Following the Spring 2010 outbreak of locusts across the state of Victoria, Frontier (Australia) was engaged by the Victorian Department of Primary Industries (DPI) to review locust-control activities and policies and conduct an ex post benefit-cost analysis of these efforts. The evaluation was based on actual data revealed after the event.
The purpose of this study was to compare the benefits derived from the DPI locust-control program to the costs of conducting the program. The policy intervention was found to be net beneficial. We found that it was important to recognise that the government's locust-control strategy decisions were made under uncertainty in a situation where payoffs were contingent on weather outcomes. Had seasonal conditions been different, then it is expected that realised net benefits would have been even higher.
For more information, please contact Marita O’Keeffe at m.okeeffe@frontier-economics.com.au or call on +61 (0)3 9620 4488.
Today the National Water Commission launched their review of pricing reform in the Australian water sector and supporting reports including two Waterlines publications on scarcity and externality pricing in the urban water sector.
The review finds that, where implemented, water pricing reforms are making a positive contribution to achieving their intended outcomes. There are some areas that have not yet benefited from the full implementation of agreed reforms and some instances where the suitability and resilience of reforms have been strained, albeit under pressure from severe and prolonged drought. The review highlights that the objectives of water pricing in the future remain the same—that is, pricing should encourage economic efficiency in service delivery, investment and water use. However, the context has changed, particularly in the urban sector. The report makes nine recommendations on the future direction for water pricing reform.
Frontier (Australia) was contracted to the Commission to undertake the review of pricing reform and to develop the additional reports on scarcity and externality pricing.
For more information, please contact Marita O’Keeffe at m.okeeffe@frontier-economics.com.au or call +61 (0)3 9620 4488.
Today the National Water Commission (NWC) launched Urban Water in Australia: Future Directions to promote reform in the urban water sector. The Commission’s report found that while the initial set of national urban water reforms have been beneficial, they are not fully suited to Australia’s climatic conditions and other new challenges and opportunities. The Commission found that government intervention in the response to the recent prolonged drought has created ongoing institutional uncertainty about the roles and responsibilities of those involved in urban water management. The report identified other inefficiencies in the mix of policies commonly aimed at managing supply security such as water restrictions, regulatory targets and water pricing. In addition, the emergence of recycling and other integrated water management solutions has created challenges for water quality regulation and broader uncertainty about the roles of water suppliers in contributing to the liveability of Australian cities.
Frontier (Australia) was contracted to assist the NWC in the preparation of the final report and has advised the NWC under contract on many aspects of water reform since 2005.
For more information, please contact Marita O’Keeffe at m.okeeffe@frontier-economics.com.au or call +61 (0)3 9620 4488.
Communications, media and entertainment services are converging fast, with the digitisation of content and the emergence of new delivery platforms transforming consumer choices and shifting market boundaries. In light of this, the Australian Government has recently commenced a review to consider whether policy responses are necessary in the media and communications sectors to deal with these developments. In this bulletin, we focus on the implications of convergence for existing broadcasting licensing arrangements. We conclude that convergence will challenge the traditional form of these arrangements in Australia and make it harder for the Government to use existing quota obligations to support the local content industry.
In the past, communications and entertainment services were provided through separate distribution channels. Telecommunications services were provided over copper wires; television services were provided by broadcasters using radiofrequency spectrum; and written news content was provided in printed newspapers and magazines.
Often, control over individual distribution channels conferred significant market advantages on those organisations delivering services over them. For instance, the limited amount of radiofrequency spectrum made available for television services meant that only a restricted number of television broadcasters could operate in any given geographic area.
In return for the exclusive use of dedicated radiofrequency spectrum in Australia, television and radio broadcasters are currently required to pay licence fees based on a proportion of their gross revenues. Further, the Government supports local industry by imposing local content quota obligations on broadcasters. To the extent local content is more expensive, or attracts less advertising revenue, than other content, broadcast quotas are being used to subsidise local industry indirectly.
