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Taxation and the Environment

Environmental Economics Seminar Series
Department of the Environment, Sport and Territories
March 1996
ISBN 0 642 24878 8

Discussion

Steve Dovers (Centre for Resource and Environmental Studies, Australian National University) - Session discussant: I have two matters I wish to cover. I will make some quick comments on what came out of the two papers presented this morning, which I think are matters worth pursuing. I will then look at some other issues to try to broaden the policy instrument agenda.

Tor reminded us straight off that tax instruments aren't popular - they are the policy equivalent of an enema and that really has to be thought about in terms of 'why?'. He mentioned that there is a lot of evidence about the effectiveness of tax instruments; although having looked at some OECD material on economic instruments , I found that a lot of that evidence isn't comparable relative to other instruments - that is, while more economic instruments are being used, so are other instruments generally. That is an area where I feel a lot of work needs to be done.

Both speakers this morning reminded us that there is a mix of instruments available and required, and that has to be kept in mind. Gul reminded us that social, economic and environmental considerations are very important, so we don't want to lapse too much just into economic analysis.

I noted the EPAC survey where, if you add up the black on the positive side and the black on the negative side, it is obvious that everybody wants us to spend more money, but not raise it. That was an untrained eye adding up just the spaces. Mind you, an increase in spending on environmental protection would be from a relatively low base.

We heard a lot about regulation, particularly in Gul's paper, but also in Deborah's. I remind people that it isn't just the adequacy of regulation that you need to think about, but compliance as well. That is a black hole in Australia and in most developed countries. I am quite certain we spend more on compliance using parking inspectors than we do on cleaning up environmental damage in Australia. And, as Gul said, industry know their way around the regulations. That is because they are not enforced. So to say that regulation doesn't work isn't enough, one must always ask: was it actually enforced?

Generally this morning we had the picture of three classes of instrument: regulation, economic instruments and education. I think that is too narrow and I will put up a broader menu in a moment.

We were reminded that you need institutional, statutory and administrative frameworks for economic instruments, particularly tax instruments. And I would remind you that they cost, and in a lot of analysis that I have seen of economic instruments, they are taken somewhat in a vacuum without their institutional, statutory and administrative arrangements. That makes them look better than they might be.

We were also reminded that we needed an inter-disciplinary team to design such schedules and schemes, but that means that economists have to get the others on board. And that I think is a very big challenge. You have to convince political scientists and lawyers that tax instruments are a good thing to analyse.

We were reminded by Gul of scepticism. That isn't just a lack of understanding, though that is a very important matter, but I think there are some very good reasons for scepticism: the New South Wales environment levy, world parity pricing - remember that? - resource rent taxes and so on. There have been some fairly bad examples in terms of use of revenue. People have quite good reasons for suspecting that the money will go into the slush fund.

Deborah reminded us again of the range of instruments required, but it struck me that in that particular area land degradation is one of the most long-standing areas of environmental management. There is a fairly long history of people using economic instruments of a sort and in New South Wales we have had many decades of pasture protection board levies. There are other examples of levies and charges and we might learn from that history.

I think the main thing that came out of Deborah's paper was the complicated nature of such instruments in practice when we start to embed them in existing arrangements and look at the fine details. I think there is a lot to be learned from that ABARE analysis. I think it is the sort of analysis that we need more of and I will return to that.

It raises the question of whether we try to create new systems which are expensive, or use existing systems which, as Deborah indicated, have some problems. It reminds us that statutory law - regulation, if you like - is always required to underpin any economic instrument. All of our policy will be underpinned by regulatory and, to an extent, educative instruments. So again you are not looking at any single option.

TABLE 1 - Elements of Policy Processes for Sustainability

Policy framing

8. Identification of policy principles
9. Development of policy statement (avowal of intent)
10. Definition of measurable policy goals

Policy implementation

11. Selection of most suitable policy instruments
12. Implementation plan: timing of implementation
13. Implementation plan: institutional requirements
14. Undertaking of policy actions (application of instruments)
15. Establishment of enforcement/compliance mechanisms
16.Establishment of policy monitoring program

Monitoring and review

17. Ongoing policy monitoring
18. Mandated, regular policy evaluation and review
19. Extension, adaptation, redesign or cessation of policy, as required

Overall description

20. Description and explanation of complete policy program

Source: Dovers, S. Information, sustainability, and policy. Australian Journal of Environmental Management. Vol 2, 1995

Problem framing

1. Identification of relevant social goals
2. Identification and monitoring of topical environmental issues
3. Thorough and consistent monitoring of environmental change
4. Identification of problematic environmental degradation (causes for concern)
5. Identification of causes of environmental degradation
6. Recognition of uncertainty and ignorance
7. Framing and scaling of policy problems to be solved

Land degradation is a nice example - we know a fair bit about it but the uncertainties are very great. It is extremely hard to monitor the impact of any policy. You can try to monitor the environmental condition, although we don't, but it is still difficult to say what policy instruments and what behaviours are influencing that.

Land degradation is a messy problem; it varies across regions and across forms of degradation, as Deborah pointed out. I think the impact of the tax bracket bias on equity and on the effectiveness is a very good lesson to keep in mind for any other schemes.

