Improving agricultural productivity and competitiveness by improving environmental regulation

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Improving agricultural productivity and competitiveness by improving environmental regulation

Introduction

As part of the Commonwealth’s deregulation agenda to provide better national outcomes for the agricultural sector, which was identified as one of the five pillars of the Australian economy by the Abbott Government, the Productivity Commission (Commission) was requested to inquire into the Regulation of Australian Agriculture (1)  and report on its findings (Report). The Commission’s key task was to “identify regulations that impose an unnecessary (and therefore avoidable) burden on farm businesses”.(2) Its secondary task was to consider whether the regulatory objectives of legitimate policies could be achieved in a more efficient way.(3)

The Commission considered a wide range of material impacts on the productivity of Australian agriculture, including the domestic and international competitiveness of farm businesses, and identified regulations that should be reformed because they produce unnecessary burdens or unnecessarily restrict competition. This article reviews the burden of environmental regulation on farmers as found by the Commission in its Report.

The burden of environmental regulation on farmers

The conservation of native vegetation and biodiversity in Australia substantially depends on the actions of farmers. The Commission found that the burden of environmental regulation on farmers can have serious adverse effects on agricultural production, create perverse incentives and produce contrary environmental outcomes. The Commission recommended improvements to the regulation of native vegetation and biodiversity conservation to reduce its burden on farmers and acknowledged that farmers bear a substantial cost of providing environmental services that benefit all Australians.

Barriers to effective environmental regulation

Cumulative burden of laws

The cumulative burden of regulation provoked the most comment from participants in the inquiry that was the subject of the Report. The Commission found that dealing with layers of competing and contradictory environmental regulation is uneconomical for farmers and a barrier to development (4) and concluded that “reducing even relatively small regulatory burdens could make a difference to farmers”.(5)

Questionable, unclear or conflicting regulatory objectives

The Commission found that the effectiveness of an environmental regulation was difficult to reckon if the objectives of the legislation were unclear or conflicting.(6) This problem is most evident where the objects of environmental legislation list social and economic interests with environmental interests but do not provide guidance on how these interests should be weighed.(7) The Commission did not agree with submissions that environmental considerations should trump economic and social factors.(8)

Duplicative roles and inconsistencies across jurisdictions

The Commission found that “better coordination across jurisdictions and agencies would simplify arrangements and reduce the regulatory burden on farmers”.(9) For example, differences in the application and enforcement of rules across jurisdictions create uncertainty for farmers which could be improved by leadership, while greater transparency of government decisions and regular independent auditing could improve community confidence in local government. Duplication and inconsistencies make it difficult for farmers to understand their obligations and add to the cost of doing business.

Excessive prescription and rules that are disproportionate to risk

Excessive prescription resulting from disproportion- ate responses to risk was a common theme raised by participants. The Commission found that excessive prescription is often caused by the application of regulations that have been designed for other industries which are incompatible with agricultural production. Excessive prescription can occur where standards for urban environments are applied to the agricultural sector, such as where ambient dust levels in agricultural areas can be higher than the statutory limit which is based on city environments. The Commission found that regulators need to create industry-specific laws for agriculture instead of squeezing it into “one size fits all” regulation. It recommended that regulators should ensure that native vegetation and biodiversity conservation regulations are risk-based, assessed at the landscape scale and consistently balance environmental, economic and social factors.(10)

Ongoing changes to regulations create uncertainty

Ongoing regulatory changes create future uncertainty and can produce perverse incentives for farmers to avoid proposed regulation. This problem is best illustrated by a pervasive fear surrounding changes to native vegetation regulations which encourages landholders to plant exotic plants instead of native species or clear native vegetation to insure against the introduction of stricter native vegetation rules. A particularly perverse outcome of native vegetation and biodiversity regulation raised by the Commission is that farmers who degrade native vegetation are rewarded but the benefits of good environmental stewardship are acquired by the state or Commonwealth at no advantage to the farmer.(11)

