Recent environmental assessments have highlighted the extent of land degradation in Australia and the significant costs involved in addressing it. With projected investment costs running into tens of billions of dollars[2] it is not surprising that greater attention is now being focussed on who should pay. One idea gathering significant momentum has been the imposition of an environmental levy. Such a levy would raise public funds to be spent on resource degradation issues and has been proposed to work through the taxation system in a similar fashion to the Medicare levy.
The need for a special purpose levy is based on an assessment that such a large increase in the funding of environmental issues is outside the scope of existing government budgets and beyond the level of agri-environmental conservation which could reasonably be expected of landholders. In this paper the arguments for increased public funding of environmental issues are reviewed and some comments offered on whether an environmental levy is the right instrument to address a lack of environmental investment.
The experience of many countries including Australia is that the demand for environmental goods increases with rising real incomes. Increases in discretionary expenditure take place and some of this expenditure is allocated to environmental issues. Some indication of greater discretionary power is shown by the proportion on income spent on food falling from around 25 per cent in the 1950’s to just 10 per cent in 2000. Streeting and Hamilton (1991) cite a possible annual growth rate in the demand for environmental benefits of between 3.5 per cent and 5.5 per cent, representing the sum of estimates of income, population and consumer preference shift components. Environmental expenditures by governments in such circumstances may have widespread community support provided that tax payers can be convinced that their resources have been committed to important areas of public benefit.
Part of the rationale for an environmental levy is based on a purported need to more equitably share the costs of agri-environmental conservation between landholders and the general community (so called ‘environmental equity’). In short, it is argued that landholders should not be expected to meet the full costs of actions which principally provide public good outcomes.
Contemporary debate in Australia about property rights has featured terms like:
Irrespective of the different terms used, the property rights debate is essentially about rights and responsibilities in environmental management, and by implication funding. Crean and Vernon (2002) reviewed some of the arguments for and against government funding when the nature of agriculture property rights change. On the one hand, there are compelling arguments which favour government funding if changes in property rights are demanded by the community including the:
There are also arguments which challenge the legitimacy of absolutist views of agricultural property rights including the:
In broad terms, the case for the public funding of agri-environmental conservation will be the subject of on-going debate because agri-environmental conservation activities have different aspects of private and public benefits requiring some value judgements about the level and appropriateness of public funding.
In some cases, the costs and benefits of resource management will be primarily borne by individual landholders with limited spillovers to others. Government has little role in these issues other than addressing potential information failures. Problems of soil acidity and sodicity largely fall into this category because they primarily remain on site. In other cases there may be spillovers to other farmers within the catchment but limited effects beyond the catchment. In these cases efforts to internalise the problems within the catchment may lead to an efficient outcome provided transaction costs are not prohibitive. Some agri-environmental conservation activities will provide public goods which have the characteristics of non-excludability and non-rivalry (eg. biodiversity).
In these cases, individual landholders are likely to face poor incentives (indicating a divergence between private and social outcomes) and public funding may be an appropriate response to encourage their provision.
In considering the amount of public funding to be provided, there should be a focus on the minimum level of incentive required by landholders to facilitate the desired change. Given the problems of asymmetric information existing between landholders and government, consideration needs to be given to how to efficiently reveal this information. There are large transaction costs and possible inefficiencies in applying either standard or negotiated cost sharing ratios for particular conservation activities. There would appear to be compelling reasons for involving competitive market processes in determining the level and allocation of public funds.
The current state and trend in the condition of Australia’s natural resources is a key consideration in any debate about enhanced environmental funding. Australia appears to be well served in this area through initiatives like the National Land and Water Resources Audit (NLWRA)[3]. Whilst there are deficiencies in terms of trend data, the comprehensive nature of the NLWRA provides a good starting point for considering environmental priorities. A key point arising from the Audit’s findings is the mixture of good and bad news across different areas. The Audit summarised the condition of Australia’s natural resources as follows:
Many of Australia's resources are in sound condition, but may require protective management programs to ensure this remains the case. In the small proportion of Australia that contains the greatest concentration of the population and industry there are many opportunities for improved productivity and sustainable development. Resource condition and management opportunities vary as:
While there is both positive and negative data on the state of the environment, you could easily be forgiven for thinking that the environment was in universally poor shape and only getting worse. There appears to be no shortage of claims about an impending crisis in the state of our natural resources in Australia. Ironically, some of the more emotive accounts come from our scientists. The Wentworth Group of Concerned Scientists (2002) offer the following comment.
