Yearly Archives: 2008

142 – The “Caring for our Country” Business Plan

The Business Plan for the new national environmental program, released November 28, is a substantial improvement on equivalent documents for past programs. Although there are areas that could be improved, the new Australian Government does appear to be taking seriously the cost-effective pursuit of environmental outcomes, rather than just activity. It will still be difficult to deliver this, but the Plan is a good start. Large parts of the program align very well with our INFFER framework for planning and prioritising environmental investments.

There are, of course, positives and negatives in the Caring for our Country Business Plan, but for the first time since the Australian Government became active in national policy for natural resource management in around 1990, there is a sense that the Government is serious about achieving environmental outcomes. There was no sense of that in documents for the previous programs: the National Strategic Plan of the Natural Heritage Trust, or “Our Vital Resources“, the nearest equivalent documents for the National Action Plan for Salinity and Water Quality. The latter, in particular, was just dreadful.

In the new document, there appears to be a willingness to take reasonably seriously the need to target resources to the highest priority areas, rather than attempting to fund too many projects at inadequate levels. With a fixed budget for the program, picking winners implicitly involves picking losers too: accepting that there are things you will not try to do. If you try to do to much, you will actually achieve less, which is what we have observed in past programs.

Picking investments that will actually be effective and cost-effective is not easy. It requires a detailed integrated assessment, drawing together technical, economic and social consideration. The list of assessment criteria that will be applied to the selection of specific projects (pages 38 and 39 of the Business Plan) provides a good basis for prioritisation of investment. It includes key criteria like technical feasibility, adoption, and use of best available science which were badly neglected in past programs.

It will remain difficult to apply these criteria in practice. To help with this, I am hoping that the Australian Government will make use of INFFER as part of their process. The assessment criteria of the program line up very well with what we do in INFFER, as shown below.

Caring for our Country assessment criteriaHow is it dealt with in INFFER?
Technical feasibilityAssessed explicitly.
Delivery mechanismsPolicy mechanisms and policy interventions explicitly documented. Their selection is guided by the Public: Private Benefits Framework.
Scale and degree of intervention proposedProposed specific on-ground works documented.
Likely degree of adoptionAssessed explicitly. Adoption by three potential target audiences is considered: landholders, partner organisations, and the general community (in the sense of political acceptability of the proposal).
Alignment with national strategiesInvolves assessment of asset significance, which includes factors such as alignment with national strategies.
Public benefit per dollarConsidered using the Public: Private Benefits Framework and the Cost-Effectiveness Index.
Value for moneyAssessed using the Cost-Effectiveness Index.
Best available science and collective knowledgeRequired by INFFER as a whole. The science is integrated with other knowledge.
RiskCaptured and managed in various ways: knowledge gaps documented, probabilities of success specified, influential factors driving cost-effectiveness can be identified, clear goals or targets identified for the project.
Engagement with stakeholders and partnersThe full INFFER process includes community consultation about about asset identification and valuation. Additional aspects would be drawn out in the project proposal, separately from INFFER.
Capacity of proponent and partnershipIs implicit throughout the INFFER Project Assessment Form, and in the assessed cost effectiveness of the project.
Potential to raise community awarenessINFFER is focused on assets, rather than on general community awareness, although awareness raising and capacity building can be specified as delivery mechanisms, if they are judged to contribute sufficiently to outcomes.

Weaknesses I see in the new Business Plan include the following.

(a) I suspect that the budgets allocated to some of the specific elements are too small. For example, the stated “five year outcomes” for the Great Barrier Reef are not outlandish, but even so I wonder whether the budget of $200 million over the life of the program will be sufficient to achieve them. Are they based on the “best available science”? If proponents of projects do bring together the best available science (and economics), they may put up proposals that indicate that more modest target outcomes are realistic. Hopefully there will be an opportunity to revise the program’s targets (or budgets) as the best available information is brought to bear (in the spirit of adaptive management).

(b) Point (a) partly reflects the fact that the full set of assessment criteria were not used to select the target “outcomes” of the program. Given the unreasonably tight timelines imposed on the departments by their ministers, it was impossible to do so. To avoid this problem in future, the departments need to rework their analyses and targets on an ongoing basis, well in advance of future program decisions. This type of analysis should be a core part of the program.

