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Convened by Senator Robert Hill, Minister for the Environment and Heritage, Canberra, 5 July 2000
Environmental Economics Research Paper No. 7
© Commonwealth of Australia, 2000
ISBN 0 642 19485 8
Dr BUTCHER–How do you ensure that those crusty old Shell engineers actually comply, especially when they work in countries with relatively poor regulatory frameworks? There have been some examples in the last, say, 12 months that I can think of where Shell has been busily defending new projects where your principles have not been complied with, if you like.
Mr D’ARCY–I think that is a fair question. It does require quite a big change in culture within the organisation. Partly, the strategy to address it is by building it explicitly into appraisal and reward systems for individuals, actually changing job descriptions to explicitly require better consultation and better environmental performance for the projects under the control of the managers. Partly, it is better communication within the group so there is a much stronger emphasis from the top down in terms of communication flows about the commitment to environmental performance and about the benefits, commercially, of picking up better practices. I am not sure what specific incidents you are referring to, but I would say to you that I cannot think of an incident recently where we have manifestly dramatically failed to adhere to principles. Generally, we have tried to open up the organisation much more widely to external scrutiny, and that is another way of driving change within the organisation.
Senator HILL–Presumably Shell is now negotiating a carbon emissions target in the United Kingdom in order to avoid the new tax. That, I guess, will mean for the first time that you are working to a real cost of carbon rather than a notional cost. Is that right, and are you taking that into account in these global models that you are developing and experimenting with around the world?
Mr D’ARCY–I am not sufficiently familiar with the detail of the UK regulatory regime to know whether we are negotiating a target or whether we are voluntarily making some changes to reduce emissions. I am just not familiar with the detail. But the general principle of the world moving from a notional carbon cost to a real carbon cost, as countries start to impose constraints on carbon emissions, is certainly real and we recognise that. It is not explicitly factored into the kind of emissions trading scheme that we have got going at the moment because, as yet, there has been no real carbon tax applied in any of the countries that we are participating in. But when it is, of course we will factor that in to commercial decision-making processes.
CHAIR–One of the great conundrums in the climate change negotiations is how we begin to engage with non-Annex B countries. We all know that unless we broaden the contribution to emissions reduction, what is done in the OECD world will not have the sort of effect that we require. To what extent is the action of companies like Shell going to help drive that? For example, under your internal emissions trading system, would you distinguish whether or not the country is an Annex B or non-Annex B member of the Protocol, or would you be applying the same sorts of standards globally?
Mr D’ARCY–There are three levels, I think, in answering that. First, in terms of the pilot emissions trading scheme, none of the primary participants are from non-Annex B countries; they are all developed countries. We are trying to bring in developing countries by mimicking the CDM process within the scheme so that if one of the participating business units invests in a clean development mechanism project, the credits so created are factored into the scheme. We are trying to mimic as far as possible the Kyoto Protocol design. However, in terms of trying to extend the reach of climate change greenhouse response to developing countries, the general strategy is two-fold. One aspect is in terms of the design of specific projects. In terms of the hardware, the kit for energy production facilities, it is a ‘one size fits all.’ We use a standard kit across the group, largely. For example, if we are building a new LNG plant in Australia or we are building it in Malaysia, it will largely follow the same design. That is the first point. The second point is in terms of the fuel offering to developing countries. We are strongly moving towards expanding our gas business. In our offer to developing countries in terms of fuel, we are emphasising the climate change advantages of using gas as opposed to other traditional forms of fuel.
Mr LOVINS–I think it is easy to overlook the fact that non-Annex 1 countries are in a very fluid situation. Broadly speaking, the south is saving carbon faster than the north in percentage terms and possibly even in absolute terms. A lot of people working with several-year-old statistics have missed the astonishing reversal in China, particularly where for the past two years the rapidity of the shift away from coal and towards gas and efficiency has become really clear. China’s coal burn this year will be down to its 1986 level. Coal has been in decline essentially worldwide over the past couple of years for very fundamental reasons, which I think have a lot of relevance to Australia’s industrial strategy.