To try to put things into a slightly broader perspective very quickly, I have some unreadable overheads! (see Table 1) That's what a policy process might look like if it were a good one. The actual policy statement and the selection of instruments and applying them is a small part of a complete process, and the success of a particular policy measure will depend greatly on other parts of the policy process, particularly the monitoring of environmental change, which is rather important in these issues and which we don't do very well. It will also depend on defining the policy problem correctly - and we don't do that particularly well. Defining policy goals we tend to avoid like the plague. And we also avoid the institutional reforms that are required to set those policies in place, and we certainly avoid ongoing review and tight monitoring of policies. The instrument choice is one small part - though a crucial one - of what should be a fairly well-structured and well-thought -out process.

We tend to talk about economic instruments, education, regulation. (see Table 2) We have a fairly narrow menu and I think we should broaden it. Within market mechanisms there are a lot of options, as we heard this morning. Within education it is not just anti-litter campaigns. There is training and all sorts of other things. In regulation there is a number of different reasons why you have regulation. We just tend to think of banning naughty things. At the moment we have fashionable instruments: education, consultation, negotiation, agreements between governments, self-regulation by firms - all of which are now popular. And some of the small and soft market mechanisms get up on fashionable lists these days. What they have in common is that they are gummy instruments - that is, they don't have any teeth - and strong market mechanisms aren't up there for that very reason. It is interesting to think about why. Tax isn't fashionable, and whether it could ever be fashionable is highly questionable.

That brings us to how we select one of these instruments. Again, we need a broad list of criteria. (see Table 3) This probably is as full a list as you will ever find. Some of these criteria are very relevant to the sort of discussion today. As to dependability, I am not sure that taxes could ever be argued as dependable in achieving a required goal. Timing can be a problem because, as was pointed out on the land degradation example, the influenced tends to be muted over time. Monitoring requirements are difficult for taxes. Cost and efficiency obviously varies as to whether it is revenue positive or revenue neutral. That difference needs to be made very clear.

Equity is a problem but possibly no more so than for other instruments, and you can offset equity problems, especially with revenue positive taxes. Cross-sectoral influence is important. The cross-sectoral influence of a carbon tax has been pretty much lost in the recent debate. It has a number of other good things going for it, apart from meeting international CO2 obligations.

There are two critical ones. One is political feasibility and we heard a bit about that this morning. Most people are against taxes for very different reasons, and revenue positive taxes will work out worse on that criterion of choice. The other very important one is what I call communicability, which is basically: how well can you get across the message about the instrument? If we look at the carbon tax debate, I am not sure that even many of the supporters could explain to themselves why they wanted a carbon tax. Getting that message across is very hard. Gul's instruction to consult, consult, consult might be the answer, but obviously there are some other answers there as well.

Lastly, using those two menus of lots of instruments and lots of criteria, what sort of problems are tax instruments useful for? I said that we don't define problems very well. (see Table 4) This is a list of the sorts of things that make different problems 'different'. I think those sorts of considerations and these attributes of problems have very large implications for the sort of policy instrument that you might want to choose.

Reversibility of the impacts is a problem, I think, for the open-ended sort of slow incremental push that a tax causes. And the nature of the cause is very important. I think strong tax instruments suit clear causes. With carbon tax, CO2emissions from energy is a clear cause and you have a chance of a systemic policy instrument. Whereas land degradation is a very difficult one. It is a messy problem. You have not as clear a connection between the cause and the response that you want to put into place. On the issue of relevance, taxes are one of the few mechanisms available at a federal level in Australia under our customary and constitutional arrangements where federal governments can actually influence economic agents in the environmental area. One of the reasons taxes tend to be thought of is that it is one of the few direct instruments available to a federal government in Australia.

TABLE 2 - Policy Instruments for Environmental Management and Sustainability

1 Research and development; monitoring:

- to increase knowledge in a general fashion, or about a specific issue
- to establish an environmental standard
- to develop required technologies
- to establish the socio-economic implications of a policy
- to monitor environmental conditions
- to monitor the impact of policies.

2 Improved communication and information flow:

- directions: of research findings to policy; of policy imperatives to research; and of both these to individuals, firms and agencies
- mechanisms include: state of the environment reporting; natural resource accounting; community-based monitoring; environmental auditing; strategic environmental impact assessment; and mandated agency performance indicator reporting.

3 Education and training:

- public education (moral suasion)
- targeted education (subsections of the population)
- formal education (schools, universities)
- training (skills development in particular areas)
- education regarding other policy instruments.

4 Consultation, mediation and negotiation between parties.

5 Agreements and conventions between governments.

6 Regulation:

- new statutory law, or
- regulations under existing statutes, to
- create an institutional framework for management
- set aside areas of land
- enforce standards
- prohibit or discourage undesirable practices.

7 Common law.

8 Self-regulation by firms or sectors.

9 Community involvement in management:

- community empowerment
- cooperative management.

10 Market mechanisms (ie. prices, economic instruments):

- input or output taxes and charges
- user charges
- subsidisation
- penalties
- tradeable emission permits or use quotas
- deposit-refund systems
- performance or assurance bonds
- pricing of state owned natural resources product labelling.

11 Institutional change (to enable other instruments).

12 Removal/adjustment of distorting policy settings (subsidies, conflicting policies).

13 Reasoned inaction.

Source: Dovers, S. Information, sustainability, and policy. Australian Journal of Environmental Management. Vol 2, 1995

TABLE 3 - Selection Criteria for Policy Instrument Choice for Sustainability

EFFECTIVENESS CRITERIA, involving the likelihood of the instrument achieving stated goal/s:

Information requirements. The availability of a sufficient information base to allow effective design and implementation (impinges on all other criteria).

