Proceedings of the National Conservation Incentives Forum by dfgh4bnmu


									National Keynote – incentive design
National Conservation Incentives Forum
Melbourne 5 July 2005

       Drew Collins

                      BDA Group
                      Economics and Environment
Long history of landuse incentives in
 n   Until ~ 1980s largely production focussed

 n   Eg: subsidies, tax concessions and bounties to
      q   clear native vegetation
      q   cull pest species (including native fauna)
      q   develop land and water
      q   increase fertiliser and chemical use
      q   etc

                              BDA Group
Since 1980s shift from resource development
to stewardship and efficiency
n   Recognised failure of traditional policy approaches to
    efficiently allocate resources

n   Increasing recognition of resource degradation brought about
    by past practices – eg: salinity, acid-sulphate soils, water
    quality, degradation of supporting ecosystem services, ..

n   Rise in community environmentalism calling for a better
    balance between conservation and development à ESD

n   Led to raft of policy reforms in relation to drought assistance,
    water management, farm planning, fish & forestry resource
    access, etc …

                               BDA Group
In fact a fundamental policy shift
 n   Decade of Landcare, NHT, NAP
 n   Competition reforms (especially water)
 n   R&D – creation of LWA but also rise in prominence of nrm in other
     Rural RDC programs
 n   Environmental reporting – SoE, NLWRA, TBL corporate
     reporting, etc
 n   Recognition that;
     q   Environmental repair bill beyond public budgets
     q   Regulatory approaches used for urban envir gains not politically
         or practically transferable to nrm
 n   Interest in environmental incentives as mainstream
     policy tool

                                 BDA Group
Some Australian milestones
n   1982/83 drought – led to temporary water trading and reform program
    separating water and land entitlements, volumetric allocations and tradeable

n   1991/92 longest algal bloom in the world along the Darling
    river – prompted water quality reform agenda
n   National Competition Policy & COAG Water Agenda
n   1997 Kyoto protocol (and provisions for emissions trading)
n   NAP Salinity & Water Quality – MBI Pilot program
n   ………………
n   1997 national reviews of environmental incentives - by the
    Productivity Commission and Environment Australia

                                   BDA Group
            Staff Research Paper
            released by the
            Industry Commission
            (now the Productivity
            Commission) in July

BDA Group
Industry Commission review of incentives
 n   Identified incentive instruments in use at that time
     q   noted subsidies most prevalent incentive
 n   Considered 2 specific opportunities where incentives not
     being used but believed potential to do so:
     q   native vegetation retention – suggested conservation covenants
     q   dryland salinity – suggested extension of MDBC salt credits
         scheme to dryland areas
 n   Argued incentives can promote low-cost solutions to
     environmental problems
 n   Called for research into environmental performance
     indicators and opportunities for greater use of incentives

                                 BDA Group
            by EA from
            Dr David James
            and released also
            in 1997

BDA Group
Environment Australia review of incentives
 n   Updated an earlier 1993 review

 n   Provided more comprehensive stocktake of instruments,
     especially of those being used by local government

 n   Included review of tradeable resource rights (water, fish,
     forestry), noting their main function to ‘encourage allocation to
     highest valued use while meeting yield constraint’
     q   … butno real attempt to ‘co-manage’ significant environmental

 n   Report concludes with evaluation of incentives as policy
     instruments in relation to usual public policy criteria
     (effectiveness, efficiency, administrative ease & costs, …)

                                 BDA Group
Looking back at these reports
 n   Provided good overview of use of incentives to that time; &
 n   Valuable ‘call to arms’ for their greater use in Australia
     q   good timing given COAG competition reforms
     q   success of US Acid Rain scheme and interest in carbon trading

 n   … but incentives identified were;
     q   few
     q   generally not outcome based
     q   offered limited compliance flexibility
     q   trading schemes were in pilot stages with little trade activity
 n   Provided conceptual arguments for their use but limited
     consideration of substantial challenges faced in practice

                                   BDA Group
Since 1997, increasing interest in environmental
incentives as policy tools
  n   Incentive instruments are being encouraged by policy
      makers and vigorously investigated by the research
      q   led to raft of studies, pilots and applications

  n   In particular, Governments are looking to new
      generation incentives such as:
      q   the use of competitive allocation methods to provide
          subsidies – such as auction & tender approaches, and

      q   development of environmental markets where environmental
          effort is traded

                                   BDA Group
Investigation of environmental markets by
BDA Group
n   Designed markets applicable to water quality (nutrients,
    salinity), environmental flows, biodiversity, solid waste, used
    oil, greenhouse & biofuels
n   Some promising opportunities
n   But not always the answer – eg:
    q   potential market too ‘thin’ or trade benefits to small
    q   vague policy goals frustrates development of metric & targets
    q   lack of information / tools / cost to define, monitor & enforce
        tradeable rights
    q   concerns over requirement for statutory limits being imposed over
        diffuse sources of pollution (often rural activities)

