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Key departmental publications, e.g. annual reports, budget papers and program guidelines are available in our online archive.

Much of the material listed on these archived web pages has been superseded, or served a particular purpose at a particular time. It may contain references to activities or policies that have no current application. Many archived documents may link to web pages that have moved or no longer exist, or may refer to other documents that are no longer available.

Environmental Incentives:
Australian Experience with Economic Instruments for Environmental Management

Environmental Economics Research Paper No.5
Consultancy report prepared by: Dr David James, Ecoservices Pty Ltd
Commissioned by Environment Australia
Commonwealth of Australia, 1997
ISBN 0 642 26850 9

14. Other economic instruments

14.1 Victorian accredited licensee scheme

Problem Identification

The Victorian Environment Protection Authority (EPA) has had 25 years experience in dealing with industrial pollution problems. Over this period, the EPA's licensing and works approval system has been a powerful tool in controlling industry emissions to air, land and water.

A number of factors have also acted to increase business awareness of their impact on the environment. These include increased public awareness and concern, and increased international pressure from treaties and agreements. As a result, many businesses have changed the way they operate in relation to the environment. A number of businesses subject to licensing and works approval under the Environment Protection Act have dramatically improved their environmental performance. To consolidate these gains and provide further incentives, the licensing and works approval system was modified to reward those businesses that have established a high standard of environmental performance and to focus EPA resources where they can make the greatest difference.

Instrument Selection

The modified licensing and works approval system is known as the Accredited Licensee Scheme. It came into existence in 1994 when the Environment Protection Act was amended to allow for the accreditation of licensees who can demonstrate an ability and commitment to effective environmental management. The scheme was established to take advantage of the existing framework for environmental protection in Victoria by providing good performers with increased flexibility.

The Accredited Licensee Scheme represents an appropriate mix of regulatory framework and economic incentives to achieve improved environmental protection. This highly innovative approach to regulation will provide Victorian businesses which are scheduled premises with the opportunity to move into a form of co-regulatory partnership with EPA and the community.

Description of Instrument

Under the Accredited Licensee Scheme, businesses with demonstrated capabilities and commitment to environmental protection are given greater scope to manage their own environmental performance within the framework provided by the Environment Protection Act 1970. These businesses can apply for accredited EPA status, which offers a number of advantages, many of them financial.

The scheme represents a major attempt to harness commercial forces by providing greater economic incentives for good environmental performance. For example, accredited licensees will have greater scope to manage their environmental performance for a site in the most cost-effective manner. Advantages accruing to accredited licensees include:

The reduced demand on EPA resources in servicing the system will enable pressing problems such as diffuse source pollution to be dealt with more effectively within existing resource allocations. It will also free EPA resources to provide additional assistance to small companies experiencing environmental problems.

The community will have improved access to information about the operations, forward plans and performance of accredited licensees, as well as greater opportunities to discuss their concerns with companies through forums such as local community liaison committees. All these are essential if this co-regulatory approach is to receive sustained community support.

Accredited licensees will be able to devote their efforts to more creative and cost-effective approaches to environmental management, as they will be operating under a less prescriptive, whole-of-site licence and will not require works approval for most plant improvements. Realising the importance of protecting their accredited licensee status and commitment to continuing improvement is expected to produce better environmental performance and fewer mishaps.

In particular, significant benefits will accrue to an accredited licensee from having a sound environmental management system (EMS) in place - one of the requirements of accreditation. From an environmental perspective, it is expected that the discipline imposed by an EMS will lead to increased environmental awareness and hence to better environmental outcomes. The number of environmental incidents should be reduced and waste minimisation opportunities should be more readily identified.

From an economic perspective, an EMS should generate significant benefits to the accredited licensee. Operational efficiencies will be created as companies spend less time, especially senior management time, on crisis management because an EMS introduces a proactive approach. The cost of pollution incidents and hence any resultant legal action should be reduced. The increased likelihood of identifying waste management opportunities should also result in cost savings from lower costs of raw materials and waste management processes.

Companies using an EMS may also gain a competitive edge in terms of international trade and investment because markets, especially in Europe, are increasingly looking for proven environmental credentials before doing business. A certified EMS provides evidence of such credentials. It also places a company in a better position to take advantage of international developments.

In addition, the Accredited Licensee Scheme builds on, and can be integrated with, quality management approaches already being adopted by business, rather than adding new layers, costs or requirements. Checks and balances will be provided by the following prerequisites for accreditation:

Should an accredited licensee betray the trust involved in the system, accreditation will be withdrawn and a more prescriptive licence and control system will be reimposed. The licensee would lose some of the cost advantages of greater flexibility and the market advantages derived by being formally recognised as a good environmental performer.

