Pollution

Mar 162015
 
Hepatitis A
Typical of the confusion Australian consumers face

In the wake of the Hepatitis A scandal, which as at this point has infected some 26 people in Victoria, New South Wales, Western Australia, Queensland, South Australia and the ACT. There has been a great deal of debate about food labelling laws, protocols, and food safety.

A potential cause of the outbreak and a potential solution fall within what readers of this blog might be familiar with – water quality and market-based instruments.

At this stage, it looks likely that the source of the infection was and is imported frozen berries from China.

Sufferers of Hepatitis A are likely to suffer gastro-intestinal problems such as nausea, vomiting, diarrhoea and fever and in some cases may suffer acute liver failure.*

Hepatitis A is spread through the “oral – faecal route”. So, there are perhaps two mechanisms for which Hepatitis A can be passed onto another person through ingesting food. One, involves an infected person exhibiting poor hygiene practices (such as not washing hands), and then directly handling the food. The second is contaminated water being used to wash or prepare food.

The outbreak and the poor quality control standards for food production and packaging shouldn’t have come as a surprise. China has had a well documented, if not at times overblown record of food contamination. Ranging from contaminated milk formula, to poisonous pet food, and garlic sprayed with outdated and harmful (to human health) fertilisers and pesticides. Frozen berries were thought to be the cause of Hepatitis A infections in the United States and European Union. These are problems in practices that would not be allowed to occur in countries like Australia.

Calls for better food labelling laws as a result of the Hepatitis A outbreak have been made by consumer groups. It is often a battle for consumers to understand where their food is sourced. Confusing labels such as “Made in Australia from local and imported ingredients” make food labelling meaningless and devalue the system as a whole. The federal government initially rejected such calls and deemed them an unnecessary regulation. However, it appears that a proposal is going to be made to cabinet by the end of March.

I support such a move, but I argue that it is positive and productive regulation. As opposed to restrictive regulation. Companies that import food products would be well aware of their supply chain – meaning a low cost of implementation for the companies involved.

The benefits are obvious. Consumers would be able to make better choices as a result of the extra information. It is unusual in any given market, that a consumer is unaware and cannot know the source of the product purchased. For example, if an oil company is selling oil, it is graded and sold on an exchange, with the details of the product known. Some oil grades will command a premium over other oils.

It should be the same with food. But because of our food labelling regulations, this is not the case. It is what is known as a market “friction”.

Friction occurs in a market where the buyer – in this case, the consumer – has to make choices based on insufficient information. The gaps between information between the seller and consumer in the market lead to an inefficient transaction of goods. Meaning that products that should sell for less, may sell for more and products that should sell for more, sell for less. These are transaction costs.

This is where Friction Reduction market-based instruments, or as I prefer to call them: Information based market-based instruments become relevant.

Information based MBIs or Friction Reduction Instruments reduce the transaction costs by creating a more efficient market. These instruments might include certification, labelling, education campaigns or any number of other related schemes. Many of these schemes are voluntary, on the part of producers, in response to demand from consumers.

A classic example is “fair-trade” coffee. This resulted from ethical considerations of coffee drinkers towards the growers and workers on coffee plantations.

One might ask why if it such a good thing, that local producers don’t already label their products more specifically, or precisely. The answer is that many if not all, already do.

The efficient functioning of a market relies on the underlying regulation. In this case, Australian growers and producers have their products devalued as a result of the lack of information. Those already providing the information are having their products lowered in value by those who don’t have to accurately state the source of their products. The confusion in the labelling raises the value of imported product, and lowers the value of local product.

There is something being missed out on as a result of the lack of informative labelling. Australian food and locally sourced food fetch a premium overseas and at home. Yet, when these products are in supermarkets, the value is less.

With the explosion of local farmers markets in Australia and so on, it is obvious that there is high demand, and an expectation of locally sourced and grown product. And people don’t mind paying a premium for the assurance that that provides.