Regulators need to be better communicators

The Commission found that the way regulators engage with farmers is crucial to ensuring good environmental outcomes. Smaller farm businesses struggle with the complexity of environmental rules and “the lack of clarity around what regulations apply to different activities and how best farmers can work within their legal boundaries”.(12) Complex environmental regulation leads to a higher incidence of inadvertent non-compliance which could be avoided if regulators supported farm businesses to understand the application, purpose and intent of complicated rules. The Commission recommended that regulators should review the way they engage with landholders on environmental regulations to ensure farmers understand the environmental regulations that affect them and what actions are required under those regulations.(13)

Regulatory response when there are differences in risk perceptions

Responses to different perceptions of risk were considered to be similar to the need for regulators to become better communicators by the Commission. The Commission found that more effective communication between regulators and the public can respond to perceptions of higher risk than is suggested by “scientific, technical and/or economic evidence”.(14)

Good regulatory processes are not always observed in practice

Poor regulation-making processes, in particular failures to adhere to good regulatory impact assessment methods, create poor regulation. The Commission found that good regulation-making processes were frequently not followed in practice. Assessment of the impacts of draft environmental legislation was especially poor. Impact assessments failed to rigorously test the costs and benefits of regulations and inadequately considered alternatives to proposed regulation. Regulations have been adopted despite being assessed as imposing net costs on communities and impact assessment processes can be disproportionally influenced by some stakeholders. The Commission found that the process of assessing the impacts of regulation needs to be reformed so that it cannot be used to legitimate the making of regulations that place unacceptable burdens on the community or be treated as merely a compliance exercise. Impact assessment of the burdens and benefits of draft regulation puts the intended regulation into con- text. The Commission found that generally the regulations that participants were most critical of were those that have not had their impacts effectively assessed. The Commission also found that assessments of regulatory burden should also include an assessment of the inter- action between current regulations and new regulations rather than just examining the impact of new regulations.

Cumulative burden of environmental regulation costs

The costs of native vegetation and biodiversity conservation regulations can be considerable for farmers. Costs are particularly high where compliance involves complex and costly processes such as detailed specialist advice about the presence of protected species on farmland. Costs can be greater where environmental assets are administered “in a very bureaucratic and inflexible way”.(15) The Commission found that native vegetation and biodiversity conservation that is administered inflexibly builds distrust of government and limits voluntary participation. The Report documents how bureaucratic reticence inhibited one farmer’s efforts to improve environmental outcomes for water birds after a flood event on his land and lengthy bureaucratic delays reduced the biological effectiveness of the farmer’s innovation.(16) The bureaucracy referred to the farmer’s innovation as a “pilot” because it did not want to create a precedent for future conservation projects. This example illustrates how rigid regulation does not always provide improved environmental outcomes and may even result in poorer environmental outcomes.(17) This is because rigid application of environmental regulation reduces incentives for farmers to conserve or re-establish environmental services or values.

Paying farmers for environmental services

Environmental regulation places substantial restrictions on legitimate land use without compensation. Unfortunately for farmers, restrictions on property avoid federal and state compensation regimes for the acquisition of property because they are not acquisitions and the cost of restricting legitimate farming activities “for the ‘greater good of society’ [means] … society is asking” them to pay for its benefit.(18) The result is that farmers are bearing a disproportion- ate burden of the financial costs of protecting the environment for all Australians and while market-based solutions should continue to be developed, the Productivity Commission recommended that all levels of government should buy environmental services, such as vegetation conservation, from farmers.(19) Compared to other countries which heavily subsidise and protect local agricultural production, Australia takes an indirect approach to supporting farmers. Australian farmers receive no market price support but instead support is provided “through a mix of direct budgetary outlays”(20) incentivising agricultural investment. Indirect support includes tax concessions such as income aver- aging, a range of deductions specific to particular types of agriculture, write-offs for electricity and telephone infrastructure, accelerated depreciation, hardship measures (21) and a Farm Management Deposits Scheme which defers income tax until deposits are withdrawn.(22) Therefore, the burden of maintaining environmental values for all Australians also restrains the international competitiveness of farm businesses.