(c) The section on “Improving Land Management” is the weakest of the main components. To be fair, it includes attempts to target effort. The focus has been narrowed to a few specific land degradation issues (soil erosion, soil acidity and soil carbon) and for each of these there are maps showing areas where these issues are priorities. There is no indication of how these priority areas were chosen, and some of my colleagues who are experts on these issues have been scratching their heads about some of the choices. (A stand-out is the choice of the Perth region as a national priority for increasing soil organic carbon!) It is disappointing that there doesn’t seem to be any requirement for investments in soil erosion and acidity to be targeted to locations where they will generate the greatest benefits for non-agricultural assets (although there is a slight hint that this would be smiled on). Making that a clear requirement would have been a way to increase the public benefits and the cost-effectiveness of the investments, consistent with the program’s stated assessment criteria. Finally, the policy mechanisms flagged in this section of the Business Plan do not seem to be well considered. They emphasise the sorts of delivery mechanisms that were relied on rather naively in the previous programs: “extension and capacity building initiatives such as demonstrations and workshops, the development of codes of practice, or similar guidelines.” For these sorts of activities to be effective in promoting adoption on a large scale, the practices being advocated need to be highly attractive to landholders, but not yet adopted by them. For this to be true, the practices would need to be new and previously unknown to the landholders, or else circumstances would have to have changed substantially since farmers became aware of the practices and initially decided not to adopt them. The former is clearly not relevant to the practices that the program is trying to promote, at least not for most farmers. The latter might become partly true for soil carbon (depending what happens with national climate change policy) but not for the other two. Overall, I’m pretty pessimistic about the outlook for this part of the program, unless it is modified.

David Pannell, The University of Western Australia

Further Reading

Anonymous (2008). Caring for our Country, Business Plan 2009-2010, Australian Government, Canberra, http://www.nrm.gov.au/resources/index.html

141 – Thinking strategically about practice change

Extension is one of the tools that can be used to promote practice change by rural landholders, but it is not the only one. When is it appropriate to rely on extension as the main tool to encourage practice change, and what broad type of extension would be used in different circumstances.

Our national symposium on “Understanding Practice Change by Farmers” on November 14 was a successful day, with plenty of positive feedback from the 400 delegates. PowerPoint slides from the day are now available here, and within a month or so, you will be able to podcast complete audio recordings of all of the talks, and view video of edited versions of each talk at the new ruralpracticechange.org web site. In the meantime, here is a snippet from my talk on policy aspects of practice change.

My Public: Private Benefits Framework (PPBF) highlights the importance of the “adoptability” of a proposed new practice as a driver of the appropriate policy response. The “private net benefits” of a change in practice basically means the adoptability of the practice: how attractive or unattractive is it to landholders? This obviously is a complex issue depending on many factors, not just financial outcomes (Pannell et al. 2006).

The figure below presents some conclusions from the PPBF in a different way, and elaborates on some of them. It shows how the decision to use extension as the main tool to promote practice change depends on whether the practice is adoptable, and breaks down the type of extension that is relevant depending on other factors.

Figure 1. Choice of strategy to promote practice change depends on the adoptability of the practices being promoted, and other considerations.

Note that, if the practice is judged to be adoptable, there are three different modes of extension suggested, depending on why it isn’t already adopted.

(a) If the practice is not yet adopted, but is on track to adopted over time, there may be benefits from using extension to raise awareness of the practice in order to accelerate adoption. This is relevant to new practices, not ones that are well known to managers already.

(b) If the practice is well known, and you judge that it is adoptable, but it is not yet adopted, it implies that there is some sort of learning failure. In other words, the land managers may have a misperception about some important aspect of the practice. Rick Llewellyn has devised an approach for identifying such misperceptions, and determining which of them matter (Llewellyn et al. 2005). Extension would be targeted at fixing those misperceptions that can make a difference to adoption.

(c) If the thing holding back adoption is lack of skills, extension would focus on training.

If the problem is lack of resources, there may be little to do except wait, in the hope that a good season will provide those resources. Alternatively, if there are large public benefits from the practice, it may be appropriate to provide modest financial support, to provide the required resources to get the landholder over the adoption hump.

