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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

Francis Grey (Consultant environmental economist) Session discussant: I will begin by quickly summarising the arguments of John McLeod and Tony Beck because I think there is an interesting dichotomy here today which characterises the situation as I see it.

I thought John McLeod's contribution was very important because clearly and with no holds barred, he laid down the business view of the argument. I thought this morning's discussion was far too reasonable, and his contribution drew the distinctions very sharply. I take it from what John was saying that there is an overall view of what business sees as environmental policy and its likely impact on industry competitiveness, particularly if it not done properly. In his opinion the bottom line is: don't fool yourselves; it is going to hurt! That is the feedback John is getting from industry, that the general view of certain academics and economists that there are opportunities out there for gains - free lunches, in some people's language - is not correct. I think that summarises his view. He feels that we need to be quite careful in what we do here, and not damage our longer-term objectives for growth and jobs.

What was interesting about Tony Beck's contribution was the fact that he looked at an example which illustrated the point that John McLeod was making by using greenhouse as an example. Tony's was an Australia-focused view of the debate put out in his game theory diagrams. In those diagrams there were no losers and winners. We could win and we could win with the other side alongside us if we wanted to.

Tony's view assumes that there is a big cost in change. In essence, that is what John was saying too. This is a critical point because this is what we have heard for a very long time. We have had academic contributions which suppose that there are gains to be had, as Mick suggested, and the question is to what extent are those gains out there.

Tony mentioned energy efficiency as an area in which we had opportunities to make gains. The diagrams that Tony showed were two-dimensional - they showed a static situation. I like to take two-dimensional diagrams and turn them into three-dimensional ones and put time on the back. If you put time on the back of the existing two-dimensional diagram, the boxes in the game theory could well change and the opportunities for wins could become far larger and the opportunities for losses far smaller.

What Terry A'Hearn put forward was a very interesting counterpoint to the argument of both Tony and John, because he started off with this dichotomy between growth and environmental protection and pointed out that the EPA has focused specifically on finding, in effect, win-win solutions in that. The way they are realising those win-win solutions is by looking at things such as cleaner production and waste minimisation and getting out there with industry to uncover those opportunities, demonstrate to industry the opportunities that are there and seek to encourage them to seize those opportunities. He summed it up and gave us six reasons why industry was not taking up those win-win opportunities.

He mentioned that time was a constraint and he said again towards the end of his talk that the costs of environmental policy are often a question of timing. If you implement it tomorrow, it will cost a fortune; if you implement it over five years it may still cost a lot, but it may bring us a fortune. This is where it is important to see in context the diagram that Tony showed. You could argue that if you put the third dimension of time into Tony's diagram and said: 'Give us five years to implement a staged program of energy efficiency improvements', the costs in the short term would become benefits over that longer period. That is, of course, assuming that the two-dimensional frame is the correct one, focusing as it does on costs only and not on gains that already exist in the energy efficiency area.

In the case of the work that Terry A'Hearn has talked about, I think there are three additional things that are worth mentioning. There was an investment analysis done by two economists, Dixit and Pindycke in 1994, and in that they looked at investment under uncertainty. That has enormous implications for the environmental area because it points to why companies do not behave in the way that we neocrats or economists like to see them behave - that is, a 20 per cent return and therefore one invests. If it is a new technology or a difficult economic context in which one is operating or there are problems of sovereign risk - whatever the particular issue is - industry will hang back quite significantly before it invests. That is a rational choice of investors under conditions of uncertainty. The difficulty with the game theory approach is that it is far too simple a world. We have to make serious choices which will require a lot of optimisation under uncertainty.

John raised the example of Jamaica and I raise the example of the software industry in the United States which is moving to the more pristine environmental areas of that country for lifestyle reasons and so on. The software industry in the US has become the engine of that economy over the past five years. In our own case, we have tourism, which is an ecology-based industry. Other ecology-based industries, such as farming, are beginning to engage in fights over diminishing water supplies and so on. The environmental resource base is an input into industry and when it becomes degraded it has its own feedback effects. The situation is complex; there are other effects that need to be taken into account in any particular analysis.

