Papers selected for oral presentation are marked **
** Possibilities to use Market Based Tools for Management of Phosphorus Pollution from Point and Non-Point Sources in a Watershed
Authors: Tihomir Ancev (University of Sydney); Arthur L. Stoecker (Oklahoma State University)
Point source municipal and industrial pollution and non-point source agricultural
pollution attributed to organic fertilization is a serious environmental problem
for surface water quality. In particular, excess phosphorus loading can cause
eutrohication of rivers and lakes and compromise beneficial water uses. There
are various policies for regulating phosphorus pollution at a watershed level.
Market based mechanisms are potentially effective and economically efficient
for this purpose.
The objective of the paper is to present a method that can be used to determine
the optimal cap on phosphorus pollution in a watershed, the demand for tradable
permits by point and non-point sources and the expected trade in pollution rights
between the point and the non-point sources as well as among the non-point agricultural
sources of phosphorus loading in a watershed.
Soil and Water Assessment Tool (SWAT) was used as a biophysical computer model
to simulate the biological and hydrological parameters for the Eucha-Spavinaw
Watershed, Oklahoma in the Ozark region of the U.S. The results from the model
were integrated in a mathematical programming optimization framework. The mathematical
program was used to determine the optimally allowable phosphorus loading in
the watershed and to determine the optimal allocation of tradable rights for
phosphorus emission between the point and the non-point sources, and among the
non-point sources. Willingness-to-pay for tradable permits was determined for
each agricultural enterprise in the watershed and for the point source. Implicit
price of the tradable permits on the watershed level was derived.
The Murray-Darling basin in Australia has been seriously affected by eutrophication
in the early and mid 1990's. This threat is still very much present. External
phosphorus loading in the basin is mainly generated at the point sources but
the contribution of agricultural non-point sources has been also noted and investigated.
The methodology outlined in the present paper can be directly applied to various
catchments in the basin to determine the economically optimal distribution of
phosphorus abatement between point and non-point sources.
The main contribution of the paper is the derivation of optimal phosphorus loading
in a catchment using high level of spatial detail and the presentation of expected
direction of potential trades in phosphorus emission permits. The main implications
are that the patterns of trade in phosphorus pollution permits will depend on
the cost of the available abatement technologies and practices to the point
and non-point sources.
Feasibility of using tradable permits is discussed from a transaction costs
perspective. In particular, the paper discusses the possibility to establish
markets for permits within individual catchments. Transaction costs of establishing
such markets may be substantial, especially in the presence of multitude of
heterogeneous point and non-point sources. If there are relatively few agents,
the transaction costs will be reduced, but the danger of thin markets will still
persist.
Keywords: pollution, agriculture, phosphorus, tradable permits.
Presenting Author's Email Address: ancevt@agric.usyd.edu.au
** Land Management Tenders on the Liverpool Plains
Authors: Di Bentley (Liverpool Plains Land Management Committee); Warwick Moss (WWF-Australia)
The Liverpool Plains Land Management Committee (LPLMC) is a community based
organization working in the 1.2 million hectare Liverpool Plains Catchment on
the Namoi River in northern NSW.
Having undertaken extensive research and planning, it is now implementing its
catchment plan, the Liverpool Plains Catchment Investment Strategy (LPCIS) which
combines research based biophysical knowledge with landholder expertise to recommend
management actions (specific to different parts of the landscape) to overcome
six major natural resource issues.
In implementing its Strategy, the LPLMC is exploring different methods of paying
farmers for the public good component of various on-ground works. These methods
include Natural Resource Auctions, called Land Management Tenders (LMT's), in
which it collaborated with WWF- Australia. Two rounds of these Tenders have
now been completed, purchasing biodiversity, salinity and water quality benefits
on 8,000 hectares of country. Conducting the LMT's presented an interesting
set of challenges for a community committee and an NGO in the development of
communication strategies, environmental benefits indices, assessment processes
and management agreements. The poster will emphasise that lessons learnt from
community based trials can provide usefully different perspectives from government
administered trials.
LMT's have proved valuable in overcoming some of the traditional problems associated
with funding the amelioration of natural resource problems like salinity. They
have been well received by landholders.
The LPLMC is currently working with Environmental Management Systems (EMS).
Using EMS, it is attempting to link the implementation of its Investment Strategy
to landholder incentives provided through accreditation, product differentiation
and market access.
Key-words: community committee; Liverpool Plains, NSW; auctions; biodiversity,
salinity, water quality
Presenting Author's Email Address: Wmoss@wwf.org.au
Auction for Landscape Recovery In Southwest Australia.
Author: Michel Burton (University of Western Australia); Jane Madgwick
This project is one of the MBI pilots, and has started in mid-2003. As such
the poster will outline what is the intent rather than any specific outcomes.
The pilot will evaluate conservation auctions as a landscape recovery mechanism
through a cross-sectoral government-community partnership, coordinated through
the Avon Catchment Council.
The pilot will build on and complement the development and trial of a Salinity
Investment Framework and Framework for Biodiversity Target Setting in the Avon
Basin and identify auction design requirements relevant to the whole Basin and
other fragmented, salinising landscapes of high biodiversity value. We will
draw conclusions on the cost-effectiveness, "key success factors"
and "key impediments" of the auction approach with regard to achieving
environmental outcomes linked to the NAPSWQ and regional plan targets.