If the practice is judged to be lacking in adoptability among the target group, the options would include the following.

(d) Develop a better technology that is attractive enough to be adoptable.

(e) If there are large enough public benefits, it may be worth using financial payments or regulation (depending on whether it is judged that polluters should pay or beneficiaries should pay) to support or require adoption.

(f) If the costs of adoption are too high relative to the public benefits, and technology development is not attractive, the best option is probably no action. Effort should be directed elsewhere.

In cases (d) and (e) extension is not recommended as the main front-line policy tool, although it may be used in support of technology development, incentive payments or regulation.

David Pannell, The University of Western Australia

Further Reading

Llewellyn, R.S., Lindner, R.K., Pannell D.J. & Powles, S.B. (2005). Targeting key perceptions when planning and evaluating extension, Australian Journal of Experimental Agriculture 45: 1627-1633. Full paper (52K)

Pannell, D.J., Marshall, G.R., Barr, N., Curtis, A., Vanclay, F. and Wilkinson, R. (2006). Understanding and promoting adoption of conservation practices by rural landholders. Australian Journal of Experimental Agriculture 46(11): 1407-1424.

If you or your organisation subscribes to the Australian Journal of Experimental Agriculture you can access the paper at: http://www.publish.csiro.au/nid/72/paper/EA05037.htm (or non-subscribers can buy a copy on-line for A$25). Otherwise, email David.Pannell@uwa.edu.au to ask for a copy.

 

140 – Renewable energy in a carbon market

Some time back I had a discussion with a scientist who was a lead author on the latest report of the Intergovernmental Panel on Climate Change. Given his senior position in the IPCC I was amazed to find that he had a remarkably inaccurate view of how renewable energy (specifically bio-energy) would work in a carbon emissions market.

The problem was that he believed that an energy supplier who relies on fossil fuels would (and should) pay an amount (based on carbon emission savings per unit of energy produced) to an energy supplier who uses renewable fuels, such as bioenergy from agroforestry.

That is not the way that markets for emission permits actually work, and it is not the way they should work either.

If the market is working well, net emitters of carbon should pay an amount equal to the marginal environmental cost of that carbon times the amount emitted. Let’s assume that the cap on carbon emissions has been set at the “right” level, meaning that the market price of carbon emission permits would equal the marginal environmental cost of carbon emissions.

Now here is a stylised example to show how an emissions permit market would work. Suppose the price of carbon emission permits is $50 per tonne. There are two emitters, named Fossil and Forest.

At time = T0 Forest grows some trees and instantly sequesters a tonne of carbon.

At time = T1 (one year later), Forest chops down the trees, burns them to generate energy, and emits a tonne of carbon.

Also at time = T1, Fossil generates some energy using fossil fuels and emits a tonne of carbon.

In an ideal market for carbon emission permits:

  • Forest sells a permit at T0, and gains $50.
  • Forest has to buy a permit at T1, at a cost of $50.
  • At T1, Forest would receive interest from its bank on the $50 that has been sitting there since T0. If interest rate is 5%, Forest gets $2.50.
  • At T1, Fossil has to buy a permit, at a cost of $50.

The net outcome of all this is that at T1, Forest has gained $2.50, and Fossil has lost $50 (not counting any other costs or income). Thus, Fossil has been appropriately penalised for the carbon it has emitted, and Forest has been appropriately rewarded for the carbon that it briefly sequestered. Any other cross payments will mess this up. If one tonne of emissions was moved from the non-renewable to the renewable energy producer, the net gain would be $52.50.

(Note that the annual benefits to Forest equal the interest rate times the carbon price times the amount that remains sequestered during that year. If the carbon is sequestered for longer, the annual benefit remains the same. This relates to another misconception I’ve encountered among some people who promote sequestration, that the annual benefit per tonne of sequestration is the carbon price.)

Now consider what would happen if there was a cross payment (of $50 per tonne of carbon emitted) from the non-renewable energy producer to the renewable energy producer.

