Competition Better than Regulatory Compulsion

We have now seen almost a decade of contention over the regulatory regime for controlling Australia's natural gas supply.  The present warzone is a Productivity Commission Review.

Behind arguments about regulated price outcomes is a four-way conflict.  Pipeliners want to build new facilities and obtain any blue sky that might emerge;  they also want existing pipelines to escape regulatory control and "inadequate returns" of regulated prices.  By contrast, various user groups want to see low charges, based on marginal costs.  Gas suppliers also want to see carriage prices kept as low as possible to increase demand for the commodity.  Arbitrating these divergent interests are the regulators for whom retention and expansion of existing powers constitutes a further, separate interest.

The current regime, centred on regulatory price determinations, replaced state government control and ownership.  Within the framework of National Competition Policy (NCP), this has promoted competition by smashing the previous gas pipeline monopolies.  But it has left regulators, like the ACCC, to "scientifically" determine prices for gas carriage based on their estimates of the market price that would prevail if there was active competition.

Whether or not pipeline price reductions required by regulators replicated competitive outcomes, these price reductions were one-off.  They translated the lower costs resulting from privatisation/ corporatisation into lower prices.  Scope for further reductions is unlikely to be so spectacular and is best achieved by real competition increasing efficiencies rather than regulatory compulsion.

Greater scope for allowing competition to assume its conventional role of market "regulator" is developing.  Pipeline-on-pipeline competition is already in place in Sydney and will soon also be in Adelaide.  The dominant sources of gas -- Cooper and Bass Strait -- are already competing with each other and additional sources are emerging.

A deregulated system is essential for new investment.  Claims that benign ACCC oversight has created the certainty for a boom in pipeline construction do not stand up to scrutiny.  There are just too many distorted investments, like the SEA Gas line in South Australia, and investments that have not proceeded, for this view to have any credibility.

We can never attain the Holy Grail of perfect competition, comprising many buyers and sellers in gas or other line-based supply industries.  And even the ACCC acknowledges workable competition is better than the synthetic variety regulators must apply.  But it is yet to recognise that as few as two sources of competition bring cleaner market outcomes than a regulator.

For a healthy and growing industry, regulation must be relaxed in three areas.

First, regulators should exit control over greenfield pipelines giving entrepreneurs time to profit fully from spotting opportunities for new pipelines without these being killed by price and service conditions.

Secondly, regulators should exit regulatory oversight where a load centre is served by more than one major pipeline serving.

Thirdly, for monopoly gas pipelines we should now move from the present price setting system.  Essentially, this is profit-capping.  Price-capping based on economy-wide price and productivity movements must be used to improve incentives for productivity gains.

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Checking on Charities

Jim McGinty is cutting non-government organisations (NGOs) out of the health funding loop.  What is that all about?  After all, the NGOs are just trying to help.

It is about a government, duly elected by the people of West Australia, determining who shall help it deliver the best services at the lowest cost.  Sometimes NGOs do the job well, sometimes they do not.

Similarly, my study of Commonwealth-NGO relations for the Prime Minister's Community-Business Partnership, and the Federal Treasurer's Bill defining charities are part of the same thinking.  Governments need to test the credentials and effectiveness of those NGOs (which include charities) who want to use public funds to act on behalf of interest groups.  This is not only a government right, but also a responsibility.

NGOs come in all types and sizes, always non-profit, sometimes charitable, sometimes glorified lobbyists, some international, some local, some want to save the world, some want to save themselves.  They are vehicles for private initiative to pursue public purposes.  Few matters of public policy pass without an NGO spokesperson voicing an opinion.  They have, in some regards, become the official opposition.  Their growth in recent times is an "associational revolution", and reflects an enthusiasm for citizens to participate more directly in public problem-solving.

NGOs are private associations and as such should be left alone, unless they use public money or have privileged access to politicians.  Then the politicians should ensure that they and the public know who they are, whom they represent, why they receive government funds, why their view is preferred to another group, and, if they provide a service, how effective and efficient are they.

For example, right now charities are arguing the toss with the Commonwealth government about what they are required to do to obtain tax advantages -- valued in total at around $4 billion per year.  At present, there is an assumption that a donor understands the purpose of the charity when making a donation.  This may be true when the charity's methods are direct such as giving aid to the poor, planting trees, and writing letters to foreign governments on behalf of political prisoners.

As the methods and definition of charities have widened however, the assumption of donor knowledge does not hold.  Few charities just provide direct aid to the poor.  Most put a great deal of effort and resources into lobbying governments to do that work for them.  For example, lobbying government to provide more generous welfare benefits, to provide shelter for women, to protect the environment and to teach people how to be good parents.  Few charities however disclose to the public -- or governments for that matter -- the extent or nature of their lobbying or its effectiveness.  The trend towards lobbying can undermine a charities link with the community and its self-help ethos.

The states have the responsibility for regulating the fund raising activities of charities.  However, they do so poorly.  Requirements vary immensely between states, enforcement is generally lax, and oversight low key.  At the Federal level regulatory oversight is if anything weaker.

At present, the Australian Tax Office does not audit charities, despite the millions lost in tax revenue.  Indeed, the ATO struggles to be able to determine whether an organisation is a charity or not.  While some charities apply extremely high standards of disclosure, the norm for the sector as a whole is poor.

