mixed market instruments for salinity mitigation

Mixed Market Instruments Mixed Market Instruments for Salinity Mitigationfor Salinity Mitigation

Amy CheungAmy CheungSchool of Economics - UNSWSchool of Economics - UNSW

Policy Choices for Salinity Mitigation: Policy Choices for Salinity Mitigation: Bridging the Disciplinary DividesBridging the Disciplinary Divides – Workshop – Workshop

1-2 December 20051-2 December 2005

ContentContent

Introduction: motivation for changeIntroduction: motivation for change Market-based instruments: featuresMarket-based instruments: features Problems with market-based instrumentsProblems with market-based instruments Salinity: applicability of MBIsSalinity: applicability of MBIs A case for “mixed” market instruments for A case for “mixed” market instruments for

salinity mitigationsalinity mitigation The next stepThe next step

IntroductionIntroduction

Quality of natural resources Quality of natural resources a public a public good that regulatory authorities must good that regulatory authorities must protect by preventing private agents from protect by preventing private agents from its overutilisationits overutilisation

Standards, regulations, legislations: basic Standards, regulations, legislations: basic mechanism for regulatory authorities to mechanism for regulatory authorities to conduct environmental policy throughout conduct environmental policy throughout industrialised countriesindustrialised countries

IntroductionIntroduction

Compliance Compliance mandatory with penalty for mandatory with penalty for non-compliancenon-compliance

Amount of pollutants set either on:Amount of pollutants set either on:

- - scientific scientific opinion of the adverse health or opinion of the adverse health or ecological effects of the pollution ecological effects of the pollution

- - socialsocial or or politicalpolitical judgment of the public’s judgment of the public’s value to the environmental goodvalue to the environmental good

Introduction: motivation for changeIntroduction: motivation for change

Traditional command-and-control Traditional command-and-control regulatory measures fails to regulatory measures fails to efficientlyefficiently manage natural resources because:manage natural resources because:


1.1. Tend to be inflexible: regulation is Tend to be inflexible: regulation is commonly viewed as lacking in flexibility commonly viewed as lacking in flexibility

2.2. Extremely costly (government, Extremely costly (government, community) if poorly designed and community) if poorly designed and administeredadministered

3.3. Sub-optimal: environmental and Sub-optimal: environmental and economic efficiencyeconomic efficiency

Why?Why?


Only produce an economically efficient Only produce an economically efficient (i.e. least cost) solution to meeting a given (i.e. least cost) solution to meeting a given environmental standard by:environmental standard by:

good judgment + good informationgood judgment + good information May discourage new economic and May discourage new economic and

technological abatement initiatives technological abatement initiatives because polluters do not incur a financial because polluters do not incur a financial penalty for their emissions provided they penalty for their emissions provided they remain below the standardremain below the standard


Uniform standards: do not fully take into Uniform standards: do not fully take into account differences in abatement costs account differences in abatement costs between producers between producers sub-optimal sub-optimal distribution of abatement devicesdistribution of abatement devices

Salinity is a Salinity is a non-uniformly distributednon-uniformly distributed ‘pollutant’, so a standard may not be cost-‘pollutant’, so a standard may not be cost-effectiveeffective

Features of market-based Features of market-based instrumentsinstruments

Increased interest in Increased interest in market-based market-based instruments instruments (MBI) in past 20+ years to address (MBI) in past 20+ years to address environmental problemsenvironmental problems

Mainly through the price mechanism Mainly through the price mechanism creates creates positive incentivepositive incentive to alter attitudes of private to alter attitudes of private agents toward the environmentagents toward the environment

A more flexible approach to facilitate natural A more flexible approach to facilitate natural resource management in market economiesresource management in market economies

Idea dated from earlier seminal works by Pigou Idea dated from earlier seminal works by Pigou (1920) and Dales (1968)(1920) and Dales (1968)


Instrument Instrument BaseBase

Instrument Instrument ExamplesExamples

Practical Australian ExamplesPractical Australian Examples

Price Price ((behaviour behaviour by by PP))

AuctionAuction

RebatesRebates

SubsidiesSubsidies

TaxesTaxes

Bush Tender, North-East and North-Bush Tender, North-East and North-Central Catchments VictoriaCentral Catchments Victoria

Beverage container deposit system, SABeverage container deposit system, SA

EnviroFund – NHT, AustraliaEnviroFund – NHT, Australia

QuantityQuantity

((behaviour behaviour by by QQ

Cap and tradeCap and trade

Offsets Offsets BubblesBubbles

Hunter River salinity trading scheme – to Hunter River salinity trading scheme – to curb saline water discharge from 20 curb saline water discharge from 20 mines and 2 electricity generatorsmines and 2 electricity generators

