successful.  But hope springs eternal in the breasts of politicians with access to our bank accounts and greater faith in their own judgments than of those collectively made by buyers and sellers.

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Case of the warm and fuzzy

Three claims have been repeated so often they are accepted as fact:  global temperatures are rising, we have less rainfall and so water is becoming scarce, and salinity in the Murray River is rising.

Of course there is the old adage:  lies, damn lies, and then there are statistics.  But we can keep it simple and just consider data from observations of the real world and from the most reputable institution since records began for the particular issue in which we are interested.  It is important to not confuse real-world data (also known as observational data) with output from computer models because computer models generate scenarios that may or may not come true.

Observational data on rainfall for the entire east coast of Australia is available from the Australian Bureau of Meteorology with yearly averages for all the sites back to 1900.

But, contrary to the Stern report, this chart does not show declining rainfall; rather, it indicates that rainfall was very low in the early 1900s, that there were some very wet years in the late '50s and early '70s, and overall the trend is one of a slight increase in rainfall during the past 107 years.

Stern got it wrong, perhaps because he was confusing output from computer models with the real-world data.  There are a lot of computer models that foretell dire environmental catastrophe that may not eventuate.

Rainfall data for the Murray-Darling Basin is also available from the Bureau of Meteorology.  The overall trend is one of increasing rainfall since 1900.  The past few years show below-average rainfall for the region and indeed there has been drought.  The low river inflows have been exacerbated by more groundwater pumping, more plantation forestry, including in the upper Murrumbidgee, and more salt interception schemes along the Murray River.

Salt interception schemes evaporate water to trap the salt.  In the '80s, computer models predicted that Adelaide's drinking water soon would be too salty to drink because of declining water quality and rising salinity levels in the Murray River.  Measurements of salinity are recorded from many different sites along the Murray River, including at Morgan, which is immediately upstream from the offshoots from Adelaide's drinking water.  The data from Morgan enables us to get an idea of how salt levels are trending in the real world, as opposed to computer-generated scenarios.

Concerns with salinity have resulted in levels being tested from the '30s.  Salinity levels rose dramatically during the '70s and peaked at Morgan in 1982, which was a drought year.  Then the Murray-Darling Basin Commission implemented a catchment-wide drainage management plan and started building salt interception schemes, and since then salinity levels have more than halved.

Measuring global temperatures is much more contentious than measuring salinity or rainfall.  Issues include how to combine the data from all the weather stations across the globe and the data is usually presented as a temperature anomaly rather than, for example, just a global average.  A temperature anomaly is derived from the average temperature for a specific but arbitrarily defined period and usually emphasises the extent to which temperatures have increased.  The Bureau of Meteorology relies on the Climatic Research Unit at the University of East Anglia in conjunction with the Hadley Centre of the British Met Office for its information on global temperatures.  This information is available on the internet going back as far as 1850 and shows the deviation from the period 1961 to 1990.

But when global temperatures are presented just as a simple average with a vertical axis that spans the range of temperatures experienced in a place such as Ipswich (west of Brisbane) during a single year, the global rise in average temperatures is not that obvious because the mean temperature since 1850 has increased by less than 1°C.

The data from the CRU is generally accepted as accurate by those who subscribe to the idea that carbon dioxide is driving dangerous man-made global warming.  In contrast, many sceptics of man-made global warming argue that the only reliable measure of global temperatures is from satellites.

Ross McKitrick from Canada's University of Guelph argues that 50 per cent of global warming measured by land-based thermometers in the US since 1980 is due to local influences of man-made structures, also known as the urban heat island effect.  There also have been issues with the additions and losses of weather stations; for example, many weather stations were lost in places such as Siberia with the disintegration of the Soviet Union.

Thermometer temperature data has been collected in the polar regions only since the '40s and calculating the mean temperature at the poles is still difficult.

James Hansen, from the Goddard Institute for Space Studies, has explained the general difficulty of measuring surface temperatures.

"Even at the same location, the temperature near the ground may be very different from the temperature 5 feet (1.52m) above the ground and different again from 10 feet or 50 feet above the ground," he says.  "Particularly in the presence of vegetation (say in a rainforest), the temperature above the vegetation may be very different from the temperature below the top of the vegetation.

"A reasonable suggestion might be to use the average temperature of the first 50 feet of air either above ground or above the top of the vegetation.  To measure SAT (surface air temperature) we have to agree on what it is and, as far as I know, no such standard has been suggested or generally adopted."

Given these difficulties, an alternative is to use temperature data from satellites.  Since 1979, orbiting satellites have measured temperature in a completely different way from the traditional method of using thermometers.

The satellites measure microwave radiation and the research focus has been on getting a broadly representative measure of lower atmosphere temperature.

The satellite data is available only since 1979, but it does give a good overview of how global temperatures have been trending during the past 30 years.  Global temperatures peaked in 1998, associated with an El Nino warming event, then dropped quite dramatically before stabilising for a few years and dropping again recently.  The satellite data on global temperatures indicates we presently have a global cooling, not a global warming, trend.