The key is not heavy-handed regulation, but disclosure.  The motto should be informed giving.  Charities should be required to publish how much money they spend in raising their funds, how much they spend on policy work, and how much they spend on administration.  This would provide the information necessary for donors to decide whether or not to give.  The donor market would be better informed, not just of "the cause" -- the pictures of felled trees, and hungry children -- but the efficiency with which the funds are gathered and applied to the purpose, and how much is spent on the conferences, education, propaganda and lobbying.

It would be good to be able to check the ATO website for an annual form lodged by these organisations that told the story not only of charity status, but how efficient they were, and whether they preferred to be policy people, or help out in the old way.

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Interference Driving up Electricity Prices

When markets replaced integrated electricity supply systems, Victoria parcelled the State Electricity Commission into a dozen components and sold them off.  New South Wales also reformed its system into separate generating and distribution businesses but retained them under state ownership.

NSW government firms learned some very hard lessons.  One was delivered by Victorian retailer Powercor, which signed contracts for electricity from NSW's Pacific Power at knock down prices.  The NSW Government tried to wriggle out of the contracts but the courts would have no bar of this.  As a result, NSW taxpayers have incurred a loss of some $600 million.

A further imprudent commercial decision was taken by energyAustralia, the biggest retailer in the NSW (and in Australia).  This involved a 35 year deal with an American firm for two new power stations, Redbank 1 and 2.

Soon after the deal was struck, the price in the market halved and remains 30 per cent below the Redbank contract price.  Some estimates put the contract loss on at $750 million.  Again the NSW Government sought to renege on the deal.  And again the courts refused to overturn it.  After all, if one of the largest businesses in the country could simply tear up a contract that no longer suited them what would any contract be worth?

Redbank 1 has been operating for the past two years.  But Redbank 2 is still not built and the NSW Government set up an inquiry into it.  Citing greenhouse gas emissions, the Government has refused it development approval, thus avoiding an onerous contract.  Various Carr Government funded green groups chipped in with a chorus of opposition to the project.

Using approval processes to cancel debts smacks of banana republic government practice.  That aside, opposition to the development on environmental grounds is ironical.  A few years ago there would have been green accolades for the Redbank project because it uses waste coal which could otherwise pollute the Hunter River.

Victoria has its own wrangle over environmental approvals with power stations.  Hazelwood Power, which had been scheduled for decommissioning in 2004, was sold.  Its private sector owners have revitalised it and extended its life by decades.  But that extension requires changes to the mining license boundary.  While this would normally be a formality, Minister Theophanous is making it conditional on costly greenhouse gas savings.

Playing the Green Card to energise radical environmentalists is a risky political game.  Giving green lobbyists a voice in deciding which sort of power stations might be built can rebound savagely on power system security.

To see this we only have to look at California.  In California, new power station approvals ground to a halt as a result of green and local NIMBY objections.  The electricity market, which had design deficiencies anyway, became vulnerable to shortages.  Those shortages caused widespread black-outs.  The government panicked and bought additional electricity supplies in a sellers market at exorbitant costs.  These costs almost bankrupted the Californian State Treasury.  Along came Arnie and the rest, as they say, is history.

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Just a Couple of Suits Talking

Conventional wisdom in the media argues that voters need more election debates in the campaign.  As The Australian put it yesterday:  "The great debate [between John Howard and Kim Beazley on Sunday] proved how important it is for our leaders to argue face-to-face in front of voters so they can make an informed choice".

Yet academic research suggests that voters don't find debates all that useful.  Although the academic literature, primarily from the US, can be contradictory at times, a few conclusions do stand out.

The first is that while election debates may attract a large audience, the main effect seems to be a reinforcement of pre-existing opinions.  These were the findings of the first studies in the wake of the 1960 Nixon-Kennedy presidential debates.  When one reads journalistic accounts of these debates, we are told of youthful, confident and telegenic John Kennedy using the first televised debates to defeat a tired Richard Nixon, who was still recovering from the flu.  Yet the academic studies of these debates cast doubt on the media's mythology and show that most voters didn't change their minds and that the debates only served to harden the voters' attitudes to the candidates.  The studies showed that the debates were not decisive, with a number of studies even giving the result to Nixon by a slim majority.

Subsequent studies have tended to confirm these findings.  Reflecting this consensus, communications scholars David Sears and Steven Chaffee have noted that "the information flow stimulated by debates tends to be translated by voters into evaluations that coincide with prior political predispositions".  In plain language, after viewing the debate on Sunday, without the benefit of post-debate analysis, Liberals would have thought Howard won, while Laborites would have seen Beazley as the victor.

A second conclusion that we can take from the academic research is that direct viewing of debates results in only minor shifts in votes.  Studies of the Reagan-Mondale debates in 1984 showed that three out of every four undecideds who used debates as a cue to make their voting decision thought Walter Mondale won the debate.  The Harris poll gave the result to Mondale by 61 per cent to 19 per cent.  History shows that Mondale lost in a landslide to Ronald Reagan.  Unfortunately for Mondale, what the studies revealed is that only a small percentage of those undecided use debates as their principal frame of reference for casting a vote.

The Nine network's exercise with the worm, which showed what an audience of undecided voters was thinking, was entertaining.  It will also assist the press gallery in its assessment of the "winner".

But it is largely irrelevant.  Given the level of cognitive dissonance in Australian swinging voters, the chances are that these voters, who really don't like politics much, would have watched the Seven and Ten networks on Sunday night instead of the debates on Nine or the ABC.