The Accredited Licensee Scheme represents a further step towards a partnership with industry and the community that will deliver both environmental improvements and more freedom from regulatory control. In short, the scheme should help deliver better environmental outcomes at less cost to the Victorian community.

Assessment Against Criteria for Evaluation

The Accredited Licensee Scheme uses the existing regulatory framework and sets environmental outcomes or boundary conditions within which businesses are required to operate. The regulatory framework allows the EPA to issue notices and otherwise ensure compliance if these boundary conditions are transgressed.

The scheme ensures a high standard of environmental performance as the licensee is required to have a sound EMS, and Environmental Improvement Plan and environmental audits. It is believed that these requirements will increase environmental awareness and will result in better environmental outcomes.

The scheme promotes efficiency gains for both business and the EPA. Cost savings accrue from the less prescriptive approach, whole-of-site licence, and flexibility in the choice of environmental performance. Savings will also flow from the removal of the requirement for additional approval for most new works and from the 25 per cent reduction in the licence fee extended to accredited licensees.

Long-term financial benefits are expected from the integration of environmental management into the mainstream decision-making processes of business. Other benefits will accrue from the avoidance of environmental incidents, opportunities for improved environmental outcomes, lower materials costs and lower costs of waste treatment.

Accredited licensees will also be well placed in terms of competitive advantage and international marketing opportunities.

The scheme gives greater access to information about the operations of accredited licensees and provides the community with an opportunity to make an input to the environmental performance of businesses.

It also bestows efficiency gains on the EPA, allowing it to redirect its own resources to other environmental management problems, such as diffuse source pollution and provision of assistance to small and medium-sized businesses experiencing environmental problems.

Concluding Evaluation

The Accredited Licensee Scheme represents a major initiative to use market forces within a regulatory framework. It provides strong economic incentives for businesses to become good environmental performers. As well as providing benefits to business, the scheme helps to allocate resources where they are most needed. The fact that it is voluntary is important. The expected benefits will accrue only if the company is committed to best practice environmental management and consultation with interested parties.

14.2 Cleaner production facilitation in Victoria

Cleaner production represents one of the principal ways in which economic incentives can help to meet environmental objectives. A major initiative of the Victorian EPA over the past decade has been helping to promote the adoption of cleaner production technologies and management practices.

A critical factor in encouraging businesses to adopt the philosophy of cleaner production is the financial gain that can accrue to firms that implement it. Since the mid-1980s it has become clear to many sectors of industry that there are significant commercial opportunities as well as environmental advantages in minimising wastes, or avoiding them altogether, by adopting cleaner production technologies and management practices.

It has also been recognised that cleaner production can overcome the operating and financial limitations of the more traditional end-of-pipe technologies that deal with waste after it has been generated. This realisation that a win for the environment can also be a win for shareholders has been very attractive to business.

In Victoria, cleaner production has become a key feature in all EPA processes and activities. Helping companies to identify opportunities for cleaner production is now an important part of the licensing and works approval process. The following case studies present numerous examples of its application. They demonstrate that cleaner production can deliver significant financial benefits to companies as well as significant environmental improvement. It is expected that as the philosophy of cleaner production permeates all commercial sectors, there will be major economic and environmental gains.

Waste Minimisation Plan by Ford Australia

Ford requires each of its plants to develop and implement a Waste Minimisation Plan. Under these plans, Ford has adopted a number of cleaner production initiatives to reduce the generation of solid wastes, increase water reuse, increase recycling and promote energy conservation.

One of these initiatives was to assess the process for cleaning paint from skids and booth grates, which was done traditionally with caustic soda. An opportunity to implement cleaner production was found in blasting the paint off with a high-pressure jet of water.

The new process is saving Ford approximately $300,000 per year in reduced heating costs and disposal of caustic residues. The capital outlay for the blasting equipment was $120,000, giving a payback period of less than five months. Additional benefits included cost savings of $100,000 per year, resulting from a 2 per cent to 3 per cent reduction in the reprocessing of reject items.

Environmental benefits were obtained by eliminating the use of caustic soda, avoiding the need for acid neutralisation of the waste, and reducing the amount of energy consumed in the process.

Cadbury Schweppes Cleaner Production Project

In 1992 Cadbury Schweppes began a Cleaner Production Project to improve its waste minimisation activities. Twelve areas of its operations were identified for immediate action, and staff were invited to contribute ideas for improvement.

At the end of the first year, the project resulted in significant financial benefits to the company. For an initial capital outlay of $1.25 million, the project has already created savings of $780,000. Environmental benefits achieved by the project include reductions in solid and liquid wastes and dramatic reductions in water use and energy consumption. The company expects similar gains from cleaner production initiatives planned for the future.