(a) If the cross payment occurs in addition to the above system, then we would end up with Fossil paying $100 for a tonne of emissions and Forest receiving $52.50. This is much too large a penalty to Fossil and too large a benefit to Forest. If one tonne of emissions is moved from the non-renewable to the renewable energy producer, the disparity is $152.50, which is about three times too big. It favours renewable energy relative to fossil fuel energy by too much. We would end up paying more than it was worth to cut carbon emissions.

(b) Maybe a cross payment could happen instead of the above. The result would be Fossil paying $50 and Forest receiving $50. This time the difference in net receipts is $100, which is almost double the correct amount for one tonne of carbon.

My scientist protagonist thought that the cross payment should be calculated on the basis of emissions per unit of energy produced. Notice, however, that in my explanation above, I did not talk about the quantities of energy produced by either Fossil or Forest, as they are completely irrelevant to the carbon market. Of course the amounts of energy generated per tonne of carbon are important to Fossil and Forest, but they are not relevant to the market for carbon emission. The overall relative attractiveness of fossil fuel energy versus renewable energy is a combination of the energy economics and the carbon economics.

All the above discussion is based on an ideal market for emission permits. In reality, the rules and regulations that are put into place may make it difficult, impossible or expensive for it to actually work this way. For example, the system may exclude sequestered carbon, or require it to be sequestered permanently, rather than temporarily as in the above example. In principle there is nothing wrong with allowing and rewarding temporary sequestration using the approach described above, but some people seem to think that if it’s not permanent, it’s not real. This is bad logic. On the other hand I suppose there may be better arguments around the transaction costs of rapidly turning over permits from brief sequestration. In any case, it doesn’t alter the conclusion that cross payments in the example above would be illogical and inefficient.

Unfortunately, despite a long discussion, I wasn’t able to convince the scientist that his view was in error, and when I followed up with a detailed explanation by email, he didn’t reply! Oh well. One can only try.

David Pannell, The University of Western Australia

139 – Free-rider problems: milk in the office fridge

Free-rider problems can be serious impediments to good management of environmental or natural resource assets. The example of milk in the office fridge illustrates many of the issues.

Economists recognise free-rider problems as one of the most important fundamental causes of environmental degradation or resource over-exploitation. Free-rider problems are closely tied to one type of public good: non-excludable goods, and to the issue of weak property rights.

Suppose there is an unregulated fishery where one of the fishers is worried that the level of fishing effort is excessive. This fisher thinks about cutting back on fishing effort in order to allow fish numbers to grow, so that fish catches will be higher in future. The problem is that this fisher cannot stop other fishers from stepping in and increasing their own effort in the area where the first fisher was previously working. The incentive for any individual fisher is to free ride on the benefits from conservative fishing behaviour by others. The result is that no individual has any incentive to fish conservatively, and so most commercial fisheries in most countries are badly over-exploited.

Closer to home (for many of us), consider the issue of milk being provided for tea and coffee in the workplace. If there is no coordination of milk provision, then any individual who buys a carton of milk for themselves and leaves it in the office fridge faces the risk that others in the workplace will free-ride, using up milk without contributing fairly themselves. What’s to stop others from putting your milk in their coffee, or even drinking a whole glass of milk when they feel like it? You can’t stand guard over the fridge, and it isn’t worth buying a fridge of your own to keep in your office just for your milk. The risk is that nobody will provide any milk, so that everybody will be worse off.

Free-rider problems, if they are serious enough, may be worth managing by some authority taking control and closely directing the behaviour of the people involved. In a fishery, a government may institute a quota system, and exclude people who don’t hold quotas from fishing. In the office, the boss may decide to be generous and provide milk for all workers, or (less generously) to levy people and use the funds to buy milk. Alternatively the boss may organise a rotation system where people take turns to buy milk. I have seen each of these in operation in practice, but they don’t necessarily happen (just as fisheries are not always regulated).

I work amongst resource economists. You’d think that, as a group, we’d know a thing or two about managing free-rider problems, but I started to have doubts when I learned about the milk situation in our School. I don’t drink milk at all myself, but in a coffee-break discussion the other day, I learned that our office milk is completely unregulated. It appeared that this lack of regulation is causing a free-rider problem. It came out in the discussion that there are two or three people in the School who are regularly purchasing milk, and finding that some of their colleagues in the School are helping themselves to it. The situation seemed to cry out for a regulatory solution of some sort.