Dependability. The extent to which one can be sure that the instrument will achieve the desire outcome or specified goal under existing conditions.

Corrective vs. antidotal focus. Whether the focus of the instrument is the cause (ie. corrective) or the symptom/s (antidotal) of the environmental degradation.

Timing. The time required for the instrument to take effect, in relation to the time perceived available for redressing the problem.

Adaptability. The ability of the instrument to be applied in the face of heterogeneity within one time period.

Flexibility. The degree to which the instrument will continue to be effective, or will require modification, in the face of changing social or economic circumstances.

Cost. The gross demand on economic resources for implementation of the instrument.

Efficiency. The instrument that can realise the policy goal for the least possible cost. Efficiency is differentiated from cost by the consideration of the achievement of the policy goal, thus moving beyond simple expense.

Cross-sectoral influence. The potential for the instrument to offer other benefits (economic efficiency, equity, human health, etc) aside from the achievement of the environmental policy goal. Conversely, the degree of surety that the instrument does not entail a risk of disbenefits in such terms.

IMPLEMENTATION CRITERIA, involving the likelihood of being able to implement the favoured instrument in the relevant social and institutional operating environment.

Equity. The distributional implications; who bears what costs associated with the changes brought about by the application of the instrument.

Political feasibility. The likelihood that the policy instrument will be acceptable to major political /interest groups and the wider electorate.

Institutional feasibility. The ability of existing or realistically envisaged institutional arrangements to implement the instrument.

Monitoring. Whether monitoring the impact and use of the instrument over time is feasible and/or affordable.

Enforcement/avoidability. Consequent on monitoring, whether adherence can be enforced if that is necessary and/or appropriate.

Communicability. Can the particular details of the instrument, and the reasons for its use, be adequately communicated to those involved in its implementation or upon whom it will impact.

Source: Dovers, S. Information, sustainability, and policy. Australian Journal of Environmental Management. Vol 2, 1995

TABLE 4 - Policy Problem Attributes and Scale Descriptors

Problem-framing attributes

1 Spatial scale of cause or effect:
Local - national - regional - international - global

2 Magnitude of possible impacts:

2a Impacts on natural systems:
Minor - moderate - severe - catastrophic

3 Temporal scale of possible impacts:

3a Timing:
Near (months, years) - Medium (years, decades) - Long term (decades, centuries)

3b. Longevity of possible impacts:
Short (months, years) - Medium (years, decades) - Long term (decades centuries)

4 Reversibility:
Easily/quickly reversed - difficult/expensive - irreversible

5 Mensurability of factors and processes:
Well-known - risk - uncertainty - ignorance

6 Degree of complexity and connectivity:
Discrete, linear - complex, multiple feedbacks and linkages

Response-framing attributes

7 Nature of cause/s:
Discrete, simple - fundamental, systemic

8 Relevance to the policy:
Irrelevant/ beyond jurisdiction - primary responsibility

9 Tractability:

9a Availability of means:
Fully sufficient - available instruments/ arrangements/ technologies - totally insufficient

9b Acceptability of means:
Negligible - moral/ social/ political/ economic barriers - insurmountable

10 Public concern:

10a Level of public concern:
Low - moderate - high

10b Basis of public concern:
Widely shared - moderate variance in understanding - disparate perceptions

11 Existence of goals:
Clearly stated - generally stated - absent

Source: Dovers, S. A framework for scaling and framing policy problems in sustainability. Ecological Economics Vol 12, 1995.

Finally, it struck me this morning that what is really needed is some more stuff like we heard from Deborah this morning. There is a lot in the literature, but I think we need to carry the theory into policy reality. I think we have got enough cases to look at in Australia and they don't have to be implemented because what is just as interesting is why some of the proposed taxes didn't get up.

This isn't a job just for economists. We need political scientists and others on board on that matter. For example, we have the reef visitors levy, and there was a big gripe when that got up; we have the land degradation tax arrangements; we have got the tax exemptions on things like recycled paper; we have the Sydney environment levy - and I am surprised our New South Wales speaker didn't say lots about that! We have the proposed carbon tax, and we had the proposed levy on fishing tackle and boats to fund management in fisheries, which get howled down. I think it's time now to head down into the detail of those. Let us examine the successes that did get up; look at how they are working. But also let us look very closely at the ones that didn't get up and think about why they didn't get up. One also has to think a bit more clearly about the criterion of communicability.

Chair: I thank Steve for a comprehensive summation and for adding to the debate. Also, I must thank him for SSMMs - small and soft market mechanisms. Steve has highlighted some of the key issues, and the topic is now open for discussion.

David Butcher (World Wide Fund for Nature): I have a question for Deborah. She talked about landcare and I think confirmed our view of landcare - as a mechanism to address existing problems. She talked about prevention, and I think was more or less referring to preventing land degradation and so forth from becoming worse. Obviously addressing land degradation and using the mechanism that she described is a terribly expensive process, not only to the community generally but to the individual who is trying to address degradation problems on the property.

It would seem to us that a far more reasonable proposition would be some form of financial instrument to avoid the problem occurring in the first place. It was interesting to see the map that Deborah put up describing those areas of Australia with very high levels of land degradation, which seem to track fairly neatly the central west of Queensland and New South Wales. One noted that the major areas of land clearance taking place in Australia are exactly in those same areas. What types of financial mechanisms would be available to address the problems of land degradation before they actually start?