This tendency to avoid politics where possible is the reason political parties invest so heavily in highly intrusive forms of communication such as electronic advertising and direct mail.  Question marks over the effect of debates are further compounded by Australia's Westminster system, where local issues and local candidates often matter far more to voters than the leaders and certainly more than any debate.  This is particularly the case as one heads farther from the capital cities to regional and rural Australia, where many marginal seats are concentrated.

One area where the research does support the importance of debates is in the area of agenda-setting.  A fairly constant finding is that political debates do have an agenda-setting effect.  Paul Keating's tour de force in 1993 is regarded as a decisive debate.  Still, the debate's real impact for Keating was in its ability to focus the media on his agenda of the GST and not on Opposition leader John Hewson's agenda of income tax cuts.  It is questionable how many swinging voters, who generally dislike aggression, would have been won over to Keating's side immediately by his rather brutal demolition of Hewson.

Academic research simply does not accord debates with the degree of importance that the media does.  And it is the media -- not the voters -- who are driving this demand for debates.  No doubt the public would much prefer to have their usual programming.  The election debates are for the benefit of the press gallery, not the voters.  If the media wants another debate, they should say so.  But they shouldn't use the voters as the justification for their demands.

Social Responsibility and Society

Corporate social responsibility may be couched in the language of reasonableness and fairness, but in reality it is a racket that threatens many shareholders and workers.

This racket is illustrated by the RepuTex Rating System, released this week.

RepuTex says it assesses companies for governance, environmental and social impact and workplace practices, judged by 19 groups including the Wilderness Society, the Australian Shareholders Association and Standards Australia.

In part, it provides a soapbox for activists such as the Wilderness Society to blame, shame and praise corporations in a variety of areas.

The process is clothed in an appearance of independence and rigour.  However, from the list of the assessors it appears they are chosen for their influence in the media and their desire to get something from corporations rather than their technical expertise.  It seems inevitable that their evaluations will reflect little more than their agendas.

The strength of the process, however, is in the susceptibility of large corporations to "brandmail".  Corporate reputations are highly valuable and fickle.  Corporations will often appease groups that attack their reputations with conciliatory gestures to their aims, and donations.  RepuTex appears to be perfectly placed to exploit this process.

Not surprisingly, Westpac comes out on top of the RepuTex rating -- as it does in most similar ratings.  Westpac has come to the conclusion that, in the end, the values and wishes of activists will probably prevail and, even if they don't, they must be catered for as their influence and capacity for damage are too great to ignore.  Moreover, it believes that there is money to be made from being friendly with them.  Accordingly, Westpac has embraced groups such as the Wilderness Society as stakeholders.

One such example is BT Funds Management (a fully owned subsidiary of Westpac) and its actions at a recent extraordinary meeting of Tasmanian-based logging company Gunns' shareholders.  The meeting was brought about by Wilderness Society activist-shareholders.

During the past 20 years, the native timber industry in Tasmania has been the subject of an intensive process of investigation and consultation through a regional forest agreement.  The RFA in Tasmania was finalised in 1996 and resulted in a great reduction in native forest open to logging;  a plan to phase out logging of old-growth forests and a strategy designed to shift the timber industry from native forests to private plantations.

The Wilderness Society -- a loose group of anti-logging activists -- was involved in the RFA process and achieved much of what it wanted.  The community, however, decided not to ban logging of old-growth timber immediately, as demanded by the society, but to phase it out over decades to allow time and money to shift to private plantations.

As a result, Gunns has what other logging firms would die for:  strong bipartisan community support;  resource security guaranteed by a joint act of the federal and Tasmanian parliaments;  and a union militantly onside.  Indeed, the process has been a model of community consultation and sustainable development.

Unable to get traction against Gunns in Tasmania, the Wilderness Society refocused its campaign on Gunns' financial backers, including Westpac and the Commonwealth Bank.  As part of this campaign, the Wilderness Society succeeded in getting an extraordinary meeting of Gunns' shareholders to vote on a proposal to immediately stop logging in old-growth areas.

The proposal was accompanied by research sponsored by the Wilderness Society that predicted the proposal, if accepted, would reduce earnings per share by "only" 11 per cent but would also increase the riskiness of Gunns' earnings profile.  Gunns provided research that showed the impact would be greater.

As part of this campaign, the Wilderness Society warned that "Westpac would be judged by its success in preventing Gunns Ltd from logging old-growth forests".  The Commonwealth Bank was given a similar warning.

At the extraordinary meeting, BT abstained from voting.  The Commonwealth Bank voted against the motion on the grounds that it was against its shareholders' interests -- which it clearly was.

True to its word, in the RepuTex rating the Wilderness Society and other environmental judges ranked Westpac high and the Commonwealth Bank low.

After long, detailed and inclusive deliberations, the Tasmanian and federal governments decided to let old-growth logging continue for a period and on a sustainable basis.  Gunns and its shareholders, acting on the decisions, invested in good faith.

However, Westpac (through BT) ignored the decision process in an effort to placate the demands of the vocal few.

The RepuTex Rating and the Gunns example highlight the fundamental flaw of corporate social responsibility, which is, in the end, just another attempt by the great and good to usurp the rights of ordinary people.

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Time for Tax Cuts

The unexpectedly large budget surplus has again raised the spectre of tax cuts, and not before time.

The tax reform of a few years ago did little to improve the burden of taxation.  Indeed, we came through the exercise not only with crushingly high levels of taxation on personal income but a higher overall burden of taxation.