However, on closer inspection, it emerged that the situation was not so simple. People had responded in a variety of ways, such that the additional (marginal) benefits of a regulatory solution would probably be small – possibly not large enough to outweigh the costs.

It was interesting to see how different people had adopted different strategies. Within our small group, individuals reported a remarkable diversity of strategies:

  • Switching to drinking their tea or coffee without milk. This was quite a common strategy. Having made the switch and become used to it, the cost to these people was minimal.
  • Buying soy milk, on the basis that people are less likely to free ride, given that many people don’t like soy milk. The person who did this was quite happy with soy milk.
  • Buying UHT (long-life) milk, using the same logic as for soy milk.
  • Only bringing in enough milk for one day.
  • Bringing in milk in a distinctive container, such as a sturdy plastic container.
  • Writing the owner’s name on the milk carton. This was reported to be only partially successful.
  • Purchasing normal milk but putting the carton inside a plastic bag and placing it low down and at the back of the fridge. For some reason, this seemed to be more successful than the name-labeling strategy.
  • Forming a cooperative, where a group of people agreed to take turns at buying milk. This doesn’t completely solve the problem as there are still milk drinkers (potential free riders) outside the cooperative. However it does somewhat reduce the risks, the more so the larger the cooperative. Unfortunately the cooperative in our School was actually very small – just two members.

These two members and one other person purchased most of the School’s milk. All three were well aware that they were bearing a cost due to free riders. Two of the three even named one other person (the same person in each case) as a particularly bad free rider.

However, I was interested to note that they took no steps to attempt to reduce free riding. They did not approach the worst offender. They did not petition the Head of School or School Manager to institute some sort of regulatory system, and they did not organise some peer-pressure-based system themselves. They also did not use any of the strategies employed by other members of the School, such as using a distinctive container. There were several reasons for this:

  • If they took steps to reduce free-riding, the cost to them in awkward feelings or in time would not be trivial.
  • The benefits to them from resolving the problem did appear to be trivial, or nearly so. The cost of the free riding was said to be low and not worth getting bothered about. Milk, after all, is not all that expensive, and the level of free riding was tolerable. The marginal value of the second half of a carton would be close to zero. If only one person was drinking it, it may go off before it has been completed. With this in mind, it was easy to tolerate free riding.

Overall, after discussing the issue with most people in the School, I concluded that the free-rider problem was not that serious in this case. Those who were bothered by it had adopted effective strategies to avoid it, and those who were not bothered by it just bought the milk. These strategies were clearly superior (in the minds of these people) to the option of any one of them attempting to negotiate and enforce a strong common-property solution. And the current head of School (in common with the previous three) clearly did not consider it to be an issue of sufficient importance for it to be worth the costs of him intervening. (This was in contrast to the situation with the fridge itself, which was provided by the School for all to use, as happens in most offices. I suppose that, since a fridge is relatively expensive, the need for a coordinated solution is greater.)

I was struck by the parallels with the writings of economist Ronald Coase. Coase argued that market failure problems such as free riding are often not as serious as we tend to think, and that if we look closely, we may see that they actually have been addressed to some extent. If you factor in the transaction costs of making changes, the case for a more interventionist approach may not be strong. For example, when lighthouses were put forward as the archetype public good, with high risks of free riding to be faced by any shipping company that builds them, Coase (1974) investigated and found that prior to the mid 19th century in England, lighthouses were privately owned, operated and funded (see here). This showed that, in some circumstances at least, people can work out ways to get around free riding.

Any attempt to alter such a system runs the risk of making it worse, at least for a time. For example, as a result of my interviews, and a frank discussion I had with the School’s worst free rider, we ended up with an excess supply of milk in the fridge. No doubt, this will work itself out in time, but until then we may see an increase in milk wastage.

I’m not saying that a coordinated solution is a bad idea. If some community-minded person in the School did organise and operate a coordinated system, it probably would be better than the current arrangement. Just not as much better, overall, as you might have expected.

