6 Summary and conclusions
This report has considered the many facets of economic instruments and developed a framework for evaluating the potential of these instruments to manage diffuse source water quality issues in New Zealand. To lend concreteness to this analysis, the focus has been on two particular water quality concerns in New Zealand:
- Diffuse source agricultural drainage rich in nutrients that is entering groundwater and then discharging to freshwater lakes. With New Zealand freshwater lakes in the central North Island volcanic plateau, nitrate is of particular concern as it is now considered to be the limiting nutrient and therefore the main cause of increasing chlorophyll and decreasing water clarity. A certain amount of nitrogen has always entered New Zealand lakes from rainwater and undeveloped land. It is the increased loading that has resulted primarily from development of grazing based farming systems after European settlement that is leading to declines in water quality.
- Sedimentation of streams and estuaries as a result of surface runoff from urban development and forestry. Many urban and peri-urban developments in New Zealand are in close proximity to important estuaries (i.e. Christchurch, Nelson, Tauranga, Wellington, and Auckland) and as a result, sedimentation from development is a threat to several important estuaries in New Zealand. The Okura Estuary and its Marine Reserve, for example, is significantly threatened by proposed urban development. Another significant threat to freshwater streams is the erosion, turbidity and sedimentation associated with some aspects of forestry. Extensive plantation forests in New Zealand are the source of most timber and pulp production. While conversion of pastoral land to forests provides erosion control and other environmental benefits, the requirement for regular clear-felling and replanting every 20-40 years does create soil exposure and erosion risks.
A range of policy options could at least in principle be used to deal with these issues. More traditional 'non-market' regulatory approaches that could be used include:
- standards limiting nitrate discharge, or sediment load, standards limiting practices known to influence nitrate or sediment loading, or standard limiting levels of inputs that relate to sediment or nitrate loading
- charges or incentive payments on performance (e.g. a charge per kg of nitrate loading or tonne of sediment load) or some proxy for performance that is easily measurable (e.g. per head of livestock); and
- differentiating charges or incentive payments based on some easily observed characteristics that are correlated with the environmental outcome of interest (e.g. rates per hectare differentiated by slope and proximity to stream to differentiate among rates of payments for actions to control sediment).
Three economic instruments are of particular interest:
- Tendering could be used to deliver incentive payments. This would involve soliciting bids to take actions to reduce nitrate or sediment loading and choosing among bids based on levels of measurable factors correlated with the outcome of interest (e.g. prioritisation of bids to reforest based on slope and proximity to vulnerable water bodies).
- Offset approaches could be implemented by setting limits that preclude future conversion of land to pasture to control nitrate loading or setting limits on logging or urban development to control sediment loading. Then some level of actions such as livestock farming intensification, urban development of timbering could be allowed where compensating mitigation is provided based on formulas that would guarantee a "net" decrease in nitrate or sediment load.
- A tradeable permit approach could be applied to either nitrate or sediment loading by placing a cap on the level of nitrate of sediment load allowed from each source or on levels of allowable input use for some input correlated with nitrate or sediment load. Those able to reduce loading or input use below their entitlement would be able to sell permits. Experience from the USA suggests that point to non-point trade could be introduced. Caution must be employed, but there are opportunities for associations to take more responsibility for water quality.
Approaches to overcome challenges in implementing economic instruments were identified by evaluating:
- opportunities to use or modify existing institutional mechanisms defining treatment of diffuse source environmental issues in New Zealand in ways that would facilitate development of more effective diffuse source water quality policy; and
- opportunities to overcome key characteristics of biophysical processes and markets that limit potential for cost-effective, or environmentally reliable implementation of economic instruments to diffuse source water quality issues.
An understanding of New Zealand's institutional setting for dealing with diffuse source environmental issues was reviewed as this is a prerequisite to understanding constraints to implementation of economic instruments. The main New Zealand government legislation relating to management of land, water, air, and coastal environments in New Zealand is the Resource Management Act, 1991 (RMA). Important features of the RMA are that:
- Environmental management responsibilities have been largely devolved to two levels of local government.
- While significant point source discharge to water generally requires council assessment and permission, this is not typically the case for diffuse source discharges to water.
- The devolution of environmental management responsibility to regional and local governments has generally meant that most environmental incentive programmes to address water quality and soil conservation impacts resulting from agriculture are locally funded. Local funds are most commonly raised from property taxes (rates) with part of the cost paid by farmers and rural properties and part paid by urban households.