The Federal Government ended the last fiscal year with a surplus of $7.9 billion -- almost double the level forecast in May at budget time.  The main reason for the large surplus is once again buoyant tax receipts.

While the government has yet to release revised forward estimates, the expectation is for large surpluses into the future.  This, along with a concerted effort to trim the fat that has accumulated around most areas of spending, is enough to provide a major reduction in taxation.

The case for tax cuts is strong.  Australia has a particularly onerous taxation system in comparison to other countries and as a share of earnings.

As detailed in a recent report by KPMG (a large accounting firm), Australia's total tax take represents 31.8 per cent of GDP (excluding social security taxes).  This makes us the sixth most taxed economy in the developed word and clearly ahead of all our major international competitors such as the US, Japan, UK, Singapore and Hong Kong.

Australia's tax position is particularly out of sync where it counts the most;  that is, on the corporate tax front.  Even after the recent reduction in the corporate tax rate (from 34 to 30 per cent), Australia is ranked the second highest taxing economy (after Luxemburg) on corporate incomes and is some 75 per cent higher than the OECD average.  The problem lies not so much with our tax rate, but with the way it's collected.

The other key area of concern is the taxation of personal income.  While Australia's overall tax take of personal income is only just above the OECD average, its impact on middle to high income earners is onerous in the extreme.  The top marginal tax rate is not only high, but it kicks in at a low level of income relative to over countries.  For example, the UK has a top marginal tax rate of 40 per cent which kicks in at an income of AU$83,900.  In contrast Australia's top marginal tax rate is 48.5 per cent and it cuts in a $62,500, or 1.2 of full time average annual incomes.

To put this in practical terms, KPMG showed that in order to be able to buy an average home in "middle" Sydney, a homebuyer needs earnings that place him or her on the highest marginal tax rate and who will, as a consequence, lose almost half of each additional dollar earned to tax.

The tax system thus provides a huge disincentive to work, save or study and encourages businesses and skilled workers to seek their fortune elsewhere.  It also encourages people to waste scare resource on minimising taxes.

The Howard Government tried to raise the threshold for the top marginal tax rate to $75,000 as part of the tax reform package, but this was thwarted by the Senate.  It's now time to try again but to do more.

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How Do We Prioritise Our Resources?

A Lecture to a Luncheon hosted by Quadrant,
Pavilion on the Park, 1 Art Gallery Road,
Sydney, 3 October 2003

I USED to be a member of Greenpeace, worried about the environment, thought everything was coming apart, when I read an interview with American economist Julian Simon, where he said, "listen, that's not true.  It's not actually what the data shows."

My immediate reaction was that it was right-wing American propaganda, and I really was just pretty content to leave it at that, had he not said what I always tell students:  go and check the data.  It was only in the Autumn of 1997 that I started realising that a lot of the things he said were actually true.  I thought it important to get that information out.  I thought I should do so, so I published some articles in a Queensland paper.  It blew up into probably the biggest debate we've ever had since the Second World War.  That certainly indicates that this really is an incredibly important debate, and one that we really need to have.

A dossier that Greenpeace had compiled was, unfortunately, only one side of the argument, but it is what you'd expect from an interest group.  And that tells us why this is an important discussion.

Let me just give you an overview of the two important points I'm trying to focus on.  One is to remove the myths.  To the extent that we believe that doomsday is nigh, I would like to try to show you some of the data and convince you that that is not true.  The other is not to say that there are no problems, but to say, of all the remaining problems, which ones should we want to focus on?  Because, really, there's only one bag of money, but there are lots of good things we'd like to do.

As long as we believe in the myth that things are going to hell, we're unlikely to make sound judgements.  We really need to get the right data in order to make the best possible decisions.

So, are things really getting better?  Yes, on many accounts.  We have more leisure time, greater security, fewer accidents, more education, more amenities, higher incomes, fewer starving, more food, and a healthier and a longer life.  This is not just true for the industrialised world, but also, perhaps more surprisingly, for the developing world.

Let me just show you one of those graphs that -- and you'll have to forgive me -- I think is sexy.  The best information that we have about the world -- and also I should just mention, I'm not making up my own data -- come from the best sources in the world, typically the UN organisation.  This is from the Food and Agricultural Organisation of the UN, from 2001 [Figure 1].

What we see here is the caloric availability for the developed and developing world from 1961 until 2000.  If we look at the developed world, we have more than 3,000 calories per person per day.  If we have any problem, it's probably being too fat.  The main problem, of course, is in the developing world, where we actually have a dramatic increase in the availability of calories.  From 1961, the average person in the developing world had 1,932 calories;  on average just about what it takes to sustain life.  Today, that number is up around 2,650 calories per person per day.  It's a dramatic increase -- about 40 per cent -- and of course it's also testimony that people are actually living much better lives.

I want to point out two things though.  I am only saying that things are getting better.  It's not that things are fine and that there are no problems.  To say, "things are getting better", is a scientific judgement, whereas to say "things are fine" is a political judgement.  So, all I am saying is that, scientifically, things are going the right way;  that this graph is actually moving up.  I'm not saying that, hey, they have 2,650 calories, that's fine, they don't need any more.  We can say that not only have things moved in the right direction, but that we can do even more.

The other point is to say that there are lies, damn lies and statistics.  It is true that you can lie with statistics, but they are also the only source that we really have to understand how the world works.  Figure 1 shows an average.  It could be true, for instance, that the middle class in the developing world is eating up that extra stuff.  But that's not actually true.

