N., Dwyer, G., and Peterson, D.
the environmental problem and policy objectives.
can be powerful tools to address environmental problems.
why markets may be absent — there can be solutions.
policy catalytic — harness the private sector.
public sector efficiency.
who should pay for environmental problems.
Clarify the ‘environmental problem’ and policy objectives
hear there is an environmental problem. But what precisely is it? What
exactly are we trying to fix or prevent? What environmental outcomes do we
want? What are the benefits and costs of alternative action? These may seem
very simple questions but they are very fundamental for governments designing
pressures associated with natural resource-based production systems in
Australia include: salinisation of land and water; acidification of soil;
soil erosion and deterioration of soil structure; spread of weeds;
eutrophication of streams and lakes; and loss of biodiversity. Taken
together, they are usually seen as systemic — as ‘Australia’s
economic terms, the natural environment has three main (inter-related) roles:
provides raw materials for production processes: air water, minerals
it is a
receptacle for wastes generated by businesses and households; and
provides amenities and aesthetic values – scenery, wildlife, etc.
environment differs from other parts of the economy, in that:
resources can be renewable, but if over-harvested they can be wiped out;
waste assimilation capacity is over-used, it can be permanently damaged
(thus there are serious thresh-holds and discontinuities in their supply);
resources (such as forests and lakes) can provide all three functions.
economic perspective, systemic environmental problems are broader than simply
the direct costs of the degradation of natural resources. They also include
reductions in society’s net welfare from inefficient use (including
non use) of natural resources. Efficient and effective environmental
policy should be based on good science and
good economics. Unfortunately, because of the complex and often
poorly-understood biophysical relationships involved, an accurate assessment
of public and private benefits and costs of any actions, or of inaction, is
very difficult. Policy design when there are large information gaps or
constraints, is a huge challenge for governments.
consider any man-made system, such as a factory, mill or power-station, we
know exactly where the inputs go in and the outputs (good and bad) come out;
we can measure them, we know how much extra pollution there will be if we use
an extra tonne of some input, or if we increase output by some percentage.
But for natural systems, we have amazing ignorance about where and when the
outflows (borne by air or water) will appear, and what nasty surprises they
our simple models of environmental systems assume that if we change land-use
practices in one place, the environmental consequences will show up nearby,
almost immediately. In fact, it may take hundreds of years before the effects
appear, and they may appear hundreds of miles away. This also means that
often apparent ‘ecological crises which demand urgent action’ are the
result of something that happened decades or centuries before, and either
cannot be fixed, or don’t need to be fixed, now.
environmental problems are unlikely to be solved by ad hoc and piecemeal
policies that do not address their underlying drivers. While individual case
by case on ground works may address localised environmental impacts they will
not address the root causes of an underlying, more pervasive, malady.
environmental problems are likely to require a mix of policy tools including:
carefully designed regulation; voluntary codes of conduct; suasive
approaches, such as public awareness and attitudinal change campaigns; taxes;
subsidies; and sometimes, markets. The focus of this paper is on markets —
just one aspect of an environmental tool box — how the energy and
initiative of the private sector can be harnessed and how governments can be
catalytic by ensuring appropriate institutional settings are in place for
efficient and effective environmental markets to emerge.
have governments responded?
governments have directly provided environmental ‘goods’ (water
catchments, parks and outdoor recreation areas) and regulated private sector
activities to curtail environmental ‘bads’.
recognition of environmental problems has seen Australia committing large,
and increasing, amounts of public resources to the objective of improving the
environment particularly through natural resource management. For example,
the Murray Darling Basin Council has adopted a program of salinity
interception schemes worth $60 million over 7 years, complementing the $1.4
billion National Action Plan for Salinity and Water Quality (Truss,
levels of public expenditure are not necessarily a good indicator that
systemic environmental problems are being, or will be, adequately addressed.
The mere existence of public benefits from a conservation activity is a
necessary but not sufficient condition for that activity being undertaken by
the public sector. For example, even if most of the benefits of a particular
activity go to others, it still pays someone to undertake the activity if
their private gains are greater than the private costs. Government
involvement may ‘crowd out’ private sector initiatives. The key criteria
for intervention by governments should be whether or not an improvement in
social wellbeing results from that intervention. Any assessment should
consider the problems that might arise from government actions as well as the
various proposals have emerged for leveraging more private sector resources
to address environmental problems (e.g. Allen
Consulting 2001). While the desire to engage the private sector is
laudable, care is needed to ensure this is not translated into policy-induced
market distortions and perverse incentives that lower net welfare. Well
designed and functioning markets for environmental goods and services avoid
such problems, since they can:
the initiative and innovative capacity of the private sector;
some of the burden on the public sector and enable more remediation to
the underlying drivers of environmental problems.
role of economics
can provide insights into why environmental problems occur, how they might be
solved and indeed whether it is worth solving them. At its broadest level,
economics is a framework to help in balancing unlimited wants and scarce
resources. The ‘environment movement’ has done economists a service by
highlighting that the environment is a scarce and valuable resource and in
order to maximise society’s welfare, care is required in using it.
