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Environmental Policy and International Competitiveness

Environmental Economics Seminar Series
Department of the Environment, Sport and Territories, 1996
ISBN 0 642 24879 6

Discussion

Gene McGlynn (Department of the Environment, Sport and Territories) Session discussant: I am in a bit of a dilemma as I do not think I can add much to the papers that were presented this morning. I have been looking back at a number of papers that deal with this whole competitiveness issue and I am struck by the large percentage which begin with words to the effect: 'We are not really sure that we are asking the right questions in this debate.' Given that there are many studies on the impact of environmental regulation on competitiveness, and the fact that when environment regulations are considered there is quite a bit of opposition to them from quite a few areas of industry, it makes one wonder whether we are asking the right questions.

The Chairman mentioned Michael Porter, and I think it is worth expanding a little on some of the things that he has been saying. The question he starts with is: 'What determines competitiveness?' I would also like to have a quick look at the question: 'What determines profitability?'

It strikes me that this is often looked at in the static model. Basically, you have a fixed product and that is what you produce. You try to minimise your costs to produce that product and when an environmental regulation is imposed, it clearly imposes costs because there is no option to do anything else. This is where I agree with Stuart, who said earlier that dynamics were very important. We must look at profitability and competitiveness in a dynamic framework. Innovation drives international competitiveness, and companies that are static and produce the same sorts of products in the same markets and market things in the same way are not the ones that will be successful. The success stories are those that constantly develop their products, respond to new market demands and are innovative. There is a lot of evidence to show that they are the most successful in all sorts of markets.

Despite what some of the models say, we are never in equilibrium. We are always moving ahead; things are always changing and therefore it is wrong to look at an equilibrium framework. In terms of companies, this occurs in all sorts of areas - the design of the product, the marketing and the production technologies. It also relates to customers, where there are now increasingly more markets for environmentally preferred products and services.

In that kind of world there are all sorts of opportunities for environmental regulations to trigger innovation in companies. While I was listening to the presentations this morning, it also struck me that environmental management is really quite simple. Companies take things from the environment, transform them in some way, produce other products which then move on. In doing so, they produce what I call waste, which is put back into the environment in some way or another.

Environmental management is about using the products that come out of the environment more efficiently and making sure that the things that go back into the environment are safe that is, minimising those emissions. In that sense, it is really all about efficient production.

This morning Stuart mentioned that in his view trade and environment are mutually reinforcing. I think that environment and efficient production are mutually reinforcing as well. Basically they are the same thing. Therefore, it is not at all surprising that there have been a number of studies to show that when companies have focused on environmental management, they have come up with all sorts of cost-saving measures. There are numerous examples of this, both on the pollution side and the resource use side. There have been a lot of studies in Australia showing that both big and small companies have made substantial savings in their energy use in a very short timeframe - periods of around two, three and four months.

Yesterday someone mentioned to me that when there was an attempt to reduce the dumping at sea of jarosite from some of the Tasmanian refineries in order to meet our international obligations, the initial reaction was: 'We cannot do that. This is waste that we have to get rid of, and this is just part of the process.' I understand that a market has now been found for that jarosite; it is no longer a waste; it is now another revenue-earner for the company. That is the sort of innovation that is rife, and that is what environmental management is all about. It can be a spur to profitable innovation.

Stuart also alluded to the question of whether this applies to commodity industries, such as coal, wool, wheat and so on. I distinguish those markets not because they are export markets or import markets, but because of the nature of the markets. The traditional business thinking on those sorts of markets is that they are pure price-based competition markets. You do not have consumers who are willing to pay more for environmentally preferred products. There is not a lot of innovation because they are established markets; they are basically mature markets where there is no room for innovation. I think there is perhaps something in that argument, but there is probably less in it than is often thought and given credit for. There are some areas where there are clearly consumer-driven opportunities for innovation - such as tropical timbers, organic foods and organic fabrics, where consumers are willing to pay for environmentally preferred products.

There are also some less direct ways in which those markets have room for innovation: in things such as development of environmental services, where those companies which have proven quality records in environmental management may find it easier to move into other countries because the governments are more amenable to their moving in and more willing to finance them because there is less risk of some sort of environmental problem down the track. Also, in those markets there seems to be an increase towards generally improved quality of products produced and that is often associated with technological development which, again, can be driven by environmental regulation.