Our land management practices over the past 200 years have left a landscape in which freshwater rivers are choking with sand, where topsoil is being blown into the Tasman Sea, where salt is destroying rivers and land like a cancer, and where many of our native plants and animals are heading for extinction (Wentworth Group of Concerned Scientists 2002).
Statements of this nature are consistent with what Lomborg (2001) describes as the ‘litany of our ever deteriorating environment’. He suggests that our understanding of the real state of the environment has been massively skewed by environmental advocates and scientists to the extent that we seldom question exaggerated claims of environmental degradation and impending disasters. He argues that there has been an increasing fusion of truth and good intentions in the environmental debate and illustrates the significance of the problem through cases across different countries and issues. Biases can take many forms but it appears that either ignoring positive environmental trends or carefully selecting statistics amenable to your cause are popular strategies.
An example of the former is given by Marohasy (2003) who questions data about deteriorating water quality in the River Murray. She compares the negative statements that CSIRO’s website contains in respect to rising salinity in the Murray-Darling Basin with actual recorded salinity levels at Morgan (a key water quality indicator site). The conclusion is that data over the last 20 years indicates that salinity levels are either steady or actually dropping in the River Murray rather than rising. This trend may be attributed to various remedial actions by governments over that period but it does not legitimise the exclusion of actual trends from environmental statements made by our influential research organisations. There are also examples of how statistics can be selectively used to create a misleading picture of the environment. The 2001 State of the Environment Report refers to problems with land clearing by stating that ‘the rate of land clearance has accelerated, with as much cleared during the last 50 years as in the 150 years before’ (ASEC 2001, pg 7). Information from the ABS indicates that the average annual clearance rate has progressively fallen from 1.465 million ha’s in the 1970s to 0.551 million ha’s in the 1980’s to 0.381 million ha’s in the 1990’s. The ASEC statement conveys a misleading picture that clearing rates are increasing where as in fact rates are actually falling over the last 30 years. This is not to say that the current rate of clearing is acceptable or desirable, but it does illustrate a downward trend not an upward trend.
These examples suggest caution in accepting the overwhelmingly pessimistic, but all too familiar view, of the state of the environment. From a public policy perspective, such a view is likely to divert the allocation of resources from other areas of the economy, or possibly from higher priority environmental problems, and trigger a range of possibly inappropriate policy responses (regulatory or market based). It reinforces the need for objective information on the real state of the environment. Despite initiatives like the NLWRA, this could be harder than it sounds with the ever present bad-news focussed media, the relative ease in manipulating statistics and an increasing trend for scientists to be become more active lobbyists in seeking public funding for environmental problems.
Increasing amounts of public and private resources are being committed to environmental issues. According to ABS (1998) Governments, industry and households in Australia spent an estimated $7.9 billion in 1995-96 on measures to protect the environment, up from $6.6 billion in 1992-93. Total environment protection expenditure represented 1.6 per cent of GDP. The public sector accounted for approximately half ($3.8 billion) of total environmental protection in 1995-96 with major expenditure on the protection of biodiversity and landscape ($695 million). Some recent examples of major environmental programs include the National Landcare Program ($1 billion), the Natural Heritage Trust program ($2.5 billion) and the National Action Plan for Salinity and Water Quality ($1.4 billion).
A pertinent issue in relation to the expenditure of additional funding for the environment is the level of returns from existing programs. Bardsley, Chaudri and Stoneham (2001) note that while governments have allocated enormous amounts of funding to environmental concerns there has been little accountability to the public purse on the effectiveness of policies implemented. Anecdotal evidence of the larger programs like NHT is not complementary. For example, the ACF suggest that the NHT program has ‘squandered public money and wasted community effort by operating a poorly coordinated grants program rather than a strategic investment program’.