Deborah Peterson: The current tax provisions specify prevention and treatment. I think they touch on actual prevention as opposed to just stopping things getting worse. For example, you can claim a deduction for land class fencing to stop a problem happening. So there are elements of true prevention in there. Whether or not those provisions go far enough is another issue. You ask whether there are other means. We get back to Steve's long list of alternative non-tax instruments that might or might not have to be used.

A word of caution. We have collected data over the past three years, and that has corresponded to a time when farm incomes have been particularly low. Farms have been drought-affected over much of the country, particularly south west Queensland, and the north and west New South Wales region over those three years. So from that point of view expenditure has been lower than it might otherwise be in an upturn.

Charles Jubb (Bureau of Industry Economics): It struck me with some of the remedies, in particular the rebate or subsidy schemes in respect of landcare, that the incentive effects could be slightly perverse in that if somebody else is to come in at some stage and pick up the tab for your depreciation of a natural asset, there is over time change in incentive structure such that there will be points where you would have a vested interest in degrading that land because ultimately you will not have to pay for it.

It also seems to me that in modifying things such that there are stronger incentives not to degrade, many of the impacts are off site, and there is need to at least alert people to the existence of common law remedies, if indeed those can be applied, such as negligence that may be extended in, say, the Rylands and Fletcher context. Alternatively, one could have statutory mechanisms to enable people to seek compensation for land degradation that has impacted upon their property as a consequence of actions taken by somebody else.

One final point. I don't think there is quite the phobia about taxes that people say. If you combine it with the word 'lower', everybody seems to be very pleased.

Chair: On a point of clarification, wasn't the Rylands and Fletcher matter about keeping an elephant in your backyard and the damage it might cause if it escaped?

Charles Jubb: Basically if it does something that knocks over the house next door, it is pretty obvious that it is a somewhat negligent action for you to have that elephant in your backyard.

Deborah Peterson: I would agree with Charles. I think it is a fairly well known problem with subsidies, particularly if they are expected to be permanent. You can end up having an unintended effect on raising the overall level of land degradation. You certainly end up shifting farm management practices towards those which have the potential to cause degradation. Subsidies alter the entry and exit conditions for firms into the market. So all those effects are definitely true and matters for concern.

Steve Dovers: On the idea of common law and comebacks in that way for off-site damage, one of the big problems, such as dryland salinity which Deborah mentioned as a classic case, is the temporal lag. You have got off-site damage on another property caused by clearing maybe 30, 50 or 80 years beforehand, so the practicalities of that are rather odd. One can look at the American litigations over waste where that has been carried over decades. The liability in those cases is a fairly 'iffy' area. Again, it depends on the form of degradation and whether it was current or the result of past damage.

Gosta Lynga (Nature and Society Forum): I was a member of the Swedish parliament five years ago and also a member of the standing committee on taxation when the carbon tax was introduced. They didn't go quite as far as the Greens thought they would, but much further than the present discussions. What was important was that the reform was revenue-neutral. Other types of excise duties imposed earlier were lowered, and the carbon tax was introduced. It was received quite well by the people. I think that one should aim at similar things here. There are a lot of variations one can do with other taxes to compensate for it. The carbon tax should be there as an instrument between fossil fuels and alternative energy sources and that sort of thing.

Andrew Chisholm (Tasman Institute): I wanted to add toSteve's point, looking at nuisance law and common law application to salinity issues. So far as I am aware, you can't take out an action after seven years. So within the common law framework, it would be difficult to pursue those sorts of actions.

Charles Jubb: That is where one may look to strengthen the provisions in respect of certain issues through statutory modifications.

Raja Junankar (Public Policy Program, ANU): I don't think there was mention this morning of equity aspects and income distribution aspects of a carbon tax vis-a-vis, say, subsidies that are given to agriculture. I feel this is an aspect that we should not forget about when talking of revenue -neutral proposals because it might have very different equity implications.

Gul Izmir: In response to that, there is a general presumption that carbon taxes are regressive and hit the lower income people a bit more. But there are also studies that have looked into expenditure patterns. I cannot remember exactly who has done those studies, but it seems that the regressive effects may not be as great as they are made out to be, and possibly other mechanisms could be put in place when you develop the actual package to take account of those concerns. Just as you develop a revenue-neutral package, you could develop a package that takes those things into account.

Mick Common (Centre for Resource and Environmental Studies, ANU): On Raja's point, the work that has been done on regressivity of carbon taxes suggests that in impact terms they are much less regressive than is widely assumed. The point about carbon taxes is that they would hit indirect use of as well as direct use of fossil fuels. While it is true that the poor spend higher proportions of their income on direct fossil fuel consumption, they spend lower proportions of their income on indirect fossil fuel consumption. So the regressivity in terms of impact is generally thought to be greater than it appears to be.

The other thing is that the carbon taxes would generate revenue and the standard current idea, as Raja would know, is that you use general revenue to address regressivity problems.