there are benefits and costs associated with the use and non use of the
environment. Importantly, scarcity inevitably results in opportunity costs
— the value of the net benefit of available alternatives foregone. We need
to remember that environmental resources are not ‘free’ when they could
be put to alternative uses. The problem of opportunity costs is complex and
widespread in environmental management. According to Bardsley
et al. (2001, p.35). it is a common thread
in the major public policy issues associated with the use and degradation of
land today has an associated opportunity cost in terms of viability of
that land in the future. There is much debate on the monetisation of
these costs as they require some weighting of current versus future use
(in economic parlance there is no agreement on an appropriate discount
rate). Similarly farming land may entail some loss of biodiversity and
this requires some method for evaluating the implicit cost. Finally,
transboundary concerns highlight the fact that the opportunity cost of
degradation need not be internalised by nations let alone firms.
not to say that all market based solutions will necessarily achieve policy
objectives — markets may ‘fail’ to function according to economic
ideals. Nevertheless, even imperfect markets for environmental services may
yield better net outcomes than no action or a fully regulated approach.
a forward-looking approach is needed, one where the expected total benefits
and total costs of alternative initiatives are assessed and action occurs
where economic benefits exceed the economic costs (including hard-to-value
effects like cleaner water and conservation of biodiversity). Environmental
managers should use a policy approach that is conducive to weighing the
merits of an extra dollar for conservation against an extra dollar for
competing social demands — such as for health, education, transport and
welfare. Of course society must also balance non-economic considerations and
monitor the trade-offs between non-economic objectives and economic
choices usually have a time dimension and this has important economic
implications for governments considering the benefits and costs of
alternative policy options. Since a dollar today is worth more than a dollar
tomorrow, how do we choose between options with outcomes in different time
periods? How do we ‘discount’ over long time frames? For example, high
discount rates will weight policy choice toward reaping benefits today rather
than later, and will also ‘bias’ decision making towards activities with
rather modest costs now, compared with activities with huge costs much later.
on-going debate on the choice of discount rates (box 1). Nevertheless it is
helpful to separate rudimentary cost-benefit analysis for relatively short
horizon environmental projects from the intergenerational equity issues
associated with extremely long time horizons. How (or whether) to discount
the welfare of future generations
and how much capital stock should be passed onto future generations are
important questions for governments.
Sustainable Development principles suggest the total stock of assets
(including natural capital) passed on to future generations should be at
least as great as that inherited (PC
1999, p.8). Markets and market principles can be used to help
determine the values we place on natural capital, but ensuring a sufficient stock of natural capital for future generations is a
problem for society to address more broadly through the democratic process.
Economists can aid the decision making by providing information on risks and
limitations of any government intervention as
well as addressing the absence of markets that make valuing natural
Economists have identified (highlighted by
Stiglitz 2000) two approaches to the discount problem (which in some
circumstances can yield the same result):
social rate of time preference — based on the degree to which
individuals trade off decreases in current consumption with rises in
future consumption — the consumers’ borrowing rate; and
opportunity costs — using the rate of return on alternative
investments — the producers’ borrowing rate.
Various factors complicate the discounting
question. First, there may be divergences in the discount rates between
individuals and society — individuals may not consider the implications
of their choices on future generations and free ride thinking that other
individuals will instead take future generations into account. Second, it
is not uncommon for the outcomes of environmental action to have an
indefinite time dimension — for example consider the time dimensions of
how greenhouse emissions reductions may affect climates.
in assessing benefits and costs of environmental action it is important to
consider the human dimension of any policy choices. Where reform is likely to
improve the net welfare of the community but also result in significant
transitional costs, it is appropriate for governments to consider reducing
these adjustment costs and how this might be best achieved.
Economic insights into environmental problems
important insight of economics is that markets can be powerful tools that can
be harnessed to achieve better environmental outcomes. The information
generated by markets can enable society to improve its well being. Why is
this so and what are the limitations of markets associated with natural
resources? What can be done when markets do not exist?
understand these questions it is useful to think of the natural ecosystems as
potentially providing both goods and
services (see Daily et al. 1997).
Ecosystem goods are goods that can be harvested from natural ecosystems such
as food, fibre, timber and biomass. In contrast, ecosystem services are the
functions performed by ecosystems that lead to desirable environmental
outcomes, e.g. air and water purification, drought and flood mitigation, and
stabilisation of climate.
functioning markets enable exchange of goods and services and this is no
different for natural resources. Markets for ecosystem goods are easily
observed in commodity markets that deliver food and many of our clothing and
shelter needs. The information exchanges that occur in the marketplace are
critical to the success of markets (see box 2).
there are markets for many ecosystems goods, there are very few effective
markets for ecosystems services (Daily
et al. 1997b). The lack of markets reduces information the
available to decision makers to make appropriate resource use decisions and
this can reduce the overall wellbeing of society.
challenge for environmental managers is understanding why markets may not
exist for aspects of the environment and what, if anything, might be done to
facilitate them. Broad based and well designed economic instruments should be
at the fore of an environmental managers’ policy toolkit. In particular,
they should be directed to getting the price and value of environmental
services right — so that they reflect the true marginal social value of the
service. Ideally, the policy objective should be to position environment
resources including environmental services as an integral part of the
mainstream conventional economy.
this exchange, information is revealed to buyers and sellers that can aid
decision making. In the case of markets for environmental goods and
services if the markets operate well, the price can reflect the value
society places on the good or service. Prices reflect the scarcity of
goods and services as well as the preferences of buyers and sellers. The
higher the price the higher the implicit value to society.
negotiation provides signals and information to buyers and sellers. As
sellers negotiate a price at which a good is sold they reveal information
about the cost of producing an extra unit of the product. Similarly, as
consumers negotiate a purchase price they reveal information about the
value they enjoy from consuming an extra unit of product.
