Yearly Archives: 2010

173 – Indirect influences of policy on environmental outcomes

There are many policy programs around the world that aim to influence the activities of farmers in order to benefit the environment. Sometimes people fall into the trap of thinking and talking about these programs as if they were mechanistic in their impacts on the environment — you pull a policy lever and get an outcome. Of course, the reality is not that simple. The influence of policy actions on the environment is indirect and compromised by other factors, making life rather difficult for policy makers who wish to achieve particular outcomes.

The difficulty is that, in practice, in a democracy it is not in society’s power to select a particular sustainable farming system, because the government cannot simply order farmers to adopt the chosen system. Rather we are constrained by the effectiveness of the various tools that can be used to encourage adoption of different practices. The farming system that comes into existence will be that which results from farmers’ reactions to the government policies and institutions in place, allowing for other constraints and considerations.

Figure 1 illustrates these ideas. It shows that an environmental body (e.g. government agency, Catchment Management Authority, or NGO) concerned with land use can influence the decisions of private landholders (box E) through the selection and application of policy mechanisms (box A). The mechanism options include things such as regulation, education, subsidies, conservation tenders and research. The figure highlights that the environmental body is only one of a number of broad influences on land-use decisions, others including the economic environment, social factors, and bio-physical conditions. Clearly, the ability of environmental bodies to control land use is partial and often highly uncertain.

Figure 1. The indirect and partial effect of policy (through choice of policy mechanisms – box A) on land use and natural resource outcomes.

Actual land use has a set of economic, social and environmental consequences (box G) which may or may not align with the objectives of the policy maker (box H). If they do not, the environmental body can attempt to improve the alignment by modifying the policy mechanisms being used (link back to box A).

An alternative route to achieve policy objectives is for the body to undertake required works itself (box D). For example, governments may choose to establish national parks, to repossess private land in order to alter its management, or to implement engineering works to protect environmental assets.

Science may influence land use through several channels. These include giving landholders better knowledge of the relevant biophysical or economic conditions (boxes F and B) and their influence on outcomes from different land uses; through developing improved technologies that provide new land-use options (altering the influence of box E on box G), or indirectly through better informing policy makers.

Note that land-use change is occurring continuously, irrespective of policies or science, as a result of changes in economic, social or bio-physical conditions or changes in technology. It may also occur as a result of other policies that are not intended to target land use, such as taxation or trade policy. Overall, the influences of policy and science are complex, and often indirect.

A lot of environmental modelling doesn’t do justice to the complexity of this system. Economists are better than most in this regard. There are at least some numerical models that represent policy mechanisms affecting farm business decisions, flowing through to environmental consequences (e.g. Doole, 2010). Another relevant approach is the ‘Principal Agent Model’, which explicitly represents the relationship between a principal (such as a government) and agents who the principal wishes to influence (such as farmers). These models are used to design policy mechanisms that will achieve the optimal balance between benefits and costs, given different objectives and different information levels between the principal and the agents. When applied to the environment, they typically involve only a simplistic representation of the biology, but they do at least represent the human behavioural aspects of the system explicitly.

David Pannell, The University of Western Australia

Further reading

Doole, G.J. (2010). Evaluating Input Standards for Non-Point Pollution Control under Firm Heterogeneity, Journal of Agricultural Economics 61, 680-696.

Pannell, D.J. 2003. Balancing economics and sustainability in building an integrated agricultural system, Pacific Conservation Biology 9 (1/2), 23-29.

Pannell, D.J. and Roberts, A.M. (2009). Conducting and delivering integrated research to influence land-use policy: salinity policy in Australia, Environmental Science and Policy 12(8): 1088-1099. Full paper (94K)Journal version on-line

172 – Peak oil

This week’s Pannell Discussion is a review of a book called ‘Oil panic and the global crisis: predictions and myths’ by Steven M. Gorelick. It’s a fascinating book that reaches conclusions that might be surprising if you aren’t familiar with details of the oil industry (as I wasn’t).

Before reading this book, my knowledge of the issues around peak oil was not great. I knew of the concept, of course, and understood the predicted consequences, but I had not read any of the arguments about the validity and usefulness of the idea. Steve Gorelick, a Professor in the Department of Environmental Earth System Science at Stanford University, has fixed that. This highly readable and interesting book presents both sides of a complex and important debate.