Many scientists, environmental activists and politicians have staked their reputations on the idea that global temperatures are going to keep steadily rising, so it is not surprising that they are ignoring the past few years of data from the satellites.  But the stakes are very high.

The Australian Government is planning to introduce an emissions trading scheme, also described as a carbon pollution reduction scheme, on the basis that that carbon dioxide from the burning of fossil fuels is contributing to dangerous global warming.

Many people assume that such a drastic action is premised on good evidence establishing a proven causal link between anthropogenic carbon dioxide and global warming.

But it is not, instead relying on computer models, claims of a scientific consensus and the belief that global temperatures continue to creep higher and higher.  Many false claims are made about the state of our environment on an almost daily basis but, because most Australians are illiterate when it comes to science and maths, they are mostly just accepted.

Most Australians rely on television and newspapers for information about environmental issues.  If this reporting incorporated some charts, in the same way business reporting does as a matter of course, then there might be at least some quality control.

But, ultimately, good policy is going to require that a much larger percentage of Australians having a higher level of scientific literacy.

The alternative is important policy continuing to be decided on hearsay rather than evidence because you just can't trust the environmental advocates.  Indeed, they may care more about the environment than the truth.

MANY people want to save the environment, but few people are confident of interpreting a chart or graph of scientific information on, say, water quality or global temperatures.  So, when it comes to environmental issues most Australians just believe what the experts say.  After all, people who care about the environment are the good guys, caring and trustworthy.

Furthermore, when it comes to issues such as global warming, we are told there is a consensus, that most scientists agree about most things and this should make us feel even more secure believing what they tell us about the sorry state of planet Earth.  But who should check what the experts are saying about environmental issues, and at what point?  When it comes to business issues, whether interest rates or commodity prices, we are shown charts, hard data, and people who are interested in the business issues would expect no less.

Environmental issues are very much like business issues:  they are about numbers and trends.  For example, business analysts are interested in whether the price of oil is going up or coming down and Al Gore tells us that global temperatures are going up.  But if your next stock investment depended on what Gore was telling you the business market was doing, wouldn't you also seek information from other sources to be sure?

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Wasting our tax dollars on symbolism

Australian policy makers have an obsession with motor cars.  Australia, they say, should not only 'make things' -- as Kevin Rudd so simply put it during the election campaign -- but they should specifically make automobiles.

But Australia isn't very good at making cars.  Consider the evidence.  The Bracks Review into government assistance for the automotive industry indicated that the average fault per vehicle for Australian manufactured cars was well above the appropriate benchmark.  Furthermore, the proportion of domestic manufactured cars in the Australian fleet has declined over time.

But rather than face reality and allow the local automotive industry to survive or fail according to the dictates of the competitive market, the government is proposing more industry policy.

Industry policy has an entirely disreputable history with an appalling track record of failure -- it is amazing that politicians still think they can get away with proposing these sorts of winner picking ideas.  In essence it constitutes a supply side conspiracy of government and industry in order to collude against consumers.  As Adam Smith warned, "to narrow the competition must always be against [the public interest], and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens".

"NEW STYLE" INDUSTRY POLICY

The failure of old-style industry policy is plain to see.  Governments have rightly shifted their tack a little -- we now have "new style" industry policy.  Here the government proposes building a culture of innovation, focussing incentives, and accelerating the take-up of new technology.  Rather than imposing tariffs and quotas or throwing money at specific products, government now throws money at research and development (R&D).  This is widely accepted as being appropriate expenditure of public money.

Certainly, standard economic theory suggests that markets will undersupply basic R&D and the market economy will be less innovative than is socially optimal.  Government, by subsidising basic R&D, can correct for that 'market failure'.  This is especially the case in environmental issues.  Here, apparently, there is a double market failure.  The Stern Report makes the argument that the "climate is a public good" and as in the case of basic R&D the market does not ensure the optimal allocation of consumption and investment in climate.  Solutions to climate change involve a substantial investment in R&D and so government can correct a double market failure by investing in green technology such as the green car.

At face value that is a plausible argument.  Unfortunately, it does not stand up to close scrutiny.  The climate is not a public good despite having the characteristics of public goods -- it is both non-rivalous and non-excludable.  The climate is not produced in a market, it is not bought and sold in a market, nor can government subsidise the production of the climate.  The first component of the double market failure is simply not correct.

The second part of the story is also problematic.  The benefits of publicly funded R&D are remarkably difficult to pin down.  Even the Productivity Commission has failed to find a clear relationship between R&D and productivity.  In 2003 the OECD published an official report into The Sources of Economic Growth in OECD Countries, and as part of that analysis, the OECD disaggregate R&D into a private and public component.  As expected there is a positive relationship between overall R&D and economic growth, and also between private R&D and economic growth.  In contrast there was a negative relationship between publicly funded R&D and economic growth.  In other words, it is not at clear that government should be financing or subsidising R&D.