Senator HILL–But that is not right, is it? As a percentage of the total energy production in the world, coal is still continuing to rise, according to the last IEA statistics that I looked at.
Mr LOVINS–But I think they end around 1997 or 1998 and it is at 1998 or 1999 that things turn around.
Mr D’ARCY–I think developing country coal consumption is growing dramatically and is forecast to continue. Our own ABARE estimates predict a very strong growth in coal-fired electricity.
Mr LOVINS–India is kind of teetering in policy at this point, but China has definitely turned around. There is a new article on energy policy by the Lawrence Berkeley National Laboratory giving the latest Chinese figures. It is just stunning what has happened there. They are already halfway deployed on a modern gas infrastructure in the five biggest cities, just in the last year or two. You can perhaps do that sort of thing that fast only in a command economy.
Senator HILL–And they are not so much responding to a price trigger; they are responding to the fact that you cannot see the end of the street. Somebody mentioned values decisions. Values decisions are now coming into play in China. As their economic strength improves, they are now taking choices.
Mr LOVINS–But I think it is not just that environmentally you cannot run the world’s second biggest economy on 1920s Pittsburgh technology. When, say, 40 per cent or maybe more of your rail capacity in the winter is tied up hauling coal, it is a real bottleneck to development. The combined-cycle gas plants they can now get are half the lead-time and less than half the cost of coal plants, without even counting the upstream investment. So just logistically, what they were doing does not work and, for economic reasons, they have been shutting down tens of thousands of mainly high-sulfur coal mines. To be sure, the blue sky project for the party’s 50th birthday– wanting to see the sky in Beijing–caught on when they found they really liked it and started spreading it around. But there were some very fundamental economic drivers here. I am beginning to think that the non-Annex 1 problem may be a good deal easier than we thought if we would just give a further nudge to leap-frog development, especially by setting a good example ourselves.
Mr HEINZ–I have a question for Paul D’Arcy. I first want to applaud Shell’s efforts in changing corporate culture. In our experience and that of others, that is never easy. I think Shell has been really an outstanding player in its commercial sector for trying to embrace more broadly the community voices. To that end, I would like to understand a bit better because I did not get it in your presentation how you round out your definition of what sustainability is for Shell. I would agree that hearing the voices of stakeholders is critical, but you pointed out in your implications for policy that that was maybe one of your main drivers or mainstream mechanisms for understanding what to do. If I try and be strict to my presentation, I think that is actually sort of a reactive or forecasting-based way of understanding where your policy is taking you. I would like to know what does Shell see as Shell in the future? What does a sustainable Shell look like? That was one element I could not find in the presentation as a kind of key.
Mr D’ARCY–That is a fair question. Like any company, I do not think we pretend to have all the answers to where community expectations are headed or where commercial drivers may lead us in terms of fuel choice. From where we sit now it is possible to contemplate, for example, a whole range of renewable technologies and a rapid shift out of oil into renewable energy and Shell being a main player in that transition. But it is very hard to predict how these things are going to play out. I would not say that consultation with the community is a ‘somewhat reactive’ way of approaching the issue. We have to take our lead from where the community views acceptable environmental performance. I think that needs to be front and centre in terms of how we change our behaviour in the organisation.
Mr HEINZ–Just to clarify: I do not mean in any way to suggest that it is reactive in any negative way. It is something I think that always has to happen and will be ongoing and I hope is part of Shell’s legacy in the future. But if you are looking to the press or to public feedback as to what to do from an environmental perspective, given the way we are today you are almost by definition listening to problems and effects of nature. From my perspective, say if I am a shareholder in Shell, that is a slightly sub-optimal way to respond and to allocate future investments in resources. I could not agree with you more that it is next to impossible to understand what the mix will look like–who will have what cards in the future and exactly what everybody will be saying. But I would challenge you that it is actually a lot easier than we think to understand from a sustainability perspective what a fuel scenario might look like overall and then for Shell to try to identify what part of it they might want to target. If we understand that we cannot systematically increase concentrations of carbon dioxide, for example, the question must then be posed to Shell: well then, what are you going to be like? In other words: to what end are all of your fantastic measures of carbon emission trading?