Tradable water entitlements in MDBTradable water entitlements in MDB

Market Market Friction Friction

(( Friction) Friction)

Risk Risk Management Management

Leverage fundsLeverage funds

Product Product differentiationdifferentiation

Conservation insurance, SA (MBI Pilot 1)Conservation insurance, SA (MBI Pilot 1)

Greenbank – leverage NRM objectives Greenbank – leverage NRM objectives (MBI Pilot 1)(MBI Pilot 1)

Eco-labelling, QLD (MBI Pilot 1)Eco-labelling, QLD (MBI Pilot 1)


The market The market encouraged overutilisation encouraged overutilisation of natural resources (a ‘free’ good) of natural resources (a ‘free’ good) now now the approach where environmental the approach where environmental objectives could be met at least cost!objectives could be met at least cost!

Improve on or creates previously non-Improve on or creates previously non-existent market to provide incentives for existent market to provide incentives for the greatest reductions in pollution by the greatest reductions in pollution by those agents that can achieve these those agents that can achieve these reductions most reductions most cheaplycheaply


Achieve static and dynamic efficiencyAchieve static and dynamic efficiency

Arise when polluters face different marginal abatement cost – able to work out efficient level of resource use depending on cost of abatement

Polluters want to continuously seek new ways to reduce cost of abatement – incentive to develop new and cheaper technology now and future


Efficient solution: equating marginal Efficient solution: equating marginal damage costs with marginal costs of damage costs with marginal costs of environmental protectionenvironmental protection

Difficult to determine, especially marginal Difficult to determine, especially marginal damage costs – encompasses many damage costs – encompasses many “costs” and often very “costs” and often very long timelong time frame – frame – e.g. time lag for pollution-related illnesses e.g. time lag for pollution-related illnesses to take effectto take effect

Problems of market-based Problems of market-based instrumentsinstruments

1.1. Market/Monopoly power in the output market – Market/Monopoly power in the output market – achieve supernormal profit by reducing output achieve supernormal profit by reducing output below market competitive level e.g. below market competitive level e.g. environmental taxenvironmental tax

2.2. Uncertainty on outcome and costs: resource Uncertainty on outcome and costs: resource use efficiency depends on individual agents’ use efficiency depends on individual agents’ decisions in response to the incentive provided decisions in response to the incentive provided by the tax – outcome to be greater or less than by the tax – outcome to be greater or less than envisagedenvisaged

Problems of market-based Problems of market-based instrumentsinstruments

3. Tax ‘burden’: concerns about level of 3. Tax ‘burden’: concerns about level of financial burden may place on some financial burden may place on some natural resource users – both at natural resource users – both at household and industry levelhousehold and industry level

4. Cost: Poorly designed MBIs may cost as 4. Cost: Poorly designed MBIs may cost as much as pure regulation; administrative much as pure regulation; administrative cost; some producers will face higher cost; some producers will face higher cost/consumer pay higher price post-tax - cost/consumer pay higher price post-tax - economic slow down???economic slow down???

SalinitySalinity

Salinity: one of Australia’s most costly Salinity: one of Australia’s most costly environmental problemsenvironmental problems

Damages to built infrastructure, Damages to built infrastructure, agricultural production, wetlands, rivers, agricultural production, wetlands, rivers, water supplies and hence welfare of rural water supplies and hence welfare of rural communitiescommunities

SalinitySalinity

Vital knowledge: where the salt lies in the Vital knowledge: where the salt lies in the landscape, how it moves, how quickly it is landscape, how it moves, how quickly it is moving, and where it is most likely to moving, and where it is most likely to cause damage in the futurecause damage in the future

It has been demonstrated that salt is It has been demonstrated that salt is localised and moves along well defined localised and moves along well defined underground pathwayunderground pathway

SalinitySalinity

Land use changesLand use changes - tree clearance, - tree clearance, irrigation: more rainfall soaks into the irrigation: more rainfall soaks into the ground, raising the water tables, and ground, raising the water tables, and bringing natural salt deposits to the bringing natural salt deposits to the surfacesurface

Non-uniform pollutant Non-uniform pollutant – different – different characteristics of each region – climate characteristics of each region – climate and topographyand topography

Salinity: applicability of MBIsSalinity: applicability of MBIs

Some criteria for consideration:Some criteria for consideration:

1.1. Environmental effectiveness: assessing Environmental effectiveness: assessing relative costs and benefits of measures relative costs and benefits of measures such as salinity taxes/chargessuch as salinity taxes/charges

Price: irrigators’ response to market signalsPrice: irrigators’ response to market signals

Quantity: deliver env. effect with greater Quantity: deliver env. effect with greater certainty with compulsory compliance certainty with compulsory compliance (e.g. strictly no irrigation (e.g. strictly no irrigation ≤≤ xMLxML))


2. Economic efficiency: need to assess 2. Economic efficiency: need to assess which MBIs have achieved a cost-min which MBIs have achieved a cost-min pattern of resource use efficiency – use to pattern of resource use efficiency – use to evaluate the relative cost and benefits of evaluate the relative cost and benefits of these env. policy instrumentsthese env. policy instruments

3. Acceptable cost burden: administrative 3. Acceptable cost burden: administrative cost Vs compliance cost. cost Vs compliance cost.


