5.3  Market based instruments

There is no doubt that there is significant scope to use MBIs to underpin sustainable development. Furthermore, there is ample evidence that MBIs can offer the same environmental outcome at lower cost. We now briefly turn to an examination of current practice. Once again coverage is limited, the aim is to highlight outcomes under contemporary decision-making structures rather than present definitive results. We have seen in the MfE’s statement that a great deal of the responsibility of environmental management rests with regional councils.

5.3.1  Legal framework

As McGee (1994) points out, polluter pays charges may only be imposed under the authority of an Act of Parliament. This of course limits the methods and level of government at which pollution taxes can be applied. Options for the use of polluter pays charges are further limited by the powers central government confers on lower levels of government (Bullen, Jacobsen, Palmer and Scrimgeour 2000). Therefore policies to promote sustainable development must fit within the legal framework prescribed by central government, acting outside the legal framework is ultra vires. Lower levels of government cannot apply polluter pays charges as an instrument of environmental policy if there is no parliamentary authority.

In the context of instrument choice it is important to recognise that local government has only the powers authorised in legislation. As Bullen et al (2000) note, local government is a creature of central government. Thus the relevant statutes viz Resource Management Act and Local Government Act limit the decision-making structures of regional/local government vis-à-vis sustainable development. Section 24 of the RMA requires the Minister for the Environment to consider the use of economic instruments to achieve the purposes of the Act. At the regional/local level, section 32 requires administrators when adopting any objective, policy, rule or method in relation to administration of the Act to have regard to alternatives including the provision of information, services or incentives and the levying of charges (including rates). This particular section is cast within the context of an assessment of viz an evaluation – appropriate to the circumstances – of the likely benefits and costs of each alternative. It would appear that the RMA provides a basis for using MBIs and indeed asks administrators to assess the relative merits of alternative instruments, including CAC and MBIs. Let us look at common approaches to water allocation and air pollution[4].

5.3.2  Water consumption

Section 136 of the RMA makes provision for the transfer of water permits, to take and use water (eg, irrigation) which may in some circumstances be transferred to another firm or another site provided both sites are in the same catchment. Tradable water rights are feasible. Water is becoming an increasingly scarce resource in Canterbury and Otago. Economic development in both regions is being fuelled by water using industry viz dairying, horticulture and other intensive farming systems.

Both regional councils allocate water on a first-come first served basis according to the requirements of land use. River flows and aquifer levels are often modelled and use monitored. Total abstraction levels are limited by minimum flows in rivers or water levels in aquifers. Restrictions are imposed during shortages. Typically, transfers are not feasible beyond transferring the permit to a new owner of the enterprise. During water restrictions there is limited scope for transfer. Permit duration is adequate for investment. Water use is not measured. Farmers are suspicious of measuring water use because they see it as a precursor to charging.

Although water allocation in both Canterbury and Otago makes allowances for “in-stream uses” administrators have not used the total economic value framework. Whether the balance referred to by Skelton and Memon (2002) is being achieved will be an ongoing debate. In parts of Canterbury and Otago the allocation of water between productive uses and in-stream uses is being contested in the Environment Court. There can be little doubt that water is valuable in production – but administrators do not know the relative value and there is no mechanism (other than land acquisition) that guides water to its most productive use. The inefficiencies of CAC highlighted in Section 2 apply. Furthermore, if water is not being used efficiently then there might be a greater risk of adverse environmental impacts in the future. The contest for water – not only between productive users and environmental groups but also within the community of productive users – can be expected to increase over time.

The operative water allocation plan for the Oroua Catchment (Manawatu-Wanganui Regional Council) established a basis for the first tradable permit system in New Zealand (Sharp, 1996). Ten year permits were granted according to existing entitlements within constraints of the plan. New users had to obtain all or part of their requirements from existing irrigators. Although permits are transferable the right to transfer is attenuated. The whole or part of an interest in a water permit may be transferred during periods of water restriction only, provided the end use is irrigation, both sites are within the catchment and the Council is informed in advance of the transfer.

Figure 14 scores the Manawatu-Wanganui tradable rights scheme using the dimensions provided in Section 3. Duration scores highly, exclusivity lower because the users entitlement can be reduced, both transferability and transformability are attenuated and score relatively low. The area of the “star” suggests the value attaching to the right. The value of these rights would exceed the value of rights in an identical catchment where water is allocated using CAC.

Figure 14 – The quality of water permits