(Whitten and Bennett 2001, p.3)
a competitive market, the market value usually reflects the net social
value of a good or service. A well functioning market also generates
information and incentives more cheaply than a planned economy (Wills
1997). Both government-planned economies and market economies have
limitations, but markets are consistently more efficient.
Identifying the causes of
the environmental problem
solution of environmental problems lies in understanding clearly their
underlying causes. Edwards and Byron
(2001) identify three economic factors that commonly explain much
of the environmental damage to Australia’s natural resource-based economy:
lack of knowledge; government policies that have affected incentives faced by
landholders; and the absence of markets.
Lack of knowledge
found the Australia landscape very different from Europe. Soils were dry and
infertile and the summers long, hot and dry (Barr
and Cary 1992, p.1). Australians have not had long to learn the
relationships between the activities of man and the condition of the soil,
water, vegetation and fauna (especially given the long lead-times that
sometimes occur between human action and nature’s response).
information will continue to be important to address knowledge and attitude
shortcomings of both landholders and society more broadly. This will aid
their understanding of the Australian landscape and its responses to natural
and human induced change. In terms of policy design, this suggests important
roles for research and development, education and extension.
opportunities here for private natural resource managers. For example, some
private conservation businesses are already generating a portion of their
income from selling the research skills and management expertise they have
developed. It is likely there will be increasing demand for private extension
services that advise on conservation management issues.
policies have made it rational to behave in ways that could damage the
environment. For example some agricultural policies (such as tax incentives
for land clearing; fertiliser subsidies; irrigator subsidies; product price
supports; drought assistance; and pastoral leases conditions) have encouraged
intensive and at times environmentally damaging forms of primary production.
Similarly, trade protection policies, such as tariffs, have sheltered
inefficient manufacturing technologies and industries, usually at high
environmental cost. Moreover, other policies have also acted to constrain
markets from possibly addressing environmental problems
of agricultural protection, it is also arguable that declining levels of
protection has lead some managers to consider alternative landuse systems.
Declining farm support has probably increased the conservation focus of some
landholders in marginal rangelands — with some seeking to supplement farm
income with revenues from conservation activities such as ecotourism related
farmstays and native flora production.
also continue to emerge of large properties being bought by conservation
initiatives with the sole focus of undertaking conservation activities on the
holding — Birds Australia have purchased Gluepot Station in South Australia
and Newhaven in Northern Territory; the Australian Bush Heritage Trust have
purchased Carnarvon Station in Central Queensland.
and Hone (2001, p.39) note that the retirement of land is one way
of promoting biodiversity conservation in agricultural areas. The effects of
land retirement for small and isolated rural communities that have previously
relied on pastoralism should be considered. Changing landuse systems can have
adjustment implications and this issue needs to be understood by landholders
and governments. Nevertheless, the opportunity costs of lost rural production
for some rural industries should not be overstated. For example, withdrawing
some marginal wool country from production could have positive price effects
for the remaining Australian wool producers (see Haszler
and Hone 2001).
reforms of the last two decades have gone a long way toward addressing many
of the price distortions in agricultural commodity markets and manufacturing
industries. However, there is still room for improvement in other policy
areas, for example water markets, pastoral lease conditions and taxation
earlier the absence of markets reduces the information available to resource
managers and the community more broadly and can lead to undesirable
environmental outcomes (box 3). Economics can help us understand why markets
might be absent and how this might be overcome.
the knowledge was available, land managers have sometimes had little
financial incentive to consider the effects that their decisions have on
others. This applies to decisions on water use that affect irrigation
salinity, decisions on tree removal that impact on dryland salinity,
decisions affecting the addition of nutrients to ground water and surface
water, and decisions on control of weeds and animal pests.
have usually taxed or regulated the actions of those responsible for imposing
‘bad’ environmental spillovers. Where the source and effect of the
spillover are clear such as point source polluters of streams, remediating
action is most likely to be successful. In some cases, science is only
beginning to emerge to help us understand the biophysical relationships and
consequently the causes of some spillovers.
Spillovers and public goods
Markets can fail to form or not operate
efficiently because of spillovers and public goods. Externalities (or
spillovers) arise whenever an individual or firm undertakes an action that
has an effect on another individual or firm for which the latter does not
pay or is not paid (Stiglitz 2000, p.215).
