Monthly Archives: August 2005

65 – Thinking like an economist 20: Challenges for policy economists

In this article I discuss some of the more common challenges that economists face when attempting to influence the policy process to promote the public interest.

In the past few years, a fair bit of my research has focused on Australian government policy in the area of natural resource management. I’ve concluded that the design of that policy is generally pretty poor if we want to achieve meaningful outcomes in a cost-effective way. I wondered whether it is just the natural resource management area that have such poorly thought through policy, but talking to some colleagues in Canberra, I get the impression that it is pretty normal across many, and perhaps most, policy areas. I don’t know if that’s true, but if it is, it makes one doubt whether it’s worth trying to do anything about it – it suggests that the weaknesses are caused by more than just problems in a particular policy area. I haven’t raised the white flag yet, but it is important to be realistic about the natures of politics and bureaucracies, and their implications for developing good policy.

Related to that, I was recently asked to speak about the challenges for economists in the policy sphere. Here are some specific challenges I identified, extracted from Pannell (2005b).

There are often conflicts between short-term political objectives and long-term needs for efficient policies. “Good advice on economic policy is often about convincing others that short-term responses are inappropriate” (survey respondent Alistair Watson, quoted by Pannell 2004).

As an outside expert, it can be difficult to establish credibility with policy makers, especially if you are not based in their local region. A US study found that, to a remarkable extent, state-level policy makers limit their use of expert advice to within-state experts. The tendency to rely on local, trusted information sources means that the selection of information to use in policy formation is partial and somewhat hit-and-miss. Indeed, the “experts” who are listened to may not contribute to a more efficient or effective policy. They may not even be experts in the relevant issues: “Much of the problem with bad policy comes from smart, articulate people who are operating out of their skill zone” (survey respondent Gary Stoneham, quoted by Pannell 2004).

Politicians like a crisis because fear is a more powerful motivating device than comfort. The community responds to catastrophic predictions (Lomborg 2001), including, recently, the Y2K bug and global climate change. There is a strong temptation for advocates to exaggerate the severity of the problems they wish to have addressed, contributing misinformation to the policy decision process. This may prompt urgent and short-term responses, when the real need is for careful consideration and analysis before policy strategies are selected.

There is often a mismatch between the complexity of policy problems and the simplicity of policy responses. For some problems, in my experience particularly environmental problems, there can be a great diversity of technical, economic and social issues that need to be understood. This makes it difficult even to communicate succinctly to senior policy players who are not already well informed about the details of the problem. Policy proposals need to be simple and bland enough to achieve agreement, and this can tend to drive decision making to a lowest common denominator.

For some issues, an efficient policy would involve different policy mechanisms in different circumstances (e.g. Ridley and Pannell, 2005). However, the policy process prefers a simpler policy structure, preferably with a uniformly applied policy mechanism. In some cases this might be justified on the basis of lower transaction costs, but in others I suspect that it results in substantial opportunity costs to society.

Complexity and diversity can mean that there is no consistent message going to policy makers. For example, few people are well informed about the full range of background information relevant to salinity in Australia (which include hydrogeology, economics, biology, engineering options, water resources, the context of commercial agriculture, social aspects, biodiversity, and politics), and many contributions to the public debate are narrowly conceived and poorly justified (Pannell 2005a). Even among relatively well-informed commentators, the nature of the required policy response is disputed. Some expert commentators focus on the need for hydrogeological data for targeting investments, some on the development of new management options, some on the use of engineering options, some on the importance of communication and education. One has sympathy for policy makers trying to decide whom to believe.

Politicians like everyone to feel that they are winners, or failing that, politicians like to closely control who are the winners and losers. This can result in a tendency for program funds to be shared widely among all members of the relevant section of the community, when an efficient approach would involve targeting of funds to priority cases. One hears the concept of ‘fairness’ invoked in discussions about this. It appears that political fairness tends to focus on one dimension of fairness: the expectation of current beneficiaries. Whether it is fair to taxpayers to spend tax dollars in programs that will not be very effective in achieving their objectives is less often considered.

