Public and private benefits and choice of environmental policy instruments

Context  Policy aims to influence the behaviour of people to generate positive externalities or avoid negative externalities  For example, changes in land management to increase environmental benefits or decrease environmental costs

Public and private benefits  “Private benefits” relate to the landholder making the decisions (internal)  “Public benefits” relate to all others (external)  neighbours, downstream water users, city dwellers interested in biodiversity

Possible projects Each dot is a set of land-use changes on specific pieces of land = a project. Lucerne Farm A Lucerne Farm B Forestry in water catchment Current practice Which tool? Incentives Extension Regulation New technology No action

CategorySpecific policy mechanisms included Positive incentivesFinancial or regulatory instruments A to encourage change Negative incentivesFinancial or regulatory instruments A to inhibit change ExtensionTechnology transfer, education, communication, demonstrations, support for community network Technology changeDevelopment of improved land management options, e.g. through strategic R&D No actionInformed inaction A Includes polluter-pays mechanisms (command and control, pollution tax, tradable permits, offsets) and beneficiary-pays mechanisms (subsidies, conservation auctions and tenders). Alternative policy mechanisms for seeking changes on private lands

Simple rules for allocating mechanisms to projects 1. No positive incentives for land-use change unless public net benefits of change are positive. 2. No positive incentives if landholders would adopt land-use changes without those incentives. 3. No positive incentives if costs outweigh benefits overall.

Simple rules 4. No extension unless the change being advocated would generate positive private net benefits (the practice is ‘adoptable’). 5. No extension where a change would generate negative net public benefits 6. … 10. see web site

Simple public-private framework

 That was based only on simple rules  The following slides account for additional complexities  Costs of learning/transition  Lags to adoption  Partial effectiveness of extension  Transaction costs

Lag to adoption

Extension Extension has learning costs, and reduces, but doesn’t eliminate, the lag to adoption

Positive incentives can speed adoption that would have occurred eventually Lag is long enough to be worth paying incentive

New map for positive incentives and extension

Technology change can move a project

BCR ≥ 1

BCR ≥ 2 This version is more targeted Even if public benefits are high, incentives or extension are only selected over quite narrow ranges of private benefits.

Implications for public programs  Choice of policy tool matters greatly  Depends on individual situation of environmental assets  Case-by-case  Choice of assets to protect and policy tool should be made jointly  Best projects have private net benefits close to zero

Implications for public programs  Are we getting it roughly right in environmental programs?  In many cases, no  Over-used policy tools  Extension, small temporary grants  Under-used policy tools  Technology change  Tightly targeted larger grants or regulation