A particular feature of the pilot is the intention to compare two alternative
bid selection methodologies within the auction approach, an Environmental Benefits
Index and the Systematic Conservation Planning approach incorporating a selection
algorithm to iteratively assess the complementarily of successive bids (in terms
of marginal gains in biodiversity) in relationship to others.
The poster will focus on the specific issues associated with the management
of biodiversity in the region; auction design; the SCP approach to evaluating
bids and a general overview of the planned project process.
Keywords: WA; biodiversity; auction; Systematic Conservation Planning; Environmental
Benefits Index
Presenting Author's Email Address: Michael.burton@uwa.edu.au
BushBroker: A broker for biodiversity credits
Author: Michael Crowe (Department of Sustainability and Environment)
The BushTender trials conducted in Victoria offered landholders the opportunity
to bid for the price of their management services that improve the quality and
extent of native vegetation. Under BushTender agreements, sites will generate
known gains at costs that have been set competitively through a market mechanism.
Victoria's Native Vegetation Management Framework requires that losses associated
with vegetation clearing be offset. Difficulties arise where the gains required
for offsetting cannot be generated by proponents on their own property. In these
situations offsets generated elsewhere could be available for purchase by proponents.
There may also be other parties interested in purchasing biodiversity credits.
This could include philanthropic organisations seeking to enhance biodiversity
conservation and businesses seeking market advantage.
There is a beneficial role for a broker to facilitate and oversee these types
of exchange. The resultant funds would be returned for further investment in
biodiversity conservation through BushTender or equivalent programs. Without
a broker providing a central clearing house, developers would have difficulty
in locating suitable offsets and in negotiating satisfactory deals with credit
providers in a timely manner.
A project to examine the feasibility of establishing a broker to administer
trading in biodiversity credits has been undertaken. The main issues addressed
in the feasibility study included:
· The legal requirements for creating and trading biodiversity credits;
· The legal and administrative arrangements for the long-term security
of the credits;
· The options for the type of entity best-suited for the broker role;
· The level and sources of demand for biodiversity credits in Victoria;
and,
· The pricing of credits including transaction costs and allowances for
stewardship.
The cost-effectiveness of the broker will ultimately be tested by the willingness
of proponents to use its services, rather than to seek third-party offset through
their own resources.
The proposed role of the broker is similar to some other models (eg wetlands
mitigation in the US), however there are unique features including credit supply
through auctions and discrimination of biodiversity types.
Keywords: Victoria, biodiversity, credits, broker, trading
Presenting Author's Email Address: Michael.Crowe@dse.vic.gov.au
** Green Offsets For Sustainable Regional Development
Author: Carolyn Davis (NSW EPA)
Green offsets are designed to achieve environment protection while allowing
for sustainable development. Environmental impacts of a new or expanding existing
development can be offset by taking action to cut other sources of pollution
or impact nearby. That way the overall pollution level stays the same or is
even reduced. The main economic principle underpinning this form of market based
instrument is the reduction of environmental impact at least cost.
Offsets are being explored through a project Green Offsets for Sustainable Regional
Development - to implement three salinity offset proposals in the Western Regions
of NSW. Licensed premises will be able to offset their emissions by investing
in works that reduce salinity from diffuse sources, and so cost-effectively
reduce salt loads to stressed rivers in the Murray-Darling Basin (in Gwydir,
Murray, and Macquarie/Hunter catchments). The three premises considering offsets
are Ulan Coal Mine, Norske Skog Paper Mill and spa baths in Moree.
The offset pilots will be early cases for verifying how salinity offsets can
deliver both environmental and economic outcomes, using the environment protection
licensing framework. A key challenge is to ensure environmental outcomes are
achieved while keeping implementation simple and cost effective. The project
will address this by developing, testing and refining when offsets can be used;
establishing sound contractual arrangements for their use; and developing protocols
for monitoring their application.
Keywords: Western NSW, offsets, salinity
Presenting Author's Email Address: daviesc@epa.nsw.gov.au
Water = Ecology + Money: Community Management of Environmental Water for Wetlands.
Author: Paula D'Santos (NSW Department of Planning, Infrastructure and Natural Resources)
Between 1999 to 2003, an exciting trial program which uses an environmental
water allocation as a management tool, has delivered significant ecological
benefits for wetlands within NSW. The NSW Murray Wetlands Working Group (MWWG)
- an independent, community-based, wetland conservation group - has been managing
30,000 megalitres (ML) of environmental water on behalf of the NSW Government.
The program is aimed at improving and rehabilitating degraded wetland ecosystems
along the Murray and Lower Murray-Darling catchments in NSW.
The 30,000 ML was derived through infrastructure improvements during the privatisation
of a large irrigation company in southern-central NSW and funded by the NSW
Government.
To date the environmental water allocation has been used to:
· extend a natural flood event through the Barmah-Millewa Forest and
ensured a successful bird-breeding event for more than 30,000 colonial waterbirds;
· water a remnant stand of Common Reeds (Phragmites australis) within
the Werai Forest, and enhance the understanding of the Forest's commence-to-flow
levels and flooding paths;
· water approximately 120 isolated floodplain wetlands on private properties
within southern-central NSW. This project has developed partnerships between
the MWWG, a local irrigation company and 89 private landholders; and
· generate funds for environmental on-ground works and/or programs for
wetlands via trading on the temporary water transfer market.