4. Revenues: what happens to the revenue 4. Revenues: what happens to the revenue generated from taxes?generated from taxes?

Usually allocated to public budget, could be Usually allocated to public budget, could be reserved for an env. fund (e.g. funding for reserved for an env. fund (e.g. funding for a tree-planting credit scheme), return to a tree-planting credit scheme), return to tax payers (e.g. in the form of tax tax payers (e.g. in the form of tax reduction n other areas)reduction n other areas)

Potential source of administrative Potential source of administrative inefficiency?inefficiency?


5. Flow-on wider economic effects: need to 5. Flow-on wider economic effects: need to consider possible effect on the local consider possible effect on the local economy:economy:

- Price level, competitiveness, trade Price level, competitiveness, trade patterns, production patterns, local patterns, production patterns, local employment, income distribution, growth employment, income distribution, growth of local economy, rate of innovation in of local economy, rate of innovation in salinity mitigationsalinity mitigation

- Different time horizonsDifferent time horizons


6. Compatibility: the instrument should be 6. Compatibility: the instrument should be compatible with existing or proposed laws, compatible with existing or proposed laws, institutional framework and administrative institutional framework and administrative structure. structure.

Coordination may be difficult at different levels of Coordination may be difficult at different levels of government (e.g. Federal and State) – existing government (e.g. Federal and State) – existing ConstitutionConstitution

7. Community acceptance: industry, environmental 7. Community acceptance: industry, environmental groups, regional communitygroups, regional community

Need to address different perception of ‘fairness’Need to address different perception of ‘fairness’

‘‘Mixed’ market instrument?Mixed’ market instrument?

Application of pure price or quantity instruments Application of pure price or quantity instruments may be problematic in practice - due to may be problematic in practice - due to asymmetric informationasymmetric information

Salinity: a case for a mixed market instrument?Salinity: a case for a mixed market instrument? Mixed market instrument refers to using both Mixed market instrument refers to using both

price and quantity instruments to solve an price and quantity instruments to solve an environmental issueenvironmental issue

Combines political appeals of quantity Combines political appeals of quantity instruments and efficiency of pricesinstruments and efficiency of prices

‘‘Mixed’ market instrument?Mixed’ market instrument? Mixed instrument: due to the degree and types Mixed instrument: due to the degree and types

of uncertainty present in salinityof uncertainty present in salinity Covers shortcomings inherent to pure price-Covers shortcomings inherent to pure price-

based and quantity-based instrumentsbased and quantity-based instrumentsIn a saline region: In a saline region: - if transaction costs are highif transaction costs are high- number of parties involved in a dispute is largenumber of parties involved in a dispute is large- common propertycommon property Use quantity instruments, otherwise, use price Use quantity instruments, otherwise, use price

instrumentsinstrumentsand vice-versaand vice-versa

‘‘Mixed’ market instrument?Mixed’ market instrument?

Possible mix of instruments:Possible mix of instruments:1.1. A percentage tax on a tradable permitsA percentage tax on a tradable permits2.2. A policy where polluters will have a choice of A policy where polluters will have a choice of

adhering to a standard, or purchase more adhering to a standard, or purchase more permits to cover excess, or being taxed for permits to cover excess, or being taxed for excess pollutionexcess pollution

- Polluters are able to choose the cheapest Polluters are able to choose the cheapest option – individual polluter knows own cost option – individual polluter knows own cost functionfunction

- May be complicated, but not impossibleMay be complicated, but not impossible

The next stepThe next step

Salt are localised, so we need a local Salt are localised, so we need a local solutionsolution

Question:Question: When we model a potential policy for When we model a potential policy for

salinity mitigation, do we…salinity mitigation, do we…

The next stepThe next step

……model salinity as:model salinity as:

1.1. An undesirable output – minimisation?An undesirable output – minimisation?

2.2. ……and/or desirable output? Possibility to and/or desirable output? Possibility to sell this ‘output’ in the market place?sell this ‘output’ in the market place?

Natural salt from the ground – valuable?

Thank you.Thank you.

mixed market instruments for salinity mitigation

Documents