Mr D’ARCY–The goal posts are constantly changing. But just to pick up on the climate change example, we have set a target. We set a target in 1998 for an emission level by 2003. That was a rallying point across the group in terms of how we were going to transform the business, at least in that sense. We set a target of 10 per cent reduction in overall emissions. So there are some rallying central targets which define the overall direction the company is heading in.
Mr BILLSON–Paul and Amory, on your point about where the benefits are felt and where the costs are experienced in terms of energy consumption, I am interested in how you have modelled your internal trading arrangement, the emissions you are measuring–distinguishing production emissions as opposed to consumption emissions–and how you involve in your model behavioural choice by consumers or whether it is developed to the point where it is factored into your work, your metrics and your longer term plans.
Mr D’ARCY–The pilot trading scheme is only direct emissions from our own facilities. You are quite right: it does not include the emissions arising from the consumption of the products we produce although it is pretty reasonable to expect that, in an emissions trading scheme more broadly, our operations would be a point of acquittal for the emissions generated in the consumption of our products. So to that end it is an issue we have to think about. How are we factoring in consumer responses to changes in prices arising from taxes and regulatory change? I guess the general direction we are heading in (in terms of climate change, and the sorts of responses we are generating, and in terms of changing fuel mix and increasing emphasis on gas, for example) highlights our judgment of how consumer reactions might lead us in terms of fuel choices.
Mr BILLSON–I guess where I am coming from is musing about emissions trading and the big argument of where do the tools land; the tidiness of using, say, the energy producers as distinct from the consumers on a transaction cost basis; and where the pricing signals will bring about a change in behaviour. You could aggregate vehicle emissions through State-based registration arrangements and, where they blow the permit, have that reflected in registration figures reward–those sorts of things. I am just interested in your forward-looking work on plugging your production trading model into a broader emissions trading model that takes account of the consumption of what you produce.
Mr D’ARCY–Let me make just a general comment, more from an economics perspective, I guess. In principle, the more these things are sheeted home to the final consumer the better, because that would more directly act on consumption choices. But in principle, imposts that arise at the production end do flow through to the consumer end and, accordingly, there should be a neutrality between the two. As to how quickly that changes consumer choices, that is an open question.
CHAIR–If you think about envisaging a different future for a company–picking up Andre’s point a little earlier–if Shell were to say, ‘A sustainable Shell is one which is totally committed to the renewable energy market; it is one where we are going to focus on delivering energy sources that are completely renewable, in hydrogen fuel cells or PVs or whatever.’ As soon as you say that, you have created a whole bunch of people within the company whose degrees are in a whole suite of skills which will no longer be relevant. You have effectively said that in time you will be obsolete and the rents that you have earned from your investment in human capital are going to go. This is not an easy thing for a company to do and I guess one of the most difficult parts of making these sorts of changes is how you deal with your own work force. I wonder whether you have any guidance for us in the work that you have been doing with companies about how you manage those sorts of changes.
Mr STILLER–In our project we have not dealt with managing the traditions of a large company like Shell and so forth. But I think it is a gradual shift. If you take the other assumption of saying you have certain human capital of skills of the employees in the company and if that were to be kept it would mean there would be no development of a company. There is obviously a continuous developing of the skills within a company. If you just direct this development in the right direction, I think there is sufficient time to develop towards knowledge of sustainable technology–in this case, let us say renewables and so on.
In our division, we work a lot with small and medium-sized companies and enterprises in trying to engage the existing skills of the work force because, in a lot of cases, many more skills are available within a company than are actually used in the business of the company. If you bring all the people together from the different levels of staff–from normal staff to management–and use a COMPASS radar such as I have shown you to let them work out the possible improvement, for an environmental or social direction or whatever else, then you can gain a lot of benefits just by this communication process you start within a company.