The central concept at issue is the idea, originally proposed by M. King Hubbert, that oil production over time is destined to follow a particular pattern. He predicted that it would take the shape of a classic bell-shaped curve (a normal distribution or logistic function), rising to a peak, turning over and then falling away to nothing. He predicted that the bell would be symmetrical, falling in the same pattern as it had previously risen.

After setting the scene in Chapter 1 by describing Hubbert’s idea, its appeal and its initial predictive success, Gorelick puts it aside in Chapter 2 while he provides us with detailed background on the global oil landscape. This was very valuable for a non-expert like me, covering issues such as the energy density of different fuels, the oil business, OPEC, assessments of how much oil there is, where oil is produced and consumed, oil quality, oil pricing, the price elasticity of petrol (gasoline) and petrol price variability. I was struck by the range of retail petrol prices in different countries (depending mainly on taxes and subsidies), ranging in March 2008 from US$2.30 per litre in Norway down to US$0.03 per litre in Venezuela!

Chapter 3 covers the historical resource depletion debate, starting with Malthus, via the Club of Rome and the 70s oil crises, and then returning to the ideas and predictions of Hubbert. A variety of evidence is presented supporting the argument that global oil is depleting. Indeed, the presentation of quantitative evidence is a very strong feature of the book. There are numerous graphs and tables of empirical data, almost one per page, looking at the issues from every possible angle. They show us, for example, that oil production has exceeded oil discovery since about 1980, that global oil discovery peaked in the early 1960s, that discovery of giant oil fields has particularly declined, and that projected growth in oil consumption by developing countries suggests great strain on future supplies. Using similar approaches to Hubbert’s, bodies such as the US Department of Energy (DOE) have predicted that the date of global peak oil production is getting close. Specifically, under its high-growth scenario, the DOE predicted in 2004 that the peak would occur around 2030, and would be followed by rapid declines in production.

By this stage of the book, the reader feels rather pessimistic – the evidence for imminent oil depletion looks so convincing – but then in Chapter 4 Gorelick presents the counter arguments. We learn that predictions of production rates based on Hubbert’s approach have consistently been too low, sometimes spectacularly so. “Analysts using Hubbert’s approach have the habit of ignoring their earlier predictions of the time of peak oil every so often and providing later and later dates based on larger and larger values of the global oil endowment” (p.98). Even in the US, which has done the most thorough job of finding and extracting its oil, official estimates of oil endowment have grown consistently over time, such that at any point in time there appears to be enough oil to last the next 35 years. The same applies at the global scale, except that the number is 45 years. Global oil reserves have consistently grown (e.g. they have doubled since 1980), mainly due to reassessment of how much oil there is in existing oil fields. There may be a lot more oil still to find; “The Middle East, Eastern Europe and Africa contain three-quarters of world oil reserves and yet account for only one-seventh of exploratory drilling” (p. 182). Lower recent rates of oil discovery are at least partly due to low levels of exploration during the 1980s and 1990s, due to low prices. Gorelick points out that resource economists have consistently been more optimistic about future resource scarcity than have neo-Malthusians, due to their accounting for factors such as price signals and technological change. And so on. The counter arguments to oil pessimism are many and varied.

Finally, in Chapter 5, titled “Beyond Panic”, Gorelick attempts to pull it all together and draw conclusions. He emphasises that the debate is not just about optimism and pessimism. “Informed positions transcend attitudes” (p. 221). The positions taken by different protagonists can be explained by the key assumptions they have made. Hubbert’s mass balance approach is based on the assumptions that the global oil endowment can be estimated accurately (which is palpably wrong), and that oil use is limited by production (ignoring the demand side of the market). On the other side of the debate, analysts have allowed for oil resources from unconventional sources, have considered the dynamics of oil demand, and have anticipated the role of technological change. Ultimately, Gorelick sides with the latter group. “If there is a peak and decline in global oil production during the next two decades, it is more likely that it will reflect a decrease in global oil demand, rather than production choked by critically low global availability” (p. 224). He concludes that we will probably move away from reliance on conventional oil long before the oil runs out.

A particularly nice feature of the book is the inclusion of key summary points at the end of each chapter. These sum up the essence of the material of the chapter in a set of well-selected dot points. A time-pressed or casually interested person could learn a lot just by reading these sections.

But that would be a shame. The book deserves to be read in full. For me, at least, it was a page turner. There is plenty of detailed information to allow readers to form their own judgements, but it is presented in a way that does not overwhelm the story. The lessons of the book are highly relevant to resource economists, and to anybody interested in energy.