IMPORTING GREEN CARS

Looking specifically at the Green Car fund, additional problems arise.  Australian political elites and large sections of the population have a low tolerance for wealth and income inequality.  As the late Nobel Laureate Friedrich Hayek explained, new products and services are often expensive and initially are viewed as luxuries for the rich.  Over time, the prices of these goods fall and the less affluent can access them.  Before new products can brought to the market, however, there needs to be sufficient individuals with sufficient disposable income to buy them.  Australia's brutally progressive tax system substantially reduces the disposable income that may be spent on new luxury goods.  All this means that there are fewer profitable opportunities for Australian firms to trial new products at home before exporting them.

In short, Australia is very unlikely to efficiently develop a viable green car -- the domestic market is simply too small.  There are, however, a number of overseas markets where such a viable vehicle could be developed -- the European Union or the United States are obvious contenders.  Rather than waste Australian tax dollars on a symbolic gesture, those Australians who would buy such a vehicle should simply import them from abroad.  To ensure the take-up of such vehicles the government should consider totally abolishing the import tariff on cars and, of course, the luxury car tax -- these vehicles are unlikely to be cheap.

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Gillard's two universes

Car makers are not the worst bastion of old-style protectionism, universities are, and Labor panders to them.

Francis Scott Fitzgerald said "the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function".  If Fitzgerald was right, Education Minister Julia Gillard has a first-rate intelligence.

Gillard has declared she wants to reform the country's vocational education and training system.  She wants to make TAFE colleges more responsive to the needs of industry and introduce competition and market incentives.  She is also demanding that state governments relax their rigid control over the subjects taught at TAFE and the fees charged by colleges.

Most radically, Gillard is publicly contemplating a voucher system in which government funding would be going to students rather than institutions.  Students would be able to spend their voucher at a college of their choice regardless of whether the college was run by the government or the private sector.  The best colleges would attract students and funding.  The worst colleges would change or go out of business.

Although she'd never admit it, Gillard's proposed reforms are basically a continuation of measures initiated by the coalition.  They are reforms that are long overdue and deserve widespread support.

Unfortunately the minister has refused to extend the principles she wants to apply in the training sector to higher education.  Labor has ruled out deregulating tertiary fees.  It has already abolished the ability of students to payfor their own place at university.  Education policy in Australia is now verging on the absurd.  The ALP is willing to give vouchers to students doing diplomas in multimedia studies at TAFE colleges, but it won't countenance vouchers for students doing degrees in creative writing at universities.  It appears that the training and higher education sectors now inhabit parallel policy universes.

The ALP has been accused of gaining the inspiration for its training reforms from free-market economist Milton Friedman.  If so, Labor has more than compensated when it comes to its policy for universities, which would do credit to the best of Gough Whitlam's dirigisme.

The reasons training and universities are treated so differently is not hard to fathom.  Vocational education, because it must be applied in the real world, has traditionally been less afraid of marketbased solutions.  University academics are largely immune from the requirement to do anything useful.  Academics don't concern themselves with mundane matters such as the need to attract a clientele.  Whether their students will be able to be gainfully employed is the last thing on the minds of university lecturers.  In fact most lecturers would be highly offended if asked whether anything they taught helped their students get a job.

Universities also have a special place in ALP mythology.  With nationalisation of the means of production going the same way as the Berlin Wall, free universal and government-controlled higher education is one of the few articles of faith party members can still cling to.

By and large university administrators are happy with the status quo.  There are a few notable exceptions, but most vicechancellors enjoy having the Department of Education run their university for them.  It's easier to make speeches about the need for more public funding than it is to actually go out and raise the funds yourself.  Anything that goes wrong is blamed on the government.

Australia's car makers have been labelled the worst bastion of old-style protectionism.  That's unfair.  They are only the second-worst.  Universities take the prize.  This country's car executives are far-sighted visionaries compared with the average vice-chancellor.

For example, last month a group of universities calling itself the "Innovative Research Universities" (Flinders, Griffith, James Cook, La Trobe, Murdoch, and Newcastle) made a submission to the government's review of higher education.  Notwithstanding that the submission notes the failure of "central planning", it nevertheless demands that the government establish even more targets than already exist.  The submission argues against further deregulation of higher education and it specifically says that market forces should not apply to universities.  The submission opposes more private universities, funding via vouchers, and the government allowing universities to set their own fees.

If these "Innovative Research Universities" had been given the opportunity, they probably would have argued against lowering tariffs, floating the dollar, and selling Commonwealth Bank of Australia.  It looks like Julia Gillard might be holding two opposed ideas for some time yet.

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Undermining mitigation technology: Compulsory licensing, patents and tariffs

Backgrounder

EXECUTIVE SUMMARY

The incentives to develop the technologies to reduce global CO₂ emissions are being undermined.  Internationally, a campaign is being run to undermine the intellectual property that incentivises research and development on CO₂ mitigation technolo gies.  These technologies are vital to assist developing and developed countries to reduce their CO₂ emissions based on their commitments in international treaties.

The campaign is being run by developing countries and NGOs claiming patents are reducing the access to CO₂ mitigation technologies beyond the means of developing countries.