So called ‘public goods’ occur for one
or both of the following reasons:
once a good is provided to one individual, it is provided to all — it
is not possible to exclude people from consumption (ie it is ‘nonexcludable’);
consumption of the good by one individual does not reduce the benefits
available to others (ie it is ‘nonrival’ in consumption (PC 2001)
There is little incentive for an individual
or firm to pay for consumption of a public good since it is possible to
‘free ride’ on its provision to others.
cases there has been little incentive for a free market to provide some
environmental goods and services even if their provision would enhance
overall social wellbeing. Historically, this has been common to goods and
services associated with the environment. Governments have traditionally
tried to address the ‘public good’ aspect of conservation through the
direct provision of environmental goods and services. For example, in the
past national and state parks and reserves were seen as the bastion against
the nexus between public goods and government provision is blurring and this
is creating opportunities for private sector conservation initiatives. This
is because there is a growing recognition that many aspects of the
environment traditionally considered to be public goods can be provided
privately. Examples continue to emerge of highly organised private groups and
individuals (such as Birds Australia and the Bush Heritage Trust) finding
ways to provide what were previously considered public goods.
also a multitude of examples of local community groups working with councils
and government authorities to provide more local environmental amenities. For
example, near Maffra in East Gippsland, the local Landcare group has been
working with the local council and catchment management authority to restore
a section of the Macalister River to wilderness — bellbirds are beginning
to return to what was once known locally as ‘Bellbird Corner’.
Understanding the absence of markets
Australian environmental markets the small number of buyers and sellers and
uncertainty over the nature of the service being provided are major hurdles
to markets addressing environmental problems. While environmental awareness
is growing and more people appear to be willing to pay for environmental
services, in many markets the scarcity of buyers is constraining the growth
of environmental businesses.
example, Earth Sanctuaries Limited has noted the lower returns from its more
isolated operations such as Scotia Sanctuary in Western New South Wales
compared to its smaller more profitable Warrawong Sanctuary in the Adelaide
hills. One of the challenges for private conservation initiatives seeking to
market their services is educating and convincing the public of the mere
existence and benefits of their service.
major hurdle is the fact that it is very costly bringing buyers and sellers
together to establish a market (see box 4) — the high ‘transaction costs’
of trying to tap into the latent but dispersed demand of Australian consumers
and finding buyers for environmental services.
Markets are not costless. In fact, the
costs of establishing a market can be so high that markets fail to form
— the so called ‘transaction costs’ may exceed the expected gains
from trade. Cost of exchange include:
potential buyers’ costs of identifying prospective sellers and
sellers’ costs of identifying prospective buyers;
measurement of the quality and quantity of the asset being transferred;
revealing potential buyers’ willingness to pay and potential sellers’
willingness to accept; and
specification of property rights and transfer of rights. Wills (1997,
Information problems lie at the heart of
transaction costs and many absent markets:
this is understood there is the possibility of addressing the problem
through the use of modern technology and clever institutional design. The
basic reason asymmetric information destroys markets is that it is
hazardous to do business with someone who has relevant but hidden
information. The uninformed party is liable to be exploited and may be
unwilling to participate. Bardsley et al. (2001, p.37)
Policy solutions to environmental problems
can address information failures. One of the advantages of markets is that
they can help reveal information. However, the market based instrument
needs to be designed carefully so this can occur. As will be noted later,
where information asymmetries exist, the price mechanism associated with
conventional markets might not be the most effective method for revealing
preferences of participants — other techniques such as auctions and
tendering may be more suitable
small private conservation businesses struggle to establish markets for their
services simply because it is so costly to identify their potential clients
and inform them of the product. Even where such costs could be low, other
hurdles exist. An interesting example is the Calgar Springs Sanctuary located
near Gosford on the Sydney-Newcastle freeway. Despite being on a major
tourist route, red tape has prevented any sign on the freeway to inform
potential visitors of its existence.
innovative approach to the transaction cost problem has been to link the
marketing and pricing of a good with a related environmental service. For
example, Wetland Care Australia has developed a funding model for the
restoration of wetlands. Producers of a local branded agricultural product
are approached to donate a percentage of the sale price to a wetlands
restoration project that can be linked to the product. In return, the
producer is able to promote this positive environmental dimension of their
model is working successfully for BRL Hardy Pty Ltd with their Banrock
Station range of wines. Sales of these wines have risen with consumers
demonstrating a willingness to pay for wetland restoration projects at the
Banrock Station winery and other Wetland Care Australia sites.
marketing strategy has proven so successful for BRL Hardy that they have
expanded it to include their European and North American sales (personal
communication, Professor Jeff Bennett, Australian National University, 22
successful approach (also discussed later in this paper) to the transaction
cost problem is auction and tendering. This has been useful where information
failures and small numbers of buyers and sellers prevent effective markets
from forming. ‘Prices’ emerge through a structured process of bids rather
than the ‘invisible hand’ of conventional markets. A recent example has
been the Victorian Government’s ‘Bushtender Scheme’.
complex transaction cost problems can be very resource intensive —
particularly in terms of information and capital. In some cases, it seems
that a ‘critical mass’ will be needed for some projects to be established
and achieve success (e.g. consortiums of private individuals, groups and
The role of property
recurring theme of recent Productivity Commission research has been the
importance of clear and effective property rights to emerging environmental
initiatives. Clear and effective property rights are a foundation of any
market or regulatory approach to biodiversity conservation (see box 5).
emergence of markets for environmental services will be hampered where the
rights and responsibilities of the private sector are unclear. If markets for
conservation do not function well, there can be a role for governments to
establish well-defined and enforceable property rights and thereby facilitate
the emergence and operation of efficient markets.