There is also quite a lot of innovation in the whole marketing area in terms of opening up new markets and dealing with the existing ones. It strikes me that coal is often put out as one of these economically pure, perfectly competitive markets where people do compete on price. In the last few weeks we have seen articles in the paper about coal producers returning to Australia after negotiating with Japanese buyers about what sort of prices and conditions they attach to their products and so on. Having said that, I think it is probably true that in some of these commodity-based markets there is less room for innovation and perhaps in some of those areas environmental regulation is likely to lead more towards extra costs and therefore impact on profitability.

In all these areas, the short-term impacts will clearly be more important than the long-term impacts. But in all those areas there are options for innovation and environmental regulation can often be a driver for the innovation.

It is also important to note that Porter's argument is often over-simplified, and is thus criticised on that basis. It is clearly simplistic to say that if strict environmental regulations are imposed, innovation results and that is a good thing. If you look at Porter's arguments, you will find that they are much more complex. He covers things such as the need to have competing firms - the culture of innovation and dynamism in competition within firms. But one still has to have the right demand conditions and that is where government regulation can be quite useful because it creates the demand conditions for those environmentally advanced products. It also requires a lot of supporting industries and infrastructure, not just in transportation, but also in areas such as education. Porter talks about factor conditions and how strategic disadvantages and factor conditions can often lead countries to develop specific industries.

I think Porter's argument is very much about building an entire system and culture of innovation and dynamism. In that context, environmental regulation, when it is appropriate, can act as a spur for innovation and actually reduce costs to increase profitability. That is another way to look at how environmental regulation impacts on competitiveness.

Porter also mentions a few conclusions of his analysis: these include the fact that we should regulate efficiently. It is no good just regulating specific technologies. Regulations must allow companies room to be innovative in responding to them. Porter also talks about the need to phase in regulations so that companies have sufficient time to respond to them. The general structure of the regulations must be at least reasonably predictable over the longer term so that companies can invest and innovate.

Porter also talks about the need to lead internationally, in terms of having leading environmental standards, but not to lead too much and not to lead in areas where people are not going to follow. That is, perhaps, one of the more difficult areas, and one in which there is a lot of dispute over greenhouse issues. There is still some opposition, still some feeling that greenhouse is not a real environmental problem, and that if countries lead, others will not follow.

In summary, I am increasingly coming to the view that the question of whether environmental regulations impose costs, produce costs or have no effect is, in large part, a self-fulfilling prophecy. In an environment where people expect environmental regulation to be one part of a culture of innovation, then companies will respond that way. But if there is an environment where environmental regulation is still seen in the traditional economic light, there will generally be opposition to those regulations and that will cause them to be costly. There is a big cultural and institutional issue here, which I think is very important. If we do not recognise those cultural and institutional factors, then we will get the economics wrong.

Bruce Jones (Environment and the Antarctic Branch, Department of Foreign Affairs and Trade): I am still a little confused about the cost side of the equation, which we seem to be looking at today. It seems to be debatable whether the cost side has only a small impact on international competitiveness - smaller, perhaps, than some vested interest groups would have us believe - or whether the costs are greater. Will we ever get any consensus on that? Then there is the other side of the equation to which Gene referred in talking about climate change - that is that the benefit side is equally important as the cost side, yet it appears to be in the too-hard basket.

Robyn Eckersley (Monash University): I enjoyed David's paper because he was talking about a model that is a little more sophisticated than many of the models that have been used by industry and governments in relation to greenhouse gas policies. David addressed the really important question of how the revenue from a carbon tax was used. However, there are other factors involved. There is a good deal of slack within Australian industry to improve its efficiency and a carbon levy would be a spur in that regard, so the effects on export performance may not be as dire as many would have us believe. It would make the outlook for the market for renewables in Australia much brighter, and that could be a spur for considerable growth in export industries. At the moment renewables, particularly solar, are overshadowed, largely by the dominance of coal -fired electricity stations.