In March 2011, the Australian Government commenced a “convergence review”. In a discussion document released by the Department of Broadband, Communications and the Digital Economy (DBCDE), it observed that:
The development of digital broadcasting, data compression and internet-based technologies, coupled with improved infrastructure capability, means that content and services that were previously constrained to one delivery channel can now be delivered over many different platforms.
This phenomenon is known as convergence.
Digitisation means there is now a common way to deliver many alternative types of content to consumers. Where previously consumers received their news, video entertainment and telecommunications via different delivery platforms (i.e. print, television and telecommunications networks), all of these services can now be provided over a single delivery platform (e.g. broadband internet). This means that a number of services previously provided in distinct markets are increasingly becoming complements in both demand and supply.
At the same time, the combination of digitisation and increased capacity on broadband networks mean that traditional delivery platforms now face competition from the internet as an alternative (or substitute) distribution platform.
Convergence is also challenging traditional commercial models for television broadcasters, who are increasingly facing competition to provide video content from online service and content providers. There is already evidence available to suggest the average time spent viewing free-to-air (FTA) and pay TV is in decline, while the amount of broadband data downloaded is increasing.
Further, viewers are no longer restricted only to watching content when it is scheduled by FTA broadcasters. Consumers can now download content whenever and wherever they want, and watch it at times of their choosing. Further, consumers may be downloading – perhaps illegally – programs over the internet before they are broadcast locally. This reduces the importance of broadcast scheduling and the ability to sell high-value timeslots to advertisers seeking to target consumers at particular times of the day.
From a public policy perspective, convergence has the potential to undermine revenue collection and the support of local content under existing broadcast licensing arrangements. Licence fees from commercial radio and television broadcasters are estimated as a proportion of gross revenue, which is mainly derived from advertising. In recent years, the total amount of revenue raised from radio and television broadcast licenses has ranged between $258.6 and $286.8 million per annum[1]. As consumers substitute away from viewing content via television towards viewing content online, however, online advertising will become relatively more attractive to advertisers. In turn, this will reduce the revenue earned by FTA television broadcasters, and the revenue base upon which commercial broadcast licence fees are estimated.
The internet also creates challenges for Government attempts to support the local content industry. While the Government presently imposes local content quotas as part of broadcast licensing arrangements, it is much harder to impose such quotas on online content because consumers are increasingly able to download from anywhere in the world. This contrasts with traditional platforms where broadcasters could control what viewing options consumers faced by controlling the delivery and scheduling of programs. In this instance, the emergence of a substitute platform that works on a “pull” basis (whereby consumers pull content towards themselves) creates difficulties for local content quotas that presently rely on “push” distribution platforms (whereby broadcasters have control over what content is delivered to consumers). At the same time, the erosion of broadcasters’ revenue bases reduces their capacity to subsidise the development and broadcasting of local content.
From an economic perspective, a key change delivered by convergence is the creation of substitution possibilities that previously did not exist.
An important principal in economics is that the existence of substitute products and competition can drive out market inefficiencies. In this instance, convergence is undermining the degree of market power once held by those who controlled distribution platforms when separate services could only be provided over dedicated distribution networks. In turn, this is challenging the ability of the Government to maintain existing licencing arrangements that rely on a lack of competition between alternative platforms. The competition created by convergence is, therefore, forcing changes to existing licencing arrangements.
Economics is well placed to help consider policy issues associated with substitute services and behaviours. It suggests that social welfare will often be harmed where market features or Government policies distort economic activity. Distortions can be created when alternative activities are treated inconsistently. For instance, where taxation is applied to income earned from one economic activity but not another, such policies can distort economic behaviour away from the taxed to the untaxed activity.
This could happen where income earned from advertising on FTA television is subject to licence fees, but income earned from advertising on the internet is not. Distortions can also be created when one use of radiofrequency spectrum is paid for via license fees that vary with revenue (as is the case for broadcast television), while another is allocated via auctions that do not vary with revenue (as in mobile telecommunications for example).
Similarly, applying content quotas to one way of receiving content (e.g. television broadcasting) but not another (e.g. online services) can distort consumer choices between receiving content over different platforms.
