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Second Environmental Economics Round Table Proceedings

Convened by Senator Robert Hill, Minister for the Environment and Heritage, Canberra, 5 July 2000
Environmental Economics Research Paper No. 7
Commonwealth of Australia, 2000
ISBN 0 642 19485 8

Opportunities to Improve Resource and Environmental Management

Mike Young
Policy and Economic Research Unit CSIRO Land and Water

 

Introduction

At a roundtable, participants are encouraged to go for the bottom line and assume that people have comprehensive knowledge of the issues. The focus of this paper is on opportunities to improve Australia’s environment.

Opportunity 1–A visionary set of principles

Over the last few years, Australia has been well served by a National Competition Policy that emerged from a report prepared by Professor Hilmer. The Hilmer Report presented, persuasively, the case for a level playing field for government business and private enterprise in a global economy. The report has been influential because it found a set of simple concepts that are easily explained and easily understood. It’s about the merits of competition on a level playing field. Competition has its merits but competition is not necessarily good for the environment. Indeed, the Hilmer report gives little guidance about the maintenance of ecosystem services and environmental quality.

Should the environment have to compete with the economy? Is the game 'the environment versus the economy' or 'the environment and the economy'? Is environmental quality tradeable or are some ecosystem services so fundamental that they are better seen as being part of the infrastructure that makes the game possible?

Australia needs a set of policy implementation principles–or better still a single statement–enabling us to understand the role of ecosystem services and environmental quality in the maintenance of a vibrant economy–a green extension to the Hilmer Report. Building on well understood principles, this extension should be simple and contain an obvious message. To have lasting impact, it must shift the debate about environmental maintenance and protection

The statement should provide a template against which all future actions and proposals can be evaluated. This template should enable my children’s children to decide whether or not we

In short, it is time for someone to craft the statement that makes it easy for all to see how competition can and should be adapted to maintain ecosystem services and improve environmental quality. There is a need for green extension to Hilmer Report.

Opportunity 2–Getting the signals right and defining responsibility

Increasingly, documents describing the state of Australia’s environment find fewer bright spots and more hot spots. Over much of Australia, the quality of the biophysical fabric that we call Australia continues to degrade. The Murray-Darling Basin Ministerial Council’s salinity report is the latest of these documents. I live in Adelaide and am being told, routinely, that soon the water I drink will not meet World Health Organisation drinking standards. The costs are considerable. As noted in the recent salinity audit for the Murray Darling Basin

Strategies are now being put together to contain these impacts. Radical changes in practice are needed. But how should we pay for the transition? In the 1960s, I was living in the Upper South East of South Australia. Today, this region is recognised as a significant source of salinity. The cause of this newly appreciated problem, however, comes from decisions made decades ago.

In economics, impacts like the cost of salinity on people living in Adelaide are called externalities–effects on the quality of people’s lives caused by commercial transactions, investments and actions that they are not party to.

Externalities are complex things and can be good or bad depending on one’s perspective. Figure 1 suggests a possible framework for the management of externalities. Some externalities are best managed using reward mechanisms and others are best managed using penalty mechanisms. The dividing line for choosing between these two alternatives is set by the way we define environmental responsibility. Moreover, we should expect definitions of responsibility to change with time. Where standards are low, efficient adjustment can only be expected to occur if resource users are given clear signals about the way that these standards can be expected to evolve through time. The starting point is clear definition of responsibility at individual, valley and regional scales.

Catchment-wide strategies, regional plans and local plans could be used as the means to define these standards. Where responsibility can not be assigned easily and cost-effectively at the individual level, responsibility should be defined collectively at the community level.

In summary, there is an opportunity for governments to begin using strategy documents and regional plans to make individual and collective environmental responsibilities abundantly clear. For efficient adjustment, it is necessary to signal the expected nature of the changes necessary to achieve sustainable outcomes–to signal the nature of the transitionary pathway.

 

Figure 1 A framework for the definition and identification of externalities and the signals necessary to encourage 'efficient' resource use

figure 1-efficient resource use

Opportunity 3–Use an audit and accreditation process to create hierarchal incentives for people to manage for region-wide outcomes

One of the biggest challenges facing Australian natural resource managers is to find a way to nest plans and strategies within a spatial hierarchy that is logical and internally consistent. To provide incentives and design programs that encourage local valley planning groups to act in a manner that is consistent with basin-wide strategies. Environmental Management System processes could be used to encourage consistency among plans and strategies. I prefer to call these systems–environmental audit and certification systems–because many people have very specific ideas about what is, and what is not, an environmental management system. There is opportunity to develop systems that encourage resource users to ensure that their actions and those of the industries they are associated with are consistent with local plans and that these local plans are both consistent with regional and basin-wide plans.

With Dames and Moore–NRM, CSIRO is in the process of developing a proposal for a system that is consistent with these concepts. Such systems could be designed to make it easy for wholesalers, retailers, consumers and administrators to quickly identify products produced by farmers who

In summary, there is a range of opportunities to use environmental certification and audit mechanisms to make it easier for wholesalers and consumers to support those people whose actions help to improve or maintain environmental quality.