is desirable for economic efficiency that rights and responsibilities be more
clearly defined, this should only occur to the extent that it is feasible or
cost effective to do so. Tightly specified rights can increase transactions
costs just as surely as vaguely specified property rights can.
challenge is to design property rights that are sufficiently defined for
markets to form and yet sufficiently flexible to evolve over time in response
to changing information and community preferences.
efficiency with which a society meets the aspirations of its citizens will in
the long-run depend largely on the adaptations made to property rights in
response to technological developments, newly discovered relationships and
to property rights may occur through the common law or government
legislation. Redefinition of property rights needs to be undertaken with care
— any changes to property rights can give rise to questions of compensation
How producers and consumers use
environmental resources depends on the property rights associated with
those resources (Tietenberg 1992, p.45). Property rights comprise the
bundle of ownership, use and entitlement rights that a user has over a
particular resource, good or service and include any responsibilities that
the user may have to others. They have to be seen as part of a system
which includes the rules under which those rights and responsibilities are
exercised (Bromley 1991).
Property rights may change over time with
community expectations. An efficient property rights structure — the
theoretical ideal — has four main characteristics:
universality — all resources are owned and all entitlements (rights
over how they can be used) are completely specified;
exclusivity — all benefits and costs that result from owning and
using the resource only accrue to the owner, either directly or indirectly
by sale to others;
transferability — all property rights are transferable from one owner
to another in a voluntary exchange; and
enforceability — property rights are secure from encroachment.
In practice, these ideal attributes are
seldom met, but markets can work reasonably well despite some
deficiencies. It is when one or more of these characteristics is grossly
violated that markets are absent or operate inefficiently. For example, if
it is not possible to exclude users who do not pay for a good or service,
it is unlikely to be provided by normal market (supply and demand)
approach to aid clarification could be through an appropriate ‘duty of care’
(see PC 2001b). A
legislated duty of care, in conjunction with voluntary codes of practice, can
be more flexible and less prescriptive than many alternative approaches. It
could complement other initiatives such as voluntary community action,
education and, where appropriate, financial incentives and targeted
statutory duty of care has already been introduced by some state
jurisdictions — for example see the Queensland
Land Act 1994, the South Australian
Pastoral Land Management and Conservation Act 1989 and the Victorian Catchment and Land Protection Act 1994. Nevertheless, it is still
largely unclear how such provisions will be applied and how landuse might be
monitored or enforced. Further research and public discussion on this issue
Make policy catalytic — harness the private sector
based policy instruments can harness the private sector and make government
policy catalytic, particularly where the absence of markets is the dominant
feature which makes the environment a major policy issue.
actions that reduce transaction costs and improve information:
innovation and initiative of the private sector may be tapped unleashing
new technologies and investment towards the environment; and
resulting markets lower the cost of environmental policy making previously
unviable action feasible.
cases the actual costs of environmental remediation have been much less than
previously estimated because of the capacity of markets to deliver innovative
and cost effective solutions.
the US EPA wanted to reduce air pollution, (Nitrous oxide and Sulphur
dioxide) control costs were estimated by the industry to be $1500 per tonne.
The EPA’s (optimistic) estimate was $750 per tonne in 1993. Yet in 1997,
permits were trading at just $100 per tonne. The tradable credits system had
stimulated all sorts of undreamt of innovations and flexibility.
be done to unleash the innovative capacity of the private sector to achieve
more desirable environmental outcomes? Some fundamental steps include:
Remove constraints to
potential environmental markets
environmental problem, and its underlying economic and scientific causes are
well understood, before considering any other actions, environmental managers
should assess whether potential markets are being constrained by unnecessary
or inappropriate regulatory frameworks.
example, a number of institutional arrangements associated with biodiversity
conservation — particularly aspects of the frameworks for land tenure,
competitive neutrality, native wildlife and taxation — are characterised by
extensive and often complex legislation and regulation (see below). These
factors can increase the relative costs and risks of private conservation
activities compared with those of other viable land uses. This influences
investment decisions and may lead to less efficient and effective
specific examples of constraints to managing for biodiversity are listed
below (also see PC 2001a).
While the focus here is largely on Commonwealth and State jurisdictions,
others (e.g. Binning and Young, 1999)
have considered the constraints imposed by inappropriate local government
rights are not always well specified. For example, property rights for
native flora and fauna are not always explicitly, consistently or fully
defined in native wildlife legislation, and may vary according to the
jurisdiction and any conditions of a licence. The ownership of captive
native fauna held under licence in some jurisdictions may be uncertain and
some rights appear to be untested, which may limit private conservation
legislation unnecessarily prohibits potentially desirable private sector
initiatives. For example, only public sector agencies and zoos are allowed
to undertake international trade in native fauna — commercial
conservation firms are excluded from international trade in native species
for profit. However, it is unclear whether such general trade restrictions
are effective (for example, in terms of protecting native wildlife from
illegal activities) or whether other policy options would improve
conservation outcomes at a lower cost.
times, legislation and regulation also reduce incentives to develop
innovative approaches to improve conservation outcomes. For example, most
jurisdictions use extensive licensing systems and a broad range of
regulatory controls to control specific pre-conceived end-uses (such as
keeping or exhibiting native wildlife) or prescribe a particular approach,
or even piece of equipment. This can restrict private sector initiatives
unless they are in accordance with a licence or the native wildlife has
been declared unprotected or exempt from the provisions.
regarding the approach or application of legislation and regulations also
increases transaction costs and may discourage investment. For example,
altering prescribed grazing or stocking levels under existing pastoral
lease conditions is usually at the discretion of the relevant minister or
pastoral board. The lack of explicit administrative processes or decision
criteria can create uncertainty for landholders wishing to undertake
conservation activities that require reductions in stocking levels.
can also occur when legislation and regulation is applied inconsistently.