Where possible, the Government should seek to ensure that licensing arrangements do not distort economic activity in this way, or favour one way for consumers to receive content over another. To achieve this, the Government may consider alternative arrangements such as those used in other overseas jurisdictions. Rather than obliging a growing number of disparate content providers to broadcast local content, the Government could directly subsidise the production of local content if it thought this was necessary. It could then consider ways to fund such subsidies transparently through non-distortionary means. One option may be via general taxation revenue. Other options may include a more targeted industry tax. For instance, in the United Kingdom and a number of other European jurisdictions, consumers pay a licence fee to own a television to fund the provision of public broadcasting services. In a converged world, the imposition of a “screen tax” – where a levy is charged on the sale of any device capable of receiving digitised content – could similarly be set to cover the cost of subsidising local content.
The Australian Government’s convergence review is likely to lead to changes in broadcast licensing arrangements. We believe that the Government’s focus should be on improving economic efficiency by determining the optimal level of revenue that should be raised from a converged dissemination industry, removing taxation distortions between content disseminators, and increasing transparency around the costs of providing local content.
Doing so, however, may not be easy. Such reforms will create winners and losers in a number of different industries, from FTA, pay-TV and radio broadcasting to media & content and broadband internet providers. In the absence of clear Government leadership in this area, there may be little convergence between these parties on the appropriate policy framework.DOWNLOAD FULL PUBLICATION[1] Australian Communications and Media Authority (ACMA), Annual Report 2009-10, at p. 71. The Government has agreed, however, to make licence fees subject to rebate arrangements that will lead to substantial reductions in licence fees for the 2010 and 2011 calendar years.
Communications, media and entertainment services are converging fast, with the digitisation of content and the emergence of new delivery platforms transforming consumer choices and shifting market boundaries. In light of this, the Australian Government has recently commenced a review to consider whether policy responses are necessary in the media and communications sectors to deal with these developments. In this bulletin, Frontier (Australia) focuses on the implications of convergence for existing broadcasting licensing arrangements. We conclude that convergence will challenge the traditional form of these arrangements in Australia and make it harder for the Government to use existing quota obligations to support the local content industry.
For more information, please contact Marita O’Keeffe at m.okeeffe@frontier-economics.com.au or call +61 (0)3 9620 4488.
On Monday 28 February 2011, the Climate Institute, an Australian interest group, released a study that claims that a 25% reduction on 2000 level greenhouse gas emissions by 2020 would be positive for regional economies because it will generate over 30,000 jobs. In this bulletin, Frontier (Australia) provides a critique of this claim.
The Climate Institute’s study released in Australia on Monday 28 February claims that a 25% reduction on 2000 level greenhouse gas emissions by 2020 would be positive for regional economies because it will generate over 30,000 jobs.1 Unfortunately, the Climate Institute misses the point of a carbon reduction scheme – to reduce emissions, not create jobs. Further, and crucially, it fails to identify the net impact on jobs, does not consider whether “green” jobs will manifest in Australia or overseas, and glosses over how costly any new jobs will be.
To derive this estimate of job creation the Climate Institute’s consultants first worked out how much extra renewable energy sources would be required to meet a 25% target. This was based on the electricity sector modelling of the “Garnaut25” scenario conducted for the Australian Treasury. To work out jobs created, the consultants simply multiplied the capacity installed by some ‘factors’ specific to each technology. Then they add up the jobs. The consultants work out that a total of 31,743 jobs are created.
Unfortunately, this is simply voodoo economics revisited and only a half-truth. The jobs in question are only new jobs to the extent that the people employed in them could not have worked elsewhere. To show that it is better to put these people into green jobs, one would have to demonstrate that the economy is better off shifting people into these jobs at the expense of jobs in other sectors. The study does not attempt to do that. All the study shows is that if you subsidise green jobs, then you should expect to see more green jobs, much as if you subsidised investment in sausage factories you would expect to see an increase in jobs making sausages.