Since this point comes up quite a lot, I think it is important to be clear about it and some of the issues and background that are involved. Recently in the United Kingdom a number of Conservative MPs - I think seven of them, demonstrated their moral fibre by voting against the government on the imposition of VAT on fuels on the grounds that it would hurt the poor. There was much hand-wringing about the fate of old pensioners, hypothermia and so on. It needs to be noted that these seven MPs had all consistently voted for government proposals which had done much more to hurt the poor and increase regressivity than putting VAT on fuels in Britain would have done. One does note in the carbon tax debate that people who are not normally too concerned about equity have suddenly discovered that here's a big problem about carbon taxation.

Ian Booth (National Farmers' Federation): I am not sure whether equity and regressivity are as important in social theory terms as are the behavioural change effects when a tax is introduced. My own view is that one reason that the carbon tax or environmental levy didn't get up is that it wasn't going to change consumer behaviour. That was for two reasons. One that it was too small. Secondly, that it was imposed on business costs which might or might not have flowed through to the consumer in higher consumer costs and prices. But in any case, even if they did flow through, the consumer has no easy means of establishing just what in fact that is. It seems to me that environmental taxes have to be measured in part by their effectiveness in the minds and actions of the people who suffer the increases.

Chris Nobbs (Jenny Rush and Associates): I would like to take up the point that Steve made on the issue why proposed taxes did or didn't get up, I think that's a really important point and has been mentioned by other speakers this morning. I refer to the issue of nobody liking taxes, and how do you choose between taxes and regulations.

The EPA in New South Wales did a quite substantial study about public attitudes to environment. That seemed to show not only that environmental issues were in the first two or three concerns that individuals had about their lives, but also that they were prepared to change their behaviour or bear costs to ensure that there would be some sort of environmental improvement.

I have been working more on market research issues in recent times, and it seems to me really important that economics and people involved in that area open a window towards looking at what the public thinks. Economics theory seems to me a matter of putting up on the board theoretical ideas about why people do or don't behave in a certain way, and that's the sort of philosophical background from which economics comes. But it seems to me really important in this area that you actually go out and ask the people.

There is a whole area here that could be opened up about the importance of market research - crude as it may sound - of actually asking people what they will tolerate, what their attitudes are to various forms of imposition. My understanding of the EPA study in New South Wales is that it may open up a whole range of possibilities which, despite the economic theory and despite the economic costs, might be remarkably applicable. I feel that here we have an area of issues which politicians have known very well for a very long time, about actually going out and asking people and getting feedback, which economics theory hasn't actually taken on board yet. It seems to me that that whole area has been neglected.

Chair: I will ask Gul to respond to that. I would comment that I am aware of a number of exercises, particularly contingent valuation exercises, where people have been asked those questions: how much to protect something or clean something up. There are some very nice numbers out there and not only in the EPA.

Gul Izmir: It is extremely important that we go out to the community and ask them what they want. It is important that we should know what their priorities are. Some of the things I mentioned at the beginning of my talk came out of a survey. It is important to develop whatever is to be implemented based on a sound understanding of the community's priorities and what they are and what they are not willing to do.

I suggest that it is not just asking the people what they want but also a matter of informing them: giving them a better information base on which to make their decision. Unless you are prepared to get across to the community the concepts behind these economic instruments in clearer terms that they can understand, I think it is a bit premature then to ask them to have all that appropriate information to come back to you and make an informed judgment or decision as to whether they want these things or not. So it's a two-way process. By all means go and ask the community what they want, how much they are prepared to pay, what they want to do, but also give them adequate background information on which to make those decisions in an informed way.

Charles Jubb: I think that in the economics area that process of asking people has a fairly long and honourable lineage, especially in academia. It is true that within government, and even government economic research, it doesn't have a particularly long history. In fact, recent work that I completed on plastics recycling did a survey of some 4,000 people.

There was a certain amount of resistance to doing that, and the rationale was predominantly: 'We've never done it before.' However, we did go ahead, and it was very interesting in that not only did we get response rate of about 40 per cent, but it was clear people liked the idea of being involved in providing their opinions within the context of research of this nature. I think it is very important.

Peter Kinrade (Australian Conservation Foundation): I have quite a few comments to make on the carbon tax/carbon levy proposals, but I will not go into those now as I will be following Trish Caswell on those matters and giving the historical context. Much of the debate on a carbon levy has centred on proposals that ACF put forward and I see the DEST proposal as a watered down version of the ACF proposal. But I will go into those issues this afternoon.

I wanted to pick up a point made by Steve who suggested that all taxation and economic based instruments need to some extent to be underpinned by regulatory and education instruments. He then said there seemed to be a preference these days for a selection of what one might call soft options as a preference to regulatory based instruments.

I want to throw in the thought that perhaps this preference is related to the fact that decision makers and policy makers to some extent do not want to ask what the policy objectives of the various instruments are. From our perspective we might be saying that the real objective is to achieve ecologically sustainable outcomes by the most cost effective and socially equitable means. The problem at the moment is that policy and decision makers to some extent look at only one side of the equation, the economic efficiency criteria, and do not look at the ecologically sustainable and socially equitable criteria. I throw that into the ring and ask for any response.

Mick Common: I would like to go back to what Chris Nobbs was saying. I think it raises a general point. There seems to be some impression that the case for economic instruments by way of environmental protection rests upon abstruse economic theory - upon the particular assumptions that economists make in their theorising about the way that individuals and communities behave.