The very existence of a system of funding creates considerable political pressure for its continuation. Understandably, those involved in spending the funds actively participate in the political process to endeavour to preserve the system. Even if new information about the policy issue indicates that a change is needed, it may be politically difficult to achieve. For example, the National Landcare Program in Australia created many new positions for Landcare facilitators. The facilitators were imbued with a particular philosophy of working with farmer groups to address environmental issues on farms. Over time, it has become clear that this approach and philosophy are less effective in preventing land degradation than was originally expected. Partly in response to this, the Program is undergoing change. However, changing the system is made difficult by the existence of many hundreds of facilitators who are philosophically connected to and financially dependent on the existing system, connected within bureaucratic and political networks, and able to mobilise the more committed farmers from their groups to fight in defence of the status quo.

So what, then, is politics?

“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” Ernest Benn

“Politics consists in choosing between the disastrous and the unpalatable.” John Kenneth Galbraith

“Politics is perhaps the only profession for which no preparation is thought necessary.” Robert Louis Stevenson

“Politics is supposed to be the second oldest profession. I have come to realize that it bears a very close resemblance to the first.” Ronald Reagan

He’d know.

David Pannell, The University of Western Australia

Further Reading

Pannell, D.J. (2004). Effectively communicating economics to policy makers. Australian Journal of Agricultural and Resource Economics 48(3): 535-555. Full journal paper (138K pdf)

Pannell, D.J. (2005a). Farm, food and resource issues: politics and dryland salinity, Australian Journal of Experimental Agriculture 45: 1471-1480. Full journal paper (103K) Summary version (19K)

Pannell, D.J. (2005b). Policies and politics: Challenges and opportunities for agricultural and resource economists, Paper presented at New Zealand Agricultural and Resource Economics Society Conference, Nelson, New Zealand, 26-27 August 2005, Full paper (85K)

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. Full paper (126K pdf) Summary version SIF3 project page

64 – Compliance with Kyoto

Among those countries that originally agreed to the Kyoto Protocol, what percentage of the agreed target reductions in greenhouse gas emissions has been met by now? The answer may surprise you.

Under the Kyoto Protocol, a large group of countries, collectively referred to as the Annex-1 countries, set targets to reduce their national greenhouse gas emissions relative to their estimated 1990 levels. The range of targets ranged from an 8 percent decrease (for most countries) to a 10 percent increase (for Iceland). Overall, the target aggregate reduction in greenhouse gas emissions agreed to by Annex-1 countries is 5.2%. Nicholas Schneider and Glenn Fox of the University of Guelph asked, and answered, a very interesting question about all this: What percentage of the overall target has been met by now?

Have a guess at the answer yourself. Write down your guess, before reading the rest of this article.

Schneider and Fox obtained the latest published data on greenhouse gas emissions from the United Nations Framework Convention on Climate Change web site (from 2002) and did the sums. Here is some of what they found.

The worst performing countries are Spain, Portugal, Ireland, and Canada, which have each increased emissions by several times their target decrease. For example, Spain and Portugal both had targets of an 8% decrease, but both have increased emissions by about 40%.

Australia and the US have not ratified the Protocol (along with Monaco, Croatia and Belarus), but we’ll include their results anyway. Australia’s target was an 8% increase, but we haven’t even met that generous mark. In fact we have had a 22% increase. The US missed their target by even more: target -7%, achieved +13%.

If you would like to change your guess about the overall result before I reveal the answer, feel free to do so.

OK, now you are locked in. The answer is below this picture of Glenn Fox with his modified version of the famous climate-change hockey stick.

“For all of the Annex-1 countries, including those that chose not to ratify the Protocol, … 69 percent of the target reduction in greenhouse gas emissions had been achieved, in aggregate, by 2002” (Schneider and Fox 2005, p.18). To me that seems remarkably high? A major success story!

Here is something even more remarkable: for the group of countries that have ratified the Kyoto Protocol (i.e. most of them), the aggregate emission reductions achieved by 2002 were 269% of the target. Clearly, some countries have done a remarkably good job in meeting their targets. Actually a lot have.