I will be quite provocative to John because I felt his point of view was quite firmly put. John asked industry whether environmental policy would hurt it, and not surprisingly it said 'yes'. I would not expect it to say anything else. After all, public policy in this country is conducted like a game of 'chicken' - he who blinks, loses. Industry cannot afford to blink and it will not say anything else at a public level. But Terry's work illustrates that underneath all that, there are lots of opportunities. Somehow or other, we have to turn the public policy game around to bring out those opportunities.

Charles Jubb: Something John said confused me. After giving his example of alumina in Jamaica and the alumina industry in Australia, he stated that the academic economists did not examine relocation of industry in an appropriate manner because it did not happen instantaneously. He made the point that when Australian industry moves offshore, it takes the same environmental standards with it. That suggests to me that it is not environmental standards that make industry relocate; it is other reasons. Therefore, the statement that environmental standards do not have a major impact on location decisions still seems to me to hold.

John McLeod: First of all, I wish to make a comment to Francis. The point I was trying to make was that the best win-win situation is if business perceives a win-win situation, not the EPA coming in with one. The best solution is that business perceives it to be such. Someone imposing a win-win is very different from business developing a win-win itself. I did not hear all of Terry A'Hearn's presentation, but let me point out that in the past businesses in Victoria have had some pretty adverse views of the EPA and have left that State.

I think Charles is muddling two of my points. I really want to make the point that when Australian business went abroad, it generally took world's best practice with it. If anyone around this table has ever travelled in Asia in recent weeks, as I have, they will have seen offices there attracting new industry and blatantly saying: 'We are not members of the OECD, therefore we are not bound by their codes. So come and invest here.' The Asians are deliberately using this as a competitive weapon. Anyone who does not recognise that is happening is a mug!

Philip Sutton: When you say Asians, do you mean all Asians or just the Singaporeans?

John McLeod: Well, most of them anyway. Certainly Singapore is in the thick of it.

Tony Beck: To respond to Francis's comments: the timeframe issue is undoubtedly extremely important. I guess that was implicit - maybe too implicit - in what I was saying. If there is an attempt to try to impose significant short-term abatement policies or emission reduction policies under the current structures - and there is still considerable advocacy of trying to achieve 20 per cent below 1990 levels by 2005 - you really will have significant short-term costs and you will get significant leakage and competitiveness impacts because you have the separation of commitments.

On the other hand, if you take a longer-term perspective, you come more towards the final diagram I showed, where you try to fit most of the action within a no-regrets framework by exploiting the full potential of no-regrets opportunities in developed countries, and that includes opportunities for developing renewable energy industries that will be competitive. You also invest in the R&D that will make the long -term solution cost effective. Basically I agree with you: what I was trying to contrast was a short-term solution in which we try to impose very significant emission abatement on developed countries and suffer the consequences, as opposed to the longer-term perspective where you have better scope for reducing costs and picking up some of the benefits.

Mick Common: I want to ask a question of the three speakers this afternoon. Do we actually have any evidence that points to economic activity leaving Victoria or Australia as a direct result of any environmental policy adopted in Australia?

Tony Beck: I would not pretend to have specific evidence. What I am talking about is what is likely to happen if an attempt is made to impose stringent emission abatement policies that go well beyond any environmental regulation we have seen in Australia before.

Mick Common: But we do not have any evidence, do we?

Tony Beck: I am not saying there isn't any.

Gene McGlynn: There is a body of evidence which shows there is no impact and a lot of assumptions are made. There are also a number of anecdotal situations where businesses have complained that if certain regulations are imposed, they will shut down. How long can we continue to ignore events? We have to consider the sorts of impacts that will follow.

Tony Beck: The difference I am talking about is the extent of the change that you are trying to impose. No one would deny that at the margin there is scope for adapting to regulations, and in some cases adapting to regulations in a manner that might reveal a more efficient way of doing things. But there is a limit to how much one can achieve. Once you get beyond the point of trying to comply with the regulations, effectively it exhausts what potential there might be for innovation and one is just faced with additional costs.