14.3 On-ground works in the Murray-Darling Basin

The Murray-Darling Basin Commission recently introduced a program on cost sharing for on-ground works (Murray-Darling Basin Commission 1996). The works are intended to:

The commission's Integrated Catchment Management funding program provides about $13.8 million annually to develop and implement action plans in the basin. Action plans are designed to obtain funds from various sources, including Commonwealth and State programs, the corporate sector, communities and landholders. This process involves, among other things, evaluating the full range of actions to address the problems.

The cost sharing program for ground works is a mechanism to facilitate the formulation of an action plan where on-ground works are one of the actions to be implemented. The cost sharing framework is used to assess the benefits and costs and most appropriate mix of the various types of works under consideration. Benefit-cost analysis, and in some circumstances multi-criteria analysis, is the method recommended to carry out the evaluation.

Relevant steps in the process include:

The program applies the following principles for cost sharing agreed by the Council of Australian Governments (COAG).

The cost sharing framework recommends that governments contribute to the cost of on-ground works only where there has been progress towards satisfying the following criteria.

The on-ground works program is a clear example of a funding program designed to achieve environmental protection objectives through the application of economic concepts of efficient resource management. It internalises external costs where possible, applies the user pays principle where beneficiaries are identifiable, and specifies the role of public funding where broader community benefits are involved.

14.4 Incentives for biodiversity conservation

Biodiversity is usually defined as comprising three categories: genetic diversity, species diversity and ecosystem diversity. Biodiversity is potentially affected by a wide range of human and industrial activities, ranging from those that directly exploit natural species, as in the case of forestry, fisheries and pharmaceuticals, to more general activities that may indirectly affect biodiversity through the destruction or modification of habitat such as farming, land clearing and industrial production.

Impacts on biodiversity are pervasive and cross many jurisdictional boundaries. Management controls must therefore be comprehensive. The declaration of conservation reserves is only one of many options for managing biodiversity. Off-reserve management is also essential. This inevitably means introducing incentives and controls in the private as well as the public sector.

The use of economic incentives to protect and encourage biodiversity is a comparatively recent focus of policy. Such incentives are usually implemented in conjunction with a wide range of regulatory and other measures, including voluntary schemes. The Biodiversity Unit of the Commonwealth Department of the Environment, Sport and Territories has recently published a comprehensive review of incentives for the conservation of biodiversity in Australia (Young et al. 1996). The report identifies the range of incentives that can be used, relevant Australian experience and opportunities for future application. Preece, van Oosterzee and James (1995) discuss more specific incentives applicable to the nature-based and ecotourism industry.

Incentives Directly Affecting Species

This report has already discussed the use of economic instruments to manage populations of species harvested commercially in connection with fisheries management. The use of individual transferable quotas and controls over harvesting effort are relevant examples. There are many opportunities to extend property rights or use rights regimes to other species. The allocation of licences to professional cullers of natural populations (for example, kangaroos) is one example.

Commercial breeding and management of natural species is another means of ensuring their survival, for example, emu, crocodile and fish farming. The drawback with this measure from a conservation viewpoint is that the species are not protected in the context of whole ecosystems. Furthermore, the genetic characteristics of farmed species are likely to be deliberately controlled, so that over time their natural characteristics are lost or are significantly modified.

Voluntary Economic Measures

Donations may be sought from the general public, through fundraising for specific causes. For example, tourists may make direct personal contributions at particular sites. Donations may be sought through animal sponsorship schemes, under which a person 'adopts' a particular animal in a species conservation or rehabilitation program.

Incentives can include personal identification with ecosystems, places, animals or plants. Certificates, badges and other tokens can be used to reinforce the identification.

Private corporations wishing to demonstrate their environmental responsibility frequently provide direct financial support for the protection of natural species and habitats. Funds may be allocated to research programs and management schemes. Some companies in the ecotourism industry in Australia have allocated a percentage of their revenue to ecological research, and support may also be organised at the industry level.

An example is the Mala Fund, established by the Central Australian Tourism Industry Association (CATIA) and the Pacific Asia Travel Association. This fund is now inoperative but, when it was established in 1991, it was an innovative and successful marriage between industry and government which succeeded in raising $33,000 for research into the mala, or rufous harewallaby, an endangered marsupial found in the central Australian deserts. CATIA used the symbol of the mala on their letterheads for some time, accompanied by the words 'Save the Mala'.

Management of Protected Areas

The management of national parks and conservation reserves offers special advantages for funding the management of biodiversity. To limit potential adverse impacts of visitors, funds should be raised to pay for site development and infrastructure such as walking paths, toilet amenities and fireplaces, fuel and accommodation. Funding is required also for monitoring and research and other tasks such as fire management and visitor management.