A carbon tax imposed in the absence of energy market reforms will not be anywhere near as effective as it would be if it were coupled with such reforms, which we certainly need in this country.

A final point is that we also need to look at the cost of not taking action. If, in the period between now and 2020, other countries start to move on energy reforms and Australia sticks to doing what it thinks it does best, we could be way behind the eight-ball, economically and environmentally.

Charles Jubb: The reason people do try to focus on costs is that these are more readily identifiable, whereas benefits are more difficult to measure and appear more diffuse. I suppose that benefits from preserving the environment tend to reflect, but only indirectly, potentially through tourism or inverse tourism. In those circumstances it is much harder to measure them, but I am not suggesting for a moment that it should not be done.

Bruce Jones: On the question of greenhouse issues, it seems to me that a lot of the countries involved do not have as much of an appreciation as do developed countries of the benefits that might in future be gained from taking some action. This makes it even more difficult to actually achieve anything.

Charles Jubb: I think there is probably a strategic argument as well.

Bruce Jones: I am putting that as a question; I do not have any answers to it.

Chair: But presumably one cannot get a general answer because if we are talking about environmental regulation putting up the price of electricity, an aluminium company will be affected far more than, say, Kelloggs. Such a regulation would be minuscule in Kelloggs' total cost structure. But the evidence is quite clear that in leaving aside a few particular areas of processed minerals and the like, the cost of an environmental protection regulation will be extremely small -one to three per cent at the outside.

Bruce Jones: That brings in the question of the way in which political systems work. It is more of a problem in developing countries where a few dollars wisely distributed in the political system can reap huge benefits for a company.

Tony Beck (Business Council of Australia): The point about recognising the benefits and the attitude of industry to the carbon tax emphasises that there is a lot we need to achieve before bringing in a policy such as a carbon tax. The point was made quite effectively that one of the best ways of promoting the Australian renewable energy industry is to effect energy sector reform so that those vast areas of remote area power should be competitive and renewable systems get a fair go, enabling them to establish a base for development and more effective competition in the Australian market and internationally.

The other argument was that with appropriate will there is quite a lot that industry can do through voluntary action to improve its energy efficiency and achieve both environmental and economic benefits without needing to have additional costs imposed by way of a carbon tax.

David Pearce: I am always a little worried when people say that there is a lot that industries can do to become more energy efficient. My question is: what is stopping them now? There is always a bit of a promise of a free lunch out there! The attitude is: 'Ah, yes. There are all these things we could do, but we are not doing them now'. Why are they not doing them now? What is stopping them?

Tony Beck: This is something that is worth thinking about. When you see the way that industries or companies operate, you realise that they are primarily focused on their main course of business, their main area of expertise. For many of them, where energy is not a prime cost, the extent of energy management is basically the accounts clerk sending off a cheque to the utilities every quarter. If you can take energy management out of the hands of the accounts clerk and put it in the hands of a manager, then you begin to get the potential and scope for energy efficiency to be explored, monitored, managed and improved. What we have with the voluntary, cooperative approach is an up front commitment to take energy management in hand and achieve what can be achieved from it.

David Pearce: I guess you are saying that if my firm, instead of paying somebody nothing to look at energy, paid someone $30,000 or $40,000 to manage the energy bill, the rewards I would get back from that would be greater than the $40,000 wage bill. At the moment I do not do that because it is a small cost and it is not worth worrying about. It would cost me more than I would get back. The questions I would have to ask are: 'Am I going to get it back? How is the Business Council going to assure its members that it will be worth it in the long run? Is this a sort of extension service like agricultural extension?'

Tony Beck: Information is certainly an element of it. The process relies on corporations being seen to be active in this area. Politically they are well aware that they have to be seen increasingly to be addressing this issue. The largest companies are starting to realise that they cannot afford not to be. In terms of voluntary action, you have companies lined up to be amongst the first to sign on. It is not something that has to be sold - at least not to larger companies. It is more of an issue as you move down to companies that do not have such a high public profile and are not exposed to the sorts of political pressures that larger companies can be exposed to. Then you get into the question of extension and promoting the approach.

David Pearce: In the agricultural industries we see enormous benefits from extension services, so I guess this is another area where it could be appropriate.