David Pannell, The University of Western Australia

Further reading

Gorelick, S.M. (2009). Oil Panic and the Global Crisis: Predictions and Myths, Wiley-Blackwell Publishers, Oxford, UK.

171 – Lifestyle landholders

One of the things we often hear about rural areas is that they are losing population. However, there are some parts of rural Australia where the population is growing rapidly, thanks to an influx of ‘lifestyle’ landholders on small properties. For environmental managers, these lifestylers can pose a conundrum. They are obviously different from the commercial farmers that they are used to dealing with, but how are they different, and how will they respond to environmental programs?

With rural sociologist Roger Wilkinson, I did some research in Western Australia and Victoria to help us understand lifestylers better, with the aim of building those insights into our environmental management decision tools (Pannell and Wilkinson, 2009). Here is some of what we found.

There is a lot of variation within the ‘lifestyle’ category. Different people are motivated by different aspects of living on a small rural property, including peace and quiet, freedom from restrictions, recreation, enjoyment, having a good place to raise children, being able to impart values to one’s children, and having a place to recapture one’s sanity.

However, broadly speaking we identified two groupings. One group is very environmentally conscious. They are motivated to look after the land, and mostly know how to do it, although they may need help with logistics and labour.

For the other group, the main objective for their land is for the property to look ‘good’, according to their ideals of a pleasant, often partly wooded, green environment.

In both groups, people often work off the property to earn their main income, so time available for working on their land is limited.

As a result of interviews and some analysis using my Public: Private Benefits Framework (Pannell, 2008), we reached the following conclusions.

  • Trying to achieve changes in land management on lifestyler properties is likely to involve substantially higher transaction costs per hectare than on commercial properties. In part, this is because learning and other transition costs per unit area of land are higher.
  • On the other hand, in the absence of an environmental program, there is likely to be a longer time lag until adoption of new land management practices on lifestyle properties. As a result, there is a greater potential to reduce that lag in an environmental program.
  • Many lifestylers are relatively willing to make environmentally beneficial changes, but usually only on a modest scale. If the environmental problem requires substantial changes (e.g. dryland salinity), this is very unlikely to occur on lifestyle properties. It’s hard to achieve on commercial properties too, of course, but there may be ways to tap into their profit motives to make it happen.
  • Training of inexperienced lifestyle landholders may be able to improve their private net benefits from land management changes.

Overall, it is often harder to justify investment in land-use change by lifestylers than by commercial farmers. The project would need to be one of exceptional public net benefits, and preferably one with low learning costs.

In this light, past decisions by public agencies in Victoria to direct their extension programs more to commercial than to lifestyle landholders may have been justified on efficiency grounds.

David Pannell, The University of Western Australia

Further reading

Pannell, D.J. (2008). Public benefits, private benefits, and policy intervention for land-use change for environmental benefits, Land Economics 84(2): 225-240. Full paper (140K)

Pannell, D.J. and Wilkinson, R. (2009). Policy mechanism choice for environmental management by non-commercial “lifestyle” rural landholders. Ecological Economics 68: 2679-2687

170 – Social capital

One of the most interesting books I’ve read recently is “Making Democracy Work” by Robert Putnam. It explores dramatic differences in the effectiveness of regional governments in Italy, arguing that the main explanation is differences in ‘social capital’.

Social capital refers to features of a society that facilitate cooperation and coordination. It includes the levels of trust that people feel for each other, social norms for reciprocating positive deeds, and the strength of networks within the society.

In the 1970s Italy reformed its democratic system, creating 20 new regional governments. Robert Putnam was studying various aspects of Italian politics, and decided to research how the new governments performed, and why. A synthesis of his research over 25 years is provided in this fascinating book.

He and his collaborators found that there were distinct differences between regions in the performances of the new governments. The best of them were reasonably good at providing services to their communities, and the worst of them were really dreadful. Many different pieces of evidence underpinned this conclusion, and they were quite consistent in their indications of which were the better governments.

One striking example was when the researchers (pretending to be local community members) wrote to each government with identical requests for three pieces of advice or assistance. In the most efficient regions, they received thorough replies within a week or so. In the least efficient regions, none of the mailed inquiries ever received any response at all. They followed up over many weeks with several phone calls and even a personal visit, before finally getting satisfactory responses.