If Australia looks to increase the value of our agricultural exports, we could probably learn a thing or two about increasing the value of our domestic premium produce sales. All this would take, is a simple change on the label.

 

*This is not a medical blog, or recommended advice. Please seek other advice or treatment if concerned.

Apr 162014
 

Market Based InstrumentsIn a previous post I explained that the Carbon Price is not a Carbon Tax. That it was an Effluent Charge with a Tax Differential component. Regardless of this, they are all examples of Market Based Instruments. What they are is actually known as Price Based Market Based Instruments or just Price Based Instruments. There are generally three kinds of Market Based Instruments: Price Based Instruments, Quantity Based Instruments (or Rights Based Instruments) and Information Based Instruments.

You may have heard the Minister for the Environment explain that they will replace the “Carbon Tax” with a market based mechanism, insinuating that the Carbon Price is not a market based instrument. He is quite wrong; my master’s thesis was entitled ‘Market Based Instruments for Reducing Pollution Loads Entering Darwin Harbour’ and I will explain in basic terms what these actually are.

Price Based Instruments

Market based instruments that set a price, a charge or a fixed unit cost are known as Price Based Instruments. As previously discussed, Price Based Instruments might include policy mechanisms and instruments such as effluent charges and taxes. But they may also include:

Full Cost Pricing (and include different pricing structures)

Tax Rebates and Tax Differentiation

Insurance Premium Charges

Reverse Deposit Schemes (Container Deposit Schemes)

Subsidies, Rebates and Grants

User Charges

Performance Bonds

Covenants

These are what is known as Pigouvian Taxes. And I think the term Pigouvian Tax is where a lot of the confusion has entered the debate. However, all this term means is that the polluter absorbs the full cost of the production (or consumption) process. How this is done most efficiently and effectively is to be determined by the policy maker, and will be the subject of a later post. How price based instruments act as a market based instrument will also be discussed at a later stage, because it isn’t necessarily intuitively apparent – which is partly the problem that gives rise to comments and purchase in the population that pricing is not a market mechanism.

Quantity and Rights-Based Instruments

Quantity and rights-based Market Based Instruments are what most people think about when they think of ‘Market Based Instruments’. There really only a few types of instruments in this category and it is probably the narrowest policy set for Market Based Instruments. There really are only two types of Market Based Instruments in this category:

Cap and Trade Schemes, Permits and Tradeable Permits

Total Maximum Daily Load Schemes (including accounting and budgeting schemes)

These Market Based Instruments contain a strong regulatory basis as well as frequent market transactions. Offsets can be created and in this sense they operate both as a futures exchange and also a quasi options exchange, with regulatory bodies acting as market-makers. The exchange’s effectiveness is successful or not successful depending on the interaction of these elements.

Theoretically, such Market Based Instruments are most suited to environmental policies where there are a large number of diffuse polluters, and the impacts of pollution are not isolated. That is, a reduction in pollution in one area will benefit the whole, not just the local environment. I will discuss this dynamic at a later date. But in short, it is why Australia’s carbon pollution reduction policies have favoured a cap and trade scheme.

Information-Based Market Based Instruments

Information based Market Based Instruments are also known in the literature as Friction Reduction Schemes, or Friction Reduction Market Based Instruments.

You may ask why these are included as Market Based Instruments. The simple answer is that markets function on the basis of information. There are two things that move a market – noise, and information. Companies listed on stock exchanges are regularly releasing information. It is a legal requirement. There is legal recourse for some buyers when they have been sold something under false pretences in many different kinds of transactions.

These Market Based Instruments are said to reduce friction because they are designed to provide the user or the transacting parties with the available information. Available information is an important component of rational choice making in decision theory in classical economics, and I have some level of qualms with this philosophical position. But for the purposes of policy making, it is at least a worthy aspiring goal for policy.