These NGOs and developing countries are now advocating for amendments to the WTO's intellectual property rules (the TRIPS Agreement) to allow for compulsory licensing of CO₂ mitigation technologies.  Compulsory licensing allows for the property rights to be waived on patented inventions and the commercial return they provide.  Without the commercial return there is no incentive for investors to fund research and development into new technology.

Importantly, the industry is very much in its infancy.  The stage of development of the industry has been compared to the semicon ductor industry 35 years ago, or the biotechnology industry 25 years ago.  Compulsory licensing will stop the industry reaching maturity.

The campaign to undermine incentives for new research and development is not without precedent.  Advocates are using the successful campaign to compulsory license essential medicines under the TRIPS Agreement as precedent.  They are also advocating for the issue to be debated and included in the next agreement out of the UNFCCC process scheduled to be completed in Copenhagen in 2009.

By promoting compulsory licensing NGOs and developing countries are claiming that technology will become more accessible.  It won't.

Numerous studies have found that IP rights are vital for technology transfer from developed to developing countries.  IP provides a tradeable right for an intangible good that assists patent holders to transfer their property without fear of losing control of their technology.

Instead, studies have found that the bigger threat to technology transfer is not strong IP regimes, but weak ones.  Weak IP rules undermine both the incentives to innovate and discourages technology transfer from developed to developing countries because the owners risk a violation of their property rights.

Because of the importance of the private sector in developing the technologies to combat environmental challenges, previous international treaties have explicitly acknowledged their role.  The Convention for the Protection of the Ozone Layer and the Kyoto Protocol both recognise the role of private property rights to address their respective objectives.  Both agreements also recognise the private sector's role in promoting technological diffusion.

The importance of the private sector is also acknowledged by Governments and multilateral institutions.  Both are currently working on programs to incentivise private investment into CO₂ mitigation technologies.  The ultimate consequence of undermining IP rights would be to undermine these programs, as well as commercial incentives.

Attacking patents as the main barrier to technology transfer is also a distraction from the real barriers that exist to technological diffusion in developing countries—tariffs and non-tariff barriers.  In the top 15 greenhouse gas emitting developing nations, tariff barriers for CO₂ mitigation technologies can be as high as 30 per cent.  Non-tariff barriers can be as high as 160 per cent.  Only one country welcomes the free trade of CO₂ mitigation technologies.

In comparison to campaigning against patents, if developing countries are serious about reducing the cost of CO₂ mitigation technologies, they can start by reducing the tariff and non-tariff barriers.

ACRONYMS

CO₂ = Carbon dioxide
EGSA = Environmental Goods and Services Agreement
EU = European Union
FDI = Foreign direct investment
GATS = General Agreement on Trade in Services
GHG = Greenhouse gas
IP = Intellectual property
IPRs = Intellectual property rights
NGO = Non-government organisations
NTB = Non-tariff barrier
WIPO = World Intellectual Property Organisation
WTO = World Trade Organisation
UNFCCC United Nation Framework Convention on Climate Change
US = United States
USD$ = United States dollar

INTRODUCTION

Global efforts to reduce CO₂ emissions are increasing.  In the lead up to, and following the Bali UNFCCC Summit, there has been a strong push by developing and developed countries alike to utilise the benefits of CO₂ mitigation technology to reduce emissions.

One of the core efforts made by governments has been to provide incentives for investors to fund research and development of technologies that would deliver environmental and market dividends.

Addressing CO₂ emissions through technology has become important because governments in developing countries have made it clear that they aren't going to slavishly reduce emissions.  Developing countries have baulked at proposals that would hinder their efforts to boost economic growth and reduce poverty.

Utilising technology is an important solution for developing countries to reduce emissions while maintaining economic growth.  Technologies such as wind power, clean coal, photovoltaic solar panels and fluorescent lamps can all contribute to reducing emissions by:

• Replacing existing energy generation;
• Cleaning existing energy generation;  or
• Increasing the energy efficiency of consumption.

Yet, most of the technologies are owned by private individuals, not governments.  These inventions are protected by patents that allow the innovator to exploit their invention for commercial gain to offset the cost of its invention.

Recently, NGOs and governments in developing countries have started claiming that these patents are creating an unnecessary barrier to the transfer of CO₂ mitigation technologies that would otherwise help developing countries reduce their emissions.  Due to this claim, NGOs and developing countries have begun advocating for the removal of patents through the use of compulsory licenses.

Doing so could have a very significant effect on the transfer of these technologies from developed to developing countries.  It is also likely to undermine long-term investment in the next round of technologies to reduce CO₂ emissions further.

WHAT IS COMPULSORY LICENSING?

Compulsory licensing is intellectual property (IP) jargon for waiving the property rights that patents confer for an invention.  When a compulsory license is issued, a non-patent holder is given the right to reproduce the invention without being in breach of the patent.  Compulsory licensing is generally awarded with limited, or no, financial compensation to the patent holder.

Patents are awarded to balance the societal benefit from innovation with the incentives necessary to promote it.  Patents provide investors incentives to direct investment capital toward research and development, with the expectation of a commercial return.

