Transcript 20041019_csiro_powerpoint_template.pot

Economics of Natural Resource
Management
Prof. Mike Young
Research Chair, Water Economics & Management
School of Earth and Environmental Sciences
The University of Adelaide
Friday 2nd February 2007
High level water reform agenda
Year
Major policy
1994
COAG Water Reform Framework within National Competition Policy
1995a
1995b
MDB Cap introduced
Water reform implementation linked to competition payments
1998
MDBC commenced Pilot Interstate Water Trading Trial
2001
National Action Plan for Salinity and Water Quality
2002
MDBMC started Living Murray process
2003
COAG agreed, in principle, to implement a NWI
2004
COAG finalised NWI
2007
Howard Water $10 billion Plan
2
Natural resource management
instruments
The Key Question
How do we, at any location, get

the right intervention

at the right location

at the least cost,
so as to facilitate, from a social perspective

optimal land use change

optimal land and water use?
3
The full range of opportunities
Outcome-orientated

Informational instruments

Motivational instruments

Regulatory instruments

Market-based instruments
 Financial instruments
 Property-right instruments
Process orientated

Governance arrangements

Consultative arrangements
4
What are Market Instruments?
… policy tools that use market signals and processes to
encourage behaviour
Seek to induced behavioral change

Foster change

Offer compliance flexibility

Through variation in compliance costs exits
5
Types of market instruments
MBIs
‘encourage behaviour through market
signals rather than through explicit
directives’
Price-based
Quantity-based
Market friction
Lever behavioural
change by changing
prices in existing
markets
Lever behavioural
change by specifying
the ‘amount’ of new
rights / obligations
Lever behavioural
change by making
existing private
markets work better
Eg: Changing taxes,
introducing levies,
giving subsidies
Eg: Introducing a ‘cap
and trade’ scheme or
an offset scheme
Eg: Disclosing
information such as
via ecolabelling
Market-Like
Instruments
Create business
opportunity to
sell a service
Eg: Auctions
& tenders
6
Biodiversity Significance
Market-like instruments
Biodiversity Benefits Index
70
60
50
40
30
20
10
0
0
0.025 0.05 0.075
0.1
0.125 0.15 0.175
Habitat Service/$
0.2
Actual
(HSS/$)BBI
Landholder
BBI((HSS/$)
Thresholdneeded
Power
for $400,000
for BBI
Gold)
7
Market Friction Instruments
Best left in private sector with catalytic
inputs from Government
Typically start in niche markets

Fisheries

Timber Certification

Organic Food Markets

Supply to large wholesale businesses
8
Price v’s Quantity design choice
In theory, both approaches can yield the same
outcome at the same cost
… in practice many factors influencing instrument type
and design  a key factor is relative uncertainties
1. Price instruments
 Alter the prices of goods / services to reflect their
environmental impact
 … provides certainty as to compliance costs
2. Quantity instruments
 Control the quantity of the good / service to socially
desired level
 … provides certainty as to environmental outcome
9
Instrument choice
Screen for feasibility
Assess potential to deliver environmental goals

On their own?

In combination with other instruments
Recognise variation in human response to same
instrument
Assess potential to combine instruments to reduce cost
of achieving outcome
Design and develop implementation sequence
10
Recharge Accounts Trading
Land use
Recharge rate
mm
Area
ha
Recharge
KL
Native vegetation
5
100
500
Plantation Timber
5
300
1,500
Dryland lucerne
10
400
4,000
Other Dryland
80
3,000
240,000
Irrigated
120
200
24,000
4,000
270,000
Total Groundwater load
Recharge Entitlement @ 70mm/ha/yr @ 4,000 ha = 280,000 KL
Farm Credit/Deficit
10,000 KL
Less credits sold
5,000 KL
Credits available for sale
5,000 KL
Rebate @ $0.10 per KL
$500
11
Off-set schemes
Most cost-effective when impacts is linked to
a development or controllable land-use change
Conflict with Planning Culture of protection for
existing uses
12
Robust Water Allocation
Single title
to
Land & Water
Water
Land
Tradeable Rights
Price
13
Robustness
Robust (adj.)
Said of a system that has demonstrated an
ability to recover gracefully from the whole range of exceptional
inputs and situations in a given environment.