Peter Christoff (Australian Conservation Foundation): The importance of the issue of environmental costs really depends on whether the industry, or different components of the industry, focus on costs in terms of profitability or on economic competitiveness and opportunity in the long term. One must take account of the different industry cultures that operate in Australia, as compared with Europe. In Australia we have a very constrained industry culture when it comes to anything like investment horizons, profitability and so on. Certainly, the horizons that are adopted are very short term, which leads to very sharp responses to any increases in costs. Compare that to the sort of culture that generally prevails in Sweden or Germany, where there are much longer term horizons.

Mick Common (Centre for Resource and Environmental Studies, ANU): Gene was implicitly saying that the interest of lots of models is limited. Robyn raised the question of technical inefficiency in the use of energy, for example.

That also is omitted in the G-Cubed type model which assumes that things are done in a technically efficient way. Nonetheless, one can see the point of those kinds of models in that they establish a kind of worst case scenario. If you have a static model in terms of technology where everything is already being done efficiently in a technical sense, what you will get is the maximum cost, presumably innovation, and the elimination of technical inefficiency would reduce the cost. The sorts of results you get out of G-Cubed, for example, are quite surprisingly small costs on that basis. In terms of G-Cubed, to achieve a 10 per cent reduction in CO2 emissions - and we are looking at about 25 years out, even if Australia acted unilaterally - we would be something less than 0.5 of one per cent worse off than we would otherwise have been. It could be reduced below that if we used the revenue intelligently. This is a very small amount; it does not mean the end of Australian civilisation as we know it, and that is how it is frequently presented. There is some point in these models, notwithstanding the legitimate points that can be made about them.

I turn to the point David made in his presentation about countries A, B and C and the interactions between them. As I understood it, he split the story into two parts - the current account part, and the capital account part. The current account part was not quite complete because all these things happened and relative prices changed and that made some Australian industries worse off. But presumably in a world of flexible exchange rates - even leaving aside the capital account - the exchange rate would depreciate, which would make some Australian industries better off and more competitive. The overall non-environmental welfare effect would be in the terms of trade figures across the whole economy, which might be quite small.

Chair: I spoke to John Ralph after we finished the ESD process and he said that we must stop any talk of carbon taxes. I replied that there was one way to do that in the short term, and that was for the industry itself to come forward with an alternative, a positive approach for reducing carbon emissions. In 1994 at the Outlook Conference the suggestion then was that very little had been done on the no-regrets and insurance measures that were then brought in, and very little had been done at all by industry in this area. You are saying that industry could do a lot. In five years' time will we still be hearing that industry could do a lot? This really follows on from David's question: why has industry not come up with a systematic program as to how it could be done?

Tony Beck: With the national greenhouse response strategy we found that at the end of a couple of years not much had happened. Not only the environmentalists were saying that; industry recognised that program, which was primarily for government action, had not been very effectively embraced or pursued in a way that would deliver much. One of the consequences of that was that there were calls for a carbon tax. That prompted us to look at what we could do and perhaps not rely so much on what the government might be expected to deliver. That gave us an impetus to do more work on what industry could deliver. Industry has been working on this for well over a year and is certainly ready to move ahead. We are still waiting on the government to get its act together, to negotiate and work with us to pin this program down and get it on track.

I also wish to respond to the notion that Australian industry is somehow backward in its attitude to these issues. It is very easy to take that line when we are isolated from the day-to-day interactions going on in Europe and the United States. It was instructive to be in Berlin during the climate change convention conference, particularly so because the German government and industry launched a voluntary action program, remarkably similar to the one that is being promoted now in Australia. It is also a variation on the program that the Dutch have already implemented. The interesting point is that in both those cases the government had agreed that, within the EU context, they would argue against the imposition of a carbon tax on industries that participated in the voluntary approach. While the rhetoric might suggest that some of these countries are doing a lot more than we are, in reality there is a general convergence on the sorts of policies Australia is now pursuing.