Market-based approaches

The Commission recommended better use of market- based approaches to native vegetation and biodiversity conservation, including purchasing environmental services from farmers (23) based on its finding that where environmental regulation requires conservation, it should be supported by adequate funding to meet that objective.(24) For example,where native vegetation and biodiversity conservation environmental services delivered by farmers provide governments with the means to meet their international commitments, such as the significant carbon emissions reduction claimed by the federal government to meet its commitments under the Kyoto Protocol at zero cash cost, a farmer’s contribution is substantial and can represent lost productivity.(25) However, the science of native vegetation and biodiversity conservation is underdeveloped and this has immediate implications for market mechanisms. For example, the uncertainty of the impact of offsetting land clearing in one area for land rehabilitation in a different area requires limiting where offsets can be provided, stifling the market. Environmental service markets are also subject to considerable risk of policy change due to the high probability of new scientific discoveries.(26) Offsetting native vegetation clearing is controversial for the same reason because of the substantial limits to scientific knowledge concerning ecosystem restoration. This uncertainty impacts property rights, which are generally locked into a market but can be affected by policy changes that diminish the value of a property. When this occurs there is a risk that property owners could join together to resist any policy change impacting the market. To ensure effective environmental regulation, governments must address these matters when drafting environmental legislation. As environmental values are not evenly distributed across the landscape, the advantages provided by market- based regulation include incentives to:(27)

• retain and manage native vegetation by paying those with the best knowledge of the local environment;
• enhance community welfare;
• facilitate scrutiny of the costs and benefits of each regulation;
• promote dynamic efficiencies and the flexibility to adapt to changes;
• account for differences in conservation costs between different regions to determine where benefit-cost ratios are highest; and
• provide opportunities for increasing environmental values.

Private benefits of retaining native vegetation

The benefits to farmers of environmental regulations are notoriously difficult to quantify as they are not directly or easily measurable, not least because the relationship between conserving native vegetation and climate is “very complex and not fully understood”.(28) But even if the benefits of conserving biodiversity and native vegetation could be quantified, they currently lack a market value, making assessments of the trade-offs between regulation and generating environmental benefits dependent on non-market valuation methods, including the value of non-use/conservation.

Similarly, it is inherently difficult to measure the additionality of native vegetation conservation activities since farmers maintain and retain native vegetation because it contributes to agricultural productivity by preventing erosion, providing timber and fodder, providing shelter for stock, providing habitat for animals that contribute pest control and pollination services, for example. The wide variation of environmental services that farmers’ conservation activities provide benefits all Australians by protecting threatened species and their habitats. Equally, the cost to the Australian community of excessive land clearing is very great.(29) As such, private benefits do not outweigh universal benefits. There is little evidence that the private benefits to farmers of providing environmental services are greater than, or equal to, the benefit provided by those services to the Australian community. The Commission found that there is a wide range of variation in the private benefits of retaining native vegetation for farmers. Combined with variations in laws across jurisdictions, the variability of landscapes makes it difficult to develop a national understanding of the benefits of retaining native vegetation and conserving biodiversity. Declines in rates of land clearing can only partially explain whether native vegetation laws are effective, particularly from a biodiversity conservation or soil and water conservation perspective. These declines may be influenced by other factors such as development in land clearing technology, commodity prices or exchange rates.

Risk-based regulation

“Risk-based approaches to regulation are designed to ensure that applicants’ obligations are proportionate to the expected impacts of their proposed actions.”(30) The Commission found that native vegetation and biodiversity conservation regulations restrict how farms operate by:(31)

• sterilising land from agricultural production;
• halting diversification of production;
• curtailing the exploitation of precision technologies;
• preventing the effective management of weeds, regrowth and woodland thickening.

These restrictions limit a farmer’s ability to respond to increased demand for agricultural products. According to the Commission, risk-based environmental regulation ensures that environmental obligations are proportionate to the expected impacts of farm operations and require sufficient flexibility to focus on environmental outcomes as applied case by case.(32) The advantages of risk-based environmental regulation include more comprehensive assessments of land clearing proposals, assistance with balancing costs and obligations, increased compliance incentives, allowances for trade- offs between risks and it addresses perverse incentives under current regulations.