This type of partial analysis is flawed since it does not include any estimate of jobs lost in other areas, wages effects, or national income effects; hence there is no estimate of the cost involved in the creation of these jobs. The truth is that Australia will suffer job losses in net terms following any meaningful cuts in emissions. This is because Australia is a small, trade exposed, energy intensive economy.
The Australian Treasury conducted detailed modelling on the impacts of a carbon pollution reduction scheme, but did not release analysis on job impacts. You can find these results in Australia’s Low Pollution Future at: http://archive.treasury.gov.au/lowpollutionfuture/. Using the same very detailed general equilibrium macro-economic methodology and assumptions as Treasury, Frontier (Australia) found that Australia will suffer a net job loss of about 37,000 by 2030 with just a 5% cut in emissions. Even then workers will have to take a cut in real wages of over 3% to keep job losses to this level. So while green jobs might appear, jobs in other parts of the economy will fall by more.
Even if we accepted the Climate Institute’s estimate of green job creation, we can compare this against the loss in per capital GNP to deliver these jobs to derive an implied ‘cost per job’. This sheds light on how effective a carbon price might be in creating jobs. The Treasury report GNP per capita in Chart 6.9 of Australia’s Low Pollution Future, which you can find at the link above. In 2020 the Reference case Gross National Product (GNP) per capita is $55,900, while the Garnaut25 GNP per capita is $54,700. Recall that the Climate Institute rely on the electricity modelling of this scenario. This is a reduction of $1,200 per person. For a population of 24.9 million in 20202 this equates to $29.9 billion or around 2% of total GNP. If we divide this lost GNP by the Climate Institute estimate of 31,743 jobs created, this equals $941,300 per job. This is just the loss in GNP by 2020, compared with the Climate Institute estimate of jobs created by 2030 when we can expect the cost per job to be even higher.
We do not claim that this is the actual cost per job created, as it does not take into account the value of emissions avoided. This is more to demonstrate the serious flaws in conducting the sort of partial analysis the Climate Institute have undertaken. The point is that the objective of a carbon price is to reduce emissions; it is a very inefficient tool for creating jobs.
Another problem with the estimate is that it includes construction and manufacturing jobs, and appears to assume that all manufacturing jobs will be Australian jobs. While Australia may have excellent resources to deploy wind and solar generation, that does not mean that Australia has any comparative advantage in the manufacture of these facilities. Globally, European, American and Chinese firms dominate the manufacture of wind turbines and solar photovoltaic panels. This suggests that we should not rely too heavily on Australian manufacturing jobs arising from assistance to these sectors. Although it may not prevent us from deploying them in Australia, if the objective is job creation in Australia, they will be very expensive jobs.
The objective of a carbon price is primarily to reduce emissions, not necessarily to provide industry assistance. To claim that it is about job creation is missing the point.
None of this is to argue against the need for a price on emissions, an idea that Frontier (Australia) and many others have long supported. However, the costs of implementing such a price need to be recognised and managed in a sensible way, particularly in a small, open economy such as Australia’s. There are a variety of ways of doing this, but half-truths about job creation is not one of them.DOWNLOAD FULL PUBLICATION(1) Accessed 3 March 2011, see: http://www.climateinstitute.org.au/media-contacts/media-releases/789-pricing-pollution-and-clean-energy-policies-unlock-door-to-regional-australias-clean-energy-jobs-potential(2) Australian Bureau of Statistics population projections Series B.
On 28 February 2011, the Climate Institute, an Australian interest group, released a study claiming that a 25% reduction on 2000 level greenhouse gas emissions by 2020 would be positive for regional economies because it would generate over 30,000 jobs.
Frontier (Australia)’s latest bulletin provides a critique of this claim. It argues that, unfortunately, the Climate Institute’s study misses the point of a carbon reduction scheme – to reduce emissions, not create jobs. Further, and crucially, the Climate Institute fails to identify the net impact on jobs and does not consider whether “green” jobs will manifest in Australia or overseas, or how costly any new jobs will be.
For more information, please contact Marita O’Keeffe at m.okeeffe@frontier-economics.com.au or call +61 (0)3 9620 4488.