Information based Market Based Instruments include:

Right to Know legislation

Eco-labelling

Public Information Campaigns

Accreditation

Summary

I hope that I have had some success in helping shed light on what actually Market Based Instruments actually are in environmental policy. There is a broad range of policy options at the hands of decision makers. The pros and cons of each and in what circumstances each market based instrument is likely to be effective will be discussed over time in this blog. But don’t be fooled by politicians and their use of jargon when discussing Market Based Instruments and the underlying philosophy for addressing environmental problems.

If you have any questions or queries, leave a comment, or suggestion. Or if you want me to go over anything in detail, let me know!

Mar 262014
 

Environmental PolicyEnvironmental policy development can be a mystery to many, but it is generally not that difficult to understand. Most environmental policy is developed based on the “extrinsic values” that we place on them. This is a materialist approach, based on human uses, as opposed to “intrinsic values” which are the value of the ecosystem in and of itself.

I’d argue that over the long term, they are actually one and the same. And that it is only over the short term where the immediate extraction and exploitation value are highest that it actually has any tangible meaning. Long term policy is not an area where economics covers itself in glory when it comes to the environment, but I guess that is another debate for another day.

Despite its philosophical failings, valuing human uses of an environment gives us a starting point to be able to develop environmental policy in the most pressing areas. To explain the rationale for environmental policy development, I’ll be using the ‘Securing Western Australia’s Marine Future’s’ report: ‘How We Use and Understand the Marine Environment’ as an example. Hopefully this will illustrate how environmental policy is developed, and the factors that go into making informed environmental policy decisions.

The Requirement for Environmental Policy

The marine environment is an ecosystem, in particular in Australia that is under pressure from multiple uses. These include fishing and boating, recreation activities like surfing and even on shore development for housing, pollution runoff and so on.

As such, human use reports and evaluations at least allow policy makers the option of prioritising the highest value human use above other uses. This does have its own problems however, and if the highest value human use is not sustainable, then it is not good policy.

Methods and Data Collection

Human use reports can assess whether the human activities are sustainable over the long term, what impact they are having and have had, and how use interacts with other activities. Typically, these reports synthesise a substantial amount of pre-existing data – qualitative and quantitative, scientific and social. The range of data used to form conclusions is why these reports and studies are useful for environmental policy formulation. The Marine Futures report collates a substantial amount of data from WA State Government departments to form the basis of many of its topics of investigation.

Through interviews with recreational and commercial fishers, as well as quantitative data from various departments it was concluded that changes in the South West fishery have occurred. These changes led the interviewees to conclude that the current use of the environment was unsustainable. It was only through the collection of both the qualitative and quantitative data that the conclusion that fishing in the South West and Southern zones was unsustainable.

Outcomes in Environmental Policy

The biggest advantage of human use reports for the formulation of environmental policy is that they often provide reasoning behind changes in the environment. In the Marine Futures report, the explanation of changes in technology, demographic changes and policy changes are able to be put together to form a coherent “story” as to why things are the way they are, and what needs to be done.

For environmental policy, a coherent narrative for why something is the case is important (as I have explained previously), when the public requires a full explanation of why something is being done, or is required to be done. If the public is not informed then misinformation is likely to run rife, and interest groups will dominate any policy discussion. But if the public is fully informed, and provided with the available data, it is much less likely to face opposition.

The Economics of Environmental Policy

Economic considerations are also able to be evaluated and this is where the highest value user can be given priority in a policy discussion. But it is also where the greatest rub and greatest debate lies. As I pointed out earlier, it largely depends on what time frame is being analysed. Over the long term, activities and users that are least extractive will produce the greatest economic benefit. But this disregards economic imperatives over the short term. It is another area where human use reports are valuable to try and make decisions which balance these factors. A prime example of policy decisions being out of kilter with human uses and sustainability in favour of a narrow economic and political interest is the shutting out of commercial fishers in the Perth region, without restrictions being applied on recreational fishers.

Education and Social Policy Recommendations

The report also makes clear why an education campaign for certain activities is needed for the sustainable use of the Western Australian environment. According to the report, recreational fishers who were new to fishing attributed environmental changes that were inconsistent with the views of long term users and the available science on these topics. When frictions are occurring in the use of the environment such as these, it is of maximum benefit to provide accurate information to inform this section of the public.