Mr HEINZ–I will just respond to that. I think Hartmut makes a good point which is that good companies often are in a continual state of evolution and adaptation. I can give you a brief example of a broadly similar case study, in Sweden’s largest oil company, OK Petroleum. When we worked with them, they realised that there is no future for their business model as it is currently, which is selling fossil fuel, burning it up and putting it in the atmosphere. That was a bit of a painful realisation but one that they intellectually could not escape. Then, following on from Amory’s third principle of natural capitalism, which was looking at the service and flow model, someone in the management group realised: ‘Hey, look! We are not really an oil company, if you think about it. Our expertise and our investments and our capital are tied up with fuel delivery. We are actually specialists at fuel delivery, if we think about it, though we think of ourselves as an oil company.’ Then they said, ‘Well, is there room for a fuel delivery service in the future? Is that a viable market in the decreasing room in the funnel? Yes, we think so.’ Then they started doing calculations for bio fuels, what kinds and what market niche. Within an afternoon they had identified a future vision of the company that you cannot really define on a timeline very well but it gave them something to work towards–so that they had a reason, every time they implemented an internal tax strategy or something.
In fact, they first cleaned up their gasoline so that it was the cleanest in Scandinavia, then they said, ‘Dear Mr Prime Minister, we have two questions. First, why are we paying tax as high as our competitors when we have been so proactive as to be cleaner than they? The second question is: why are we as a society paying such ridiculously low tax on fossil fuels anyway?’ This may sound like some sort of strange corporate suicide, but actually it was anything but; it was an intentional attempt to try to change the market so their next investments towards fossil fuels will be more cost competitive.
Dr WILLIAMS–My question is to Hartmut. I am thinking about the work of Wuppertal and wondering what you have been doing on society and trends in quality-of-life and wellbeing. After listening to the discussion this morning, I am thinking: how is this influencing the quality-of-life equation in terms of resource flows? In other words, have you got any evidence that we are moving from a material-rich measure of wellbeing to an experiential-rich measure of wellbeing? Until we start and pick up those sorts of indicators in a sociological sense, I suspect we are going to be pushing it uphill in terms of getting a real turnaround in resource flows. Are there any links out of your work?
Mr STILLER–We have elaborated the data for, let us say, 15 years more or less. What comes out is we have discovered material flows per capita within Germany have been more or less stable. There was a peak at the time of unification of Germany, because the East German economy had been much more inefficient in using material flows compared with the western one. But it came down rather soon, so we are now more or less on the same level. Data for other industrialised countries show a similar picture. So far, all the economic growth has been compensated by efficiency gains but not exceeded. You can say that is not sufficient; we have to come down. I am a bit more optimistic for the future, because with the IT revolution there might be a shift towards more dematerialised services. At least young people are getting used to taking those kind of services directly instead of via other people. I think the peak of paper consumption might also be reached now or may even have passed in some parts. From this trend, I am quite optimistic that a change towards a dematerialised economy might be coming.
Mr MUNCHENBERG–My comment flows on from what Hartmut and Andre have said–that those businesses that cannot handle change go out of business. That is a phenomenon which, with the pace of change increasing, is more and more relevant on a day-to-day basis. My comment is that there is an issue here for Australia and for other countries. It harks back to perhaps the third principle that Amory presented, and that is our education system and whether that is serving a very rapidly changing community in the way that it should be. Should we be producing engineers, lawyers, economists and whatever other things or should we be structuring our education system so that we are producing people who can contribute and continue to contribute in whatever sector they are working in as that sector rapidly evolves? That is a just a comment to add to the comments that have been made about flexibility of the work force.
Roger, you quite rightly raise the issue of how does the work force respond to this change and how do the engineers in Shell cope with the fact that their company is changing dramatically. The same question goes back to society in general, where we are seeing increasingly rapid change. How do we deal with those people who are not necessarily the beneficiaries of that change but in fact are ones for whom there are costs imposed? We might take water, for example. The way that water is used in Australia has been structured in a certain way by society, by governments and by business. That use of water is clearly not sustainable. We are going to have to make changes or changes are going to happen to us. How do we deal with those people who have been encouraged to operate in a certain way to whom we are now going to turn around and say that their way of operation is no longer sustainable? It is just throwing your question back to a general society.