The management of the environmental water allocation by a community-based group
is unprecedented in Australia and has proved to be highly successful. The group's
utilisation and management of the water is being used as a model for similar
initiatives around Australia.
Keywords: Murray & Lower Murray-Darling, NSW, environmental allocation,
trade, wetland ecology.
Presenting Author's Email Address: pd'santos@dlwc.nsw.gov.au
** Cap and Trade for Salinity: Property Rights and Private Abatement, a Laboratory Experiment Market
Authors: Charlotte Duke (DPI Victoria), Byron Pakula (DPI Victoria), Lata Gangadharan (University of Melbourne) and Tim Cason (Purdue University)
This pilot will use experimental economic methods to estimate the cost effectiveness
of a Cap and Trade approach to manage salinity concentrations from irrigated
agriculture within the lower Murray NAP region Victoria; specifically Nyah to
the South Australian Border.
Experimental Economic methods will be used to illustrate to national, state
and regional policy makers, the cost differences between the salinity levy currently
employed in the region and a Cap and Trade mechanism.
The salinity levy will be implemented in the laboratory as the experiment control.
The Cap and Trade mechanism will be implemented as a treatment. Students from
the University of Melbourne and Purdue University USA, and irrigators from the
region will make production decisions in the laboratory under the economic incentives
created by the different policy mechanisms. The experimental results will then
be analysed to estimate the cost differences between the two policy mechanisms
to help achieve the Salinity target at Morgan.
The project team is comprised of Experimental Economic Specialists from the
Economic Theory Centre Melbourne University and Purdue University USA, who have
extensive experience in using economic experiments for policy development. The
team also includes hydrological modellers from DPI Victoria, to estimate cause
and effect relationships between irrigation practices and river salt concentrations.
Cause and effect relationships are one of the main information requirements
for a MBI. The pilot is being lead by economists from DPI Victoria. Together,
this team has conducted two experiments in 2000 and 2001 to inform the design
of Bush Tender and Nutrient Trading in Port Phillip Bay.
Initial experimental results will be available to Natural Resource Management
Committee and jurisdictions involved in achieving the National Action Plan by
November 2003.
Key Words: Lower Murray NAP Region Victoria, Cap and Trade, Experimental Economics,
Irrigation Salinity Impacts, Hydrology Cause and Effect Relationships.
Presenting Author's Email Address: Charlotte.Duke@dpi.vic.gov.au
Enterprise Based Conservation - Conservation as a commercial land use
Author: Ed Fessey (Brewarrina Regional Vegetation Committee)
To address equity in relation to the cost of conservation on privately managed
land Brewarrina Regional Vegetation Committee has developed a market-based solution
to conservation, termed 'Enterprise Based Conservation'. Brewarrina Regional
Vegetation Committee is a state government appointed community-based group within
the Western Division of New South Wales.
Enterprise Based Conservation promotes conservation as a legitimate commercial
land use. To date landholders and the broader community have primarily recognised
production values in agricultural enterprises. Enterprise Based Conservation
allows conservation to have a productive value and be a competitive enterprise
to agriculture. The landholder outcome from entering this scheme is conservation
of native vegetation, referred to as the 'primary product'. 'Secondary products'
include reduced salinity, improved water quality, soil stability and biodiversity
conservation.
To help determine the eligibility criteria, conservation management conditions,
mechanisms for allocating funds and the administrative framework for Enterprise
Based Conservation, a pilot program has been established in the Western Division
by WEST 2000 Plus. Within the pilot program conservation landuse will be for
a five year term, however if Enterprise Based Conservation is implemented the
conservation landuse would be permanent.
Enterprise Based Conservation is best suited to the conservation of existing
native vegetation rather than regeneration or rehabilitation. The rangelands
were chosen for the pilot program due to the unmodified nature of the landscape.
This scheme could be applied to remnant native vegetation across any landscape.
Under Enterprise Based Conservation landholders voluntarily manage an area for
conservation purposes and receive an economic return comparable to the value
of the production that would have been generated from the conventional landuse.
Economic returns are received from an independent and self-generating conservation
fund. The interest gained from money borrowed from the fund sustains the dividend,
monitoring and administrative costs.
Long-term conservation will result from a short-term investment by the Government
to establish a conservation fund. Estimates of a one-off cost of $500M have
been made to conserve 10% of the rangelands of Australia. To initiate Enterprise
Based Conservation financial and administrative support is required from Government
or private industry. In the longer term, conservation products would trade on
the free market in competition with other commodity production.
Key words: Conservation, alternative enterprise, conservation fund, Western
Division.
Presenting Author's Email Address: C/o kkneipp@dlwc.nsw.gov.au
** Get More out of Cost Sharing with Risk Ranking and Cooperative Action
Authors: Jeff Connor (CSIRO PERU), Leonie Scriven (Earth Tech Engineering), Steven Gatti (Onkaparinga Catchment Water Management Board)
This pilot focuses on developing a cost effective way to allocate funds for
on ground works using tendering by catchment management Boards in the Mount
Lofty Ranges and Greater Adelaide region. It builds on innovative biodiversity
and water quality risk assessment methodologies already in use in the area.