Reducing environmental regulatory burden on farmers

Farmers are already strongly incentivised to conserve the environment as this will maintain or improve the productivity of their land and farming operations. How governments treat the provision of environmental services by farmers is crucial to effective regulation. Regulation that asserts a disproportionate net cost on farmers is bad regulation as it does not provide adequate funding to meet the objective of the regulation so that farmers bear the full financial cost of meeting that objective. The Commission found that requiring one group in society to bear the costs of regulations that benefit the whole population reduces governance discipline and treats conservation as a “‘free good’ where more is always better”(33) and is an unnecessary burden on farm businesses. There is also scope for governments to work more cooperatively with landholders and allow for flexible and innovative ways to meet regulatory objectives. And risk-based decision-making has the potential to enhance stakeholder trust in environmental regulators.(34)

Our conclusions

Conservation is an activity which must be managed and farmers as majority landholders are the primary managers of native vegetation and biodiversity conservation. If the recommendations made by the Commission in this Report are implemented it is very likely that environmental outcomes will be improved and will build the capacity of farmers to provide the environmental services that all Australians need them to provide. Balancing environmental, social and economic factors promotes productivity and provides financial certainty to farmers which will provide greater certainty for environmental conservation. A best practice code should be developed by regulators for regulatory impact assessments and should be applied consistently. Command and control regulation is unsuitable for environmental regulation, which requires responses to variable and local issues. Incentives promoting native vegetation and biodiversity conservation by farmers, including payment for environmental services, are required to successfully manage these resources. Regulators must recognise and engage with the conservation efforts and expertise of farmers and restore trust in their administration by communicating effectively and working collaboratively with farmers to minimise the uncertainty and impacts from bad regulation identified in the Report. As one participant submitted, “[better] regulation should enhance productivity, not impinge it”.(35) We agree.

This article was first published in the Australian Environment Review Volume 32 Issue 7 2017.

Footnotes

(1) Productivity Commission Regulation of Australian Agriculture Inquiry Report No 79 (2016) www.pc.gov.au/inquiries/completed/agriculture/report/agriculture.pdf.

(2) Above, p 3.

(3) Above.

(4) Above n 1, p 59. However, the Report noted, at p 114, that the number of referrals under the Environment Protection and Biodiversity Conservation Act 1999 (Cth) is low and agricul- tural projects that are required to proceed to assessment are rare.

(5) Above n 1, p 59.

(6) Above n 1, p 10.

(7) Above.

(8) Above n 1, p 114.

(9) Above n 1, p 11.

(10) Above n 1 , p 36 and 139, Recommendation 3.1.

(11) Above n 1, p 124.

(12) Above n 1, p 13.

(13) Above n 1, p 36.

(14) Above n 1, p 13.

(15) Above n 1, p 18.

(16) Above n 1, p 125.

(17) Above n 1, p 18.

(18) Spencer v NSW Minister for Climate Change, Environment and Water [2008] NSWSC 1059; BC200808866 at [85] and see Spencer v Commonwealth (2015) 240 FCR 282; 328 ALR 16; [2015] FCA 754; BC201506903 in relation to the Commonwealth jurisdiction.

(19) Above n 1, p 152, Recommendation 3.2.

(20) Organisation for Economic Co-operation and Development, Producer and Consumer Support Estimates database, Interactive data comparison Australia — Country note, accessed
9 August , www.oecd.org/ tad/agr icul tural -policies/   producerandconsumersupportestimatesdatabase.htm.

(21) Australian Government, Department of Agriculture and Water Resources, Taxation measures—Australian Taxation Office: A Better Tax System for Farmers, accessed 9 August 2017,
www.agriculture.gov.au/ag-farm-food/drought/assistance/tax-relief.

(22) Australian Taxation Office, FarmManagement Deposits Scheme, accessed 9 August 2017, www.ato.gov.au/Business/Primary-producers/In-detail/Farm-management-deposits-scheme/.

(23) Above n 1, p 36, Recommendation 3.2.

(24) Above n 1, p 19.

(25) Above n 1, p 119.

(26) Above n 1, p 150.

(27) Above n 1, p 147.

(28) Above n 1, p 116.

(29) Above n 1, p 118.

(30) Above n 1, p 139.

(31) Above n 1, p 120.

(32) Above n 1, p 139.

(33) Above n 1, p 19.

(34) Above n 1, p 13.

(35) Above n 1, p 10.

 

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