CHAIR–It is a question that lies behind a lot of the public response to globalisation. It is a question that lies behind a lot of the public response to the decades of micro-economic reform that we have pursued. We have produced an economy which is growing more rapidly than it has ever done and is doing so in an inflation context that has been continuously below the Reserve Bank's concern limits. But at the same time we have had public responses that suggest that, while it has always been possible for the gainers to more than compensate the losers, in principle–which is the welfare economics test that you usually apply–in fact, that has not happened. I think, in the broadest sense, the public is telling us that we need to be more clever about how we deal with those distributional effects, but to do it in a way that does not lose the impetus for ongoing change. There are some moral hazards involved if you insist on compensating precisely everyone whose welfare is impacted by change. You can then end up stifling change completely.
I can give you practical example, which is not an Australian one. I was talking a few weeks ago with Sir Andrew Turnbull, who is the Secretary to the Treasury in the United Kingdom and deeply interested in environmental economics issues. We were talking about how to deal with congestion. Until we move to the new technologies that Amory was talking about, transport congestion is a major and difficult source for all developed countries to deal with in terms of greenhouse emissions. Andrew made the point that they have decided that it was very hard to put together a saleable package at the national level to deal with urban congestion because inevitably it is going to have impact on most households and is politically sensitive. You are going to have to use some pretty strong pricing signals–road access charges and so on–to deal with these issues. They felt that politically it was unsustainable to do that at the national level. What you needed to do was to move that sort of action to the point where you could demonstrate to the constituency that these funds were being recycled and used in a way that addressed welfare issues for that community. If you were increasing congestion charging or increasing taxes on parking, you needed to demonstrate that the funds were going back into local public transport improvements or demonstrate local quality of life gains. Your question is a huge one, but I think that one of the answers is to try to get these issues balancing at a level where you can make sense for ordinary people and ordinary voters.
Mr HEINZ–To add to that: there are two things. The longer we wait in addressing this as a society, be it Australia or globally, the larger the costs will most likely be, for two reasons. One is that we tend to build on our investments of the past and of today. If we are going in the wrong direction now and we start building on those technologies and those investments, when we have to change course, especially if it is a radical change in course, it will be more costly. Secondly, the longer we wait, the more we begin to feel the costs and the impacts of being ‘unsustainable’–be it through adverse market reactions or increases in resource prices or liability; the list goes on. That is one way you can explain to people who do not understand why we must change and why we must do it now. You could explain that that is one reason.
The second is to use Amory’s tactic and Hartmut’s tactic and what I think we have experienced as well. In almost every case, change is not as bad, especially financially, as people think. The basic reason is you have folks who say, ‘We have never done it that way. It probably cannot be done.’ They have this strange belief. They think it will cost more. But once they actually do the homework and start practising a new way of doing things, they learn and get better and they more than realise that there is plenty of money to be made out of eking efficiency and other stuff like that.
Mr MUNCHENBERG–The motive for my question was that this has often been the weak link in what we have done in the past. We have tended to focus on the economic, the environmental or the social dimension of the sustainability. What flows from the economic and environmental is an area where we have tended not to do as much of the sorts of things we have been talking about.
Mr HEINZ–In Idaho there is a cadmium mining community. A few years ago, we did a presentation with them. One of our main messages was that there is no future in spilling out heavy metals into the environment and everything. We thought we would not get out of there alive. But actually the town spokesman got up and said, ‘This is actually great because our contract for the mine expires in about 10 years. Our initial reaction would have been, 'we want more mining', which is the kind of reaction you find in timber communities and mining communities and a lot of natural resource communities because that is what we know. But if we know of a better sense of what the future markets entail, which is decreased mining or higher liabilities with it, maybe we can start planning today for alternative economic development strategies for our small, fragile community.’ So I think, depending on how it is phrased, it can be viewed as a real asset for small communities especially, like you have in Australia too.