                                  BDA Group
Prominent incentive instruments / trials
  n   Hunter River Salinity Trading Scheme

  n   South Creek Nutrient Trading Scheme

  n   Mandatory Renewable Electricity Target program

  n   New South Wales Greenhouse Gas Abatement Scheme

  n   Liverpool Plains Land Management Tenders

  n   BushTender trials

  n   Trust for Nature Management Agreements

  n   National MBI Pilot Program

                            BDA Group
The good are generally outcome-based
n   Hunter River Salinity Trading Scheme
    q   Switched management focus from ‘trickle discharge’ to
        discharges timed with high flows

n   BushTender
    q   Switched from input subsidies (for fencing, pest mgt, etc) to
        subsidies for biodiversity outcomes

à Much of the gains can be attributable to outcome-based
    à   Incentives will be most effective when applied closest to point of
        environmental damage – need to trade-off incentive targeting with
        costs / practicality

                                 BDA Group
NRM metrics a focus of MBI Pilot program
  n   MBIs demand metrics investigated
      q   biodiversity
      q   salinity
      q   stream flow
      q   stream quality
      q   carbon sequestration
      q   riverine condition

  n   Metrics are useful even without MBI
      q   Inform government about value for money
      q   Improve accountability

                               BDA Group
The MBI Pilot Program
 n   The Program aims to:
     q   Increase knowledge about MBIs in envir. & NRM applications
     q   Test new mechanisms that might be relevant to NAP through field
         pilots and experimental economics methods

 n   Round one nearing completion
 n   Eleven pilots funded (~$5m)
 n   Key documents forthcoming
     q   individual reports from each pilot
     q   overview report about Round One
     q   communication about Round One starts 2005-06

                                  BDA Group
MBI Pilot Locations

                                                                                                        ID18 Establishing Land
                                                                                                        Care Corridors (Auction))

 ID46 Farm Finance :                                                                                      ID53 Offset Trading
 Creating positive land use change                                                                        (Tradable Permit)
 with Natural Resource Management

                                                                                                          ID33 Tradable net
                                                                                                          recharge contracts
ID21 Auction for                                                                                          (Tradable Permit)
Landscape Recovery
                                                                                                          ID16 Green Offsets

                                                                                                        ID20 Multiple-outcome
                                     ID26 Catchment Care     (Auction)                                  auction for land-use
                                                                                                        change (Auction)
                                      ID8 Adoption of New Land
                                      Management Practice through
                                      Conservation insurance (Insurance)                                 ID57 Recharge
                                                                           ID10 Cap and Trade for
                                                                                                         Credit Trading
                                                                           Salinity (Tradable Permit)    (Tradable Permit)

                                                              BDA Group
Range of Pilots
  MBI Type            Method                   NRM Focus
              Field    Laboratory   Salinity   Water     Biodiversity
              Pilot    Experiment              Quality

   Auction     4           1           4         4           4
  Tradeable    1           3           4         4

   Offset      1                                             4
    Risk       1
  Leverage     1                       4         4           4
    Total      8           4

                                BDA Group
Auctioning conservation contracts

n   Significant improvements in cost-effectiveness
    q   25% improvement in biodiversity outcomes per $
    q   206-315% improvement in cost-effectiveness

n   Demonstrate that auctions can be designed for:
    q   Corridor formation
    q   Site aggregation
    q   Multiple-outcomes

                               BDA Group
Tradeable permits
n   Tradeable resource access permits relatively common
    q   One property right traded (eg. water market, fish quota)

n   Tradeable permit dryland salinity
    q   Potential for improved cost-effectiveness
    q   Transaction costs could be high if full participation needed

n   More complex where two intersecting property rights
    q   Eg. water and salt rights in irrigation systems

n   Experimental economics can support traditional analyses
    q   Not possible to run tradeable permits in field (legislation change)

                                 BDA Group
Other pilots
 n   Offsets
     q   Demand for capacity to offset (No Net Loss/Net Gain)
     q   Offsets useful where like for like is needed
     q   Offsets and auctions are a good match
     q   Don’t over-use offsets

 n   Risk markets (insurance)
     q   Risk markets may not be efficient with respect to NRM outcomes
     q   Intervention may not be worthwhile?

                                  BDA Group
Moving on from successful applications & the
MBI Pilot Program, ….

 n   There are instances where environmental incentives
     have been poorly applied

 n   Usually this is where incentives have not been applied
     close to the point of environmental damage
     à That is, they are poorly targeted with respect to the
       fundamental environmental issue

                              BDA Group
For example:

 n   Waste levies
     q   incentives at the end of production – consumption chains poor
         surrogate for direct incentives to conserve resources

 n   Water and energy efficiency incentives
     q   hotch-pot of incentives narrowly applied will not promote
         innovation nor harness ability of resource users to find low-cost

 n   Environmental flows
     q   Lip service under the National Water Initiative to market
         approaches, but big money to ‘efficiency saving’ measures
         despite cost > value of water to current users

                                  BDA Group
Incentive design observations
n   Cost-sharing – gov’t seeking the mythical 3rd party
n   Greatest potential where compliance costs vary
    q   … and so incentives must allow compliance flexibility
    q   narrow incentives = prescription not compliance flexibility
n   Incentives often a type of regulation rather than an alternative
    q   need regulatory platform, monitoring & enforcement
n   Robust incentives need good information
    q   as do all efficient policy instruments
n   Size of incentive needed à smaller than you would expect
    q   Cultural change – low fruit
    q   Dynamic efficiencies – incentives spawn innovation

                                  BDA Group
Thank you

Drew Collins

               BDA Group
               Economics and Environment

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