The UN has made estimates of the number of people starving in the developing world since 1970.  In 1970, about 35 per cent of all people in the developing world were starving.  Today, that number is down to 17 per cent.  In 2030, the UN expects it to be down to 6 per cent [Figure 2].  The point again is to say that it's much, much better to live in a world where only 6 per cent of those in developing nations are starving, than one where 35 per cent are starving.  But it doesn't mean that there's no problem.

In 2030, there will be 400 million people starving -- unnecessarily so.  But it's not because we can't produce the food.  It's because they don't have the money to buy it.  So again we can say that things are moving in the right direction.  We can still identify problems, and start thinking about what, in fact, the most important problems are.

With all these things getting better, however, is it true that all the environmental indicators are going in the right direction too?  Well, generally, yes.  Not all, but most of the important ones certainly are, and especially for the developed world where we are rich.  We really have succeeded in creating a better world.  But many people will argue that it is not sustainable.  One of the main questions asked is, will there be enough of both natural and artificial resources?  I showed you one thing with food.  There will be more people, but at the same time we'll actually be able to feed them even better, by the best predictions that we have from the UN, till 2030.  But what about resources?

This is one of the main fears that we all had back in the 1970s:  the feeling that we would run out of everything.  Let me just show you one graph which looks at oil [Figure 3].  An old Princeton Professor a couple of years ago said we've been running out of oil ever since I was a kid.  And, yes, that's true, we've always worried about it.  Nevertheless, if you take a look at 1920, we know how much oil the world used.  We also know how much oil the world thought was left over.  Divide those two numbers and you get how many years was left over at 1920 consumption.  With these numbers we find that there were 10 years left over in 1920.  So, not surprisingly the American Bureau of Mines came out and said, "in 10 years' time we'll run out of oil".  Now, you may be forgiven for thinking that in 1930 we'd be down to zero, but in 1930 we'd used 10 years' worth of oil and yet at this new higher level of consumption in 1930 we still had about 10 years' worth of oil at the new higher level.

Now that might be a little surprising.  Not so surprising was that the American Bureau of Mines came out and said that in 10 years' time the world would run out of oil.  So you might be forgiven for thinking that at least in 1940 we should be down to zero.  The surprising thing was that despite the fact that we had now used 20 years' worth of oil, we used more oil in 1940 than we did in 1930 or in 1920, there was still eight years' worth of oil at this new even higher level of consumption, and so on and so on.

The curious thing is, the more we used, and the more we use, the more that is left over.  This is not the same thing as saying that the Earth is not round.  Of course it's not.  The point is that the myth-driven idea that there is only so much, and when we've used that up we're done for, is silly.  It's a little bit like going home to your fridge and looking in there and saying, "whoa, I've only got food for three days", so you're going to die in four.  Basically, what we've done is that we've been able to find more resources and utilise these resources more efficiently, and in the long term, of course, we'll also substitute.

When we look at oil, at the present moment we know that we have enough fossil fuels for about 50 years.  But if we take all the shale oil that's commercially available within the next 25 years, we have another 100–150 years.  If we take all the shale oil that exists, we have enough oil for the next 5,000 years.  However, the real point, of course, is that long before that, we'll have switched to other resources, probably renewables or fusion or something we haven't even thought of.  Sheikh Yamani, the guy who founded OPEC, loves to point out that the Oil Age is going to come to an end, but not for lack of oil.  Just like the Stone Age came to an end, but not for lack of stone.  It wasn't like, Oh, God, we've run out of flint, we've got to move to bronze, right?  The idea was that we actually found better alternatives and this will happen with oil.

This principle also holds true for coal, non-fossil fuel and non-renewable resources, the most important ones being cement, aluminium, iron, copper and zinc.  Of course, nobody every worries about running out of cement.  But the other resources, despite the fact that we've increased our consumption globally over the last 50 years anywhere from 2 to 25 times, have all shown increasing user consumption, not decreasing user consumption.  The economist would, of course, say that this is because the price has dropped on all basic materials over the last 150 years by about 80 per cent.  It's become more abundant, not more scarce.

Clearly we have a myth that just doesn't stand up to scrutiny.  We're actually leaving our kids and grand-kids with a greater availability of resources.  We're using up the easily accessible iron ore, but at the same time we are leaving them with technology that enables them to dig deeper and use less good iron ore even more cheaply.  So we really need to reassess our understanding of what the problem actually is.  Again, my main point is to say that not only have things been getting better but they're likely to continue to get better into the future.

Air pollution is by far the most important environmental problem.  The US Environmental Protection Agency estimates that anywhere from 86 to 96 per cent of all social benefits that stem from any kind of environmental regulation come from regulating just one pollutant, namely, particulate air pollution.  However, most people in the developed world believe that air pollution is a fairly recent phenomenon that's getting worse and worse.  But that's just simply not true.

Let me just show you the graph for London which is the one that we have for the longest period of time [Figure 4].  Here we have particulate air pollution, showing smoke from 1585, where it has increased up to about 1890, and from then on declined dramatically, so that today it's now down below what it was in 1585.  We need to tell people it's not true when you think that air pollution is getting worse.  For London it's improved over the last 110 years.  Actually, London air has never been cleaner since medieval times.

Notice that this is not saying that we shouldn't do anything about it.  We can also say we want to do even more.  Because particulate air pollution is such an important issue, however, it makes sense to invest very heavily in more technology and get a worthwhile environmental benefit.  We should invest in things that are smart.