Patricia Bunton (Department of Foreign Affairs and Trade): I guess it is all hypothetical, but I don't think what people here are proposing here will necessarily be so onerous that business will get into the situation of wanting to leave. There can be the threat to go offshore, but I thought the point being made today is about changing the culture. People are always going to have different preconceptions about what the government may or may not do and how that will impact on business, but I wonder whether the sorts of things that the government may propose will be that onerous. Will they inhibit innovation? I do not think it will get to that.

Francis Grey: Everybody here wants companies to innovate, but the question is: how do you actually deliver that to the companies? Environmental regulation is a way of delivering information to companies about one of the most important inputs to their business - the environmental resource. Tony gave examples of gains to be had and he referred to the energy efficiency side. I do not have a problem with that. But when Tony said that no-regrets policies should be pursued, my immediate reaction was: 'Well, where are they? Where is this being done?' The World Bank has brought out a report which says that energy efficiency will get us where we need to go, so I am looking to see industry back a demand management program at a serious level in Australia as part of the way of realising competitive gains from the energy sector for environmental benefit. But at this stage I am not seeing that, and this is where regulation comes in. We have a game of 'chicken' being played at one level and we have these opportunities at the lower level, which are exploitable.

In the industry argument we see one position put - zero regulation; nothing at all in this area. The academics are saying that there are opportunities here and it is not a question of zero or 100; it is somewhere in the middle and we can realise economic gains along the way. If you take the time argument and do some stretching in time - a five-year target or whatever - you might get a lot of big benefits there as well as the gain.

Philip Sutton: Clearly two sets of changes are needed in industry - one set is a kind of tidying up and increased efficiency, and here I agree with Tony Beck that there are some things that can be done without any heartache. But if we are to take sustainability as a serious objective then major structural changes have to take place. There will be absolute shrinkages in certain markets and major restructuring in others. We must face the fact that there will be big changes and that some types of products will just disappear, along with the companies, unless the companies can adapt. We have to recognise the degree of change and work to smooth it out so that people will not get hurt.

John McLeod: I wish to make three quick points. First, in response to Francis, if I am to have a win -win situation, I want the market to drive it, not the government. I want business to see that it can gain competitive advantage.

Secondly, on the question of his not perceiving any change on the energy question, all I can say is 'Where have you been?' Let me give you two examples: gas transmission in Western Australia replaced dirty, filthy Collie coal. Why have we not done this before? Why has it taken us 20 years to use that North-West Shelf gas? Not because industry did not want to. What about the use of nuclear power in Australia? Apparently that is off the agenda as one of the ways in which a major contribution could be made. The energy scene is changing extremely rapidly and we can expect significant gains to come from what we are seeing.

Francis Grey: I take up your Western Australian example. The Collie power station was hard fought against by environmentalists until, at the last minute, the Western Australian government said that as it could not find anyone private to build it, it would fund it itself. Then it decided to go for gas.

John McLeod: This is a case of the union monopoly taking the rent. That is what one would expect. Earlier mention was made of Victoria - well, look what is happening to Victoria.

Mick Common: That was the question I asked. I did not understand whether you were saying that you had evidence that environmental regulation was causing businesses to leave Victoria or not.

John McLeod: Well, have you seen any evidence of Victoria growing strongly?

Philip Sutton: It is not an environmental problem. It was growing strongly but in the last couple of years the whole thing unravelled.

Mick Common: The question that was posed was not whether businesses in Victoria have grown quickly or slowly, but whether there was any evidence of any activity leaving Victoria as a result of environmental controls.

John McLeod: There has been a very large migration of business from Victoria. In some instances, business is almost non-existent.

Chair: But the relationship to environmental controls is unlikely to be very significant because, by and large and with the exception of substantial mineral processing, the environmental costs are so small. Any other regulations and costs are likely to outweigh them. I would think that the answer almost certainly is that an extremely small number of businesses would leave, or make any decision on environmental grounds unless they were the big energy users, which might be affected by greenhouse, or big mineral processors who might be hit by something like jarosite and cannot find a technical fix.