Promoting Environmental Policy

Some human uses and interactions with the environment can actually enhance human amenity, environmental productivity and value. This is the gold standard in environmental policy and protection, and should be the aim of policy makers when making decisions. One such example of this is the Busselton Jetty, where physical infrastructure – the jetty – provides habitat for the surrounding ecosystem (an artificial reef), but also provides a site for human recreation and education which would otherwise not be in place if it weren’t for human intervention.

So What?

As you can see, human use studies and reports provide the basis for developing environmental policy. By matching science with human use and the interaction between people and the environment, environmental policy can be enacted that is least harmful to the environment, or most beneficial to the community. In many parts of the country, Marine Parks have been set aside on the basis of human use studies. Without acknowledging the human uses of the environment, observations and community wishes are often excluded in the environmental policy development process. It is why any policy, such as those looking at pollution reduction, is much harder to justify and provide emphasis without human use studies. It is why one of the policy recommendations in my thesis was to conduct a human use study in the Darwin Harbour region.

If you have any thoughts on the development of environmental policy, or this brief explanation, feel free to let me know below. Point out any of the obvious problems inherent in this approach and I’ll take the time to look at examining these problems down the track.

Further Reading

Davies, A., Tonts, M., Pelusey, H., & Niedzwiadek, M. (2008). Securing Western Australia’s Marine Futures: How We Use and Understand the Marine Environment. Perth, Western Australia: University of Western Australia.

Mar 112014
 

Carbon Tax/ Price ModelUnless you’ve been living under a rock it has been impossible not to hear of the “Carbon Tax” debate in Australian politics. Given my knowledge of market-based instruments for environmental purposes, I feel compelled to explain many of the issues that confound the Australian public. If you require further detail, you can consult my thesis on the topic.

This post is the first in a series of posts explaining why the “carbon tax” is actually good policy and a different mechanism to what most pundits and voters think it is.

 

What is a Tax?

A tax is an enforced and unavoidable contribution to an authority.

Income tax for example (unless illegally manipulated) is a fixed contribution, or equivalent to, as a rate of money earned. $100,000 will be taxed the same (accounting for adjustments) as any other $100,000 earned from any other work. The tax is collected regardless of the outcomes of your work or the manner in which your work is done.

Tax revenue is consolidated into a revenue pool and is not set aside for specific purposes or programmes, such as 3rd party insurance.

For environmental purposes, a tax is usually applied to inputs. For example, fertiliser taxes apply a charge as a rate of a specific active ingredient. The resultant outputs and impacts of the fertiliser use are irrelevant to the way the tax is charged and collected.

Environmental taxes apply to what would be considered as the front end rather than to the emissions – or the back end. For this reason, an environmental tax is a blunt instrument and isn’t regarded as an effective policy choice for improved environmental outcomes due to the lack of consideration of outputs, limited influence on changing behaviour and or negative environmental impacts – known as externalities.

However, the “Carbon Tax” does not work in this manner and it has been shown to influence behaviour.

 

The “Carbon Tax”

Under the Clean Energy Plan the “Carbon Price” or the “Carbon Tax” was set.

This is where the confusion is allowed to reign supreme. The carbon price is a direct pricing instrument (more about this later, or see my thesis). Under which, by definition it is what is known as an Emissions Charge, or an effluent charge.

An emissions charge is a direct pricing mechanism for the outputs – the emissions. Not on the inputs. Not on the coal going to power stations, but on the estimated or measured emissions.

If we refer to the previous example regarding income and income tax, we can use the example of electricity generation to show the difference in how the Carbon Price works. The energy output is equivalent to income earned. And the CO2 emissions are equivalent to the work performed. The price is levied against the work performed – not on energy output.

The charge will vary depending upon the work performed, regardless of energy output. In this way it is avoidable.