You will notice that whilst decreasing air pollution is true for all developed countries it is not true if you live in Beijing or Bangkok.  There, things are actually getting worse and worse [Figure 5].  But it's not very surprising either.  That's exactly what we saw in London.  Basically, if you don't have any industry, you don't have any pollution, but you don't have any money either.  So you say, cool, when I get industrialised, I can start buying food for my kids, give them an education, maybe buy stuff for myself, and so never mind, I cough.  That was the trade-off that Londoners and many of the rest of us made, and it's only once you get sufficiently rich, at around US$3,000 PPP [purchasing price parity] per person, you start saying, Ah, now it would actually be nice to cough a little less.

And so you buy some environment.  Already, if you look at some of the richest developing countries such as Mexico and Chile, we've seen declining levels of air pollution both in Mexico City and Santiago, exactly for that reason.  So the point is, not only have things been getting better, we're actually cleaning up.  We're leaving a cleaner world for our kids and grandkids -- certainly in the developed world -- and it's likely to happen in the developing world once they get sufficiently rich too.

These are the important facts to get out to the public.  But, of course, the question still remains:  are we dealing sensibly with the problems that are still there?

I'll now just give you a very quick run-down on global warming.  First of all, I'd like to say global warming is happening and it is important.  The total cost of global warming is not, by any standards, trivial.  It's going to be somewhere around five to eight trillion US dollars.  Yet, I would still maintain that we need to question how important this is, and what we are going to do about it.

Furthermore, global warming is a limited problem, basically because eventually we'll move over to other fuels.  We know that renewables have been coming down in price about 50 per cent per decade over the last 30 years, so it's very, very unlikely to expect that we are still going to use massive amounts of carbon fuels by the end of this century.  This, of course, is important because you have all heard the predictions from the UN climate panel saying, it's going to be somewhere between 1.4 degrees and 5.8 degrees warmer, but only if we continue to use massive amounts of fossil fuels into the twenty-second century.  It just simply won't happen.  It is far more likely to have the median outcome of two to three degrees warming which is also the median outcome from the UN climate panel.

Well, I would actually argue that Kyoto will do very little good.  Kyoto is just not going to do very much good at a very high price.  Let me show you [Figure 6] the climate models from one of the lead authors of the 1996 UN climate panel report.  All the models show essentially the same thing.  If we don't do anything with global warming, this particular model predicts that over the next 110 years we'll get a temperature increase of about 2.1 degrees.  But if we follow Kyoto and if the US and Australia were also in, and if everybody kept to their Kyoto requirements all the way till the end of the twenty-first century, then what would actually happen is that we'd get slightly less global warming.  We'd end at 1.9 degrees, or, to put it more clearly, the temperature that we would have had in 2094, we would postpone until 2100.

So basically, doing Kyoto will mean that the guy in Bangladesh who has to move because his house gets flooded in 2100, can wait until 2106.  I mean, it's a little good, but it's not very much good, right?  On the other hand, the cost is pretty phenomenal.  On all the major macro-economic models, it is estimated that we'll end up paying somewhere between $150 and $350 billion a year -- starting in 2010.  That's not a trivial amount of money.  To give you a sense of proportion, right now we spend about $50 billion globally on helping the Third World.  So we're talking about spending three to seven times that amount to help the developing world very little in a hundred years from now.  I'm simply asking, is that a good investment?

Actually, there are many other things that we could do that would do so much more good.  Just for the cost of Kyoto in one year -- say for 2010 -- we could solve the single biggest problem in the world.  We could give clean drinking water and sanitation to every single human being on earth.  It would save two million lives each year.  Perhaps more importantly, it would save half a billion people from getting seriously ill, every year.  And that's just the cost of Kyoto in 2010.  Then, in 2011, we could do something equally good.  In 2012, we could solve the third biggest problem in the world, and so on.

Likewise, of course, we also need to make sure that in the long term we deal with global warming and we should invest in research and development of renewables that would cost a fraction of what Kyoto would do.  If we could just bring forward the day we shift over to renewables -- by a couple of years around mid-century -- it would do much more good than Kyoto could ever do.

Why is it we don't hear this?  Why is it that it's not an issue?  I meet with a lot of politicians who say, yes, Kyoto's not going to do very much good, but that only shows we need to do much more.  Usually it's not a good argument to say, yeah, the first step is a bad step, so let's take more steps in that direction.  It might be, and we should certainly investigate that, but these models have already been looked at and they tell us that Kyoto's a bad deal and going even further is an even worse deal.

It is important to notice that a lot of environmental legislation does not have as a primary focus the saving of human lives.  For instance, if we're talking about the Bengal tiger, it probably has the opposite effect.  The main point is that when we're looking at policy whose main focus is to save human lives, we should go in and compare how efficiently the different policies do that.

The biggest study on this subject comes from the Harvard Centre for Risk Analysis, connected to Harvard University.  The researchers spent three years going through all of the American legislation where there are published results on the cost and efficiency of saving human lives [Figure 7].  What we basically see is that the typical cost of saving one human life for one year in the health-related area is $19,000.  In the residential area, it costs $36,000 and in transportation it's $56,000.  In the work-related area, it's $350,000 to save one human life over one year, and for the environment, it's $4.2 million.  We could also call this graph "Spot the Bad Investment".