The incentive is provided through a property right that allows the patent holder to exclude others from commercialising their invention.  There is no one fixed period of time for the life of a patent, but the standard is the minimum requirement under the World Trade Organisation's (WTO) Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement of 20 years.  The incentive patents confer varies depending on the industry.  For technology requiring significant capital outlay before there is a return on the investment, they are essential.  The cost of developing CO₂ mitigation technology is significant, and rising. ⁽¹⁾  As a result, governments and multilateral institutions are developing investment programs to incentivise private capital to invest in the research and development of CO₂ mitigation technologies.

Many countries have compulsory licensing provisions;  but these are designed to only be used in exceptional circumstances.  IP is governed by both domestic law and international treaties.  While there are a number of IP treaties that exist, they are enforced on most countries through the TRIPS agreement and the WTO's dispute settlement process.

The TRIPS agreement binds WTO members to many international IP treaties and their obligations, as well as establishing a number of additional obligations.  The TRIPS Agreement also provides for compulsory licensing.  Section 31(b) of the TRIPS agreement allows for compulsory licensing of patented technologies in cases of "national emergency or other circumstances of extreme urgency or in cases of public non-commercial use". ⁽²⁾

Section 31 (b) has been tested on a number of occasions throughout the debate surrounding TRIPS and public health.  Since its foundation in 1994, the TRIPS agreement has been the source of significant international debate about the obligations it places on WTO members and whether they conflict with public health priorities.

Many developing countries and non-government organisations (NGOs) have argued that the exclusive rights that patents provide to inventors undermines technological diffusion.  In the case of public health, they have argued that patents increases the price of essential medicines.  The inclusion of Section 31 (b) in the TRIPS agreement was designed to address these concerns.  In response, many developing countries have issued compulsory licenses on medicines under the provisions allowed for in Section 31(b).

Since then, a series of declarations, as part of the Doha Development Agenda, have amended the IP protection required by TRIPS.  In the 2001 Declaration on the TRIPS agreement and Public Health countries were given the "right to determine what constitutes a national emergency or other circumstances of extreme urgency". ⁽³⁾  Similarly, amendments have been made to allow for the parallel importation of patented medicines when a country does not have the industrial capacity to issue compulsory licenses to a domestic producer.

Numerous governments, notably Thailand and Brazil, have issued compulsory licenses for HIV/AIDS and heart medicines.  While HIV/AIDS medicines are considered legitimate targets for compulsory licenses, the compulsory licensing of heart medications is deemed to be an abuse of the obligation to only issue compulsory licenses in cases of "national emergency or other circumstances of extreme urgency".

COMPULSORY LICENSING AND CO₂ MITIGATION TECHNOLOGY

Opponents of IP rights have used compulsory licensing of medicines as a vehicle to undermine IP regimes.  They have used their attack on pharamaceutical patents to push back against the obligations WTO members signed up to under the TRIPS Agreement.  They are now using CO₂ mitigation technology as their next battleground to broaden the definition of the applicability of compulsory licenses.  To do so, they are advocating for amendments to the TRIPS Agreement and for compulsory licensing to be included in the next agreement from the United Nations Framework Convention on Climate Change (UNFCCC) and further amendments to the TRIPS Agreement for CO₂ mitigation technology.

Their argument for the inclusion of compulsory licensing in the UNFCCC process is essentially the same as those used for medicines.  According to them patents awarded to CO₂ mitigation technologies increase the price of technologies beyond the means of developing countries.  By increasing the price, technological diffusion of essential technologies is being inhibited.  As a result, developing countries are unable to access the technologies that would otherwise reduce their emissions in order to avert human-caused climate change.

Advocates are using the debate surrounding TRIPS and public health as a precedent.  At a speech to a meeting of the Environment Ministers in the Framework of G-8 + 5 Presidency, the Indian Minister of Environment and Forest, Shri A. Raja, argued that "an agreement is needed on intellectual property rights on technological efforts in developing countries paralleling the successful agreement on compulsory licensing of pharmaceuticals". ⁽⁴⁾

Similar sentiments were voiced by the Indian Prime Minister, as well as other developing countries in the lead up to the 2007 G-8 Summit.  The governments of Brazil, China, India, Mexico and South Africa released a Joint Position Paper which included a request from the countries to the G8 Summit to consider "an agreement on transfer of technologies at affordable costs for accelerated mitigation efforts". ⁽⁵⁾

In press reports leading up to the Summit, there were also calls for "an agreement on ... IPRS on technological efforts in developing countries paralleling the successful agreement on compulsory licensing of pharmaceuticals". ⁽⁶⁾

However, developing countries are not alone.  In late November last year, the European Parliament passed a French Green MP's motion relating to efforts on trade and climate change.  The motion called for a "study on possible amendments to the WTO Agreement on Trade Related Aspects of Intellectual Property Rights in order to allow for the compulsory licensing of environmentally necessary technologies". ⁽⁷⁾  While the motion also called for any amendments to be "within the framework of clear and stringent rules for the protection of intellectual property", the intention of the motion is clear.