For example, different treatments of donations to environment and heritage
organisations affect the relative costs (and therefore attractiveness) of
alternative types of donations and may consequently influence the type and
amount of ‘environmental altruism’ undertaken. Amendments to existing
gifting provisions in income tax law to address these issues have been
proposed (Howard 2001).
also exist between the approach and application of legislation and
regulation across jurisdictions. For example, significant differences exist
between the State-based licensing systems and controls on the keeping and
trading of native wildlife. South Australia has a flexible and
non-restrictive system where applications can be made to keep any native
fauna. New South Wales, Queensland and Western Australia, have more
restrictions and controls which appear to be more complex than necessary
and may unduly constrain private conservation initiatives.
problems may be magnified by other government measures (such as
agricultural assistance) and/or tax treatments that encourage other land
uses that may adversely impact on biodiversity.For example, concessions
that lower the relative operating costs of production and land use may make
those businesses relatively more attractive, consequently drawing more
resources to them and, potentially, away from biodiversity conservation.
Subsidies to fertiliser and irrigation water, and artificially high prices
for agricultural crops, have distorted land-use, favouring agriculture
where it is not really viable, often accelerating clearance of natural
Create markets for
last few years there have been considerable efforts to design and establish
markets for specific environmental services. Some have been more successful
than others — what are the lessons for future policy development?
general, while the use of market based mechanisms and the creation of new
markets offers potential solutions to help deliver desirable biodiversity
conservation outcomes, it is unlikely to be suitable as a policy option for
addressing all conservation issues. Rather, it is likely that a combination
of policy instruments will be required.
combinations of market based instruments can be applied to different
environmental problems. While care is required to design the right set of
instruments for a particular problem, environmental management is full of
examples, such as air pollutant markets in the United States, where the mix
has gradually evolved over time to address unforeseen outcomes (see Tietenberg
1995). This is not a sign of policy failure but rather
demonstrates the adaptability of market based instruments when knowledge and
distinction can be made between schemes that use conventional prices to
reveal consumers’ willingness to pay and producers’ willingness to
supply, compared with schemes that reveal market information indirectly
through structured competitive bidding. The conventional price theory
approach (such as those used in cap and trade environmental markets) is more
suitable where core market conditions exist, such as enough sufficiently well
informed buyers and sellers willing to trade a definable, transferable and
contrast, Stoneham et al. (2000)
highlight the usefulness of ‘game theory’ approaches of competitive
bidding (such as the Victorian Government’s tendering and auctions approach
of the Bushtender Scheme) where basic market conditions do not exist and
information asymmetries are prevalent.
of property rights, creating markets for environmental services may involve
creating proxy commodities. The commodity for exchange must have an inherent
value to individuals in the community. The scarcity of the property right is
critical and must be enforceable if necessary — without scarcity the value
will diminish. Regulation may be necessary to ensure scarcity. For example,
the value of carbon credits lie in the restrictions on carbon emissions.
A realisable commodity is also central to businesses attracting investment
capital for the formation of ecosystem service markets.
property rights can encourage technology progress — more so than ‘command
and control’ systems (Millman and
Prince 1989). This means the pursuit of the environmental
objective will be less expensive and more timely. In addition, it is usually
easier to establish markets where there are clear point source producers of
an environmental commodity (‘good’ or ‘bad’). Schemes that allocate a
property right to produce an environmental bad should be designed to ensure
concentrations of the bad are not localised in space or time.
property rights to a defined production technology tends to constrain
innovation and the development of new lower cost processes. Successful
emission schemes have broadly defined the environmental constraint and then
allowed producers freedom to meet it as best they can (see Tietenberg
1995) i.e. they are outcome-based rather than prescriptive.
surprisingly information and technology are critical in the design of market
instruments. Science is commonly required to define proxy commodities and
verify aspects of the exchange in created markets. High levels of scientific
information can be central to the success of schemes where the property right
is not easily defined, measurable or verifiable. In the case of markets with
offsets, the science to measure and monitor the offset is critical.
information can be costly and add to transaction costs. However, successful
schemes have been designed where scientific information is limited or
production technologies are still evolving (see Tietenberg
1995, p. 25). For example the feasibility of “Wetlands banking”
will depend on the science dealing with the substitutability of the offset
areas being traded.
of the environment, such as the irreversibility, scientific uncertainty,
threshold effects and connectivity associated with biodiversity, attach risks
to policy design and implementation. When establishing new markets, a prudent
approach to balancing these risks is extensive testing and pilot scale
trials. For example, the New South Wales Hunter River Salinity Trading Scheme
recently enacted into State legislation started as a pilot scheme in 1995.