Typically, we make very, very bad investments in the environment when our primary policy focus is to save human lives.  We do so very, very inefficiently and we have to ask that crucial question:  why is it we're willing to spend $4.2 million in saving one human life when we could have saved more than 200 elsewhere?

We've got to face up to the fact that our prioritisations are not free.  This does not mean we shouldn't worry.  This does not mean we shouldn't be concerned, but it means we should start being concerned about the right things.  We must state what it is that's actually important, where it is that we should place our efforts, and make sure that we don't just do something that sounds good, that makes us feel good, but that actually has little effect in doing good in this world.

Green "Truth" Just a Load of Hot Air

The publication of Bjørn Lomborg's meticulously researched tome The Sceptical Environmentalist in 1998 shocked the environmental movement.

Supported by 2930 footnotes and a bibliography that extended to 70 pages, Lomborg clinically examined the grand environmental issues of the day against the scientific evidence.

While far from complacent, his analysis demonstrates that cataclysms are not imminent.  In fact, at least among richer countries, air and water are getting cleaner, forests are expanding, energy supply is getting cheaper and very few species have been recorded as becoming extinct.

In poorer countries, too, the problems have been exaggerated and also can be abated if those countries adopt policies that favour economic growth.

Remember the alarmists' panic about the decline in sperm counts, claims that we're running out of space for waste dumps, the hole in the ozone layer, acid rain?  Lomborg shows how many of the save-the-world solutions of environmentalists were tilting at non-existent problems and would have no effect other than wasting money.

Much of his work looks at tomorrow's problems.  He accepts that global warming will occur, but does not see it as catastrophic, and believes it will be self-correcting over the long term.

More importantly, he shows that the forecast warming is relatively slight.

Such warming and cooling trends are part of the Earth's history and even before the invention of airconditioning, mankind had adapted to much greater temperature swings.

He also shows that all the apparent hardships developed nations have imposed on themselves in agreeing to the Kyoto protocol will have the most trivial effect on global temperature -- at best delaying the trend by six years.

The Intergovernmental Panel on Climate Change found there was no evidence of net change in extreme conditions.

But in any event, as Lomborg claims, with increased wealth comes a capacity to avoid the consequences of hurricanes, heatwaves and cold snaps.

And, as is also clear, increases in wealth are jeopardised by measures to prevent increases in greenhouse gases.

We already can see this in Australia, where the Federal Government has said we must spend $380 million in increased electricity bills for renewable energy.

In addition, Australian governments are pouring subsidies into windmill power and other renewables.

In Queensland, the Government has declared that consumers must forgo cheaper coal-powered electricity and use electricity fuelled by gas.

Lomborg is much reviled by "politically correct" scientists who are often in positions of great influence.

Similarly, contributors to Scientific American, many of whose arguments Lomborg roasted in his book, also piled into the critical feast.  Their arguments also were criticised.

One claim he made that has been targeted as false is that he was once a Greenpeace member.

He was never a Greenpeace member, since membership of that multinational is confined to an elite of a few dozen in each of its country franchises.  He thought offering money and support meant being a member.

He exposed the humbug and specious arguments put by eco-superstars like Paul Ehrlich -- who claims the world is running out of resources, that we will soon face mass starvation and aid to India is simply putting off the day when millions will die.

Resources have become cheaper and India now exports food.

It is not surprising that Lomborg is so reviled.  He uses the best scientific sources to deflate fraudulent claims.

Sadly, many of these claims are endorsed by some who, calling themselves scientists, are simply clothing their green fanaticism with their academic credentials.

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Best Person to Handle Health's Heady Brew

John Howard's unexpected Ministerial reshuffle clearly indicates his own lack of certainty about the next election.  This is not a job-rotation exercise but a clear effort to shore up strengths and reduce weaknesses.

Some of the changes are clearing out dead-wood.  The most significant of these is the retirement of the fascinatingly combative but accident-prone Wilson Tuckey and the demise of Richard Alston who has failed to give us a phone and TV system of North American quality.  Kay Patterson is moved from the demanding Health portfolio where she struggled against the sector's numerous and noisy special interest groups.  The reshuffle means that Ms Gillard, one of the Opposition's rising stars, will now have to confront Tony Abbott -- the Cabinet's most original thinker and one of its best debaters.

Moving the tough no-nonsense Amanda Vanstone to the immigration hot-seat is a master stroke and shifting Phillip Ruddock to the less controversial but still demanding Attorney-General portfolio retains and rewards a late blossoming, loyal and effective performer.

Kevin Andrews' move to the Industrial Relations portfolio replaces the feather-ruffling, reform-insistent Abbott dynamo with a dour politician who must have given up on the prospects of advancement.

The Abbott change is crucial.  On the one hand it removes a source of conflict, somebody who has marked the way forward but whose posture and persistence might be a disadvantage in pushing reform through the often red-tinged Democrats.  Kevin Andrews offers better prospects of achieving an accommodation to inch away at the long march to reforming labour relations.  In the case of the construction sector, labour relations are anchored in Leninist notions of class war and equally important are the public servant unions, which form the backbone of the ALP's support base.

By the same token, health is the area where spending blowouts threaten to derail all developed country budgets.  We have an ageing population, a determination by the baby-boomers to hold and extend their leisure privileges, declining number of working-age providers, and a reservoir of hard luck stories that the media and Opposition can present as screaming out for attention by a cold-hearted government.  Australia's own health expenditure rose nearly 80 per cent per head over the past decade with more exotic cures, increased labour costs and rising expectations all playing their part.