International NGO, Friends of the Earth, has also called for the removal of IP on CO₂ mitigation technologies.  While not calling specifically for compulsory licensing, Friends of the Earth has advocated "amend(ing) TRIPs ... so that developing countries can exclude from patentability green technologies". ⁽⁸⁾  The effect would be similar.

The UNFCCC Bali Summit in December 2007 became the launching pad for developing countries to campaign for compulsory licensing in the UNFCCC process.  In a high-level official side-event on the second-last day of the conference, the Nigerian Environment Minister, Halima Tayo Alao, spoke out against IP as a "barrier" for developing countries to access carbon dioxide mitigation technologies.

It appears the campaign against IP on CO₂ mitigation technology is gaining traction.  During the UNFCCC Summit there was an informal meeting of Trade Ministers discussing the relationship between climate change and trade policy.  At a side-event on the Monday following the informal meeting Indonesian Trade Minister, Mari Pangestu, commented that Trade Ministers discussed using TRIPS flexibilities on CO₂ mitigation technology.  The most relevant TRIPS flexibility mechanism for accessing CO₂ mitigation technology is compulsory licensing.

The UN is also undermining incentives to develop new mitigation technologies.  At another side-event the UN Department of Economic and Social Affairs released a paper arguing for "tiered pricing". ⁽⁹⁾  Tiered pricing is currently used by pharmaceutical companies to introduce different prices in different markets, dependent on the capacity of consumers to pay.  For tiered pricing to work successfully limitations must be placed on the import of patented products to ensure that parallel importation of cheaper products into wealthier countries does not occur.  Doing so undermines the pricing structure of the patent holder and removes incentives to provide cheaper products to poorer consumers.

Undermining IP on CO₂ mitigation technologies would cause irreparable damage to the development of technologies necessary to reduce emissions.  The green technology industry has been compared in terms of its infancy to the semiconductor industry 35 years ago or the biotechnology industry 25 years ago. ⁽¹⁰⁾  Research and development into CO₂ mitigation technology requires significant, long-term, up front financial commitments.  Such commitments will only come with a guarantee of property rights on the end product and a commercial market for its output.

IP HELPS TECHNOLOGY TRANSFER

On the surface, introducing compulsory licensing for CO₂ mitigation technologies would appear to aid technological diffusion and assist developing countries in meeting their emissions reduction targets.  But IP is not a barrier to technological diffusion, it assists it.

Developing countries are increasingly relying on IP protected goods and services to develop their economies, improve living standards and maintain or improve their environmental standards.  IP provides a tradeable property right to transfer technology.  Licensing of patented products is particularly important for technology transfer in developing countries that have weak IP regimes, where companies are reticent to use foreign direct investment (FDI) because of the risks associated with enforcement. ⁽¹¹⁾  Studies have shown the clear relationship between weak enforcement and reduced FDI from firms with IP-dependent goods and services. ⁽¹²⁾

Similarly, weak IP regimes also discourage joint ventures between businesses in developed countries who own patented technologies and businesses in developing countries.  The Stern Review on the economics of climate change found that "joint ventures (are) likely to lead to effective technology transfer ... (and) are an effective long-term route to embed local firms into the learning network of transnational corporations". ⁽¹³⁾  A study by the International Energy Agency came to a similar conclusion, citing that one of the main barriers to technology transfer was a lack of IP rights protection. ⁽¹⁴⁾

The Stern Review also found that "companies with advanced technologies often cite insufficient IP protection in developing countries as a barrier to technology transfer". ⁽¹⁵⁾  Instead, companies believe "stronger protection ... would help them deploy advanced technologies". ⁽¹⁶⁾

Strong IP regimes are important for commercial licensing that promotes technology transfer.  Licensing is a widely used method for diffusing patent protected inventions to ensure that they access as wide a market as possible.

Licensing is also important because many contemporary inventions are now built on the use of other protected material.  For example, computers are based on a combination of IP-protected technology.  Computers are built with multiple IP-protected technologies owned by different parties.  These technologies are licensed by their owners to manufacturers.  These manufacturers then provide royalties of the final product's sale to the licensee in recognition of the use of their technology. ⁽¹⁷⁾

Compulsory licensing will not supplant the need for IP as a facilitator of technology transfer.  Instead it will undermine transfer.  A recent World Bank Human Development Report Working Paper came to similar conclusions about the alleged cost of patents.  The working paper argued "much of the knowledge required to develop, produce and deploy cleaner coal technologies is tacit and is not codified in patents". ⁽¹⁸⁾

But the recent debate on CO₂ mitigation technologies is not the first time that undermining patents has been considered and rejected in environmental treaties.  During the debate on the formulation of the Ozone Layer Convention there was consideration of, and understanding that, weak IP regimes undermined technology transfer by giving IP right holders justification to deny access to their technologies. ⁽¹⁹⁾

Advocates for reducing CO₂ emissions often point to the 1985 Vienna Convention for the Protection of the Ozone Layer as a demonstration of how the global community can work effectively to respond to increases in carbon dioxide emissions.  However, the 1985 Agreement is also instructive on colpulsory licensing.

