1 Introduction
Sustainable development links the welfare of future generations with the capacity of the biosphere to sustain life. Sustainable development poses particular challenges for public policy because it is not a fixed state but rather a process of change in which exploitation of resources, the direction of investment, the orientation of technology, and institutional change are made consistent with the future as well as present needs.
The primary purpose of this paper is to focus on the environment/economic interface; identify key market-based approaches; identify the level at which market failure should be resolved in particular circumstances (ie, centralised vs. decentralised); explore ways to incentivise administrators to apply market-based approaches where this can result in more efficient environmental outcomes, while also being conducive to economic growth; assess the quality of institutional arrangements in New Zealand and areas to focus on for improvement; and consider access to resources and the decision-making structure. It also includes consideration of the integration and tradeoffs required between economic and environmental objectives.
Sustainable development has a policy focus because it is about the “design” of policy that ensures delivery of a set of quantitative and qualitative outcomes. The key to sustainable development is choosing robust policies. Institutional arrangements provide a fundamental link between public policy, commercial organisations that use (directly or indirectly) environmental resources and public organisations that are responsible for administering environmental policy (Sharp, 1996a). Many of the reforms introduced in the 1980s early 1990s fall within Williamson’s (1991) notion of primary reforms. For example, the introduction of tradable fishing rights was a primary reform that led to the formation of markets to solve the problem of allocating a sustainable harvest and unleashed incentives to form new businesses, invest in stock enhancement, and so on (Batstone and Sharp, 1999).
Frameworks whereby sustainability can be evaluated and measured are a crucial input. Environmental problems are rooted in failed markets. Their resolution requires government taking some kind of action – to establish property rights, set standards of liability, apply polluter pays taxes, or regulate. The economic literature on market failure is well known and economic instruments have received rigorous analysis over the years. Many externalities arise from a poor definition of property rights. For example, well-designed systems of property rights effectively manage externalities associated with water use. It goes without saying that efficiency can also be enhanced by greater reliance on rights-based systems of management (Scott, 1996). Thus, rights-based instruments offer gains to both economy and environment. Of course, rights-based management may not be best suited to all environmental “problems”. Water pollution might be better approached by using the “polluter pays” principle endorsed by the OECD decades ago (OECD, 2001).
The Resource Management Act 1991 (RMA), along with accumulated legal decisions, provides the legal structure underpinning environmental management and policy in New Zealand. The overriding purpose of the Act is to promote sustainable management. Sections within the Act vizSection 32 were inserted to provide a degree of discipline – use of an appropriate cost-benefit analysis – in the formation and implementation of environmental policy. One result of the RMA was to devolve a great deal of environmental management and policy to local government (Sharp, 1997). The Act is permissive and created opportunities for local and regional government to find effective and efficient ways of achieving environmental standards that suited their communities. Policies of national significance can be “called in” and considered at the national level.
In New Zealand today, many environmental policies are based on a regulatory response without consideration first being given to the full range of options available. On this surface the prevailing preference for regulatory interventions is contrary to the intent of Section 32. In some cases regulation may be warranted, but it should be the result of careful analysis and evaluation of alternative options. Non-regulatory approaches, especially market-based approaches, can produce better environmental outcomes while also being conducive to economic growth. Why is this not occurring?
This paper emphasises the operation of existing institutional arrangements and systems of decision-making as they relate to the environment-economy interface. It includes consideration of the integration and tradeoffs required between economic and environmental objectives.
Five sections follow the introduction to this report. Section 2 provides an overview of the economic foundations for designing policies to enhance sustainable development. Section 3 moves from the standard economic treatment of externalities to discuss their incorporation into institutional arrangement and decision-making structures. Section 4 provides a generic framework for assessing the quality of institutional arrangements and decision-making structures. Section 5 applies the framework to a limited number of issues in New Zealand, highlights the progress made towards implementing policies to achieve sustainable development and identifies deficiencies in the current set of institutional arrangements. Section 6 provides conclusions and suggestions for reform.