- The RMA includes an entitlement for agriculture and other existing land uses to continue that land use at its current intensity and type (sections 10 and 20A). These entitlements to continue existing lawfully established activities do not (appear to) extend to "discharges" for which a significant adverse effect can be demonstrated. The ambiguity may be impeding effective and confident use of the potential of the legislation to address diffuse source discharges.
- A logical consequence of this institutional constraint is that, most of the New Zealand government programmes to deal with non-point sources of environmental impacts are incentive programmes.
The conclusion from review of potential institutional constraints was that guaranteeing that New Zealand's valuable ecological assets remain in good condition will require institutional change to enable more stringent regulation as part of the process of increasing the use of market based instruments. Several mechanisms could be used to facilitate creation of more effective standards limiting activities that are the source of diffuse source water quality externalities. They include:
- Discharges from diffuse sources could in principle be regulated by local councils under the resource consents process of the RMA through requirements for mitigation under defined conditions. For example, in the Lake Taupo catchment regulation prohibiting any further intensification of livestock stocking is being proposed.
- Development of catchment-based water plans could be required that provide standards for environmental outcomes and best-practice performance. This approach was intended in the original RMA enabling legislation but has only been pursued by three councils.
- Either of these above-listed approaches could in turn be augmented by offset or tradeable permit approaches for agricultural and forestry diffuse source water quality issues.
- More fundamentally, changes in standards relating to activities influencing water quality are possible at the national government level under section 43 of the RMA. New Zealand is currently in the process of developing standards for air quality and landfill gas under these provisions and it would be possible to develop standards for water quality in a similar way.
- Another fundamental change in the RMA worth considering would involve clarifying the ambiguity between provisions for continued land use and intensity at current levels (provisions 10 and 20a) and provision prohibiting discharges with demonstrably significant adverse effects. This could enable development of more effective standards and support economic instrument development.
- In peri-urban settings where sediment loading from development is an issue, existing development laws generally allow for the development of controls that limit activities impacting sediment loading. In this setting, further development of such controls could represent an effective standard on which quantity-based economic instruments of the offset type can be built.
This report outlined how a number of attributes of biophysical processes and markets can limit potential for cost saving and/or environmental reliability of economic instruments. One key finding was that the difficulty in measuring actual outcomes of interest for diffuse source water quality issues has made the application of economic instruments to such issues particularly challenging. There are essentially three ways to overcome the "monitoring problem":
- focus on practices that are correlated with the outcome of interest;
- focus on a "proxy" - an input the use of which is correlated with the output of interest - rather than the outcome of interest per se; or
- setting standards or charges, or incentive payments on some easily measurable proxy input or practice, and differentiating standard stringency, charge or incentive payment level across locations based on location attributes correlated with outcome of interest.
Focusing on practices is not recommended for New Zealand. While the approach has been used elsewhere for ease of implementation and environmental reliability, it has often failed to produce the anticipated cost savings because the flexibility of the landowners or developers is often curtailed.
Using inputs as a proxy, in the form of stocking rates, urban development limits, or logging limits could be a feasible basis for implementing a charging systems or standards. In particular, much of the cost savings potential of outcome based charges, incentive payments, tendering and offset systems could be realised with a focus on inputs such as hectares of deforestation or units of livestock per hectare but with differentiation based on location attributes that are correlated with sediment or nitrate threat level (e.g. slope).
An important prerequisite to the implementation of any of the three approaches outlined above is a good understanding of the market segments and a good understanding of the science underlying the relevant environmental processes. Depending on which of these approaches is used, this can require capacity to model relationships between environmental outcomes, input use levels, practices and/or variations in outcomes across location with some confidence. An important implication is that in many instances, implementing economic instruments may require significant investments in environmental investigations, modelling, and monitoring.
Finally, it was noted that there will inevitably be some political aversion to new policies like higher environmental standards, differentiated charge rates based on outcome or input use levels, and additional development restrictions. Successful introduction of change can be facilitated with several strategies. One useful approach involves a transition to higher standards with an initial period of reduced compliance burden, followed by a period of gradually increasing standards and penalties for non-compliance.
An additional strategy worth considering in New Zealand is implementation of a series of pilot projects designed to test the approach and build experience in the use of economic instruments. This approach is currently being pursued in Australia. The experience suggests that this approach could represents an effective, and politically feasible way to gaining understanding and acceptance of how economic instrument design and implementation influences environmental and cost effectiveness. An advantage is that best practice can be developed using pilots before new policies are developed on a larger scale.