It is true that lots of academic economists present the thing in that way, but in fact the case for economic instruments doesn't rest on all those assumptions at all. It rests on empirical regularities and what the result of introspection. Other things being equal, people use less of those things that are made more expensive. You don't need abstruse economic theory to establish that proposition. In the particular case of carbon taxation, we have masses of evidence of the response of individuals and firms to higher energy prices, which is basically what carbon taxation would be.

It so happens that in the 70s the origin of the higher prices was different, but presumably there is no reason to expect a different behavioural response if the higher energy prices were to result from carbon taxation. So we don't need to worry too much about economic theory in considering the case for economic instruments for environmental protection.

Chris Nobbs: I want to respond to Gul and Charles on this issue I raised. I agree with Gul that there is the issue of asking people what they want; there is also the issue of informing them. But more broadly there is the issue: what are their attitudes? It is a more general view about individuals and their behaviours and way of thinking into which you can actually 'sell', if that's the right economic word, a certain way of proceeding to enhance environmental quality. I don't think Gul and I are at odds there.

I don't think Charles and I are either. The interesting thing for me in what Charles said is that there is a group of people who are really interested in doing this thing and who felt that to some people in the hierarchy it was a novelty.

Gul Izmir: I think we basically agree on the need to go and talk to the people. One of the really interesting things that came out of the survey was that when people were asked why other people were not being environmentally friendly, they said: 'Oh, they are lazy or don't care about the environment.' It was all a matter of thinking that other people did not have the right attitude to the environment. When they were asked why they themselves were not behaving in an environmentally friendly way - for example, why they were using too many private vehicles - the reply was always: 'Oh, it's too difficult, there is no public transport in place - nobody is giving me the appropriate information.' So there is this sort of tendency on the part of people to think that it is all others' fault. It is not our fault at all. It is very important to get that point across to people as well and to use economic instruments in such a way that they might impact on people's behaviours in areas where it is really difficult for people to recognise that sort of responsibility.

In response to Peter's points, I would say they are very valid, and I can assure you that from the New South Wales EPA perspective at least the primary aim in looking at any economic instrument scheme at all is to make sure that we have improvement in the environment. We will not get any schemes up and running if they will not lead to improvements in the environment. One of the schemes that we are trialling at the moment in the Hunter area to deal with salinity problems has been structured in such a way that there have been real environmental gains up front from the scheme.

One feature was that discharges to the rivers from the mines during low-flow conditions have been removed or phased out over a certain time. Discharges will be allowed only during high-flow conditions, with added flexibility to make it easier for people. You then bring up your environmental standards. That has been one aspect of it.

Another aspect is that the initial allocation of credit is different from schemes overseas. What we have done is to give recognition to good environmental performance and to give people who have done the right thing so far a greater number of allocations and credits. So in any scheme that we develop, the primary object is ecologically sustainable development.

Chair: I recall work by sociologists a long time ago in the rural area which suggested that farmers always thought their neighbours had the soil degradation problem and that the problem wasn't on their land. That's another story. A lot of interesting work has been carried out on the subject.

Andrew Chisholm: I would like to return to the question of regressivity and whether economic instruments, particularly charges and taxes, are regressive. I find it hard to accept that anything which will be a tax on goods and service can be other than regressive, having worked quite extensively in that area when we were analysing a move to GST. Most indirect taxes in Australia, when you begin to pass them forward and work out their final incidence on final demand, have a regressive impact. That is the case whether there is a petroleum products excise, stamp duty, payroll tax or whatever. The reason is basically that people on higher incomes save more. That is the thing that drives regressivity. If you are on higher incomes you save more, therefore you spend less, so an indirect tax will be unequivocally regressive. Work by Neil Warren and also by me when I was at the Centre for Policy Studies shows that whichever tax you are looking at, regressivity of impact is relatively the same. It tends to follow a similar pattern.

There is some tinkering around the edges but it is basically driven by the fact people on higher incomes save more. Because of that, when you are analysing indirect tax options, such as GST, quite detailed compensation packages were devised, both in 'Fightback' and also in the arrangements in New Zealand, in order to address the problem that people on lower incomes were impacted more.

It seems to me that that question of compensation for people on lower incomes hasn't been adequately addressed. If there is to be a broad-based tax charge instrument based on some form of goods and service, environmental good or service or environmental bad, then compensation issues need to be tackled. One cannot deny there will be a negative impact on people on lower incomes.

Steve Dovers: Dealing with the points that have run through what has been said so far as to the theory of communicating and why it doesn't get up, I would emphasise that the matter is extremely complex. There is now a tendency to write off the carbon tax and why it didn't get up, for a couple of reasons. When one list the reasons, they remind me of the same reasons why some other things don't get up or have a hard time getting up. There is no constituency for the instrument. There are vested interests - in the case of the carbon tax, industry, parts of the media, some state governments and some federal departments. There is a lack of policy context. People didn't connect it to the framework convention, and there was a lack of understanding on the part of many parties of the energy basis of the tax and also the impact of the tax, the regressivity among other things. There were political machinations at the federal level which you could sum up as the fact that the environment portfolio shouldn't stick its nose into public finance. And there was a failure of the political process in that it wasn't decided via the budget and cabinet process. It was decided before it was out in the middle, and nobody knew anything about it. And importantly there was a failure of previous policies that led to it, which was the failure of the national greenhouse response strategy.

When one asks why it didn't get up and so on, usually there are a number of reasons, and it is complex to think about how things can get up. The exercise is not very simple. And you could probably add your own reasons to that list.

Chair: It sounds like good material for a PhD!