The political nature of some of the funding decisions also raises questions about the level of returns to the broader public from environmental programs. This political aspect can be seen in the writings of Toyne and Farley (2000) in their review of Landcare when they suggest that ‘there is a political imperative to maximise the number of projects funded across the country so that as many voters as possible can see where their Telstra dollars have gone’ (cited in Edwards and Byron 2001). This ‘vegemite’ approach to funding (spreading funds thinly and widely) is likely to be poorly correlated with an economically efficient allocation of resources and in a worst case scenario may crowd out private sector investment. It is likely that ongoing public support for an environmental levy would require better targeting of environmental outcomes and more transparent processes for allocation and assessment than those suggested by Toyne and Farley.
While information on the level or cost of degradation is important in understanding of the extent of our environmental problems (as discussed above), it is obviously not sufficient for determining what we should do about them. Neither the area of resource degradation nor the estimated costs of that degradation inform us about whether the problem can be efficiently or effectively addressed. As outlined by Edwards and Byron (2001), what is required is a forward looking approach focussed on the benefits and costs of future actions. The community may well make judgements that investment in particular environmental problems is justified even though the costs of actions outweigh the benefits. However, even in these cases information on benefits and costs will provide transparency in decision making by making the trade-offs explicit.
Much of land degradation in Australia is geographically diffuse. Commonly, this makes degradation both difficult to accurately measure and difficult to assign to individuals. Physical complexities associated with land degradation processes, including interactions with climatic conditions, suggest that certainty in causes and effects is likely to be the exception rather than the norm. This poses major challenges for efficient investment in addressing existing and preventing further land and water degradation.
Natural resource management problems are different to many conventional policy problems due to temporal and spatial scales, pervasive uncertainty, complexity and cross problem connectivity (Dovers 2000). Many reports gloss over the significance of such uncertainties. For example, the Wentworth Group seems overly optimistic about the ability of technical experts to identify standards for environmental management so we can make judgements about landholder responsibilities. Gleeson offers the following remarks:
The Wentworth Group, like many technically deterministic groups and individuals before it, is apparently sufficiently confident in our understanding of the biophysical features of our landscapes to assert that there are best practices that should be applied universally within and across catchments. Land managers applying these best practices would be exempt from economic costs. Such approaches do not account for the heterogeneity that exists in our landscapes, they constrain creativity and cycles of continuous learning and they stifle innovation.(Gleeson 2003, pg 2)
The effectiveness of institutional arrangements to address natural resource management problems has also been identified in a series of major reviews as a key issue of concern. For example, the Industry Commission (1998) concluded that there were problems with current institutional arrangements in terms of the limited devolution and capacity of local and regional institutions to deal with environmental problems and that there was poor coordination of responsibilities amongst agencies involved in environmental management.
There are also concerns with the proliferation of environmental regulation across many jurisdictions. With the sheer volume of regulation governing land use, there would only be a limited number of landholders with a good understanding of their environmental responsibilities. Bardsley, Chaudri and Stoneham (2001) note that environmental policies have suffered common problems due to piecemeal approaches to the environmental landscape. These approaches have tended to consider particular environmental issues (biodiversity, water quality, dryland salinity etc) in isolation and have not adequately recognised their jointness in occurrence and causation.
Prior to any large enhancement in environmental funding, it would be wise to review areas of remaining agricultural policy which have the potential to adversely effect environmental outcomes. Although many of the previously offending policies (subsidised water prices, taxation incentives for land clearing, fertiliser subsidies leading to increased soil acidification) have been removed, the environmental implications of specific industry assistance programs and drought policies require closer scrutiny. For example, many commentators have noted the potential for transport subsidies to discourage de-stocking during drought periods with resulting adverse environmental impacts in the form of increased soil erosion.
In considering whether a special environmental levy is an appropriate response to environmental problems, it is sensible to firstly question why environmental spending cannot be funded through normal budget processes used to allocate government resources. The environment is an increasing priority for governments and accordingly should be able to compete with other portfolios in the prioritisation of scarce funds. ‘The conservation budget should not be quarantined from the scrutiny that applies in other areas in the process of bringing expenditures and available resources into balance’ (Edwards and Bryon 2001). From an economy wide view it is important that the potential uses of funds compete with each other so that the best allocation of public resources is achieved.
A general issue raised about the imposition of special purpose levies is the ability to remove them at some point in the future. The sizeable build up of public funding in any area has the potential to generate its own industry to the point that it has an interest in maintaining funding well beyond the point where society actually needs the good or service. In respect to the environmental area, this could involve the use of environmental funds beyond the point that the marginal social costs of investing in the environment exceeds the marginal social benefits (broadly defined).