One step below bulletproof.

Carries the additional connotation of elegance in addition to just
careful attention to detail.

Compare smart, oppose brittle.
Robust systems

Endure without the need to change their foundations.

They last for centuries.

Inspire confidence.

Produce efficient and politically acceptable outcomes in
an ever changing world.
Theoretical Design Foundations
Tinbergen Principle (NP in 1969)
 For dynamic efficiency
=> One instrument per objective
Mundell’s Assignment Principle (NP in 1999)
• For dynamic stability
=> Pair instruments and objectives
for greatest leverage
Coase Theorem (NP in 1999)
 To minimise adverse effects of entitlement
mis-allocation on economic activity
=> Ensure very low transaction costs
Practical Enduring Experience
Structures that have stood the test of time
• Limited liability share companies
• Money
• Banking systems
• Double entry book keeping
• Torrens Land Title System
Partitioning the Problem
Need instruments for
•
Managing individual users
 Entitlements
 Allocations
 Use approvals
•
Managing aggregate consequences
 Water allocation plans to allocate equitably
 Trading Protocols to allow efficiency production
 Catchment management plans to manage environmental
impacts
Goals, Objectives & Targets
•
Distributive Equity
•
Economic Efficiency
•
Manage Environmental Externalities
The CoAG Communiqué
“A key focus of the National Water Initiative will be to implement a
robust framework for water access entitlements
…. while ensuring that there is sufficient water available to
maintain healthy rivers and aquifers.
…. Under the National Water Initiative, jurisdictions will establish a
robust, transparent regulatory water accounting framework that
protects the integrity of entitlements.”
19
Three Part Separation
Entitlements => Equity instrument
Allocation => Efficiency instrument
Use licence => Externalities instrument
Entitlements
Allocations
Use Approvals
20
Generalised framework
Scale
Policy Objective
Distributive
Equity
Economic
Efficiency
Externalities
Individual Entitlements Allocations
Use licences
(approvals)
Total
System
Catchment
Plans
Water
allocation
plans
Trading
Protocols &
Accounting
Rules
Register integrity
River Capacity
Administrative Error Management Rules
Risk
Bulk water licence
& ownership
Channel Capacity
Shares
This Feburary
Delivery
Return Flow &
Drainage Rules
Trading Fees
Administrative
Dilution Risk
Delivery Charge
A Water
Licence
Trading opportunity Permanent
Salinity Pollution
Right
Climate Change
Risk
Seasonal Variability
Risk
Trading opportunity Temporary
Split Environment &
Consumptive Use
Impact of use - on
river
Impact of use - on
groundwater Impact of use Local
Access to Sales
Water (Vic)
Carry over rules
Integrity of
(NSW)
Register, mortgages
22
Why unbundle?
Delivery
charges
Salinity
obligations
Ownership
Restrictions
Tenure
Water
Entitlement
Registered interests
Low cost
trading
Water
Allocation
Volume for
use or trade
Return flow &
drainage
Delivery
Priority
Expected
Reliability
Casting the Net
Critical Concepts
1862 – Companies Act Limited Liability
1857 – The Torrens Title System
?000 - The Banking System
Jan Tinbergen – 1st Nobel Lauriat in
Economics
24
Whereas the inhabitants
of South Australia are subjected to loses,
heavy costs, and much perplexity, by
reason that the laws relating to the transfer
and encumbrance of freehold and other
interests in land are complex, cumbrous
and unsuited to the requirements of the
said inhabitants, it is therefore expedient to
amend the said Act
25
Defining entitlements
•
Unit shares that define an entitlement
to a proportional of a defined
consumptive pool
•
Unbundled from other part of the
system
•
Share Registers guaranteed and
mortgageable
•
Fully tradable anyone can own/invest
Risk Specification
Financial risk met entirely Compensation claim possible Financial risk
by entitlement holder
incompletely specified
or shared
(Adaptive Risk)
(Duty of care in managing the
(Uncertainty)
interests of all parties )
Natural variations
Administrative error
Catastrophes
Overallocation
Revised estimate of the
Rapid and unexpected policy change
capacity
Planned small adjustments
Land-use change
27
Risk - A community guarantee?