The evidence that people have looked for in a great deal of detailed examination of company decision-making overseas, has come up with only two examples of companies actually moving for environmental reasons. One was an asbestos brake liner firm that went to Northern Ireland and another was an oil refinery that went to Italy. It is very difficult to find any evidence of a company going to a developing country because of environmental pollution requirements being significantly less.

Philip Sutton: I have heard evidence of people moving from Taiwan to South China on those grounds.

Chair: A petrol refinery was going from Taiwan to South China, but I do not know whether it has actually moved. However, I was talking about moving from developed country to developing country. There may well be other examples, but if there are they are extremely small ones. There are very good logical reasons for this. A whole range of factors come into company decision -making about location and, by and large, environment tends to be a minor one. It could be major under certain circumstances.

Blair Comley: Most surveys indicate that environment regulations and even company tax do not have a great deal of influence on location decisions in countries. When this will really become important is if one moves down the track and exhausts the no-regrets policies. We do not know when that will happen. It depends on whether we take Terry's view that there are lots of things out there, or the opposing view that there are not many things out there. Presumably, we will soak up all the no-regrets policies over time. Presumably also, we are looking at a long-term problem. If we only want to maintain GDP growth at two per cent real per year for 10 or 15 years, you might eventually reach the stage where we have to take serious steps if we want to contain emissions. At that point it is not inconceivable that the cost difference for having emission abatement becomes significant enough for location decisions to change. There may be little evidence now, and that is because the cost is so minimal, but we should not assume that this will not be an issue within the timeframe that we have talked about - 20 or 30 years down the track - if you really do try to contain emissions or stabilise greenhouse gas concentrations, as required by the FCCC.

Mick Common: I did not mean to suggest that this might not happen in future, but as an academic, one is interested in the evidence. That is a problem that academics have!

Ian Booth: I think Blair's point is a good one. You are looking down the track to see when you have exhausted no-regrets. That is also the same time as you have to re-equip. Thus, the timing question is really big and you have to look at it in the context of the capital cycle of capital-intensive industries. That is where we come to John's point about industry needing to have a major say in this. Only by taking a cooperative viewpoint can we factor in the least cost but biggest bang opportunity.

Henry Leveson-Gower (DEST): My point, which is relevant to carbon tax, especially in the longer term, relates to the issue of border tax adjustments. I do not know how aware people are of this. Earlier in his presentation, David Pearce looked at the competitive effects of the carbon tax and stated that the main effect would be on exports of coal. At present, under current GATT rules, you can adjust for a tax on coal for export, so you could rebate that tax.

One of the results of the Uruguay Round, which is just a small footnote in the subsidies code, is that it is now possible to adjust for taxes on inputs such as oil, coal and so on in products. So you could imagine the case where you have a carbon tax on coal, when the product - particularly one with a large energy input like aluminium - could have the tax that it incurred in the production process rebated at the border.

The whole issue of border tax adjustments is currently being looked at in the WTO work program on trade and environment and these sorts of questions about the longer term possible use have been raised. Although it is admitted there may be practical limitations in working out and imputing the level of tax incorporated in the product, especially on imports, I think this may become more of an issue when and if carbon tax resurfaces as a policy tool - particularly if it is relatively high.

I would be very interested in any evidence of countries encouraging people to come on the basis of low environmental standards. I have just been working on a report by the OECD, which will be published very soon, and which says categorically there is no evidence of countries using low environmental standards to encourage investment. If John has any evidence of this happening I would love to see it.

An interesting process which is going on at the moment is the voluntary standards on environmental management practices, which are being developed in the ISO. In many ways, at least in theory, this is very similar to the accredited licensee scheme in Victoria, and could well be used in a similar sort of way. The idea is that if you have certain management practices and policies in relation to the environment, you get standards, which will be ISO 14000 series. Those will have interesting effects in terms of international competitiveness because it may well be the case, as with previous standards of similar nature, they go down the supply chain in that major producers will want to make sure that their supplies meet the standards in question, so that they can assure their customers.