A clear geographic pattern emerged, with the best governments being in the north and the worst in the south. Of course, reasons behind such differences are bound to be complex, but Putnam’s conclusion was that the key factor was the difference in social capital between communities in the north and the south. People in the north were more community-minded. On average, they were more trusting of each other, and they behaved such that the trust was justified. They were more strongly connected to people outside their own families (e.g. through clubs and association) and more likely to reciprocate positive behaviours. These social characteristics and norms tended to flow through into the behaviour of regional government officers, making them more efficient, and reducing for everyone the ‘transaction costs’ of getting things done.

Putnam explained the differences in social capital as being due to differences in political and social histories over many centuries. This suggests that it could be hard to change, which is reflected in his conclusion.

Stocks of social capital, such as trust, norms, and networks, tend to be self-reinforcing and cumulative. Virtuous circles result in social equilibria with high levels of cooperation, trust, reciprocity, civic engagement, and collective well being. These traits define the civic community. Conversely, the absence of these traits in the uncivic community is also self-reinforcing. Defection, distrust, shirking, exploitation, isolation, disorder, and stagnation intensify one another in a suffocating miasma of vicious circles. This argument suggests that there may be at least two broad equilibria toward which all societies that face problems of collective action (that is, all societies) tend to evolve and which, once attained, tend to be self-reinforcing.” (Putnam, 1993, p.177).

It certainly made me glad to live in Australia. In social capital terms, I’m sure we would be as good or better than the best of the Italian regions studied. We’ve got our problems, of course, and I’d be the first to admit that there are plenty of problems with our governments, but it’s clear that we do better than many.

On the other hand, one shouldn’t attribute too much to social capital. I’ve sometimes seen people emphasise it as a driver of environmental behaviour, to the exclusion of other important factors. Certainly it can make a difference, but if other factors are strongly against the adoption of an environmental practices (e.g. Pannell et al., 2006), social capital can’t work miracles.

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.

You can access the paper at: Non-subscribers can buy a copy on-line for A$25 or email to ask for a copy.

Putnam, R.D. (1993). Making Democracy Work: Civic Traditions in Modern Italy, Princeton University Press.

169 – If I were a government minister …

I was recently invited to write an article for the Farm Policy Journal on the topic, ‘If I were minister for agriculture …”. Here is a brief extract from the article that relates to any portfolio, not just agriculture.

The first things I would change, if I had the power, is an aspect of the public service culture in Canberra. I would attempt to foster a reduction in the speed with which people move between jobs. I am told that, currently, if you are an up-and-coming employee in an Australian Government department, and you stay in the same position for as long as two years, your colleagues start to think there must be something wrong with you. Generally people move on into new positions and even new departments very quickly. Few people have enough longevity working in a specific area to develop strong expertise and knowledge of the issues, the relevant research, the people, the myths, the history, the past policies, who the best-informed experts are, and who the snake-oil salesmen are for that area. Two years is not nearly enough, let alone three to six months, which is not uncommon. Of course, a minister cannot stop people from changing jobs if they want to, but it would be possible to create incentives for people with important and relevant expertise to stay put, and this could contribute to cultural change over time.

This culture of rapid job movement leads to a range of problems. It makes it more difficult for departments to be good at recognising flaws in policy proposals, to distinguish the really good proposals from the rest, to avoid capture by persuasive but ill-informed people, or to avoid repeating the same mistakes. It contributes to the problem that, when policies are being designed, consensus within the agency matters too much, and the quality of logic and evidence is not influential enough. It makes it harder to make good but tough decisions.

Secondly, I would attempt to move away from short-termism, to increase the chances of achieving real outcomes in the long term. For understandable political reasons, ministers tend to put a lot of pressure on their departments to spend program resources on things that will deliver benefits as quickly as possible – in particular, before the next election. Often this means that the resources achieve much less than they could do if more time was allowed. Natural Resource Management programs are particularly vulnerable to this problem. Turning around a serious resource degradation problem probably requires at least 15-20 years in most cases, but political pressures mean that the funds tend to be spent on actions that might deliver some sort of outcomes within three years. Usually, these short-term outcomes are not very significant, and they may be lost anyway once the program ends, as there is rarely any process to ensure continuity of funding to maintain benefits that have been achieved.

The over-riding issue is that I would focus on the achievement of real outcomes – real changes in things that really matter. This necessarily implies nurturing strong expertise within the Department, as well as allowing for long slow changes if necessary. It also means taking time to examine and evaluate the options using the best-available information. It means avoiding the tendency to rush into apparently obvious actions without assessing whether they will really work.

David Pannell, The University of Western Australia

Further reading

Pannell, D.J. (2010). If I were minister for agriculture …, Farm Policy Journal 7(2): 15-19.