Monthly Archives: July 2005

62 – SIF3: Salinity Investment Framework III

Salinity research in Australia over the past decade has generated a wealth of new knowledge that has yet to be incorporated in policies and investment strategies. The SIF3 project will work with governments (national and state) and with regional bodies responsible for salinity investment planning to bridge the gap between state-of-the-art knowledge and action.

Our aim is to integrate a full range of hydrological, biological, economic and social research to understand of how best to respond to dryland salinity in different circumstances.

We are concerned with impacts from dryland salinity on: (i) agriculture through land salinisation, (ii) water resources, (iii) infrastructure, and (iv) vegetation and biodiversity.

We identify circumstances where it would be logical for particular policies to promote uptake of existing management options. Policy makers have a number of choices on the policy ‘menu’ including:

  • Extension: Technology transfer, education. Relevant where existing management options are attractive to land managers.
  • Incentives: Positive financial incentives to encourage a change of management. Examples: subsidies, market-based instruments, cost-sharing. Relevant to promote existing management options to protect public assets where off-site benefits exceed on-site costs.
  • Penalties: Negative incentives to discourage a practice or land use. Examples: transferable water rights, regulation on land use or drainage, zoning, government acquisition. Relevant to discouragement of existing plant-based systems in some circumstances, esp. water resource catchments where salinity management can cause downstream costs.
  • Engineering: Salt interception through pumping saline water to avoid discharge into rivers. Local engineering works on-site to protect public assets where problem is generated locally (e.g. many towns). This category represents direct investment in public engineering works. Engineering for agricultural land is captured in other categories (e.g. extension, penalties).
  • Plant-based R&D: Invest in development or improvement of technological options for salinity management, particularly plant-based R&D systems. May also include investment in infrastructure, market institutions, etc. to support profitable new industries.
  • Other R&D: e.g. Research to provide information to support planning and decision making. Research into the performance and design of engineering options.
  • No action: No response is justified where the costs of intervention outweigh the benefits.

Several of these categories would be relevant to the broad category of ‘capacity building’: extension, incentives, R&D, some types of engineering works, and perhaps incentives.

Recommendations

We identified 60 distinct situations where specific strategies could be recommended, depending on the type of asset affected, hydrological conditions, and the economics of available responses. Recommendations are very sensitive to these conditions, and are based on a mixture of research results, theory, judgments and logic. Ridley and Pannell (2005) provide the complete set of recommendations. Here we provide a very brief summary for each type of asset.

The process of identifying the appropriate response to salinity is illustrated in the figure below. It shows how the choice depends on the type of asset and on several other factors. The set of influential factors is different for each asset type. For waterways, the important factors are salt input, groundwater response, fresh runoff and the economics of perennials.

Summary of recommendations for all asset types

Where the main aim of salinity management is to reduce impacts on water resources, the logical approach in some upper catchment areas is for penalties or permits to prevent loss of fresh water runoff entering waterways. There are few cases where providing incentives to grow existing plant-based options is the most appropriate response. Investment into plant-based R&D is justified in several cases, particularly where groundwater systems are responsive and the potential for runoff generation is low. In a minority of locations, salt interception schemes are technically and economically feasible.

For protection of high value, non-agricultural terrestrial assets (infrastructure and biodiversity), each of the policy approaches is relevant in some circumstances, although the role for incentives is very limited. Engineering (subject to economic analysis) may be appropriate when the value of the asset is high and the urgency for action is high. Plant-based R&D is relevant in a number of situations, particularly where the asset value is high but the urgency is low. It is justified on the basis of reducing the public cost per hectare of treatment.

Compared with infrastructure and biodiversity, agricultural land is generally of low relative value per hectare. Where profitable perennial options exist, extension is the main tool. More commonly, where current plant-based options are not sufficiently profitable, R&D to develop improved options should be undertaken as the main publicly funded response.

Where land is already salt-affected, development of plant-based or engineering options is justified where the downstream impacts are positive or neutral and where profitable options are lacking. A choice between penalties and no action applies where the downstream impact of managing salt-land is sufficiently negative.

Conclusion

The study has a number of implications for government, R&D corporations, and catchment managers. It provides a pathway to more cost-effective and scientifically defensible investments in management of dryland salinity by providing guidance on the broad categories of policy measures that are appropriate in different circumstances. It highlights the need for salinity investments to be highly sensitive to case-specific circumstances, and well informed by science. It implies that there should be a number of shifts in emphasis in the funding directions of the existing policy program, most notably less emphasis on incentives and extension. It confirms the appropriateness of the attention that has recently been given to engineering and permit-based approaches. Given that two of the more prominent policy responses in our recommendations are plant-based R&D and penalties, and that these are likely to be best considered, managed and implemented at scales greater than existing regional bodies, the degree of emphasis on regional decision making in the existing program should also be reconsidered.