supporting market infrastructure is useful in conventional price markets. In
particular a centralised clearing house can improve the efficiency of
tradeable schemes. For example, on line trading can facilitate trade in spot
and futures markets and trade at short notice. It can also reduce the cost of
searching for a buyer and the need for an agency to closely administer the
Improve public sector efficiency
addition to using markets to allow the private sector to efficiently and
effectively deliver environmental goods and services, it is important to
examine the performance of public sector provision. Opening up the public
environmental sector to greater scrutiny is likely to create opportunities
for private conservation entrepreneurs to offer their services in
and public sector environmental markets are inextricably bound together and
we need to make progress on both fronts simultaneously. Unlike other sectors
of the economy where public provision has been prominent (such as utilities
and health) there appears to have been limited application of basic
competition policy principles to environmental activities (PC
example, governments have collectively agreed on the principle that any
competitive advantages that government businesses may have over their private
counterparts simply by virtue of their government ownership should in general
be removed (resulting in what is known as ‘competitive neutrality’)
unless the costs can be shown to exceed the benefits. Despite the apparent
generality of this principle, in practice it has had limited application to
government conservation businesses.
although jurisdictions have reviewed environment related legislation for
potentially anticompetitive effects, there appears to have been little change
in many areas, such as those related to the conservation of biodiversity.
Aspects of pastoral lease arrangements and native wildlife regulatory
frameworks may be anticompetitive and overly prescriptive. For example,
private sanctuaries have to obtain many licences that are not required by
competing public providers and face a broad range of regulatory controls on
keeping, use, trade and movement of native wildlife.
application of other aspects of competition policy could also be considered
including the pricing of, and access to, natural assets such as national
parks, state forests and reserves.
discussion and analysis of these issues is needed.
Establish who should pay for environmental problems
advantage of using markets to address environmental problems is that they are
a mechanism to gain funds for environmental action from the private sector.
Markets are only one policy tool and others may also be necessary. Other
mechanisms will be required to address who should bear the costs of
appropriate cost sharing frameworks can
create incentives for individuals to use resources more efficiently — governments
can reduce costs of beneficial private conservation activities and increase
the costs to private entities which harm the environment.
the rights and responsibilities of the private sector is a fundamental step
in determining who should bear the cost of additional conservation on private
land. How these rights and responsibilities are assigned is a matter for
political judgement based on perceptions of equity or fairness rather than
efficiency (Aretino et al. 2001).
But at present, when it is unclear who is responsible, very little action is
taken by either side.
effects of actions by a landholder to address, prevent or reduce
environmental damage are confined to his/her own property, it is appropriate
for the landholder to pay the costs of addressing the problem, as well as the
costs of adapting to it. The case for governments to pay in this situation is
weak — examples of situations of this type include some dryland salinity (Pannell,
McFarlane and Ferdowsian 2001) and soil acidification.
there is a public demand for more conservation than would be provided
voluntarily by the private sector alone, an important question arises as to
how the additional burden should be shared. If property rights effectively
require resource users to maintain an environmental standard, those who fail
to achieve this standard are imposing costs on the rest of us. In such
situations the ‘impacter pays’
principle should generally be adopted. This effectively amounts to
enforcement of an individual’s existing legal responsibilities to protect
the public “downstream”.
contrast, if the community demands results well beyond the level required by
established property rights, those benefiting from the additional
conservation activities (neighbouring property owners, the local or regional
community or the broader community, for example) should generally be required
to contribute to the cost of undertaking them — the ‘beneficiary
choice of cost sharing principle and how it is implemented would need to take
into account the costs of implementation as well as equity considerations (Aretino
et al..2001). For example, in adopting the ‘impacter pays’
principle, some individuals may seek to avoid paying for conservation, so
implementation requires effective monitoring and enforcement. If these costs
are too high, it may be simpler for the public to just pay up.
may also choose to pick up more of the tab in the short term to help
landowners adjust. Issues surrounding the social consequences of cost sharing
arrangements, and the possible need for adjustment assistance, are complex
and require examination on a case by case basis, but there are some general
structures will ultimately determine the distribution of the costs associated
with agriculture-related environmental damage. Even when farmers pay for the
environmental costs initially, part of the costs will ultimately be passed on
to consumers, domestic and foreign, for those commodities facing imperfectly
elastic demand and supply curves. However, for major Australian agricultural
commodities other than wool, price is determined totally by overseas supply
and demand — no part of extra policy induced environmental costs paid by
producers are passed on to consumers.
and Byron (2001) demonstrate that there is also a broader
dimension — if farmers around the world are required to incur extra
environmental costs, commodity prices will rise as higher production costs
shift the global supply curve upward.
in those countries where environmental costs are relatively low could be net
winners when the market response to the multi-country environmental measures
is allowed for. Cassells and
Meister (2001) found that New Zealand dairy farmers would lose if
they alone were made to bear the costs of effluent controls, but that they
would gain if they along with farmers in the other three leading dairy export
regions (EU, Australia, and US) all had those costs imposed on them.
paper has focused on the role markets can play in environmental policy. While
they are not a panacea for the environment problem, they are nonetheless a
helpful tool for environmental managers. Governments may be an important
catalyst bringing the potential of markets for environmental goods and
services to the fore.
many ways in which markets can be established or market based instruments
applied. Our design knowledge is still growing — no doubt there will be
successes and failures in the future. Basic market design principles continue
to emerge as practitioners focus on addressing poor information and high
transactions costs. As environmental science and technology and economics
improves so too should the flexibility of the markets we create.