Guarantee to only use market mechanisms to change
allocations

Effectively, insure water users against change in
their share of the pool in return for a small return to
the Community
 Start in 2015 @ 0.5% pa
 increase gradually to rate for crown agricultural
leases

Place returns in an Environment Trust
28
Periodic Allocations & Trading
Account Name: Aussie Irrigation
Statement No: 24
Date
1/07/2001
Balance bought forward
1/09/2001
Periodic allocation
1000 shares translates to 2000 ML of
water that may be consumed
Debit
Credit
Balance
400
2000
2400
12/10/2001 Transfer from XYZ Pty Ltd
3/11/2001
Cheque No. 1234 5678
Use from 1/9/01 to 1/11/01
500
500
2900
2400
(Pumped 1000 ML and deemed to have
used 50%)
3/11/2001
Transfer from AB&CD Smith
Electronic RN 9876543
30/04/2002 Use from 2/11/01 to 30/4/02
300
2700
660
2040
420
1620
(Pumped 1320 ML and deemed to have
used 50%)
30/05/2002 Unused water not available for carry
forward to 2002/03 season
29
Allocation Trading
Date ____________
Pay ____________________________________________
________ML
The sum of ________________________________ ML of 2000/01 Water
Water Trading Australia
Signature______________________
807512 085 249:0223 7851
BPay
WPay
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Robust Use Licences
Permission to irrigate to “use” water
Irrigation conditions

eg Not more than 300 ha or 1500 ML pa
Only use drip irrigation
Obligations to third parties

Other irrigators

Urban water users

The environment
Pollution right reserved to the Crown
Use managed separately from entitlements
31
A robust “separated” system?
Torrens title-like
interest register
Mortgageable
Shares
A Two-sided
contract
Risk stated
transparently
Bank-like
Allocations
Approvals to irrigate &
3rd party obligations
Use conditions
& obligations
(Periodic review)
This licence authorises the
holder of this permit to do xxx
on area AAA provided
1. The holder has a valid permit
to do XXX
2. XXX is done in a manner
consistent with the ….
management plan
32
A Robust System
Single Title
to
Land & Water
Water
Land
Tradeable Rights
Entitlement
Shares
in perpetuity
Channel Capacity
Shares
CoAG’s
1990’s Vision
Bank-like
Allocations
Channel Capacity
Allocations
Price
Use licences
with limits &
obligations
Salinity
Shares
Solution for
C21?
Salinity
Allocations
33
Water accounting
x
Ground
water
x
x
Water Yield
Storage
Water Extraction
Base flow
R
i
v
e
r
Surface Drainage
x
GW Recharge
industrial use $
Land use
Irrigation, urban &
Rainfall
Wetlands
34
35
Two new MDBC reports on 6 “risks”
In 20 years, a further reduction in flow of around 2,500 – 5,500GL.
 Effects below dams and hence outside release rules erode flows most.
36
Possible reduction in mean annual River Murray flow as a result of
incomplete accounting (baseline 1993/94)
Unmanaged flow reducing effect
Reduced water yield (Trees and dams)
Nett
effect
- 600 GL
Water use efficiency savings
- 723 GL
Increased groundwater use
Salinity Interception Schemes
Estimated nett reduction in mean river flow
and allocations to irrigators
Add back 500 GL
-349 GL
-20 GL
-1,692 GL
37
Recharge Credits for return flows
Evapotranspiration
Extraction
45 ML
Gross entitlement = 100 ML
Return = 50 ML
Actual amount used
5 ML
Drainage
50 ML
100 ML
Water that returns
to the aquifer
Unconfined Aquifer
38
Known accounting solutions
Offset the flow reducing effects of establishing
permanent vegetation, clay spreading etc by
surrendering an entitlement equivalent to the
expected mean effect
Defining tradable entitlement as a “nett” entitlement
to prevent increased WUE erosion (return flow
reduction)
Defining salinity interception as a water use and
acquiring the necessary water from below the cap.
Changes the cost benefit of most schemes!
Amending the cap to include all unconfined
groundwater within, say, 10kms of the River as
part of the system
39
Water allocation plans
Rules to partition water into