And that’s how polluter behaviour is changed. Input choices are left to the polluter; however, it is the outputs and the emissions that are the important component and that which is assessed. So polluters can either reduce their emissions by changing the inputs, or end of pipe emissions reductions. That decision can be based on what achieves the most cost effective outcome, and at the same time, achieving an improved environmental outcome.

The revenue generated from the carbon price, or emissions charge, is recycled to compound emissions reductions. In Australia this is going to various grant schemes, offsets and renewable energy initiatives. It is designed to be an encapsulated system that will continually reduce carbon emissions.

Income tax reduction (tax differentiation) with the estimated revenue generated is directed to those who have a relatively inelastic demand for electricity consumption. I will write about this at another point. But there are multiple elements to the carbon price as a policy and as a mechanism.

 

What does it mean?

When broken down, and the topic is discussed with correct terminology, the rationale behind the carbon price becomes a lot clearer and the mechanism behind changing behaviour makes much more sense. What people think of as a Carbon Tax is actually at this time a hybrid Emissions Charge and Tax Differentiation Scheme.

I’m not sure why the debate was allowed to be manipulated without an actual understanding of the underlying mechanisms at work. Granted, they appear to be quite complicated policy instruments. But they are not at a fundamental level.

It is similar to the way car registration operates, but not how income tax is collected. It is another failure of our political leaders to get to grips with policy explanation and education of the public in the process, because these mechanisms are not foreign to us.

 

But now that you are with me, and over the first hurdle, we can progress further into other areas of the policy.

Mar 062014
 
Back Beach, Bunbury
Back Beach, Bunbury

So I’ve been tasked with teaching a unit in Oceanography this semester. It’s hard to not to feel that I’m out of my depth, so to speak. As someone versed mainly in water quality management, there is only so much I can bring to the table, personally. But then I realised it doesn’t particularly matter, because almost everyone else involved in this field is in the same boat.

Oceanography is perhaps one of the few remaining “descriptive” sciences which is a collection of other scientific areas, simply because we do not know enough about the topic itself – or because it is too huge an area of investigation to be compartmentalised. In this way, I guess it is much like “climate science” or “climatology” where multiple scientific endeavours have been thrust towards forming a coherent study in an area requiring research and investigation.

We really have only begun to break the surface in our knowledge of the oceans. It is truly in many ways one of our “last frontiers”. The oceans are alien to us, so much so that much of the understanding of oceans comes from our study of the universe.

The cry of many rings out that we should stop spending so much on such far flung ventures as research in astronomy. But it is this research and investigation and its ability to look back through time that has helped us unlock many of the secrets of the formation of the ocean and the history of planet Earth. It is the best example of seemingly obscure scientific endeavour having “real world” application. We have an idea of how our oceans might have formed because we can observe similar processes happening elsewhere in the universe. Medical imaging is being improved because of the advances in space and astronomy research.

Many of our waters, particularly off the coast of Australia are quite literally unchartered. But I didn’t realise exactly how extensive this area is until I read the brilliant book Northern Voyager’s: Australia’s Monsoon Coast, which is a fantastic historical work on the maritime history of Northern Australia.

It is why the oceans are so special – they hold such a significant place in the history and culture of many civilizations. It is why oceans are the nexus of myth and science and where photographers, historians, poets, photographers, film makers, artists, surfers, submariners and a whole host of scientists all have a role to play in the study, representation, understanding and protection of the oceans into the future.

It is also why I feel comfortable about talking about Oceanography and especially in my areas of expertise. There are some pressing issues facing the water quality of our oceans. The impact of changing water quality and in particular salinity levels and ocean currents is something I personally find fascinating. As is the market failure and subsequent lack of responsibility in addressing the great ocean garbage patches. Over the next few months, I look forward to bringing you a series of posts relating to these and other issues in our oceans.

Further Reading

Powell, A. (2010). Northern Voyagers: Australia’s Monsoon Coast in Maritime History. Australian Scholarly Publishing, Melbourne.