Dr BUTCHER–We seem to have downplayed a little bit the role that the community can have in using the market to drive better environmental performance. It seems to me that, if the options are available at the same price, the choice then becomes obvious. The point Paul was making, that Australians are prepared to pay a bit more for better environmental performance for their product, is not just an Australian phenomenon. I think it is a bit more than just ‘prepared to pay a little bit.’ A case that is usually quoted is: there is no good using this in the United States because a survey once showed that no-one will pay a dollar more for a car that has a better environmental performance. I do not think that is right. Another case some people would be aware of is the reef fish industry in East Asia, especially focused on Hong Kong. Reef fish are gathered in some pretty appalling ways that are certainly is not sustainable. People have continually said that no-one in East Asia would be prepared to pay for reef fish that were collected in a far better way. Well, that is not true. Recent surveys showed that 10 per cent of the people that eat reef fish on a regular basis would be prepared to pay more for that particular product.
I would say, in any business situation, if you could acquire 10 per cent of a market, especially the market of reef fish in Hong Kong, that would be an enormously important move for a company to make. Even though it might be only 10 per cent in the first instance, you can drive enormous environmental change through a whole industry by a forward-thinking organisation actually trying to take that particular market. I think it is a far more powerful tool than has come out in our discussion to date.
Mr D’ARCY–I think that is a good point. It is very difficult to gauge the consumers’ willingness to pay ahead of launching a product. Our history is littered with incidents of getting that wrong, both underestimating the willingness to pay and overestimating it. The example I quoted was really about fuel here in Australia. You are quite right; in some continental European countries, for example, the willingness to pay for cleaner fuel is much greater compared with the willingness to pay here in Australia. But it is a very difficult task to judge, ahead of actually bringing something into the market, what kind of reaction you are going to get in terms of willingness to pay extra.
I was going to raise something else about institutional structures. Roger, you made the comment about revenue recycling as one tool for sheeting home to the community the opportunities and costs of environmental changes. Just picking up on that, revenue recycling gets government much more into the market. It is a much more interventionist, bigger role for government, not only imposing a tariff on roads but also then sitting on a big wad of money and dishing it out to the community. It raises a question in my mind about the role of government. Also, I made some comments about institutional structures and some pressures that might be emerging to change the institutional arrangements. Any comments on those?
CHAIR–On the first point, the example I gave was a practical one from the UK. But it does not have to be revenue recycling. I guess what Sir Andrew was saying to me was that you would need to decide at what level you can appropriately have a compact with the community about how to manage change and how the distributive issues will be dealt with. He was making the point that, if you are talking about managing congestion, the level at which the compact has to occur is essentially the city level. I am not arguing generally for recycling or generally for the idea of double dividends on environmental taxes, but really talking more about how you put together the package. On institutional issues, I will duck that for the moment because we might come back to that later in the final session.
Mr YOUNG–At the CSIRO we have been looking at environmental management systems and certification for irrigation products in the Murray Darling Basin. There is a very different pattern of trends emerging in terms of certification and access. People are finding certification does not lead to a higher price and there is little market premium for certified products, but the wholesalers will not buy your product unless you have it. So it is an issue over access. Prices are staying the same but people are losing access to markets because they are not up to the standards being set for environment. This is starting to be stressed to us time and time again. What we are seeing is an emergence of wholesalers, especially in Europe, who are starting to ask and inquire about how the food is produced. These wholesalers will only buy from certified producers who are meeting their standards.
We have to understand that there are two things going on. One is about market premiums. The other is loss of market access. You line up to sell your product and find you are no longer actually in that market. There are many examples around the world where suppliers have suddenly lost total access to large markets that where worth millions per annum to them simply because they failed to comply with the standards of the Forest Stewardship Council. This happened, for example, in Western Australia. Western Australia was selling sleepers into the UK, but lost access to this entire market because its forest management standards were not as stringent as those set by the Forest Stewardship Council. The price for railway sleepers stayed the same; they were sourced from somewhere else in the world.