Despite the above arguments, it is apparent that special purpose levies are growing in popularity with levies recently introduced for the firearms buy back scheme, dairy industry adjustment and for the restructure within the airline industry (the Ansett levy). The former was implemented through a temporary increase in the Medicare levy whilst the latter two were imposed of consumers of the respective industries products or services. Special income tax levies (excluding the long standing Medicare levy) seem to be proposed in response to an unforseen event (eg. the Port Arthur tragedy in the context of the buy back levy and social/political turmoil in the case of proposed but not implemented East Timor levy). Although knowledge of the state of the environment is continually improving, concerns about the environment hardly fit into a category of ‘unexpected events’.
Part of the rationale for public funding of environmental issues (or an enhancement through an environmental levy) is to overcome the problem of ‘free riding’. People can free-ride on the activities of others in the environmental area because environmental goods are often public goods. The imposition of a compulsory environmental levy addresses the problem of free riding by forcing individuals to contribute to the provision of environmental goods. However, the imposition of a compulsory environmental levy potentially introduces the problem of ‘forced riding’ in that all tax payers are forced to contribute to the cost of the levy irrespective of the benefits they receive or their current level of voluntary funding of environmental issues. It might be concluded that the problem of ‘free-riding’ outweighs the problems of ‘forced-riding’ but some decline in voluntary funding of environmental issues should be expected.
A related issue to forced riding is the potential crowding out of private sector investments by government. Whitten (2001) suggests that the nature conservation sector in Australia is dominated by the government sector and that this degree of dominance is not reflected in the United States or the United Kingdom. Similarly, the Productivity Commission (2001) identify a number of institutional arrangements (including aspects of land tenure, competitive neutrality, native wildlife and taxation frameworks) that are currently constraining private biodiversity conservation activities. It is important that opportunities for institutional reform are fully explored not only to maximise private conservation but to also avoid potential government failure.
There are a range of institutional considerations in both the collection of levy funds (thresholds for low income earners, recognition of environmental expenditures) and the allocation of those funds (equity across jurisdictions, levels of funding across environmental issues, public and private aspects of environmental management, integration with existing programs, competitive tendering processes versus political decisions, periodic review arrangements etc). The Wentworth Group (2002) propose to establish a National Commission to set priorities, establish national targets and standards, accredit regional plans and recommend the funding of investment priorities. How such a Commission would operate with different jurisdictions and associated institutional arrangements is not outlined.
There are a number of complex issues surrounding the establishment of an environmental levy. There may well be justification for enhanced funding of environmental issues based on increasing concerns expressed by the community, the deteriorating status of some environmental resources (presuming that that there are net benefits of intervention) and the need to more equitably share the costs of conservation. At the same time however, we should be mindful of the potential to receive distorted pictures on the real state of the environment, the lack of transparency in relation to the benefits provided by past environmental programs, the adequacy of institutional arrangements and our knowledge of expected environmental outcomes. There appear to be many challenges to spending public money wisely in the environmental area if long term changes are sought.
In evaluating whether additional environmental expenditure is warranted, both scientists and economists need to undertake analyses using appropriate methods, accurate data and in a fashion unencumbered by good intentions. ‘The worthiness of the cause offers no guarantee against wasteful allocation of resources to it’ (Edwards and Bryon 2001). Greater effort could be put into monitoring the environmental outcomes of existing funding programs with new programs more rigorously assessed in terms of their expected social benefits and costs.
There are questions over the merits of an environmental levy in being able to efficiently address environmental problems. There appears to be little basis for the environment to be made a special case and excluded from the normal budget process where all funding priorities are routinely assessed against changing community demands. With increasing community concerns, one would expect that the environmental area would be able to compete with other demands on public resources. Lastly, there appears to be some scope for increasing private sector conservation through institutional reform and these opportunities should be fully explored prior to such a large increase in public funding to environmental issues.
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[1] The views expressed in this paper are those of the author and not necessarily those of NSW Agriculture or the NSW Government.
[2] The strategic alliance between the National Farmers Federation and the Australian Conservation Foundation funded the ‘Repairing the Country’ report (Virtual Consulting Group & Griffin NRM) which found that a total investment in the order of $65 billion would be required with around $37 billion being sought from the public sector.