Two cost effectiveness issues related to allocation of cost sharing funds will
be investigated. One focus will be using a risk reduction methodology to rank
the importance of on ground works actions/locations. The goal is to improve
targeting of high risk sites for action.
The other design issue addressed is the need to understand the potential for
increased returns per cost sharing dollar through the use of tendering rules
designed to encourage cooperation among landholders (and between landholders
and volunteers). Tendering approaches will be piloted that involve an educational
process of making coalitions of landholders and others interested in conservation
aware of the risk reduction value of cross property actions. Groups will then
be asked to prepare bids for programs of work to be evaluated with a protocol
that rewards cross property cooperation based on its risk reduction value. This
ranking procedure will be clearly communicated to potential bidders. To evaluate
the potential value of tender protocols to encourage cooperation, results from
these tendering rounds will be compared with results from past cost-sharing
or tendering with less explicit emphasis on cross property actions.
Key words: water quality, Mount Lofty Ranges, tendering, cooperation, risk reduction
Presenting Author's Email Address: sgatti@onk.cwmb.sa.gov.au
** Assessing the Applicability of Economic Policy Instruments for Dryland Salinity Management in Western Australia
Author: Tennille W Graham (The University of Western Australia)
The application of economic policy instruments for environmental management
often fail to consider such problems as, transaction costs and imperfect information,
which can impact on the selection and implementation of these tools. Economic
policy instruments have been identified as an alternative method (apart from
suasive and regulation methods) to manage dryland salinity in Western Australia.
This research will investigate (a) the potential scope for market-based tools
for dryland salinity management by identifying the occurrence or non-occurrence
of market failure from negative externalities caused by salinity and (b) the
practical applicability of specific instruments considering the level of transaction
costs and the extent of imperfect information.
The case study chosen for the research is the Date Creek Subcatchment, located
in the Blackwood River Catchment, experiencing land and water salinity. Market-based
solutions are potentially applicable to this area because i) it is judged that
market failure is likely to exist, due to the presence of high-value public
assets under threat from salinity, and ii) the existence of a local groundwater
system, which means that treatments are more likely to be effective in protecting
those assets.
First and second best policy approaches will be investigated in this research.
The methodology used is a dynamic optimisation model based at the catchment
level.
Keywords: Dryland salinity, Blackwood Catchment, transaction costs, policy instruments,
market-based instruments.
Presenting Author's Email Address: tgraham@agric.uwa.edu.au
** Utilizing Contingent Claims to Improve Livestock Waste Management
Authors: Ben M. Gramig ( University of Kentucky), Jerry R. Skees, (University of Kentucky) and Agricultural Risk Management Consulting and GlobalAgRisk), J. Roy Black, (Michigan State University)
The United States Department of Agriculture Risk Management Agency is currently
supporting research and development of market-based instruments to address environmental
and public health concerns from large livestock production facilities, known
as Concentrated Animal Feeding Operations (CAFOs). As part of this initiative,
this paper proposes the use of a class of index-based contingent claims contracts
in conjunction with third-party auditing to improve the management of CAFOs.
Society has continually attempted to alter the property rights governing CAFOs
through traditional regulatory measures designed under a "polluter pays"
approach to pollution control. While livestock waste management continues to
be a source of great public scrutiny, it is not clear whether managers of CAFOs
respond more to regulations or the threat of lawsuits from citizen groups. In
either case, the individual farmer has greater incentives to reduce the risk
of a problem. The premise of this proposal is that producers will reduce the
risk of failure of their systems more quickly when the regulator is the insurance
underwriter rather than a government entity. By packaging a waste hauling option
into insurance-like contracts that include independent third-party auditors,
one may be able to devise solutions that mitigate risk and prevent individual
failure problems.
The application of the proposed instruments may provide an optimal set of incentives
for environmental managers in a number of industries which pose information
asymmetry problems for regulators and are subject to high transaction costs.
As markets for environmental goods mature, the potential role for these MBIs
could be significant in addressing issues more pertinent to Australia-water
quality trading for NPS pollution, water market efficiency, and salinisation
are possibilities.
Keywords: USA, water quality, public health, contingent claims, third-party
auditing
Presenting Author's Email Address: bmgram0@uky.edu
NSW Environmental Services Scheme - new income streams for farmers
Authors: Keith Uebel, Dugald Black and Alastair Grieve (NSW Department of Infrastructure, Planning and Natural Resources and State Forests of NSW)
In a move to provide greater recognition for the environmental services produced
on-farm, the NSW Government has selected 25 landholders to take part in the
Environmental Services Scheme. Land use changes on the properties involved are
being funded through an investment of $2 million from the NSW Salinity Strategy's
Environmental Services Investment Fund.
The aim of the Environmental Services Scheme is to look at some of the practical
issues that will arise in the development of a market to support the environmental
services produced on-farm. These include the costs associated with including
environmental services within rural production, how to define and create ownership
of the services produced, and the types of financial, contractual and incentive
arrangements necessary.
