Trading resources to highest value use

1. 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

2. 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

3. 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.

4. VOLUNTARY INSTRUMENTS Ecosystem service payments ADMINISTERED INSTRUMENTS TRADABLE PERMITSSMART REGULATION Duty of care, penalties & ecosystem service payments DUTY OF CARE Environmental Standard Environmental Standard Time Time

5. 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

6. 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

7. Market-Like Instruments Create business opportunity to sell a service Allocation-based Price-based Market friction Lever behavioural Lever behavioural Lever behavioural change by changing change by specifying change by making prices in existing the ‘amount’ of new existing private markets rights / obligations markets work better Eg: Changing taxes, Eg: Introducing a ‘cap Eg: Disclosing Eg: Auctions & tenders introducing levies, and trade’ scheme or information such as giving subsidies an offset scheme via ecolabelling Types of market instruments MBIs ‘combine regulatory arrangements with market processes to change behaviour.Avoid location-specific and person-specific directives’ Administered Voluntary

8. Getting the mix right

9. KISS - Keep It Simple Stupid • Begin with off-set systems, not fully capped systems • Get the system 80% right, not scientifically perfect • Trade surrogates that are easy to monitor • Use one instrument per objective • Keep administrative costs low • Keep transaction costs (steps to get approval) low • Assign for maximum leverage

10. Issue - Who takes the risk (C02) Payments as CO2 sequestered Landholder Emitting Firm Sequestration Contract facilitated by a BROKER Payments as CO2sequestered Landholder Payments for performance of pool Landholder Dealer Emitting Firm Landholder Contract to maintain pool of sequestered CO2 Landholder Sequestration Contracts Landholder

11. Science and Policy • Build response functions that relate to production • Remember $$$ received = P * Q • Focus on development of simple indices

12. Five Policy Opportunities for SA • Off-sets • Small farm dam off-sets • Storm water credits • Expected salinity impact • Biodiversity • Prices (voluntary and mandated) • Levies and charges (not taxes) • Tenders • Permit Tradeable permits • Carbon credits • Water entitlements and allocations • In-River salinity • Market signals • Accreditation to a standard • Regional branding (What are you known for?) • Regulation • Engage with planning profession and local government

13. The future depends upon the way you think about it. Contact: Prof Mike Young Water Economics and Management Email: Mike.Young@adelaide.edu.au Phone: +61-8-8303.5279Mobile: +61-408-488.538

14. Land-use change control 250 mm = 2.5 ML/ha/yr @ $1000 /ML = $2500/ha