Peter Morris (Australian Mining Industry Council): I wish to make a general, methodological point. In talking about marathons, Steve Monaghetti is alleged to have said that a marathon is made up of three parts - a beginning, a middle and a new beginning. I think we have to recognise that the G-Cubed model is looking at a 20-year horizon, which is a very long period and there have been observations already that the costs may be geographically concentrated in certain industries and perhaps in the shorter term. In the early days of the Orani modelling approach in the Industry Commission, they looked at a 10-year horizon as the long run and argued that movements towards freer trade worked to the advantage of manufacturing industry in the economy. The problems were not so much in that; a lot of people agreed with that in the early 1980s. The problem was that the costs and benefits, or the time path in that 10-year period, were not being looked at. With a three-year political timeframe, that was a very relevant criterion, which led to developments of shorter term modelling abilities with Orani. That seems to me to be a difficulty with the methodological approach of G-Cubed in answering some of the issues that have been raised.

On the question of the extension services - they exist and they are used. For example, in New South Wales Pacific Power is the wholesaler, and most of the major retailers, such as Sydney Electricity, do have facilities and do go out and offer fee-for-service and, in some cases, subsidised assistance to industry. In my previous position as Chief Economist for the Metal Trade Industry Association, I know that MTIA did a lot of work in that area. Many companies, particularly in the foundry forging/heavy industry areas, have looked at that and put in place alarm systems when they are moving into a different tariff rate. Equally, companies that are large might only be looking at 0.5 to one per cent of their total costs being in electricity, but often that is a number of millions of dollars, so they are conscious of that and they do look at it. I think it is more the medium and smaller companies that have the problem.

Blair Comley (Primary Industries and Energy Section, Federal Treasury): Mick Common was talking about the terms of trade effect in relation to the carbon tax. There is still the burden of the distortionary effect of this tax - or corrective effect, depending on your viewpoint. That is the real cost that we are trying to measure in these models. That links into the fact that a lot of the effects driven by the G-Cubed model were really macro effects because one is raising a tax. It doesn't really matter what the tax is; it could be anything that drives all those results. A more interesting comparison would be the carbon tax versus another feasible tax which is raising the same revenue and driving the fiscal outcomes. We have to be a bit careful about the G-Cubed GDP scenario when most of that is driven by this sort of fiscal effect. The thing we should be interested in is the deadweight loss of benefit associated with the process of the carbon tax.

Francis Grey (Francis Grey and Associates): Unfortunately I missed Gene's wrap-up of the discussion, because to my mind of more interest in terms of G-Cubed would be the application of an energy efficiency demand management suite to the model and then to look at the terms of trade effects and so on in that context. I think that is where the real debate lies. What David talked about before was very good because it made an effort to take account of the fact that consumers have very different timelines and horizons. Modelling is a caricature of the economy and the models are too naive caricatures at the moment. But this one has made an effort to go further. As Mick has said, these models produce the worst case scenario in policy making. That might be all right if you are on the bridge of a warship, but it is not necessarily the best way to run a country. We need models that can model the richness of industry diversity if we are ever going to move this debate ahead.

David Pearce: In reply to Mick and Blair, who asked what it was we were trying to measure with these models, I agree that the bottom line is the excess burden, the deadweight loss, if you like. With the carbon tax, you have this resource -carbon - and you are saying to industry: 'you cannot use it any more'. That is a measure of the cost. The true cost of the carbon tax is what it will cost you to find some alternative - that is the bottom line. However, along the way it is often very useful to point out other different effects and interactions. GDP is one thing that people like to know about; it is not the bottom line, but it is useful to look at. Similarly, trade flows are not the bottom line, but again they are useful. The same goes for exchange rate and interest rate movements. The reason it is good to look at them is that something changes in the world and suddenly interest rates change. We have a model, so we can say: 'Look, maybe this is why interest rates have changed'. We can provide an explanation and perhaps head off silly policy responses to these changes. That is why models like to focus on more than just the bottom line. But in terms of evaluating a carbon tax, only the bottom line is important.

In terms of the size of the costs of a carbon tax, I would point out that there are a whole stack of models out there. They roughly estimate that in order to stabilise emissions at the 1990 or 1995 levels, it will permanently reduce GDP by, say, between two and five per cent. That is the rough consensus of modelling opinion. The question is whether a permanent reduction in GDP of two to five per cent is a large figure or a small figure. That depends on your perspective. But if we look around and see what policies would permanently increase GDP by five per cent, we find that there are not all that many of them!