The project will focus on environmental services related to salinity control,
remediation of coastal acid sulfate soils, carbon sequestration, biodiversity
enhancement, soil retention and water quality improvement. The properties represent
a range of locations, enterprise types, land use changes and environmental and
production benefits. They were selected in a two stage, competitive bid process.
Activities include improving pasture management and establishment, planting
new forests, managing regeneration of native vegetation, replanting riverbank
vegetation, or re-establishing wetlands all with the potential to generate environmental
services.
The scheme is currently being implemented. Twenty contracts with landholders
to a total value of $1.7 million were signed involving 9,000 hectares of land
use change. Work to implement land use changes commenced on these properties
and the first income stream payments totaling over $600,000 were made. The approach
appears to have been remarkably effective in encouraging land use change, with
average costs around $150/ha for enduring land use change.
Selection of the successful properties used a composite Environmental Benefits
Index comprising component indices. Specific property level "estimators"
for each environmental service were developed based on biophysical models. Index
toolkits for these services are now available in a menu-based spreadsheet format,
and are being incorporated into a single platform under the Land Use Options
Simulator - a spatially-based model allowing field staff & landholders to
run different land use change scenarios at a property level to predict environmental
service and traditional agricultural production impacts.
The indices are valuable for use in making investment decisions about land use
change and environmental improvement works at a number of levels. They can be
applied at a property scale, but use a consistent framework so that the environmental
benefit generated by on-ground actions in different landscapes can be compared
in a transparent and consistent fashion.
Keywords: NSW, Ecosystem Services, Environmental Benefits Index
Presenting Author's Email Address: alastairg@sf.nsw.gov.au
Auctioning Habitat Links & Carbon Sinks - An MBI For Carbon Sink Establishment In Victoria.
Authors: Jack Holden (Department of Sustainability & Environment, Victoria)
Increased carbon dioxide emissions are a major contributor to global climate
change. Vegetation sinks may provide, cost-effective, offsets for these emissions.
Victoria's "Greenhouse Sinks" project will procure management contracts
from landholders that establish permanent vegetation.
The objective of establishing this revegetation is to provide both biodiversity
improvements and carbon storage in a "sink".
A concurrent objective of the project is to reward the better and most innovative
landholders by auctioning these contracts. The lowest price bidder (in $/tonne
CO2 storage) will be contracted first, followed by the next lowest price bid,
and then the next et al. A reserve price mechanism may be incorporated into
the auctions.
The auction process should also maximise the amount of carbon storage and biodiversity
improvements for each invested dollar.
An eligible landholder will have a cleared site that occurs in a biodiversity
preferred part of the landscape (eg. riparian zones, buffering a rare plant
community or linking two remnants).
Victoria's Department of Sustainability and Environment (DSE) is the project
manager. DSE will call for expressions of interest from landholders and a then
field inspection will be conducted by a DSE representative.
The carbon and biodiversity values of the site will be assessed and revealed.
Bids can then be submitted based on this information, revegetation costs, land
opportunity cost and expected future value of a carbon sink.
Contract monitoring and performance based payments will then continue for a
number of years with successful bidders. Auctions are scheduled to begin in
early 2004.
Keywords: Auctions, Carbon Sinks, Revegetation, Biodiversity, Victoria
Presenting Author's Email Address: jack.holden@dse.vic.gov.au
** Selecting market based instruments to drive change in natural resource management
Authors: M. Leth and J. Johnson (Department of Primary Industries, Victoria)
Selection and implementation of market based instruments has tended to focus
on designing a mechanism and searching for a decisional situation in which to
advance it. However, this approach fails to consider the complexities of natural
resource management. Market based instruments, like all policy instruments must
not only consider the regional specifics of market failure, but must also address
the policy, regional and on-ground objectives and the drivers and barriers to
change at the farm and institutional levels. Failure to consider this complex
interaction limits the success of any policy instrument to achieve the desired
change.
If market based instruments are to be considered as an effective solution to
meet the required natural resource outcome, a sound selection and design process
is required. Through research undertaken in northern Victoria (Keeble and Johnson,
2002) a generic decision support framework has been developed to provide stakeholders
at the regional scale with a systematic and interdisciplinary approach to select
and design an appropriate policy instrument or package of instruments to meet
the on-ground, regional and policy objectives.
The generic decision support framework is innovative in it's approach to market
based instruments by scoping the issue, reviewing the current situation, assessing
the opportunities and selecting and designing the most appropriate policy instrument
or package of instruments to achieve targeted outcomes. Using a multiple case
study approach, the generic decision support framework is being trialed in collaboration
with the Goulburn-Broken, North Central and Mallee Catchment Management Authorities
in biodiversity and water use efficiency issues in the 2003-2004 financial year.
Keywords: northern Victoria, water use efficiency, biodiversity, generic decision
support framework, interdisciplinary approach.
Presenting Author's Email Address: melinda.leth@dpi.vic.gov.au
** Experience with Market-Based Approaches to Climate Change Regulation in the Australian Electricity Industry
Authors: Iain MacGill, Karel Nolles and Hugh Outhred (The University of NSW)
This poster outlines some recent developments in market-based instruments for
regulating greenhouse emissions in the Australian electricity industry. In particular,
we describe the policy objectives, market design and experiences to date with
four schemes:
· The Federal Mandatory Renewable Energy Target (MRET),
· The NSW Greenhouse Benchmarks Scheme,
· Queensland's 13% Gas Scheme, and
· Government accredited Green Power.