Consulting 2001, Repairing the Country: Leveraging Private Investment, Report to the
Business Leaders Round Table, Canberra.
B., Holland, P., Matysek, A. and Peterson, D. 2001, Cost
Sharing for Biodiversity Conservation: A Conceptual Framework, Productivity
Commission Staff Research Paper, Ausinfo, Canberra.
N. and Cary, J. 1992, Greening a Brown
Land: the Australian Search for Sustainable Land Use, MacMillan,
P., Chaudhri, V. and Stoneham, G. 2001 ‘New directions in environmental
policy’, in Public Funding of Environmental Issues, 4th AARES Annual
Symposium, 5 October 2001, Le Meridien at Rialto, Melbourne.
C. and Young, M. 1999, Conservation
Hindered: The Impact of Local Government Rates and State Land Taxes on the
Conservation of Native Vegetation, National Research and Development
Program on Rehabilitation, Management and Conservation of Remnant Vegetation,
Research Report 4/99, Environment Australia, Canberra.
D.W. 1991, Environment and Economy: Property Rights and Public Policy, Basil
S. and Meister, A. 2001, ‘Cost and trade impacts of environmental
regulations: effluent controls and the New Zealand dairy sector’, Australian
Journal of Agricultural and Resource Economics, 45:2, 257-74.
G., Soderqvits, T., Aniyar, S., Arrow, K., Dasgupta, P., Ehrlich, P., Folke,
C., Jannson, A., Jannson, B., Kautsky, N., Levin, S., Lubchenco, J., Maler,
G., Simpson, D., Starrett, D., Tilman, D., and Walker, B. 1997a, ‘Ecosystem
Services: Benefits Supplied to Human Societies by Natural Ecosystems’, Issues
in Ecology, No. 2, Spring, Washington.
G., Soderqvits, T., Aniyar, S., Arrow, K., Dasgupta, P., Ehrlich, P., Folke,
C., Jannson, A., Jannson, B., Kautsky, N., Levin, S., Lubchenco, J., Maler,
G., Simpson, D., Starrett, D., Tilman, D., and Walker, B. 1997b, ‘The Value
of Nature and the Nature of Value’, Science,
July, vol. 289.
G. and Byron, N. 2001, ‘Land degradation and rehabilitation: A policy
framework’, in Public Funding of Environmental Issues, 4th AARES Annual
Symposium, 5 October 2001, Le Meridien at Rialto, Melbourne.
H. and Hone, P. 2001, A spillover paradox’, in Haszler, H. (ed) Landuse
Policy for Environmental Objectives - Contributions from Economics,
Proceedings of a Workshop for Environmental Managers, Healesville, Victoria,
7-8 February 2001.
P., Fraser, I. And Haszler, H. 2001, ‘Agricultural landuse and
biodiversity: Policy principles’, in Haszler, H. ed, Landuse
Policy for Environmental Objectives - Contributions from Economics,
Proceedings of a Workshop for Environmental Managers, Healesville, Victoria,
7-8 February 2001.
D., McFarlane, D. and Ferdowsian, R. 2001, ‘Rethinking the externality
issue for dryland salinity in Western Australia’, Australian
Journal of Agricultural and Resource Economics, 45:3, 459-75.
(Productivity Commission) 1999, Implementation
of Ecologically Sustainable Development by Commonwealth Departments and
Agencies, Report No. 5, Ausinfo, Canberra.
2001a, Constraints to Private Sector Conservation of Biodiversity,
Commission Research Paper, Ausinfo Canberra.
2001b, Harnessing Private Sector Conservation of Biodiversity, Commission
Research Paper, Ausinfo Canberra.
I. 1997, Economics and the Environment: A Signalling and Incentive Approach,
Allen and Unwin, Sydney.
J (Prime Minister) 2001, Address to the
Prime Ministers Awards for Excellence in Community Business Partnerships 2001,
20 August 2001.
S. and Prince, R. 1989, ‘Firm incentives to promote technological change in
pollution control’, Journal of
Environmental Economics and Management, 17:3, pp.247-65.
G., Crowe, M., Platt, S. Chaudri, V., Soligo, J. and Strappazzon, L. 2000, Mechanisms
for Biodiversity Conservation on Private Land, Natural Resources and
Environment Victoria, July.
J. 2000, Economics of the Public Sector, W.W. Norton and Company, London.
T. 1992, Environmental and Natural Resource Economics, HarperCollins, New
T. 1995, ‘Policy lessons from existing air pollution control systems: The
United States’, in Hanna, S. and Munasinghe, M. (eds), Property
Rights in a Social and Ecological Context: Case Studies and Design
Applications, Beijer International Institute of Ecological Economics and
The World Bank, Washington.
W. 2001, Truss Releases Murray-Darling Basin Salinity Strategy. Press Release
S.M. and Bennett, J.W. (2001), Policies
for Wetlands Management Change on Private Land, Research Report No.11,
National Centre for Development Studies, Australian National University,