The Ozone Layer Convention clearly identifies that there should be collaboration to address the challenge posed by a diminished ozone layer, including scientific and technical cooperation.  Futhermore compulsory licensing is not accommodated in the text.  Instead the Convention explicitly states that cooperation "has to be consistent with national laws, regulations and practices regarding patents, trade secrets, and protection of confidential and proprietary information." ⁽²⁰⁾

The Ozone Layer Convention is not the only international agreement to provide cold comfort to advocates of compulsory licensing.  The 1997 Kyoto Protocol also recommends efforts for technological diffusion of environmentally sound technologies through "an enabling environment for the private sector, to promote and enhance the transfer of, and access to, environmentally sound technologies". ⁽²¹⁾  In essence, the Kyoto Protocol promotes protection of private property and recognises the important role that the private sector plays in innovating and transferring technologies to reduce CO₂ emissions.

UNDERMINING IP WOULD UNDERMINE INNOVATION

Despite the erroneous claims that undermining patents would foster technological diffusion, doing so would have a very real and concerning impact on the development of new CO₂ mitigation technologies.

IP is vital to ensure there is sufficient incentive for investors and innovators to provide the capital outlay for sophisticated technology.  CO₂ mitigation technologies will only be developed so long as there is a commercial market for their use.

Governments and multilateral agencies are currently developing investment frameworks to incentivise private sector investment in CO₂ mitigation technologies.  But to do so requires strong IP regimes.  This was the conclusion of the Stern Review.  The Stern Review identified that "there are a number of measures that governments can take to create a suitable investment climate for energy investment and the adoption of new technologies, such as ... strengthening intellectual property rights". ⁽²²⁾

Instead NGOs and developing countries are advocating for the reverse and in doing so will undermine investment.  A UNDP study has found that compulsory licensing of CO₂ mitigation technology would send a worrying signal to investors and innovators in a relatively new area of technology innovation.  The study argued that the stage of development of technological development matters and that undermining commercial incentives "may have implications in terms of the level of private investment already made in a technology and the level of returns that IPR owners need to derive before they are happy to release the IPR." ⁽²³⁾

The report also argues that "regulations governing ... (IPRs) could also help in some cases to build confidence amongst international firms and encourage them to engage in practices such as licensing and joint ventures." ⁽²⁴⁾

The irony is that governments and multilateral institutions are currently investing significant resources into developing frameworks to incentivise private capital investment in CO₂ mitigation technologies.  Yet NGOs and developing countries are actively working to undermine the incentives for the development of these frameworks by advocating for the removal of patent enforcement.  Removal of patents will undermine the creation of new technologies and halt their diffusion.

COMPULSORY LICENSING IS A DISTRACTION

Advocating compulsory licensing is a distraction from the real barriers that prevent developing countries from accessing CO₂ mitigation technologies.  The real impediment to accessing environmental technologies is not IP, but tariff barriers and non-tariff barriers (NTBs). ⁽²⁵⁾

The global market for environmental goods and services is worth between USD$550 billion and USD$613 billion per annum.  Of this figure, 35 per cent is in goods and 65per cent in services.  Yet some countries impose tariffs of up to 70 per cent on these technologies. ⁽²⁶⁾  In Asia and Latin America the average tariff on environmentally sensitive technologies is between 15 and 20 per cent. ⁽²⁷⁾  If the governments of developing countries want to promote the transfer of CO₂ mitigation technologies, they can do something immediately—remove their tariff barriers.

A study by the World Bank supports this conclusion.  In 2007 the World Bank released its report International Trade and Climate Change, which investigated the role of tariff barriers on "green" technologies.  The study found that the diffusion of technologies would increase by between 7 and 14 per cent per year based on different models of liberalisation. ⁽²⁸⁾

Table 1 identifies the enormity of the barriers imposed by the top 15 greenhouse gas (GHG) emitting developing countries.  Tariff rates are high on some technologies, including as much as 30 per cent on solar photovoltaic cell technology and fluorescent lamps by Zambia.  But even higher NTBs exist for many countries.

Table 1:  Applied average tariff and NTBs for climate friendly
technologies in the 18 high-GHG-emitting developing countries

Country	Clean Coal		Wind		Solar		Fluorescent Lamps
	Tariff	NTB	Tarff	NTB	Tariff	NTB	Tariff	NTB
China	15	25	8	0	10	0	8	0
Colombia	15	0	10	32	15	0	20	0
India	15	0	15	0	15	0	15	102
Venezuela	15	0	10	0	15	0	20	0
Brazil	14	145	14	87	18	53	18	96
Mexico	12	0	15	0	13	62	15	0
Bangladesh	6	0	8	0	25	0	19	0
Chile	6	0	6	0	6	0	6	0
Zambia	5	0	15	60	30	0	30	83
Egypt	5	149	6	70	32	0	18	87
Nigeria	5	160	0	89	20	70	20	91
Philippines	3	119	6	88	15	70	11	93
Thailand	1	0	10	0	10	0	20	0
Argentina	0	0	14	0	18	57	18	0
Indonesia	0	0	10	0	15	0	5	0
Kazakhstan	0	0	0	0	0	0	0	0
Malaysia	0	93	5	59	18	0	30	85
South Africa	0	125	0	0	12	0	17	0
High Income OECD countries	1	0	3	0	3	0	4	0