Visitor fees can be an effective means of raising funds to support management, although in Australia the revenue gained from this source has usually been insufficient for full cost recovery. Funds may be raised through park entry fees or annual permits. Any system of fees should be feasible and enforceable. It is not practicable in some cases, particularly for large natural areas with low visitation rates, to administer a system of fees because the management costs may exceed the revenue collected.

In some cases a special levy may be applied to visitors and collected by tour operators, as in the case of the per capita charge levied by the Great Barrier Reef Marine Park Authority. The logic behind this is that operators are identifiable and subject to rules and regulations. They are also easier and more available to educate on appropriate practices.

The user pays principle can be applied to commercial operators making use of conservation reserves by applying licence fees and commercially realistic rental charges on leases and concessions. Rights to operate within park boundaries may be offered to the private sector on a competitive auction basis, to raise capital funding for environmental protection.

Goods and services offered on-site in parks and protected areas should be operated on a profitable basis with the net returns being allocated to conservation measures. Commercial products and services include educational programs, consulting services, books, videos, paintings and photographs.

Economic Incentives for Off-Reserve Management

Removal of Perverse Incentives

An important objective in off-reserve management of biodiversity should first be to remove perverse incentives that are likely to cause environmental degradation and loss of biodiversity. Tax concessions used to be given to rural landowners for clearing land. This provision was abolished because it encouraged loss of vegetation and soil erosion, but on-farm costs of vegetation clearing can still be deducted. Land tax policies in some States still act as a positive inducement for land clearing, accentuating the risks of adverse habitat modification, species loss and ecological damage in local areas.

Government Support for Environmental Protection

Governments may directly support the protection of natural habitats on private lands in view of their external economic benefits. Native vegetation, wetlands and other natural features may provide valuable protection for endemic species, act as buffer strips and prevent habitat fragmentation.

Governments should recognise the significance of attractive and ecologically interesting landscapes and ecosystems as a positive benefit to the community. Some of the gains are commercial, as in the case of tourism.

In some cases, direct subsidies or capital grants may be paid to assist conservation measures, such as tree planting under the Landcare program or the eradication of weeds under rural protection schemes.

Governments can encourage conservation measures on private lands by offering tax concessions for the reconstruction of natural habitats. Tax write-offs have been allowed, for example, for fencing to encourage revegetation and land restoration. An extension of this policy to cover other forms of nature conservation would be highly desirable.

Performance Bonds

Performance bonds may be introduced to ensure that, where commercial operators disturb the land or natural habitats, the costs of rehabilitation are covered in advance. As noted earlier in this report, performance bonds are widely used in the mining industry to protect natural environments.

Concessions for proven compliance with codes of practice may be introduced to encourage environmental responsibility, as in the case of the Queensland system of bonds for the mining industry. Industry can assist the adoption of best management practices by setting a good environmental example for others to follow. One example is the program for the rehabilitation of jarrah forest in Western Australia undertaken by Alcoa, for which the company received a United Nations Environment Programme Global 500 Award.

Restrictions on Property and User Rights

Entire systems of resource management can be designed around an accepted set of ecological management objectives before allowing commercial use of natural resources. An example is the specification of environmental flows to protect aquatic ecosystems in riverine environments as a design parameter in schemes for transferable water entitlements.

Ecosystems can be protected also by attaching special conditions to other kinds of user rights for publicly owned resources. Examples include codes of management practice for logging contractors working in native forests, and regulations prohibiting damage to associated species in fisheries operations (for example, dolphins).

Private Investment in Conservation

The private sector may see direct commercial value in managing land especially for conservation purposes. Commercial operations within the private sector based on the protection of natural species or ecosystems may comprise study centres, exhibitions, demonstration sites, visitor facilities and research activities. Appropriate sites in private ownership include rainforests, rangelands, wetlands and alpine areas. Environmental rehabilitation is used frequently as an attraction for visitors, for example, rainforest sites.

Another possibility for investment in conservation is for conservation groups or similar organisations to raise funds for the direct acquisition of sites with high conservation value. This practice has occurred in other countries, but has not been common in Australia.

Other Economic Instruments

Indirect Taxes and Charges

Revenue for environmental protection can be raised from taxes on goods used in conjunction with natural areas, such as camping gear, fishing equipment, diving equipment and similar items. In the Northern Territory, a bed tax is collected by the hospitality industry, but the revenue is used mostly for marketing rather than for environmental management purposes.

Treasuries and finance departments that apply such charging systems should be aware of the importance of 'earmarking'. Funds should be allocated specifically for the purpose of establishing, enhancing and maintaining natural environments instead of being placed in consolidated revenue. People are often willing to support conservation causes provided there is some guarantee that their money will actually be spent on such programs. The experience with the environmental levy administered by the Sydney Water Board provides strong evidence of the need for earmarking.

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