Trading resources to highest value use

Prof. Mike Young

Research Chair, Water Economics & ManagementSchool of Earth and Environmental SciencesThe University of Adelaide

Wednesday 13th June 2007

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Natural resource management policy

The Key Question

How, at every location, do we get the right set of interventions at the least cost

so as to facilitate the emergence of Socially optimal land use change Socially optimal land and water use

In an ever changing world of Varying prices, climates and technology

full of people who behave differently from one another

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Crowding out

• The more governments use market based instruments to solve a problem, the less the investment by private individuals

• Voluntary MBI’s reduce voluntary input

• Without careful design,the value of lost voluntary actions can be greater than the value of the services gained.

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Duty of care, penalties & ecosystem service payments

Env

ironm

enta

l Sta

ndar

d

Time

Env

ironm

enta

l Sta

ndar

d VOLUNTARY INSTRUMENTS DUTY OF CARE

Time

Ecosystem service payments

ADMINISTERED INSTRUMENTS TRADABLE PERMITSSMART REGULATION

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Trading to the highest value use

Actually, highest marginal contribution to the economy given a host of constraints.

Markets identify value for conventional inputs efficiently (Willing buyers and sellers) Land

Labour

Capital

Less so for ecosystem services

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Markets and value

Excellent servants but bad masters Minimum amounts of knowledge

Encourage innovation

No problems with risk and uncertainty

Need guidance from a “master” A Government Minister

An NRM Board

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Types of market instruments

MBIs‘combine regulatory arrangements with market processes to change behaviour.

Avoid location-specific and person-specific directives’

Price-based

Lever behavioural change by changing

prices in existing markets

Market friction

Lever behavioural change by making

existing private markets work better

Eg: Changing taxes, introducing levies, giving subsidies

Eg: Introducing a ‘cap and trade’ scheme or

an offset scheme

Eg: Disclosing information such as

via ecolabelling

Market-Like InstrumentsCreate business opportunity to sell a service

Eg: Auctions & tenders

Administered Voluntary

Lever behavioural change by specifying the ‘amount’ of new rights / obligations

Allocation-based

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Getting the mix right

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KISS - Keep It Simple Stupid

1. Begin with off-set systems, not fully capped systems

2. Get the system 80% right, not scientifically perfect

3. Trade surrogates that are easy to monitor

4. Use one instrument per objective

5. Keep administrative costs low

6. Keep transaction costs (steps to get approval) low

7. Assign for maximum leverage

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Landholder Emitting FirmSequestration Contract

facilitated by a BROKER

Payments as CO2 sequestered

Landholder

Landholder

Landholder

Landholder

Landholder

Dealer Emitting Firm

Payments as CO2

sequestered

Sequest

ratio

n

Contracts

Payments for performance of pool

Contract to maintain pool of sequestered CO2

Issue - Who takes the risk (C02)

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Science and Policy

Build response functions that relate to production

Remember $$$ received = P * Q

Focus on development of simple indices

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Five Policy Opportunities for SA

1. Off-sets Small farm dam off-sets Storm water credits Expected salinity impact Biodiversity

2. Prices (voluntary and mandated) Levies and charges (not taxes) Tenders

3. Permit Tradeable permits Carbon credits Water entitlements and allocations In-River salinity

4. Market signals Accreditation to a standard Regional branding (What are you known for?)

5. Regulation Engage with planning profession and local government

Contact:

Prof Mike YoungWater Economics and ManagementEmail: Mike.Young@adelaide.edu.auPhone: +61-8-8303.5279Mobile: +61-408-488.538

The future depends upon the way you think about it.

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Land-use change control

0

200

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1000

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1600

0 500 1000 1500 2000 2500 3000

Annual Rainfall (mm)

An

nu

al E

vap

otr

ansp

irat

ion

(m

m)

Forest

Mixed veg.

Pasture

unknown

Schrieber (forest)

Schrieber (grass)

250 mm = 2.5 ML/ha/yr

@ $1000 /ML = $2500/ha