Here are a few examples:

  • United Kingdom: target -8%; achieved -15% (That puts an interesting light on Tony Blair’s recent outspoken stance on climate change.)
  • Germany: target -8%; achieved -19%
  • Poland: target -6%; achieved -32%
  • and many more.

For countries that have ratified the Protocol, aggregate emission reductions have exceeded the target every year since 1991. That is, it took only one year to meet the target!

“Much of the reduction in aggregate greenhouse gas emissions can be attributed to an economic downturn in the former Soviet Bloc countries, with the Russian Federation and Ukraine being the two largest reducers of emissions. By the end of the 1990s, gross domestic product in the Russian Federation had sunk to roughly half of what it had been 10 years earlier. These reductions were not the result of purposeful abatement” (Schneider and Fox 2005, p.18), but incidental emission reductions are still reductions.

This raises a really interesting point about the operation of international carbon markets: “if there are 269 credits on the supply side for every 100 credits on the demand side, the prospects for positive prices for credits in a genuinely open market among the Annex-1 countries are not great” (Schneider and Fox 2005, p.19). An open market would achieve nothing, because there would be no pressure for positive prices, which can only come about by a lack of large enough reductions.

Isn’t all that astonishing! Why haven’t we been told? Why is this remarkable and surprising good news story not appearing in the media. All those stories about the menace of climate change make no mention of this. Why would that be? One can only speculate:

  • Climate change advocates might think it is not very relevant because much of the gains relate to economic stagnation in former Soviet Bloc countries, which presumably is temporary. But surely the result is so amazing that it is worth discussing. It might teach us something. And apart from the Soviet Bloc, surely the remarkable progress in some countries of Western Europe is worthy of comment.
  • Less generously, it is not consistent with the climate of fear that some climate change advocates wish to create.
  • It might make climate change alarmists look a bit silly. They’re telling us that the climate is still getting hotter, when we have already abated greenhouse gas emission by most of the target amount. It would be unfair of us to criticise it on that basis, of course, because everyone involved knows that Kyoto is not nearly enough to affect climate in any measurable way.
  • It highlights how inherently unpredictable CO2 levels are and how difficult it will be to control them, whereas the Kyoto advocates would rather create an impression that it is something we can manage (otherwise they couldn’t justify their assertions that we need to take action). In reality, CO2 levels are largely driven by factors that are much larger and more dominant than the effects of small market prices for CO2 credits, which is the only practical mechanism in Kyoto.
  • They actually know that Kyoto is a dud policy, and they would rather not draw attention to the fact because they want to foist even bigger dud policies onto us.
  • All of the above?

Kyoto is a dud, in my view, because, even if one believes the results of the IPCC, this type of policy is incapable of generating the level of greenhouse gas abatement that would be necessary to make a meaningful difference to climate. I think the IPCC’s own modelling results lead one to that conclusion, although they would not admit it.

In my view, given all the uncertainties and the low probability of success, if we want to do something to try to moderate climate change, it should be low cost, and have good potential for high payoff. I reckon there is only one option that meets these criteria: research to develop new renewable energy technologies that are more efficient and cost effective. At the moment we hope carbon-credit schemes might create the incentives for sufficient innovation, but I think it would be much more direct and vastly cheaper to simply fund the innovation development.

David Pannell, The University of Western Australia

Further Reading

Nicholas Schneider and Glenn Fox (2005). A win for Kyoto – so where’s the party? Fraser Forum July/August 2005, pp. 18-20. available here.

63 – AANRO.NET

This is to advertise a pretty neat database available on the internet that I don’t think has had as much publicity or use as it might have. Here is a description taken from the web site:

“AANRO is a knowledge base of bibliographic and research information on Australian agriculture and natural resource management.

The AANRO knowledge base contains about 200,000 detailed descriptions of research projects and publications on Australian agriculture and natural resources.

About 1,500 new research projects and 5,000 documents are added to the knowledge base each year. This core information is drawn from the primary industries, agriculture and natural resources government agencies across Australia.

AANRO also has a gateway to other key agriculture and natural resources websites.”

Check it out at http://www.rgc.org.au/knowledgebase/AANRO

David Pannell, The University of Western Australia