“use” pool (share pool)

“flow” pool
Dam management rules
Share pool reliability and partitioning

High security shares

“General” security
Inter seasonal carry forward and borrowing rules
40
Catchment plans
Rules for

Applying water to land

Managing drainage and salinity impacts
41
Pricing
Water supply charges

Fixed charge to cover infrastructure and management

Variable charge to cover costs of supply
Market Value

Allocation prices reveal seasonal opportunity cost

Entitlement prices reveal value of long term economic
opportunity
Environment costs

Via salinity and other policies
42
Regional governance
1997 Establish a Catchment Management Board with
local representatives
Employ own staff and offices
Funded via a levy on water users
Duties

preparing and implementing plans that set water sharing,
trading and use rules

advising Minister and local govt councils on water management

promoting public awareness
2005 Converted into a Natural Resource Management
Board
43
A Robust Solution?
Single Title
to
Land & Water
Water
Land
Tradeable Rights
Entitlement
Shares
in Perpetuity
Delivery Capacity
Shares
Bank-like
Allocations
Delivery Capacity
Allocations
Price
Use licences
with limits &
obligations
Salinity
Shares
Salinity
Allocations
Regional governance
1997 Establish a Catchment Management Board with
local representatives
Employ own staff and offices
Funded via a levy on water users
Duties

preparing and implementing plans that set water sharing,
trading and use rules

advising Minister and local govt councils on water management

promoting public awareness
2005 Converted into a Natural Resource Management
Board
45
Over allocation
Exists because
 Entitlements are defined in volumes and not as
shares of available water in a pool
 Plans assume that constant technology and land
use change
 Introduction of trading that activated
previously unused water
Solutions
 Buy back
 Pro-rata reduction
46
Illustrative buy back offer form
Type of Licence
South Australian River Murray Licence
Offer conditional upon lease back of water until …..
Offer 1
…………….. ML @ not less than $2,300.00 per ML
Offer 2
…………….. ML @ not less than $2,100.00 per ML
Offer 3
…………….. ML @ not less than $2,000.00 per ML
Offer 4
…………….. ML @ not less than $1,950.00 per ML
Offer 5
…………….. ML @ not less than $1,900.00 per ML
Signatures
Licence holder …………………………………………
Registered interest (if any) …………………………..
47
Coles-Myer Schedule
48
Extracts Coles Myer “2005” Press
Release
• Off-market buy-back price $8.30
• 9.2% discount to Friday’s closing share price of $9.14
• 70.4 million shares bought back for a total of $585m
Under the off-market buy-back a total of 70.4 million
shares were bought back for $585 million – approximately
5.7% of Coles Myer’s shares
• All shares tendered in the buy-back at or below $8.30
were bought back.
• Shares tendered into the buy-back at a price above
$8.30 were not bought back.
49
Duty of care, penalties &
ecosystem service payments
Environmental Standard
Ecosystem service payments
REWARD &
ENCOURAGEMENT
DUTY OF CARE
PENALTIES &
DISCOURAGEMENT
Time
50
Natural resource management
instruments
The Key Question
How do we, at any location, get

the right intervention

at the right location

at the least cost,
so as to facilitate, from a social perspective

optimal land use change

optimal land and water use?
51
The full range of opportunities
Outcome-orientated

Informational instruments

Motivational instruments

Regulatory instruments

Market-based instruments
 Financial instruments
 Property-right instruments
Process orientated

Governance arrangements

Consultative arrangements
52
Prof. Mike Young
Research Chair, Water Economics & Management
School of Earth and Environmental Sciences
The University of Adelaide
Friday 2nd February 2007