At the moment these are in the development stage and it is interesting to see how they will work. I am told that they are being busily watered down by industry - I will not mention any company names! The problem may well be that you will end up with a set of standards that are so weak and wishy-washy that they do not mean anything. But I still believe that in the longer term they are quite interesting, particularly from an Australian viewpoint because the one problem we have in the international scene is that quite often there are moves to harmonise standards on international bases or within the OECD. Australia often has very different environmental conditions, therefore we sometimes find harmonisation a problem. The good thing about these environmental management practice standards is that they are fundamentally procedural and they are, by definition, appropriate for the environment in which they are occurring. They basically say: have procedures in place to address the environmental problems that face you, and also to meet the legislative requirements. That is the sort of developing area that could affect international dynamics in terms of competition, and incentives to improve environmental management practice.

John McLeod: The border tax issue is a very interesting and important point. It is easy to talk about coal or aluminium but when you talk about aluminium automobile wheels or a Boeing 747, it becomes extremely difficult. What you are then mixing up is not just a carbon tax on coal, but the whole of the labour market, commissions in the supply countries, in the oil countries and all sorts of other things make that very difficult.

For example, I presume you have all been to China recently and you heard what the Minister said. If we take the paper industry in Indonesia, how did that suddenly take off to the extent it did and supply 60 per cent of the market here?

The standards issue is very important and we are trying to work on this. We do think it is something industry ought to take up to see whether there is not something that can come out of certification of standards - higher standards than ISO. We think that Australia may have a lot to gain from this.

Francis Grey: John made the point that he wants to see market-based methods used in this situation. My challenge to him is: give us an example of how you see that being done. I also wish to comment about the innovation pool. Every industry has a pool of innovations coming down the pipeline that it can realise either sooner or later. The idea of putting on regulations in order to benefit innovation is that you are drawing innovations out of the pipeline sooner and obviously over time - because we are looking at a dynamic context, not a static one - this innovation pool will refresh itself. It may well be that in the no-regrets situation, where we use energy efficiency to get our greenhouse limits aggressively pursued, that innovation pool will never empty. I throw in as an example Dow Chemicals and their energy efficiency program, which set out to be a one-year program and has rolled on and on because they keep finding more innovations.

The trouble with the mindset that we have dominating the discussion today is that the static neoclassical framework simply does not take account of these dynamic processes. We have discussed today examples such as the company that moved a $60 million investment from one State to another because they were having trouble with that State's environmental authorities. My view is that they took it the wrong way. They hired three QCs, spent half a million dollars and tried to take on the State. The State EPA managed to resist them, and another State said: 'Come to us; we do not have environmental regulations - or at least they are not being put on the books until the middle of the year'. That company is still trying to get its plant up in the second State, where suddenly there is now an environmental morass. That is politics. People do not like this particular industry being around them.

Another company in the same industry took a different approach. Their view was that they were fed up with being caught up in the mess and they wanted to blow themselves right out of the argument. They put in three years of research work and $2 million and they came up with a solution which they are now marketing to the rest of the industry as a way out of the problem.

I have talked to companies about whether or not they are interested in technologies such as this, and I have stood there while engineers have said: 'We are not interested in airy-fairy environmental things because no-one out there has said it is important'. I have been asked why people do not take up environmental technologies. Even if it makes them money and there is a huge return on capital, they will sit in their niche and say: 'I have everything sorted out here.' You come along with a solution which will make them a fortune. But you are not necessarily a guardian angel fixing their problems; you are a pain in the arse because they had it all sorted out nicely and now you have upset the circumstances. You have upset their nice little niche in that area. That is fair enough for that industry, but from the point of view of government trying to run environmental policies, the significance in environmental policy of a standards and regulations framework is that it informs those companies that their niche is unsustainable, that things are going to change and they need to consider moving on. They may well move on sooner as a result of this sort of effort and reap some gains from it.