Mr STONEHAM–Our three speakers have spoken about the supply side–what businesses can do to improve environmental management. I would like them to comment on the other side of the market. Are we doing enough to encourage consumers’ attitudes to change, given that people who make decisions about consumption and investment in an environmentally minded way are an extremely powerful force in the marketplace?
Mr D’ARCY–One of the points I was trying to make is that I think there is a much greater role for information flows to the community about the costs and benefits of their consumption choices. That is a real issue for government policy, as is the role for government in information dissemination and accreditation of good practice.
Mr STILLER–I see it in a similar way. The stronger the ecological preferences among consumers, the higher the additional rent you can also take out. It is not always necessary to sell green products to eco-consumers. But it of course allows you to address an additional market, because there is a certain willingness to pay an additional fee–not very high, but there is a certain percentage (for example, in the fruit market retailer margins are below one per cent in Germany). If you are able to charge five per cent more, then you have an enormous amount of additional revenue if production costs are similar or the same. You need this additional willingness to pay off the consumers, or at least this opens new business opportunities. The government can, of course, report this point but in my opinion it is not only the government. It is not going to work if you believe that the government can educate the society and the rest do nothing. It is your role to support but it is also the role of other people within society who are producing the trends–NGOs and so on–in which this consciousness for environmental issues is growing.
Mr HEINZ–In Sweden about 10 years ago we had a bit of an experiment going on where we sent out 4.3 million booklets and audio cassettes, one to every household. Our market survey showed that about 10 per cent of the Swedish public actually read and followed up on the basic environmental education on sustainability that those materials contained. With the additional efforts of others, like Greenpeace, at the beginning of the 1990s, it was enough to help change the perspective of the market. It moved from only eco-consumers understanding there is a problem to average consumers understanding there is a problem and being much more receptive to companies that have certification or proactive measures now in place. Now in Sweden you basically cannot sell, particularly in certain areas, without some sort of certification on it.
Dr BUTCHER–Following on from Mike’s comment about Western Australia and jarrah sleepers, there is another example where there was a proactive industry, the western rock lobster industry, which was the first certified fishery anywhere in the world. The opportunities that have suddenly opened up for those companies selling that particular product in North America and Europe are quite amazing. So there is the difference between the retroactive organisation and the proactive organisation–those that want to get on and take advantage of a particular market opportunity are often very handsomely rewarded. Those that are not prepared to do this sometimes lose their market. I think that is one of the major drivers. I must admit that Western Australia most probably will get more out of their western rock lobster than they ever did out of selling sleepers to the United Kingdom.
Professor FREEBAIRN–Could I express a little bit of scepticism about how far consumer power can go on this. One of the critical things about a lot of environmental goods is they are public goods. The classic one is the greenhouse gas story. My driving a car less or using less electricity is actually providing benefits to people in Bangladesh and Fiji rather than me, so there is an awful incentive for me to free-ride. I think back to the classic of my two kids, when the big blue was on about bleached and unbleached toilet paper. They came home from school and told us how terrible bleached toilet paper was and all the damage it was doing, so we then went and bought some unbleached toilet paper. It was not fluffy white; it was brown and it was hard. All of a sudden, we went back to bleached, fluffy white toilet paper. They realised that the five sheets of paper they saved were not going to change the world around. That goes on, over and over, so that is difficult.
There are some people who say, ‘Yes, I will make a conscious choice.’ The real challenge for them is how to label that. Just think of the battle going on now with genetically modified organisms. Food produced conventionally using lots of chemicals, with residues running into water streams and so on, is a problem. Then you might have these GMOs such as cotton where you do not use the chemicals. How are we going to trace, through the whole market system, clothes that are produced from stuff that has used all these sprays with residues, from cotton that does not have all these chemicals? That is a real challenge for a lot of products. You can do it easier on some. As Paul says, you can distinguish between leaded and unleaded petrol; that is easy. But in a lot of other things that is not easy. It becomes a regulatory labelling challenge for us.