Health also presents a heady brew in view of the three way split in its funding between state and federal governments and individuals and their health funds.  This makes for constant tussles as the three sources of finance each seeks to push the costs on to the others.  The histrionics at the latest CoAG meeting, where the State Premiers staged a public walk-out over health funding, is symptomatic of the tensions in the system.

Tony Abbott promises to be more effective in holding the Commonwealth's corner in these inevitable disputes and offers the best political hope of finding a way to staunch the cost increases.

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"Catastrophe" Overheated

Again newspapers and television are packed with stories of environmental degradation, extreme weather and global warming.  Consider last year's floods in central Europe and the recent hot weather and forest fires for which global warming is blamed, spurring a widespread demand to limit the emissions of greenhouse gases.

This view comes not only from environmental organisations but also from politicians and researchers.  Prominent researcher John Houghton compared extreme weather with weapons of mass destruction and called for political action.  But is this analysis accurate?

The UN's Intergovernmental Panel on Climate Change cannot find any significant development in extreme weather in the 20th century, although there is a tendency that global warming is likely to cause more precipitation.  This is the conclusion of the IPCC's latest report.  Houghton readily cites the World Meteorological Organisation to the effect that global warming has shown itself to give rise to more extreme weather such as heatwaves.  Unfortunately, this much-cited news flash from the WMO was only a press release, not based on any research, and when questioned the WMO acknowledged that its results could be explained merely by "improved monitoring and reporting".

Of course, such distinctions fit badly with the general claim that global warming is becoming a WMD.

The intuition would be that as the weather gets warmer, we will get hotter and, consequently, more people will die from heatwaves.  But this is a severely flawed argument.

Basically, a global temperature increase does not mean that everything just becomes warmer.  Global warming will generally warm minimum temperatures much more than maximum temperatures.  In both hemispheres and for all seasons, night temperatures have increased much more than day temperatures.  Likewise, most warming has taken place in winter rather than summer.  Finally, three-quarters of the warming has taken place the cold areas of Siberia and Canada.

All of these phenomena are, within limits, good for agriculture and people.  Yet we are constantly being told that global warming is what brings on heatwaves such as those we're seeing right now.  Not correct.  Global warming has generally only decreased the number of cold days.  The US, northern and central Europe, China, Australia and New Zealand have experienced fewer frost days, whereas only Australia and NZ have had their maximum temperatures increase.  For the US, there is no upward trend in maximum temperatures and for China they have been declining.

Of course, as global warming goes on, maximum temperatures will also start to increase.  Yet the idea of comparing this with WMDs seems curiously misleading.  Yes, eventually heatwaves will cause more people to die from the extreme high temperatures, but what is neglected is that many more people will not die from cold spells.  In the US, it is estimated that twice as many people die from cold as from heat, and in the UK it is estimated that about 9000 fewer people would die each winter with global warming.  But don't wait up to see the headlines in the next mild winter saying "9000 not dead".

Even if extreme weather is not getting worse, the damaging effects caused by extreme weather are indeed increasing.  But the key factor is not global warming.  The more important factor for explaining the damaging effects of extreme weather is much more direct in its causality:  there are more people in the world, they are wealthier, and many more prefer to live in cities and coastal areas.  Accordingly, extreme weather will affect more people than before and, because people are more affluent, more absolute wealth is likely to be lost.

Florida is an example of this development.  When Florida was hit by a hurricane in September 1926, the economic loss was $US100 million.  In 1992, a similar hurricane destroyed property to the value of $US38 billion.  Clearly a bigger disaster -- but not due to a development in extreme weather.  The explanation comes from economic growth and urbanisation.

In other words, we are probably getting more vulnerable to extreme weather but this is only weakly related to climate change.  It therefore seems tenuous to blame the damage unfolding on global warming and it is meaningless to argue -- as Houghton does -- that the wise political solution is primarily extensive action against global warming.

Although global warming has not had much effect on extreme weather in the past, it might have a greater effect in the future.  According to the IPCC, some extreme weather is likely to develop this century.  However, we lack reliable data about the consequences for the damage caused by extreme weather in the future.

The only available study is about tropical hurricanes.  Here data shows that, although the extent of hurricanes will increase in the future, this effect will contribute to only 5 per cent of the rise in economic damage caused by extreme weather.  The other 95 per cent will be due to societal factors such as economic growth and urbanisation.

If our goal is to reduce vulnerability to extreme weather, limiting carbon emissions is certainly not the most cost-effective way.  In the Kyoto Protocol, industrialised countries have agreed to cut carbon dioxide emissions by 30 per cent in 2010.

This will be extremely expensive and will have only a negligible effect.  The global cost will be large:  the estimates from all macro-economic models show a cost of $US150 billion ($224 billion) to $US350 billion every year.  At the same time, the effect on extreme weather will be marginal:  the climate models show that Kyoto will merely postpone the temperature rise by six years from 2100 to 2106.  Most global warming problems will occur in the Third World, yet these countries have many other, more serious, problems with which to contend.  For the cost of Kyoto, in 2010, we could permanently solve the biggest problem in the world -- we could permanently provide clean drinking water and sanitation for every person in the world.  Should we not deal with the most pressing problems for real people first?

Endorsing Kyoto seems to have become the way to show our willingness to do good.  But we can't do all good things simultaneously.  I would prefer that we got our priorities straight and dealt with the most important issues first.

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