In the framework of 100 companies, 10 may benefit, 10 may lose and 80 may sit neutral. There is a divide here that we are arguing about. The question is how far do we go down that divide. For the answer to that we need examples, studies and so on - academic evidence, as Mick pointed out. We will then be able to say what we can gain from these regulations. If you give industry enough time with a regulated framework and market-based measures which have to exist within a regulated framework, when you give industry a path forward it knows what will happen and will innovate its way around those; use some tradeable permits or whatever to adjust its circumstances if it is in a particularly difficult situation. I come back to the question I started with: if you want market-based methods to do this, give us an example.

Tony Beck: I have a problem with this notion that industry should adopt or take up every single opportunity that is presented to it which supposedly makes money. One of things that has been proven in terms of industrial survival is that companies that stick to their knitting have often done best. The more they can do that, the more effective they have been. Supplying meals to their employees might be a very profitable business, but there is every chance they will contract that out so that they can focus their capital and so on in the area that they know best. Training their staff might be extremely profitable, but again they could well contract it out because it is not their prime area of experience and expertise.

If you present them with a completely new technology and suggest that it is one they should take up and promote, if that represents a significant diversion from their prime focus then it is not surprising that they should suggest that you take it somewhere else.

Francis Grey: I agree with you entirely. In this particular case it is not their prime business. There are solutions. If you contract out you get someone else in to invest in it and run it and operate it. But at the end of the day it is hard for a technology developer to come to that conclusion unless the companies themselves, who have the purse strings and who have had the environmental problems, take an interest in fixing them and come up with an innovative solution. But without a framework, without some driving mechanism, companies aren't putting in the time. As Stuart said, for most companies this would be a small cost on their budgets or their daily time sheets. Conversely, this receives very little attention. Therefore, if one applies some regulation and/or a market-based framework, the matter will be given some attention and the company will look for solutions to that particular problem.

John McLeod: The whole economic literature on innovation is relevant to this. There is a Business Council study on innovation - how it occurs and what the process is. It tells us that half the things that come from these gee-whiz type solutions are simply not practical. If you are telling me that you are offering me 20 per cent return on a gee-whiz invention and I am so dopey I am not going to take it up

Francis Grey: I have seen it with my own eyes! When you try to go in and sell a new and proven technology, you actually hear people say: 'Well, it is not my sort of thing' or 'We just don't want it - even if there is a 20 per cent return'. Then you realise what a gap in thinking there is. People are not just being irrational; they are simply responding to the uncertainty in their environment. As economists we have to ask ourselves what matters about, say, greenhouse. It is like driving a car down a hill and a mechanic who worked on the car says to you: 'I don't think the brakes will work'. What should the driver do? He should take a little more care when driving down that hill. That is the essence of the greenhouse debate. We should bring the expert information to bear on decision making in environmental policy.

Brett Odgers: Reading between the lines of Terry's presentation one realises that the nature of environmental regulations is changing. I would have to say that Victoria has been something of a test case for that switch from command and control to a more voluntary and self-regulatory environment where there is still a role for government, which was described best by Francis as 'delivery of information'. With some pollution problems not much information is required to identify priorities. With early warning signals, industry can respond very well. The nature of these regulations is such that they are becoming more global. That is why we are getting more and more switched on to multilateral, international efforts to identify forestry, which is a very important sector.

That brings me to my second point. We have wrestled with the problem of environmentally -preferred paper for a couple of years now and that represents an area where it is a priority rather than a problem in the urban domestic sense. It also touches on a lot of conflicting vested interests - importers, exporters, investors, planters, recyclers. There are many interests to be reconciled, and government finds itself in a mediation or conflict resolution role. Although we have not yet arrived at a solution, there is a possibility here, once the whole package is put together, of a high demonstration effect, as with unleaded petrol. It is difficult to resolve for a while, but the ultimate result is to change the way people think about the costs and benefits of particular environmental initiatives. We are certainly in a different sort of regulatory process.