David Pannell, The University of Western Australia

Further Reading

Coase, Ronald H. (1960). “The Problem of Social Cost”. Journal of Law and Economics 3: 1–44.

Coase, Ronald H. (1974). “The Lighthouse in Economics”. Journal of Law and Economics 17: 357–376.

138 – Practice change by farmers: National symposium

There will be a national symposium in Melbourne on 14 November 2008 on the topic “Understanding Practice Change by Farmers”.

Back in PD#125 I mentioned that a group of us was contemplating running a national workshop to celebrate the success of our paper on adoption of conservation practices by rural landholders (Pannell et al., 2006), which had just become the most downloaded paper of the Australian Journal of Experimental Agriculture. This idea now will become a reality, with a national symposium in Melbourne on 14 November.

Already the interest in the symposium has been remarkable. We were hoping to get 200 delegates, but with minimal publicity we had 200 registrations within five days of announcing the event. We’ve now changed the venue to accommodate an audience of up to 400, but even that looks likely to be booked out. So if you wish to register, don’t take your time about it or you may miss out.

The general plan for the day is to bring together a group of Australia’s leading researchers on the subject of rural practice change to:

(a) present an overview of what the existing research literature says about adoption of new practices by rural landholders,

(b) present new research results, cutting edge ideas and responses to current topical issues, and

(c) highlight implications of all this for organisations and individuals who engage with rural landholders.

The event will encompass rural landholders generally, not just farmers, which is important given the changes occurring in some regions.

The speakers will be:

Dr Neil Barr (Department of Primary Industries Victoria). Neil is a social psychologist by training with a longstanding research interest in the adoption of farm innovations and the demographic, psychological and social aspects of adoption.

Professor Allan Curtis (Charles Sturt University). Allan researches watershed organisations, the policy and institutional arrangements supporting catchment management, and the evaluation of NRM programs.

Dr Geoff Kaine (Department of Primary Industries Victoria). Geoff has expertise in adoption of new technologies and practices by primary producers and market based instruments in natural resource policy. Current projects include policy choices for climate change.

Dr Rick Llewellyn (CSIRO Sustainable Ecosystems). Rick’s research focuses on adoption of various farming practices, the role of farmer-led groups in the research and extension network, and a variety of farming systems issues.

Dr Graham Marshall (University of New England). Graham’s current work focuses on the economics of community-based environmental programs reliant on farmer’s voluntary adoption of conservation practices.

Professor David Pannell (University of Western Australia). David is a Professor in Agricultural and Resource Economics, ARC Federation Fellow, and Director of the Centre for Environmental Economics and Policy. He has researched rural practice change from a number of perspectives.

Professor Frank Vanclay (University of Tasmania). Frank is a Professor of rural sociology and leader of the Rural Social Research Group in the Tasmanian Institute of Agricultural Research, with a long track record of research on rural practice change and related issues.

Roger Wilkinson (Department of Primary Industries Victoria). Roger has worked as a rural sociologist and extension researcher in Australia and New Zealand and is currently senior social researcher in the Victorian Department of Primary Industries.

The event will be facilitated by Andrew Campbell (Triple Helix Consulting Managing Director).

For those who cannot make it to the event or miss out on a place, we will be using a number of strategies to capture the day and make it available to a broader audience:

(a) All talks will be recorded and made available as podcasts on the event web site, together with copies of PowerPoint presentations.

(b) Briefer video interviews with speakers will be recorded and placed on YouTube, with links from the event web site.

(c) Written papers for each talk will be published as a book.

See the event web site at http://www.futurefarmcrc.com.au/workshops.html for a flier, a program, and details of how to register.

David Pannell, The University of Western Australia

Further Reading

Pannell, D.J., Marshall, G.R., Barr, N., Curtis, A., Vanclay, F. and Wilkinson, R. (2006). Understanding and promoting adoption of conservation practices by rural landholders. Australian Journal of Experimental Agriculture 46(11): 1407-1424.

If you or your organisation subscribes to the Australian Journal of Experimental Agriculture you can access the paper at: http://www.publish.csiro.au/nid/72/paper/EA05037.htm (or non-subscribers can buy a copy on-line for A$25). Otherwise, email David.Pannell@uwa.edu.au to ask for a copy.