Source:  WITS Database, Adapted from World Bank, "International Trade and Climate Change:  Economic, Legal and Institutional Perspectives", 2007

For example, the Philippines, Nigeria and Egypt all have NTBs of over 110 per cent on clean coal technology.  In the case of Nigeria it is 160 per cent.  Similarly, India has NTBs of over 100 per cent on fluorescent lamps.  The only country of the top 15 GHG emitting nations that can claim any piety is Kazakhstan, with 0 per cent tariffs and NTBs on those CO₂ mitigation technologies that were surveyed.

The World Bank report also found that weak IP regimes were another form of NTB undermining the transfer of climate friendly technologies. ⁽²⁹⁾  Similar conclusions were developed by Professor Barton of Stanford Law School, who recently argued that there were not "significant" barriers to technology transfer caused by IP, but there were by tariffs and similar barriers. ⁽³⁰⁾  Further, Barton identified weak IP barriers as one of the potential barriers to technology transfer that provide disincentives for foreign investors. ⁽³¹⁾

Despite its enthusiasm for compulsory licensing, even the European Parliament recognises the damaging effect that tariffs on environmental technologies is having.  In its motion calling for compulsory licensing it also calls for "the need to reduce barriers to 'green' trade by, for example, removing tariffs on 'green' goods at the WTO level". ⁽³²⁾

The point has not been lost on the US either.  Removal of "green" tariffs was the objective outlined in the lead up to the Bali Summit in a joint proposal put forward by the US and the EU.  The proposal to introduce an Environmental Goods and Services Agreement (EGSA) is designed to reduce the tariff barriers and NTBs that exist, mostly in the developing world, on goods and services that will assist in reducing CO₂ mitigation emissions. ⁽³³⁾

Under the US/EU proposal there would be a two-tiered effort to remove barriers on green technologies.  The first would be to remove tariff barriers on goods, and for countries to amend their General Agreement on Trade in Services (GATS) schedules to facilitate providers of "green" services.  The second tier would be the negotiation of an EGSA to remove all NTBs on goods and bind existing market access and national treatment commitments for services. ⁽³⁴⁾

Yet despite the cost of tariffs and NTBs to accessing CO₂ mitigation technologies, the NGO, Friends of the Earth advocate for their maintenance.  In a recent statement, they attacked an earlier EU push to remove tariffs and NTBs arguing they were necessary to "enable developing countries to build their own supply capacity in developing environmental products". ⁽³⁵⁾

The US/EU proposal for the negotiation of an EGSA is consistent with the Doha Development Agenda in the WTO.  Paragraph 31 (iii) of the 2001 WTO Doha Ministerial Declaration called for "the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services".

Attacks on intellectual property are simply a distraction from the root barriers to the trade in CO₂ mitigation technologies.  Compulsory licensing will achieve little to promote technological diffusion.  In comparison, the removal of tariffs and NTBs will add significantly to the free trade of CO₂ mitigation technologies, thus helping developing countries reduce their emissions.

CONCLUSION

Technology is a vital component in the matrix of solutions to reduce global CO₂ emissions.  But it is important that, in the process of diffusing the technology to mitigate emissions, policy makers do not lose perspective.  It would be counter-productive to remove the incentives that will foster the development of those new technologies that will replace existing technologies as humanity discovers newer, more efficient ways of mitigating CO₂.

Advocates for compulsory licensing are arguing that it is necessary to promote technological diffusion for developing countries, who have limited resources to buy CO₂ mitigation technologies.

Simplistically removing patents may appear to support the diffusion of CO₂ mitigation technologies, but it will actually undermine it.  Removing patents will discourage investment and undermine the tradable nature of property rights that patents confer.  Undermining licensing of these technologies will discourage FDI into developing countries to transfer technologies.

The industry for environmental technologies is very much in its infancy.  It has been compared to the stage that the semiconductor industry was at 35 years ago, or the biotechnology industry 25 years ago.  The long term consequence of undermining patents will be to undermine innovation in the next generation of CO₂ mitigation technologies.

The cost of undermining patents is well understood.  Hence previous international environmental treaties, including the Convention for the Protection of the Ozone Layer and the Kyoto Protocol, recognise the contribution that property rights play in transferring CO₂ mitigation technologies to the countries that need them.

Attempting to undermine patents is also a distraction from the barriers that developing countries can remove immediately.  Tariffs and NTBs aggressively undermine the accessibility of CO₂ mitigation technologies by dramatically increasing their price.  In some cases removal of NTBs would result in more than a 50 per cent cut in the price of mitigation technologies.  Removing these barriers will do far more to increase the accessibility of CO₂ mitigation technology than removing patents ever will.

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