Philip Sutton: I would like to say a bit about no -regrets policies. We talked about fine tuning in the immediate short term, but we also talked about no-regrets structural change. I think the change will be that some industries will grow and others will shrink. If you can have a sense of that over time and if you can prepare for it, you can ensure that while something is shrinking something else is growing. It may well be that change is seen as no-regrets - in other words, no big traumas. If it is imposed over time, it is something that we will be used to and therefore it will be preferable to one big hit. My personal belief is that public policy framework should help cement that. I would not mind betting that if industry formed a consensus around a direction of change it would itself be beating a path to the government's door saying: 'Help us slot this in place'. I think that you need a real combination of public sector and private sector initiatives.

Ian Booth: There is a White Paper proposal that by July this year there will be a study done on possible concessional finance to allow small and medium businesses to re-equip with greenhouse gas friendly or efficient equipment. That is an example of a cooperative approach. It seems to me that the debate has looked at no-regrets; it has looked at market-based sticks, but not at carrots. I know you will all say that industry should not be looking for subsidies, but for small and medium enterprises or enterprises that are in a particular capital cycle that is out of sync with what regulation demands, there is probably a case for sharing of the cost of a community-demanded environmental solution.

Peter Morris: In the discussion between Francis and John it seemed to me that Francis was saying 'I have something to sell, but nobody is buying it because there is no market.' One solution to that is demonstration programs and there are certain examples of that. John was saying that the market can lead to win-win solutions if industry can be involved. Examples of that are the heat treatment industry where they have to get rid of waste, and the foundry industry, which is a very interesting case with the recycling of sand. Basically, as part of the production process the sand was impregnated with a chemical. They could not transport it to local tips because of the run-off into local water supplies, so the cost of transport was going up and up as the urban sprawl continued and foundries were forced to pick up technology to recycle sand. That has now been picked up by all the major foundries in Australia.

In terms of an example of a model that could work, maybe it should be something that sets down clear requirements and objectives and enables industry to have individual solutions to achieve them. There are some examples of that in very different contexts - for example, the partnership for development program in the information technology area where they insist that you reach certain export targets and certain value-added targets in Australia in order to get rid of your offset obligations over a seven-year period.

Terry A'Hearn: There have been a lot of changes in the Victorian system over the last 10 years. In one sense you could categorise it as being smarter regulation. Many of the things we have done would have made it easier, we would hope, for industry to comply in a least-cost way. For instance, in the mid-70s we had about 5,000 licences; today we are down to about 1,400. That is because industries have convinced us that they have converted themselves from high environmental risk to low environmental risk by getting good systems in place. So we can provide them with the flexibility to reach the stage where they can identify their own win-win opportunities.

One important point that often gets missed in these debates is that this discussion about market-based instruments versus command and control is a very simplistic one. For instance, let us take one example - tradeable permits. Our view would be that there is not much experience with tradeable permits; they might provide some great opportunities, but there is not an enormous amount of evidence that is conclusive one way or the other. I guess our approach would be to say that you cannot have any sort of environmental policy which is simply either command and control or economic instruments. There are elements of both. If you look at the tradeable permits systems that are in place you will see that there is a lot of regulation associated with them. That is not to say that they will not work. What I am saying is that we should not get caught in either command and control or economic instruments. What we need to do is look for smarter ways of combining the economic incentives with the public policy objectives. That is what we have done with a lot of our reforms.

What works best for us in pursuing that? I talked about a level of trust, which is absolutely critical for those sorts of processes. It is also critical to have non-polarisation of these debates. When we, as an EPA, find ourselves in the middle with industry on one side and environment and community groups on the other side, that is our proper legislative role to some extent. But when debates get polarised it becomes very hard to arrive at solutions in least-cost ways. When there is good, informed debate it becomes much easier to find least-cost ways. When a company involves its local community in its environmental plan, the two groups get a better understanding of each other and will be more tolerant to what the other is doing. If there is not a good level of trust between the two groups you will have community groups saying to companies: 'Eliminate all your noise and all your odour'. The business will say: 'But that will reduce our competitiveness; we will go out of business. We simply cannot afford it.' When we have an environment improvement plan process where the two groups get together - and in some cases we act as facilitator - then people start to understand each other's point of view. It enables the two groups to resolve their conflicts more easily.