Opportunity 4–Reduce impact costs through innovation

I assume that others at this forum will focus on the vast array of opportunities to use elegant, well-designed incentive mechanisms to help bring about the transition required to reduce the impacts of agricultural land use on river health and water quality. In the time available, I would like to point to one other opportunity. This is to seek innovative ways to reduce the impact of salinity on urban populations.

One interesting option is to increase water use efficiency in cities like Adelaide. Research by CSIRO’s Urban Water Program and others suggests that there are significant opportunities to improve urban water use efficiency by

Early modelling work suggests that, by coupling the above technologies together and if Adelaide could be retrofitted with the latest technology, in many years it may be possible to decouple Adelaide from the Murray River. In an average year, Adelaide uses 176 GL of water and takes 70 GL from the Murray. In most years, there is enough water in the Adelaide catchment for the city to be able to supply its own water. A 100% retrofit of the city could reduce to the demand for ‘new’ water to 51GL in an average year. Clearly, this opportunity needs to be costed carefully and evaluated for social, economic and environmental feasibility. We are now working on a proposal to build a partnership that will enable us to fully cost this option and evaluate its feasibility. If the system looks viable the benefits could be substantial. In an average year, something like 100 GL of water could be left in the Murray to dilute saline water and for use in well located irrigation areas. On the irrigation market, 100 GL of water is worth well over $100 million. Moreover, the Nation could become a global leader in the design of efficient urban water supply systems.

In summary, as well as seeking ways to reduce salinity levels in our river systems, it may be wise to seek innovative ways to live with salinity by reducing its potential to harm others.

Figure 2 Water flows in average year under current and a conceptually feasibly but not costed alternative water model that focuses on the development of opportunities to recycle water

figure 2-water flows

 

Opportunity 5–Expand the incentive for philanthropic conservation of biodiversity

In other parts of the world, particularly the United States, there are strong taxation incentives for people to support biodiversity conservation and it has proven to be a very efficient means of building an important part of their conservation estate. People who do this are often known as philanthropists because they provide a service to society for little private benefit. In recognition of this important opportunity, the Commonwealth Government recently amended income tax legislation to make it possible for people to donate land to an environmental organisation. The aim of this amendment is to encourage people to donate valuable pieces of our natural heritage to the National Estate. If a person wishes to donate land to a registered environmental organisation and this land is worth more than $5,000, it is now possible to

claim an income tax deduction for the current value of land (but capital gains tax must still be paid unless the donation is from a deceased estate); and
spread the deduction over 5 years.

This is an important innovation. But, the capital gains tax provision acts as a strong disincentive to such philanthropic action. Moreover, this change in tax policy misses the biggest opportunity to drive expansion of Australia’s protected area network. As reasoned by the Potter Foundation, Philanthropy Australia, Trust for Nature and several other philanthropic organisations, many people are interested in entering into conservation covenants that commit them and their heirs and successors to protect these lands in perpetuity. In many cases, the loss in land value associated with such a legally binding commitment to protect biodiversity values is substantial. Conservation covenants are registered on title and can dramatically reduce land values. In the United States, agreements to enter into a conservation covenants with an appropriate third party are defined as a philanthropic donation and any resultant loss in land value is tax deductible and, these donations of covenant or land are not subject to capital gains tax. If Australia is serious about creating private incentives for biodiversity, it could do likewise.

In summary, there is opportunity to encourage people to make permanent and lasting contributions to the Nation’s protected area network by

Opportunity 6–Provide tax rebates on private expenditure on areas within Australia’s protected area network

As well as providing incentives for philanthropic donations, another opportunity is to remove one of the main impediments to nature conservation by people who are not primary producers.

Consider someone who owns $250,000 of uncleared land in a region that is poorly represented in Australia’s protected area network. If they choose to place this land under a conservation covenant that permanently prevents it from being farmed or subdivided, all the costs of protecting it must come out of after-tax income. If, however, they use this same land for agricultural purposes, the costs of fencing, etc come out of pre-tax income. Moreover, as a farm, the land will probably not be treated as a secondary place of residence and, hence, not be subject to land tax. Costs of fencing an agricultural area are less than half those for land used for other purposes. Under existing taxation arrangements, there is a perverse incentive that discourages nature conservation. Because we have a set of policies that encourage land development and discourage private contributions to our Australia’s protected area network, biodiversity conservation is much less than they could be.

In short, there is an opportunity to remove a perverse incentive that discourages people from helping to maintain the Nation’s protected area network. To do it, it is necessary to remove the perverse incentive that discourages conservation by providing rebates for private expenditure on land that is protected by a conservation covenant.

References

Anonymous (1999) Philanthropy: Sustaining the Land, a briefing paper proposing tax and policy change that will forge new partnerships and create innovative partnerships for nature conservation across Australia. Ian Potter Foundation, Melbourne.

Murray-Darling Basin Ministerial Council (1999), The Salinity Audit of the Murray Darling Basin. Murray Darling Basin Commission, Canberra.