Key design issues are shown to include the:
· numerous abstractions and design choices that are required when implementing
such market-based tools, and the potential impact of such choices on a scheme's
effectiveness and efficiency,
· challenges of setting appropriate baselines in 'baseline and credit'
schemes, and the moral hazards that can arise in this process,
· potential for different policy measures to interact in ways that reduce
their respective environmental effectiveness,
· 'market for lemons' risks with markets for tradable instruments that
have measurement, verification and fungibility challenges as 'poor quality'
yet low-cost projects crowd out more expensive yet 'high quality' activities,
and
· challenges in creating transparent, liquid markets for these schemes
that allow efficient price discovery and risk management by participants.
The mixed performance of these schemes within the Australian Electricity Industry
to date illustrates the need for great care in designing such market-based approaches
to environmental regulation.
Keywords: electricity, climate change, regulation, market design, baselines
Presenting Author's Email Address: i.macgill@unsw.edu.au
** Establishing east-west landscape corridors in the southern Desert Uplands.
Authors: Juliana McCosker (Qld Environment Protection Agency), John Rolfe (Central Queensland University), Stuart Whitten (CSIRO)
The Desert Uplands bioregion is in central-western Queensland and is approximately
the same size as Tasmania. Rapid land development in the southern part of the
bioregion is fragmenting the landscape. To minimise risks of long-term biodiversity
losses, strategic east-west vegetation corridors, approximately 10 kilometers
in width, should be established. Agreements with 10 to 12 landholders are needed
for each vegetation corridor. The challenge is to select the most cost-effective
corridors across the region given that a number of potential routes exist, biodiversity
values vary between options, and landholder choices are inter-related.
This project outlines the potential use of market based instruments (MBIs) to
establish corridors. MBI's to be evaluated include competitive tendering and
iterative negotiation rounds, as well as within-property transfers of vegetation
clearing permits. The key theoretical issue of interest is how to design an
efficient auction system to allocate potential funding for a corridor. Bids
from landholders need to be cooperative (so that corridors line up across properties)
but competitive (so that funding is allocated efficiently).
Different auction mechanisms and information frameworks will be tested in the
project with applications of experimental economic techniques. Groups of landholders
will be invited to participate in trading games using dummy properties that
have been created for the purpose. The purpose of the project is to recommend
appropriate mechanisms for establishing corridors.
The key stakeholders are:- the landholders, represented by the Desert Uplands
Build-up and Development Committee (DUBDC), the Queensland Environmental Protection
Agency (EPA) and Natural Resources and Mines (NRM), Central Queensland University
(CQU) and CSIRO.
Keywords: Vegetation corridors, market based instruments, auction design, experimental
economics.
Presenting Author's Email Address: juliana.mccosker@env.qld.gov.au
Market based incentives and improving the management of floodplain wetlands in the Murrumbidgee River, NSW
Author: Patricia Murray (Department of Infrastructure, Planning and Natural Resources)
It is estimated that worldwide wetlands annually provide $4.9 trillion (US)
worth of ecosystem services, yet they have experienced some of the greatest
impacts of all ecosystems. Wetlands have been used by stock, drained for cropping
and urban development, and used for stormwater control. There has been little
effort in quantifying how many wetlands and to what extent they are affected
by the various impacts. Without such information it is difficult to estimate
the cost of wetland restoration. This four year study in the Murrumbidgee River
catchment, NSW, differs from others because it will establish the extent and
types of impacts on floodplain wetlands. Management options will be developed
for the impacts identified and some management options will be trialed to establish
their effectiveness. A cost benefit analysis will be done on the identified
management options and a range of incentives will be developed through consultation
with landholders and the community. The project began in 2003 and incentives
as yet have not been identified, but they may include indirect market-based
incentives such as salinity or biodiversity credits. One consideration might
be to use the credits to reduce farm holder debt through reduction in loans.
The major impediment will be the acceptance of such incentives by the financial
institutions and the federal government as the effectiveness of the incentives
demands a long-term commitment by banks and the government.
Keywords: Murrumbidgee Catchment; wetlands; management; incentives
Presenting Author's Email Address: pmurray@dlwc.nsw.gov.au
Lessons on the design and implementation of Renewable Energy, Greenpower and Greenhouse Emissions Abatement markets from the financial markets.
Author: Karel Nolles (Australian Financial Markets Association)
The use of markets to facilitate least cost implementation of environmental
policy has become relatively popular. These environmental markets have however
generally been implemented by government agencies different from those agencies
traditionally associated with the oversight and management of financial markets.
This paper suggests that some key lessons from the design and performance of
financial markets have not been heeded in the design of many environmental markets,
and that substantial improvement in the performance of environmental markets
could be achieved by borrowing techniques and structures from the management
and regulation of financial markets. In particular this applies in the areas
of:
· Release of timely information to the market and market transparency
· Comprehension by governments of the impact of risk on market performance
· The adoption of some Reserve Bank style targets and market interventions
· Understanding the linkages between spot markets and forward markets
· The important interrelationships between Over The Counter and Exchange
Based trading.