Mick made the point that if we imposed a carbon tax the exchange rate would depreciate, which would in turn benefit some other industries. That is quite true. In the model we see some increase in agricultural activities when we impose a carbon tax. That is because of the exchange rate effect. In the case of the carbon tax, however, offsetting that is the fact that energy makes up between five and 20 per cent of the costs of industry, so even though you have this exchange rate advantage, energy is a ubiquitous input, which offsets the advantage to a small degree.

On the point about short-term dynamics: the G-Cubed model makes quite a big effort to get these short-term adjustment cost issues in there. It is true that when we report the results of the model we generally talk about the long-run deviations in GDP, but there is a short-term big dip in GDP, in output and so on in these models as a result of the adjustment costs imposed by a carbon tax or whatever. In reporting the results we do not focus on the short-term cost, but at least we try to track some of the short-term dynamics through having the cost of adjustment-type functions in there.

Quite a few people made the point about our culture and how innovative we are as a country. They say that if only we were more innovative, then essentially the environmental regulations would be costless - they would be a positive. Consequently we should go around and regulate everything in order to induce innovation. I agree that you can show particular examples where this is the case, but I think you need to avoid falling for the free-lunch fallacy. Innovation itself is not costless. For firms to innovate and build up their capital stock with the new production techniques required is, in fact, quite costly. Although in the long run the net benefits of that will be positive, we must remember that even innovation costs money and innovation can lead to significant adjustment costs within the economy. We have seen this in all sorts of contexts. In medieval Europe the people who owned the watermills did everything they could to prevent windmills from becoming the main source of energy. The innovation itself imposed adjustment costs on some other sectors of the economy. We need to keep that in perspective.

Ian Booth (National Farmers Federation): It is not clear to me whether the innovation comes out of being driven by environmental signals or does the environmental excellence come out of being basically outward looking at the start. I am not sure which is the case. I would not mind betting that if you were lucky enough to be a largish European company with the huge EU market on your doorstep, you could afford to take a long-term view. Australian industry is, in a sense, higher risk. We tend to be dominated by our exports, which in turn are dominated by commodities. There is a difference between the position of Australian industry and that of European industry. It is not just a question of costs; it is whether costs can be passed on. Again, because Australia's export dependence is still very primary product intensive, industry here will obviously be more sensitive to costs because those costs tend not to be passed on. In the longer-term, if we move to a more ETM-based export culture, we will be able to afford the innovation costs and we can get more into niche markets where consumers are more prepared to pay.

The question of standards is very much a two-way street. Stuart was saying that the GATT codes favour us because Australian agriculture benefits from having high national input. On the other hand, look at the German packaging standards. Exporters to Germany of packaged manufactured products - or any products for that matter - have a very hard time getting into that market. Standards work both ways; it just depends on whether you are making standards for your own industry, which can be a Green protectionist's delight.

Chair: I take your point. The history was of something which looked like a key impost on the Australian agricultural sector - costs which, it was argued, could not be passed on. In reality though it has put Australian exports in a very strong competitive position because they are able to compete effectively against those from countries which could not match those standards of hygiene and so on. I am not saying that all standards are on our side, but in the agriculture sector, there has been this advantage.

Ian Booth: I think the GATT code is also beneficial because it puts standards on a fairly technical and rigorous basis. If you want to have higher standards than the rest of the world you can do so, but you need to show a scientific basis as to how those standards will achieve your higher environmental agenda.

Philip Sutton (Director, Policy and Strategy, Green Innovations Inc.): What the models will show - and the more models that are done, the more sophisticated they get - is that there are winners and losers. With more models, people will come up with more runs that will show that environmental measures depress international trade. I am not trying to brush aside the value of models, I am trying to point out that the real world is so complex that a model can only ever say something about the assumptions that are put into it. The world is changing all the time, so in some respects we really need to change this process around and ask the question: how can we maintain our international competitiveness while we are making the transition to a sustainable economy? That is the touchstone of the debate. If we are not ecologically sustainable in the long run, we have a big problem; but, on the other hand, if we are not internationally competitive, in the short-run as well, it will not be a feasible task to make that transition. If we have a commitment to a sustainable economy, we have to have some sense of what it means to be sustainable, and try to map that out. Then we can start to consider what policy measures we need to put in place. We will be able to take account of certain localised effects in geographical areas and certain industry sector effects to which we can respond. Then we can remove the problems as we proceed.