Appendix: Responses for recharge areas with salinity impacts on waterways

This appendix provides a slightly more detailed discussion of the results for water resources, in order to provide a feel for the nature of the results. There are four main factors driving the choice of policy approach to protect water resources:

(i) The potential input of salt from groundwaters into the waterway. Depends on recharge rates (dependent on soil texture and slope), salt stores in soil and salt concentration in groundwaters, all of which can be highly variable, even within a sub-catchment.

(ii) The responsiveness of groundwaters in potential discharge areas to establishment of new perennial vegetation in recharge areas.

(iii) The importance of fresh runoff water. Includes both the level of use of the waterway for consumptive use and the volume of surface or near-surface flows of fresh water entering the waterway (dependent on soil texture, slope, vegetation type and rainfall).

(iv) Farm-level economics: whether current perennial-plant options for reducing recharge on farm-land in the sub-catchment are more or less profitable than annual-based agriculture.

Table 1 shows a selection from the 24 situations analysed for water-resource catchments. Choosing responses is straightforward once one has identified the relevant criteria.

Case no.
Potential input of salt from ground-watersGroundwater response to vegetation
Supply of fresh runoff
Farm-level economics of perennial plant-based options relative to existing land use
Policy response
1
High
High
High
More profitable
Penalties or extensionA
2
High
High
High
Slightly less profitable
Penalties or incentivesB
4
High
High
Low
More profitable
Extension
5
High
High
Low
Slightly less profitable
Profitable plant-based R&D or incentivesB
12
High
Low
Low
Much less profitable
Profitable plant-based R&D + engineering if economic
15
Low
High
High
Much less profitable
Penalties
16
Low
High
Low
More profitable
Extension
18Low
High
Low
Much less profitable
No action

AWhether penalties or extension applies requires analysis of net off-site effect of perennials.

BIncentives paid to establish/manage existing perennials if the net effect is positive.

For example, extension is recommended in cases 1 (subject to further assessment), 4 and 16, because in these cases the management options are attractive enough to promote uptake by business-oriented land managers. Penalties are recommended in cases 1, 2 and 15, because in these cases there is a likelihood of adverse downstream impacts in excess of upstream benefits. In the fuller table (Ridley and Pannell 2005), penalties or permits are the most common recommended policy response for protection of water resources.

Plant-based R&D is recommended in cases 5 and 12, as perennial vegetation would be beneficial, but not so beneficial as to warrant support with subsidies. Engineering-based salt interception schemes (where economic) are suggested where the salinity threat is high but groundwater responsiveness to revegetation is low (case 12).

Incentives to grow existing plant-based options are only an appropriate response in cases 2 and 5 (high groundwater response, perennials slightly less profitable than annuals). In case 5, site-specific analysis would be needed to assess whether incentives, development of plant-based options or a mixture provides the greatest net benefit.

David Pannell, The University of Western Australia

Further Reading

This is a very brief summary of the following paper:

Ridley AM and Pannell DJ (2005). SIF3: An investment framework for managing dryland salinity in Australia. SEA Working paper 1901. CRC for Plant-based Management of Dryland Salinity, University of Western Australia, Perth. Available at SIF3 project page

61 – Thinking like an economist 19: Should we have an environmental levy?

Public funding for environmental and resource management has increased over time, but calls by environmentalists for dramatic further increases are common. Should we do that using an environmental levy?

The possibility of introducing an environmental levy, either on the price of food or on income tax, has had some prominent advocates in recent years. For example, the Prime Minister’s Science, Engineering and Innovation Council (2002) indicated support for the idea.

While these proposals for a levy are laudable in intent, there are a number of problems with them:

  • Some people may be concerned about the regressive nature of a flat levy, and prefer that funds be collected through a more progressive system, such as income tax.
  • A hypothecated levy (one whose revenue is allocated to a particular task) may involve greater transaction costs than an approach that makes use of the existing tax system. This would particularly apply to a levy on food purchases.
  • “Hypothecation may create inefficiencies because the tax rate can be determined on the basis of revenue required, and not on the costs and benefits of the tax. … Furthermore, it is difficult to determine the appropriate revenue sources for particular expenditures.” (Scrimgeour and Piddington 2002, p.10). The OECD (1997) recommends that hypothecation should be a transitory approach, if used at all, because inefficiency in spending priorities may become locked in.
  • Why would the environment, out of all issues in need of public resources, particularly warrant a hypothecated levy? Why not education? The arts? Police? National security? Why not simply use the existing tax system? I am not saying that the environment is not deserving of substantial funding – I think it is – just that it does not warrant special treatment over other calls on the public purse.

The “Wentworth Group of Concerned Scientists” proposes that in order to provide an incentive for change, people who adopt environmentally beneficial practices should have their own levy payments refunded. This might influence adoption of very low-cost measures, but land-management changes to protect or enhance the environment are generally too expensive to be significantly influenced by this measure. If we adopted the Wentworth Group’s suggested approach of setting the levy at one percent of income tax, the effectiveness of exemptions as an incentive to farmers would be negatively affected by the low levels of income tax paid by most farmers.