Deborah Peterson: Harking back to the questionnaires and market research surveys, I believe it is true, as Charles said, that there is an honourable history of such things, but there is also a bit of a history of dishonourable questionnaires and misuse of results. I would put in a plea for some kind of standards and careful construction of questionnaires and not to misuse the privilege of asking people what they think and not to misuse the results of such exercises.

David Butcher: To pick up another point following comments by Chris and Steve, it would seem to me that the selling of a tax to the community can be done, and can be done very successfully. In many ways it is a matter of how the government actually uses that tax that is the problem. If the government indicates that this tax will not address the problem that the tax is raised upon but will go to consolidated revenue, the tax itself falls into disrepute.

There was mention of the environmental tax in New South Wales. That was sold, and sold very successfully, to a large community with very little criticism of that tax on the basis that over a period of time it would address some problems. It all fell out when, rightly or wrongly, the money was diverted to consolidated revenue and no results came out of that particular taxation regime.

The carbon tax is a little bit similar. Ian made the point that it was such a small tax anyway, which surprises me coming from the NFF.

Ian Booth: I wasn't advocating a bigger tax!

David Butcher: That was the natural progression I was going to go to. At any rate, it was such a small tax and yet in the context of what that tax could do, if it were hypothecated, it was immense. But instead of that, it was a neat mechanism proposed to add funds to consolidated revenue. I think that this is another overload to the points that Chris was making. There is a pact that the community expects from government - that if it says it will do something that it will actually do it. Then it could be tested to be seen to actually do that.

One final point that is slightly out of context. Ian said that in terms of his constituency, the carbon tax would not have been identified by farmers as being part of reducing the energy that they use. The conclusion I got from that was if a farmer saw a levy applied to a particular practice, then it would focus his mind more directly upon that. So I find it difficult to accept that when in a recent discussion with NFF we proposed a levy on land clearing to focus graziers' minds on that particular function, it was said to be completely and utterly inappropriate. Could you explain that?

Gul Izmir: In the case of the New South Wales environmental levy, it is not right to say that the funds from the levy were directed to consolidated revenue. They were not, but there was the perception that they were, and even that perception was fatal.

David Butcher: I said 'rightly or wrongly', but delivery on the performance that the levy was to achieve has not been seen.

Chair: I think I would rather swim on Bondi beach now than three years ago!

David Butcher: Three kilometres out I would not.

Ian Booth: Generally speaking the levy is directed at people who are seen to be producing carbon or they may also be excessive consumers of petrol. But they are better than business input taxes. The chances are that it is much less effective because, in terms of cause and effect, the taxation that results is much more tenuous when you are taxing not the direct consumers but the intermediaries.

In the case of industry, you have to bear in mind that the great bulk of the effort is directed at energy incorporated in exports products - for example, metals.

Charles Jubb: This remark may engender a certain amount of creative conflict, but it seems to me that something else that tends to drive this debate is that, if you start taxing inputs, for some reason that drives up costs and people will go broke. That is true. I don't think that is necessarily a problem, because if you can't afford to pay the correct price for your inputs you drop off the edge.

In respect of taxing an input or putting up the price of an input where in a competitive market that price increase will not be passed on, I have some difficulty with that. The full impact may not appear to be passed on, but it would seem to me that it must shift the marginal cost curve. And it would seem to me that the only reason it doesn't appear to be passed on is that some people have gone broke and moved out of the industry.

Steve Scott (Department of Foreign Affairs and Trade): What seems to have been overlooked a bit in discussion of the introduction of a carbon tax was whether it was wise to go down the path of unilateral introduction of the carbon tax. Possibly industries will be disadvantaged in some respects.

Charles Jubb: That may well be the case, but this depends on how coordinated action is. If Australia imposes a tax on production and this is accepted by our trading partners so that those people who import our coal, for example, don't impose a tax, that has different implications from Australia's point of view to Australia imposing a tax on consumption and not taxing exports. The revenue implications are different.

Ian Booth: I think this raises an interesting issue here as to the point of taxation in terms of what signals you give, and to whom. If the great bulk of greenhouse gas-emitting industry is export- oriented, you could say that in theory that is an argument for putting a tax on exports. But then you have the competitiveness counter argument. If one sees the problem as being basically what we might call selfish members of the public being extravagant in the use of petrol and so on in their cars, you would be better off in terms of behaviour by presumably putting a levy directly somehow - I don't know how - on the final consumer.

The issue perhaps needs more informed discussion. When you talk about taxes in the business area, it is usually in terms of business input taxes, with the assumption that they will be passed on. Sometimes they can be, and often in an external way. In an industry sector that is exposed to external forces, you either cannot pass it on or you try to and lose your market share. These are questions that we should look at.

Peter Kinrade: The point we made with our carbon levy is that 80-85 per cent of emission sources in Australia are the non energy-intensive sectors. Our view was that the best way to target those non energy-intensive users was through a carbon levy. That is the most effective way of targeting those consumers.

Ian Booth: Who are those users?

Peter Kinrade: Residential consumers, commercial consumers, non-intensive manufacturers, agriculture, mining.

Ian Booth: At which point do you tax? Do you tax business inputs or do you tax the consumer directly?

Peter Kinrade: By taxing the actual consumption of the fossil fuel you are taxing, either directly or indirectly, the consumer.