The other problem I see is that consumer power is great if consumers are well informed. How do we get them informed? Let us think of the problems as you go into it. One of them is we do not have even good scientific knowledge. Teaching environmental economics, I am delighted that I have a whole lot of scientists in the class. They come to economics and say, ‘I have heard you have this model for this and that model for that and that for that.’ You come to greenhouse gases. How hot is the world going to be in 20 years time? I can get one model that says it will be five degrees hotter, I can get another that says it will be two and I can even get a few that say it will be zero. So, even if we had a scientific agreement–and we do not–you still have to sell it. That creates enormous information problems. I think we have seen here today three ways in which you can get that information. One is that you can have the companies do it, such as Paul described. But I am always going to be sceptical: surely Shell is going to put a good spin on its story–you know: ‘Oil is now clean and great and Shell is better than the others.’ So there will always been some doubt. Even with the NGOs, which are a little bit closer, we are going to go back and have a look and ask, ‘Who funded them?’ Think of the strife that ABARE got into in this country. It did the work on the tradable permits then all of a sudden the Australia Institute said, ‘You were funded by the oil companies; that’s the answer you would expect.’ That was terribly destructive. In a way it does come back in the end to poor old government that has to do it, and that is an ‘education right through’ story. It is not an easy one to knock off; it is very, very difficult.
CHAIR–I think that is really a good point, John. I know when we worked on changing attitudes in road safety to alcohol consumption and driving, we really did turn around the community’s attitude. But in that particular case you are also selling a benefit to the individual involved: you are reducing their risk of dying as well.
Professor FREEBAIRN–Yes, half the gains are yours and half are spillovers.
CHAIR–That is right. It does not demand quite as much altruism as many of the environmental decisions require.
Mr HEINZ–I would just like to respond to that. I think you have made some very good points. If you were referring to the consumer’s ability to change the world or move us towards sustainability based on just purchasing power, I think I would agree with you that it is a critical part of the driving forces for society. But it cannot be the only one, at least not today. However, I like to sometimes think also in terms of stakeholders or citizens, who also are consumers but who have other means of influencing corporations and society. Some are market-oriented, some are legal, some are civic–be it Greenpeace and their banners or be it a class action lawsuit or willingness to pay. There is a bunch of different mechanisms which have proved very effective and very costly to various members of society, particularly the corporate ones. I think government does have a role to play. I sometimes think government has the hardest role to play because it really is trying to figure out which roles and how it should play. I guess that is really the focus of our being here right now. But I would like to broaden the definition of ‘consumer’ to be ‘client’ so we can get a perspective of how things change.
Mr BILLSON–The idea of Kyoto and the involvement of the developing countries occupies a lot of people’s minds, mine included. I am curious to know what the reaction would be to an idea that says: beyond the incentives that are there for engagement of the developing countries, we actually recognise the moral argument about your domestic development–that we have had our shot at it and made our impact on the globe–and we understand where you are coming from, although we might not agree with you. But if that development is to be off the back of the developed countries’ economies–when goods and services are entering the developed economy from developing economies, that they be accompanied by emissions permits of the equivalent value–are we starting to get some way towards an additional lever to encourage engagement of the developing countries? Do we start to get somewhere nearer to ratification and somewhere nearer to actually making a constructive contribution to reducing emissions?
Mr D’ARCY–Anything that sheets home the cost will start to drive behaviour. My hesitancy, though, is that you could see mechanisms like that quickly turning into protection measures. Those forces are very difficult to resist. Once the doors open a little, it is very easy to see tariffs on goods from developing countries in the name of emission cost actually being more about creating a wall for the local industry.
Mr STILLER–Originally I had much sympathy for such a proposal. But after learning, for example, from a Swiss aluminium company that they in fact do not know from where the aluminium comes, if it is going through the metal exchange, I have my doubts that such a model would really be possible to implement. I think we have to develop other mechanisms to avoid such undesired consequences.