I make a final plea that we need to keep having forums like this where we can push these debates in ways that do not get us back into the error of having economic growth and environment protection totally separate. We need to find ways of having debate and communication so that we can maximise the bit in the middle. There are a lot of problems as to how we do that. We need to keep challenging ourselves in the EPA to work with industry, green groups and community groups.

Chair: I did begin this morning by saying that trade and sustainable development were mutually reinforcing and nothing that I have heard today has convinced me that is not the case. I still think it is important to look at issues in a broad macro sense and also in a dynamic sense.

I think that there is still a role for government, despite what John said, and obviously the government is inevitably involved in non-market issues, and the question is how can that be done in a way that provides an incentive for industry to maximise where feasible and minimise where a positive outcome is not necessarily the case. This involves the kind of collaborative discussions that Terry was just talking about. I think we achieved that very successfully in the ESD process. The build-up of trust across all groups was important - between the Greens and industry and between State and Federal officials - and that became a very important development. Some of the lessons learned there are still relevant.

If you are looking at international competitiveness, you see that there are problems because you have to look at the economic competitiveness and productivity across the whole of the economy and not just in the export industries. There is a difference between looking at national competitiveness and looking at industry competitiveness and I think that is where the Porter analysis falls down. It is fine for industry, but it doesn't really say much about national competitiveness.

The other thing that came through in today's discussions was the clear distinction between environmental issues that are non-greenhouse and those that are greenhouse. In a way I think we have more or less come to terms with the non-greenhouse issues if you leave aside one or two particular questions. Certainly, industrial pollution in its traditional sense is something that industry has come to terms with for the most part. But even within that, there is still a need to look at specific issues. It is still very difficult to generalise. In each case where people have given examples today on one side or the other, I could give counter examples.

It means things like whether we are concerned about the possibility of people moving their investment from one place to another. This is not an issue in the normal industrial pollution area. I would also be interested to know whether you regard the movement of the Japanese aluminium industry to Australia as part of a haven that we provide! CRA cannot go overseas without providing environmental standards which are pretty close to, if not the same, as the ones they provide here. Most multinational corporations are in that position.

In the ESD process we found that, by and large, manufacturers were not concerned about the environmental regulations - indeed, many of them were way ahead of the government anyway in the kinds of things that they were doing.

When you get to greenhouse you get to a potentially different order of magnitude. We did not get back to the discussion of whether it was two per cent or five per cent of GDP over a long period, and if it is, whether that is passed on or not. My own view is that, ultimately, unless the scientific evidence is wrong, a carbon tax of some kind is inevitable. I do not see that happening without other developed countries doing something. I suppose my counter to John's point about whether a small carbon tax matters is that in a context in which Australia has to go into an international negotiation to gain a concession in a way, because of our particular dependence on fossil fuels, it is very difficult to go in with nothing to show for the efforts we have made. A small carbon tax and more systematic no-regrets and insurance policies would enable us to be much more successful in achieving preferential treatment for the fact that we are a coal-exporting, coal-using economy and will be so for a long time.

But it seems to me that the developing country case is quite strong in the arguments they have put forward in Berlin, despite what Tony said. I do not think it helps to say that they are just looking for money from us. They do have a strong case, but they are also very vulnerable. We are in a negotiation and whether we like what is happening is almost irrelevant. What we need is for them to move pretty quickly to do things that will benefit us as well as them. That is something we should be thinking about doing quickly before they get entrenched in a fossil fuel-dependent economy, much more so than they are currently. Just letting it go may be helpful for us domestically, but I think it would be a bad thing internationally.

At the same time, my argument about dynamism does imply long-term planning. Let us hope that industry is doing some long-term planning on greenhouse, and accepting that they face a choice of doing something quickly, which will be very substantial, or doing something small and not very damaging in the short run. That debate is still going on. Apart from that, I do not have to do anything other than thank everyone here, particularly Mick Common for providing the paper that started us off on the right track. Thank you very much to all those who presented papers, and thanks to the rest of you for a very fine discussion. I am glad we solved all those problems. Now the real problem is what do we do next!


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