Paul Pollard (DEST): I do not want to shut down an interesting discussion because competitiveness is a most important issue in environmental policies. It crops up all the time, and often it is the main obstacle to countries pursuing new environmental initiatives. Competitiveness is the subject of our next seminar in this series. I mention that for information.

Andrew Chisholm: I do not want to change the subject but feel it is timely to bring up a matter that interests me arising from what Deborah said. I refer to the whole issue of the Constitution and how it affects choice of tax instruments, especially when the environmental problem that you are trying to address has a state dimension. I hadn't really thought about that before. If you can't use an income tax, a rebate or something to address the problem differentially around the states, are there state taxes that can be used, and what are the various states doing in that are of landcare, or what could be done?

Deborah Peterson: If the environmental problem is within state boundaries or within a regional boundary, clearly there is a role to deal with it at a state or regional level. The problem arises when dealing with, say, salinity with its effects in the Murray-Darling basin that crosses state boundaries. We are then back into the Commonwealth situation.

In terms of the difficulty of the Constitution, you can get tricky and get around it a little bit by defining your problem such that the problem happens to exist within a state. So that you are not discriminating between states but are dealing with a problem that happens to be within a state. You have to be somewhat clever and thoughtful to come at it in that way.

Chair: To follow up the point made by Deborah, I feel the first law is not to call them a tax or charge. As the smokers would know, it is quite possible for various states and territories to have different franchise fees, but it is also possible for the states and territories to agree on one level, as they have eventually done. The Murray-Darling Basin issue could be dealt with a little bit of innovative thinking, with cooperation, so long as you don't call it a tax.

Gosta Lynga: Considering that there are quite a few problems, I suggest that one could look at tax packages as a way of solving the problem of too high greenhouse emissions with an eye at the same time to unemployment, and there are suspicions of regressivity in the measures. A tax package could include both increase of tax on what the world is short of - for example, fossil fuels - and a decrease in tax on what we have in plenty, namely labour. I feel it should be looked at as one unit. I would say it is better to do that than just to put out a carbon tax as such.

Steve Dovers: On the subject of what happens at state level, I mentioned earlier the history of levies and charges - not so much taxes - and they exist mostly at state level. There is also the DPIE industry levy system which is possibly relevant. But at state level we have had the pasture protection board levies for years; there are levies in some irrigation areas; there are river improvements Acts, some of which have been knocked off the statute book because they did horrible things with them. They used to be part of the levy system.

There is an honourable tradition of state level resource management levies. They were used for very different things at the time. They can be looked at as existing statutory bases, and there is a cultural acceptability of PP board levies. You are not putting in something new. You may be looking at the possibility of using an existing statutory and financing arrangement toward a new problem or a redefined problem. That may be a lot more accessible and communicable than chucking in a new one. At state level there is a long history of that and a lot of opportunity.

Terry A'Hearn (EPA, Victoria): On the point about what the states can do and how one should approach constitutional questions, in Victoria for about four years now we have had a load-based licensing fee system, which is essential for industrial emissions. We are not really talking about land degradation in that respect.

An interesting point is that, in essence, it is a user pays rather than polluter pays system, because constitutionally our advice is that we cannot go beyond recovering our costs of administering the system in terms of licensing those emissions. Gul might have different advice on that, and I know it is a moot point. We would collect about $11 million of our costs back from industry in terms of their licence administration costs.

An interesting point is that economic theory would tell us that if you get the price right, that will be the signal to managers in terms of the way they manage emissions. They would say: 'The cost to a firm of the licensing fee is so minimal, because we are restricted to the user pay system rather than more of a polluter pays system in terms of moving to a tax'. But that is not the point. The point is that economic theory doesn't hold true a lot of the time. A lot of industries could save money or make money from a certain point of production, waste minimisation activities, but they don't have a tradition of environmental management being core action for a firm. It is just not part of the management culture in Australia.

What we would say is that even if a minimal fee is imposed as part of a corporate system where we use a whole range of mechanisms to try to change the attitudinal approach, the fee has helped as a small signal. It has helped to focus industrial managers on the emissions. I don't think the fee alone would do that. But it is very interesting for an economist to confront that reality. We have examples where we could talk to firms and say not that: 'You need to reduce your emissions from an environmental perspective', which is obviously our focus, but we could say: 'Forget about that. You could save yourself a fortune if you reduced emissions by pursuing certain activities.' And there is still resistance to it. We could show examples of firms that just wouldn't take it up. One cannot be critical of them in some cases because, with small and medium size firms, often they have 100 problems to deal with. They might even recognise that that saves them money, but the top 10 problems have to be dealt with today. The environment is just not a priority in terms of their staying in business.

The matter is complex, and I would make something of a plea. I would say to those of us in the economics profession that we need to keep talking to the operational staff and to industrial managers to understand the way in which they would approach these matters. We should not just say to them that they should get the price right and that will fix it. Instead we should look at the whole complex set of factors that actually influence behaviour. I think that we as economists tend to focus a little too much on price. It is important to get the price right, but we should understand a lot of other things.

This comes back to Chris's point about market research and consultation. Economic theory tells us that firms and individuals act in a certain way, but we have constantly to talk to people and understand what influences their behaviour.

Mick Common: I would observe that while getting the price right might not be sufficient, presumably nobody would want to argue that getting the price right is positively harmful.

Terry A'Hearn: I hope that it was not interpreted that I was arguing to that effect.

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