For example, if we want to deal with the greenhouse issue, there is no point at all in modelling and building policies around the idea of stabilising carbon emissions at 1990 levels because that will not do anything substantial about the greenhouse problem. Instead, let us imagine that we could stabilise the warming rather than the emissions. I have done some very simplistic work on a spreadsheet, which revealed that the only 'nice' solution was that we had to achieve on a global basis something like a five per cent per annum improvement in resource use efficiency. That was about two-and-a-half times what the Japanese achieved during the round of price rises. One must then ask what must be done to make it possible to get a five per cent improvement. One thinks immediately of innovation processes, of galvanising the community, of getting extension services and so on. There are many things that need to be done. But how do we make the changes? How do we deal with this every minute of the day -from now until 20 years hence? I think we need to entirely recast the whole debate on this issue. I do not think we can ignore what will happen to the mining industry or to various other sectors. We have problem industries and we have solution industries, and the problem industries are the ones we usually talk about - mining, fishing, forestry. The solutions will come from virtually every sector - particularly the information and personal services sectors. We have to look at whole slabs of the economy that we are not paying any attention to at all in the current debate.

Charles Jubb: The comments tend to raise the question: what is it that we are measuring? Take, for example, the greenhouse debate. The concern is with aggregate emissions. However, if you look at the situation characterised by Tony where a manager makes a discovery that enables that person to be more efficient in his energy use, that would mean that he was producing fewer emissions per unit of output. That change in efficiency would potentially lead to lower prices. So even though you have achieved a position where you are more efficient in terms of the generation of greenhouse emissions or use of environmental goods and services, the potential exists for you to be using more of those environmental goods and services and generating a greater aggregate amount of emissions because of the higher demand for your product. If you do not want that outcome, how do you drive the industry so that does not occur but, at the same time, the efficiencies are achieved?

Chair: Well, we can all ponder that over coffee!

Francis Grey: The answer is that at the end of the day you have to have a carbon tax. No matter how many efficiency measures you go through, somewhere down the track you will have to apply to the resource the level of demand which meets the sink capacity of the global biosystem. That does not mean you should start with a carbon tax. You should start with the efficiency measures and work your way to the carbon tax. But ultimately we will not get around the issue of over-using a resource by improving efficiency.

Charles Jubb: That raises the point of timing: whether it is better to levy that tax now, or wait until all the efficiency gains have been realised. If we wait, increases in demand will have occurred and there will have been a corresponding increase in aggregate emissions. In that case the level of reduction we will need to seek will be far greater than it is now.

Brett Odgers (Commonwealth Environment Protection Agency): There are two examples of recent environmental policies that have been successful, even though the cost side might have been the subject of some sensitivity at first, but it paled into insignificance when the benefits side was revealed either in community preferences or in the unanimous opinion of the scientific community. Those two are the Montreal Protocol and leaded petrol. The environmental policy took the form of public leadership, backed up by the scientific certainty which was persuasive, and the fact that the government worked closely with industry.

The national ozone strategy affected only a small part of the economy, but the leaded petrol issue was far more significant because the estimates of the cost burden there were such that the industry was not willing to cooperate. But in the end it did. The next challenge around the corner is when the National Environment Protection Council, established this year, addresses its objective to agree on uniform national standards in those areas affecting the manufacturing sector - particularly air, water, contaminated sites, hazardous wastes and motor vehicle emissions. The question will be: how do you determine the priorities? Again this will be driven by the benefits side and the first of these would appear to be urban air quality. It will be based on the consensus that there are large benefits to be quickly gained by raising standards relating to certain air contaminants. I invite people to ponder the question of how one sets priorities for the National Environment Protection Council.


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