Another idea is to place a levy on food, but this is particularly problematic. It could of course be effective in raising revenue, but its efficiency in encouraging better land management is doubtful, and there are several concerns around issues of equity and practicality.

  • Taxing foreign consumers of Australian products is usually not possible. Apart from logistical difficulties, competitive pressures would mean that purchasers would not tolerate any levy on our main rural exports; they would seek alternative suppliers. The result is that the levy would be borne by producers, not consumers. Maybe that’s OK, but it’s not what advocates for the levy have in mind.
  • In practice it is likely that, for simplicity, all food would be taxed equally. If so, food produced with adverse environmental impacts would be treated the same as environmentally friendly products. Environmentally-aware producers would be taxed (via the market) equally with their most environmentally damaging counterparts.
  • Most value-adding in the food supply chain occurs post farm gate. Depending on market structures, the levy may be absorbed by segments of the supply chain that do not contribute to environmental damage.
  • Would imported foods be levied?
  • What about non-food agricultural products, such as wool, cotton, hay or grain for animal feed?

Finally, there are doubts about whether the vastly greater level of funds that would collected under a levy scheme would be spent well. A critical view of the major national environmental programs in Australia does not inspire confidence that they would be.

David Pannell, The University of Western Australia

Further Reading

Pannell, D.J. (2004). Heathens in the chapel? Application of economics to biodiversity, Pacific Conservation Biology 10(2/3): 88-105. full paper (109K)

60 – Agricultural productivity growth

If you are trying to swim up a flowing river, you have to swim faster than the current. Farmers face a similar problem in trying to stay profitable in the face of steadily falling real prices for their outputs. To stay afloat they have to increase their productivity year by year.

Figure 1 shows the extent to which Australian farmers have faced a fall in the ratio of their output prices to input costs over the past 40 years: the so called “cost-price squeeze”.

Figure 1: Farmers’ terms of trade. Base year 1997-8 = 100. (Source: ABARE)

Swimming against that current means that farmers must steadily increase their productivity. Broadacre farmers in Western Australia have experienced particularly high levels of productivity growth in grain production compared with producers from many other regions, with average productivity growth of 3.5 per cent per annum, over the 21 years up to 1998-1999 (Ha and Chapman, 2000). By contrast sheep specialist, beef specialist and sheep-beef specialist farms recorded productivity annual productivity growth of only 0.6, 2.1 and 1.4 per cent over the same period.

Improvements in productivity may arise through technological advances, improvements in management and through exploiting economies of size. R&D figures prominently as a contributor to these productivity improvements. Major technical advances in Australian agriculture in the last two decades have included the following:

  • There has been an increasing array of herbicides, reducing the need for tillage, and improved spray technologies supporting the earlier sowing of crops.
  • New crop and pasture options and varieties have become available over the past three decades.
  • Improvements in farm machinery for tillage, spraying and harvest have increased the ease and efficiency of many farm operations. Farmers have invested in larger machinery with work rates that offer economies of size and have markedly increased their capacity to store grain on farm.
  • Improved communications (fax, mobile phone, internet) and computer technology have increased the speed and range of information received by farmers.
  • A greater variety of sheep breeds (Awassi, Damara, Dorper) are now grown and are preferred to merinos in some markets.

The crucial role that increasing productivity plays in the economic viability of agriculture is starkly illustrated in Figure 2. It shows that productivity growth in Western Australian agriculture has more than offset falls in real prices since 1953. Accumulated productivity improvements since 1953 now constitute most of the gross value of production for agriculture.

Figure 2: Gross value of agricultural production (GVP) in Western Australia, showing that portion due to accumulated productivity improvement. (Source: John Mullen, pers. comm., 2004, based on Mullen, 2002).

David Pannell, The University of Western Australia

Further Reading

Ha, A., and L. Chapman (2000) Productivity growth trends across Australian broadacre industries. Australian Commodities 7, no. 2: 334-240.

Kingwell, R.S. and Pannell, D.J. (2005). Economic trends and drivers affecting the grainbelt of Western Australia to 2030, Australian Journal of Agricultural Research 56(6): 553-561. full paper (82K) Published version (126K pdf file)

Mullen, J. (2002) Farm management in the 21st Century, Agribusiness Review 10: paper 5. Available here.

59 – Economics history

The history of economic thought sounds like a dry and dusty topic, but I think it is actually quite interesting. I recently read a very amusing potted summary of the subject by John Creedy, Professor of Economics at the University of Melbourne. It is called “Adam Smith and All That – a review of the history of economics in one easy lession”. You can access it here.

David Pannell, The University of Western Australia

p.s. 17 May 2007. The above link appears to be broken, presumably because the paper was published in the Journal of the History of Economic Thought. You can access it here, but your organisation probably needs a subscription to the journal