The ability to enter into forward contracts and other financial instruments
is a key risk management tool. In particular this paper discusses the difficulties
experienced in environmental markets when the risks are essentially unhedgable
due to poor market structure.
The paper ends with a set of dot-point recommendations about lessons to be learned
from the financial markets for those planning to implement an environmental
market.
Keywords: Financial Markets, Forward and Spot trading, Impacts of risk and uncertainity,
appropriateness of MBI's
Presenting Author's Email Address: karel@aton.com.au
** Market Based Instruments for Ecosystem Services in the Murrindindi Shire of Victoria
Authors: Wendy Proctor, Stuart Whitten and Dave Shelton (CSIRO)
The Murrindindi Shire is an attractive and growing area for lifestyle developments
and hobby farming. The growth in these landuses is negatively impacting on important
ecosystem services (e.g. water quality and wildlife habitat) in the Murrundindi
Shire and Goulburn Broken Catchment. The use of development offsets may alleviate
future development pressures on ecosystem services whilst providing flexibility
to developers. These outcomes may also be achieved at significantly lower costs
than restricting management options to on-site actions. Computer based experiments
will be undertaken to test some of the assumptions of local government authorities
using market instruments to alleviate development pressures on the environment.
The techniques of Experimental Economics will be employed along with the help
of local developers and landholders in the shire enlisted to take part in the
experiments. The scheme will involve defining suitable 'offsets' that would
apply to specified impacts of rural development such as those involving water
quality and biodiversity. An action that damages ecosystem services on one site
would be allowed to be undertaken as long as a separate activity to increase
ecosystem services (the offset) is undertaken at the same site or elsewhere.
Credits would be issued to reflect amount of offset activity undertaken. Development
could only be undertaken once the required credits are obtained and a development
permit issued.
The property right/offset/credit structure is provided by the local government
development planning and permit framework The scheme would involve a non-tradeable
mechanism where the property right to the offset action is only traded once
(i.e. when the permit is issued). Important insights will be gained from testing
these different possibilities such as the measurement and exchange rate regimes
employed, the definition of the credits, the type of offsetting actions required
and the institutional and legal frameworks necessary to make such a scheme successful.
Keywords: offsets, residential development, ecosystem services, non-tradeable
mechanism, Murrindindi Shire - Goulburn Broken Catchment.
Presenting Author's Email Address: wendy.proctor@csiro.au
** Trading Salt and Water: Developing Tradable Property Rights for Dryland Salinity Management Using an Experimental Approach
Authors: Wendy Proctor, Stuart Whitten and Dave Shelton (CSIRO)
This project will develop a tradable property rights structure based on identifying
salinity 'credits' to aid in addressing the external impacts of dryland salinity.
The framework will be developed using experimental economics to identify critical
market parameters such as the detailed specification of the property rights
and credits involved, the nature and levels of uncertainty related to the necessary
salinity information and methods to incorporate spatial and temporal variation
in the impacts of management changes. Recently completed hydrological and salt
yield modelling in the Goulburn Broken catchment in Victoria and Simmons Creek
sub-catchment of Billabong Creek in NSW provides sufficiently detailed biophysical
modelling to experimentally trial a property right based solution in these regions.
The experiments will involve stakeholders (remunerated for their involvement)
participating in a computer based virtual market and trading salinity credits
based on their own farm statistics. The credits issued would be based upon the
biophysical modelling undertaken and the experiments would determine such things
as the incentives and necessary rules for trading to take place, the threshold
level of uncertainty above which participants will not trade, the best form
of the instrument involved, the necessary institutional and legal requirements
and the potential environmental outcomes for the region. The key outcome will
be a framework for a flexible (in terms of not enforcing uniform standards across
properties) market based mechanism achieved at lower cost than on-ground studies,
that will combat the increasing problem of dryland salinity in agricultural
regions of Australia.
Key words: dryland salinity, tradable property rights, experimental economics,
Goulburn Broken, Billabong Creek
Presenting Author's Email Address: wendy.proctor@csiro.au
** Establishing the potential for offset trading in the lower Fitzroy River.
Authors: John Rolfe, Jill Windle (Central Queensland University), Stuart Whitten (CSIRO)
The Fitzroy River basin is Australia's second largest externally draining basin.
Water quality is impacted by both non-point source and point sources, including
irrigation, grazing, dryland farming, industry and urban sources. Additional
irrigation and industry development is likely to impact further on water quality.
This project will explore the potential use of cap-and-trade pollution permits
to cap emissions in the lower Fitzroy when new irrigation and industry developments
take place. As well, the potential supply of offset actions from landholders
in a particular sub-catchment will be modelled, and the potential for trade
within the lower Fitzroy catchment will be evaluated.
The challenges are to determine the amount of bio-physical data needed, the
appropriate trading rules, how a pilot can be established over discrete areas/industries
in the basin, and what incentives are needed to make enterprises/industries
participate. Opportunities for a trading mechanism will be established over
the two year project.
A key part of the pilot will be to trial a different mechanism for conducting
laboratory exercises. Choice experiments will be used to identify the relevant
supply and demand schedules, and interactions between the two will then be modelled.
'Real life' participants will be involved in the Fitzoy Basin experiments, so
more realistic evaluations should be possible.
