Trading resources to highest value use Prof. Mike Young Research Chair, Water Economics & Management School of Earth and Environmental Sciences The University of Adelaide Wednesday 13 th 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 Duty of care, penalties & ecosystem service payments Environmental Standard Time Environmental Standard VOLUNTARY INSTRUMENTS DUTY OF CARE Time Ecosystem service payments ADMINISTERED INSTRUMENTS TRADABLE PERMITS SMART REGULATION

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 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 Instruments Create business opportunity to sell a service Eg: Auctions & tenders AdministeredVoluntary Lever behavioural change by specifying the ‘amount’ of new rights / obligations Allocation-based

8 Getting the mix right

9 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

10 LandholderEmitting Firm Sequestration Contract facilitated by a BROKER Payments as CO 2 sequestered Landholder DealerEmitting Firm Payments as CO 2 sequestered Sequestration Contracts Payments for performance of pool Contract to maintain pool of sequestered CO 2 Issue - Who takes the risk (C0 2 )

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 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 Young Water Economics and Management Phone: Mobile: The future depends upon the way you think about it.

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