The key stakeholders in the project are Queensland University (CQU), CSIRO,
Fitzroy Basin Association (FBA) and Central Queensland Regional Organisation
of Councils.
Key words: Water quality, offsets, choice experiments, cap-and-trade mechanisms.
Presenting Author's Email Address: j.rolfe@cqu.edu.au
Defining the Bios: an Objective Basis for Biodiversity Market Systems
Authors: James M. Shields and Elisabeth Larsen (NSW State Forests)
We put forward that it is necessary to establish a universal biological unit
that reflects the species diversity, population density (abundance or biomass),
genetic uniqueness, and relative rarity of ecosystems and thus provide the substantive
material necessary for market systems that include biodiversity. A scientific
expression which captures the entities and relationships within biodiversity
can be based on the structure of the food web, the inter-relationships of biological
entities, and the connectivity and condition of ecosystems. Therefore, given
the tools for describing diversity, abundance, taxonomic significance, and relativity
rarity ("conservation status"), of an area, a unit for the Bios (B)
value for that area could be described by the equation set out in our poster.
We use the equation in specific and general terms to describe natural resource
management with clear positive outcomes.
The lack of this basic definition has been the source of many difficulties in
setting up systems that provide financial reward for positive biodiversity management.
In essence, the systems proposed have not provided a clear and universal description
of the relevant biological entity in a manner that is transparent, objective
and permanent. We apply the Bios equation to a biodiversity transaction in forest
ecosystems in NSW, where the variables are manipulated to achieve a positive
outcome in ecological, economic and social terms. Further uses for the basic
Bios unit are provide in global terms. The clear need for and utility of a definition
and unit that reflects the general terms of biodiversity is expressed in these
examples.
Key words: measuring biodiversity, bios equation.
Presenting Author's Email Address: jims@sf.nsw.gov.au
** Multiple-outcome auction of land-use change
Authors: Gary Stoneham, Loris Strappazzon, Nicola Lansdell, Mark Eigenraam , Craig Beverly and Arthur Ha (DPI Victoria), Peter Bardsley and Vivek Chaudhri (University of Melbourne)
This pilot will auction conservation contracts to landholders. It follows an
initial pilot auction of habitat conservation contracts (BushTender) but will
now include several dimensions of the environment including salinity, water
quality, water quantity as well as biodiversity. This pilot will draw on contemporary
ideas in economics to: determine the auction format, develop efficient contract
design and to select an optimal set of contracts. The pilot will also apply
new landscape modelling techniques developed at the Rutherglen Research Institute
to estimate the impact of potential land-use changes on salinity, water quality
and water quantity. This scientific capability extends the methods already developed
for assessing the impact of land-use change in biodiversity.
The auction will be conducted in the Goulburn Broken and North Central Catchments
of Victoria with field-based activities planned for the first half of 2004.
Results of the pilot will be available in the second half of 2004.
The project team is comprised of economists in the Department of Primary Industries,
Victoria; academic economists from the University of Melbourne's Economic Theory
Centre; ecologists from the Department of Sustainability and Environment, Victoria
and hydrologists from the Rutherglen Research Institute, DPI Victoria.
Key Words: Auction, contract design, multiple outcomes, Goulburn Broken CMA,
North Central CMA.
Presenting Author's Email Address: Gary.Stoneham@dpi.vic.gov.au
** Tradable recharge credits in Coleambally Irrigation Area
Authors: Stuart Whitten; Shahbaz Khan; Drew Collins (BDA Group); Dave Shelton, Wendy Proctor and David Robinson (CSIRO)
Irrigated agriculture in Australia often leads to excessive recharge of regional
groundwater systems causing salinity and water-logging. In turn, salinity and
water-logging impose a range of costs on individual landowners, their neighbours
and the wider community. These impacts are primarily reduced agricultural productivity,
damage to ecosystems and degradation of local and off-site infrastructure. As
these costs are largely external to landowners they are not fully included in
their management decisions.
This pilot MBI will test a trading mechanism for recharge credits via the implementation
of recharge contracts. Recharge credits will internalise costs associated with
recharge to groundwater systems. Irrigators may reduce their costs of meeting
recharge targets via creating or purchasing credits that reduce recharge through
perennial vegetation, engineered solutions or changing crop rotations. Credits
may only be created within the irrigation area, but may be created either on-farm
or off-farm.
Key impediments to the creation of the credit market that will need to be overcome
include:
· defining and allocating irrigator recharge credit responsibilities
(through individual farm water supply contracts);
· sufficient knowledge to estimate paddock scale recharge (via SWAGMAN
recharge models); and,
· potentially few viable strategies to create recharge credits
Flexibility will also need to be incorporated into the instrument in order to
ensure the system is robust to climatic and other shocks. This project is the
only MBI pilot aimed at managing salinity from 'existing' irrigation as defined
under the MDBC Salinity and Drainage Scheme pre-1988 benchmark.
The pilot will operate in the Coleambally Irrigation Area in the mid to lower
Murrumbidgee Catchment and will involve irrigators, the Coleambally Irrigation
Cooperative Limited (CICL), CSIRO and government agencies.
Keywords: Murrumbidgee Catchment, Coleambally Irrigation Area, cap and trade
incorporating offsets, irrigation salinity management
Presenting Author's Email Address: Stuart.Whitten@csiro.au