6 Conclusions and recommendations
6.1 Conclusions
Correcting externalities and pricing access to natural resources both occupy centre stage in sustainable development. Externalities and excess resource depletion are rooted in market failure. The economics literature on externalities and the merits of MBIs relative to CAC is well understood. Empirical evidence shows CAC to exceed least cost alternatives. In terms of sustainable development, regulation can be expected to result in excessive resource use in the present that might work to reduce the welfare of future generations. The weight of evidence shows MBIs to score relatively highly in terms of sustainable development.
As a criterion, economic efficiency can be applied to both the spatial and temporal aspects of sustainable development. In principle, the economic model can incorporate the latest scientific knowledge on ecosystems the notion of total economic value. Market based instruments are consistent with sustainable development. The choice of a market-based instrument should be based on analysis of the particular externality, while the choice between taxes and quotas as instruments of sustainable development control should be sensitive to the nature of the uncertainties involved.
Public policy should be based on the rational use of market incentives. This is particularly true in the context of sustainable development. In New Zealand today the potential for economic analysis to contribute to environmental policy is great and yet to be fully realised.
Historically, central and local governments have relied primarily on regulations to meet their environmental goals. From the outset we must note that both CAC and polluter pays require a standard. Governments usually set standards after considering scientific evidence and stakeholder preferences. Thus the issue for sustainable development is using a policy instrument that achieves the standard at least-cost. To do otherwise unnecessarily increases expenditures in the present. Regulations that impose a technology on industry will not adequately account for the heterogeneity of firms nor will the technology adopted necessarily be cost minimising. Regulation will not produce the desired outcome at least-cost. Empirical evidence supports this conclusion.
Polluter pays provides an opportunity cost to the polluter that acts as an on-going incentive to implement less costly abatement technology. Defining tradable rights to the standard provides similar incentives. Economic instruments produce a richer response on both sides of the market. There is no blueprint or algorithm to follow when considering whether to regulate or turn to market-based instruments. Good economic reasons might exist for adopting regulations. Devolving rights to communities, empowering them to “manage” the local resource, providing technical (and possibly financial) assistance, is a powerful instrument. There are good working examples of how devolution to non-government organisations produced significant environmental gains.
Market based instruments score relatively highly in terms of sustainable development. Concepts such as total economic value and concern for future generations can be directly addressed and incorporated. Within the generic set of options laid out above, there exists a huge range of potential applications. Discovering the most appropriate instrument should result from careful economic analysis. Ill-conceived proposals to use of MBIs will not gain the acceptance needed for implementation.
In New Zealand today the potential for economic analysis to contribute to environmental policy is great and yet to be fully realised. At a more general level, current practice of not pricing access to scarce environmental resources will, eventually compromise sustainable development. Reliance on regulation offers a political advantage in that its impact on producers and consumers is mostly implicit.
Often there are difficulties to overcome with economic instruments. For example, there might be powerful income effects to deal with that work against the political acceptability of economic instruments. Lack of practical understanding of the instruments can limit application. Too often they are crudely modelled and fail to take into account important transition steps. While it is important to get the principles right, it is also important to get the transition sorted.
A simple net-benefit maximising model shows the location of control to hinge on the public good nature of the externality and the cost of information. In situations where spillovers are minimal then local decision-making is likely to be more efficient. More weight is given to the argument in favour of local decision-making if we recognise information asymmetries in principal-agent relationships and the benefits of learning from variety at the local level of government. Arguments in favour of more central control include situations where spillovers are important, scale economies (eg, in research) might limit policy initiatives, there is increased transaction costs and a race for the bottom. These are of course empirical issues.
The structure of governance is important to sustainable development because it works to determine spatial and intertemporal patterns of resource use, economic growth and the maintenance of natural capital. Virtually every discussion on sustainability concludes that existing institutions are part of the problem and reform is required.
Devolving rights to communities, empowering them to “manage” the local resource, providing technical (and possibly financial) assistance, is a powerful instrument. There are good working examples of how devolution to non-government organisations produced significant environmental gains.
However, MBIs must be legally feasible if they are to become an object of choice. Furthermore, administrators should be appropriately incentivised to adopt policies that are conducive to economic growth within the context of sustainable development.
Enhancing the coordinative power of units of government – horizontally and vertically – is necessary for achieving sustainable development. This is about getting the basic building blocks set in place. Sustainable development outcomes are inextricably linked to decision making structures and procedures. Path dependency should be recognised. If resources become increasingly scarce users will find ways to protect and enhance the value of their property rights within existing constraints. Empirical studies show that environmental outcomes – water use, stock enhancement, water quality – can, in part, be linked to institutional structure.
It is important to seriously consider the allocation of rights – vertically and horizontally – within the architecture of governance. The issue is who has the rights – if at all – to implement MBIs. Incentives for achieving sustainable development should be clearly related to agency missions. As noted in my earlier report, sustainable development policy may have multiple goals that may make it difficult to appropriately incentivise administrators. Difficulties with measuring the productivity of agents may result in low powered incentives to efficiently achieve sustainable development outcomes.
Implementing sustainable development policy will require a transparent linkage between indicators and policy delivery mechanisms. Policies are typically crosscutting and a particular issue will usually span the domain of several ministries.
Optimal institutional design, especially within the context of sustainable development, is beyond the reach of economic theory. As a rough guideline, policy should add value to the economy and society, policy should not be too prescriptive and policy instruments should lay foundations that recognise heterogeneity, provide scope for individuals to adjust according to their circumstances and flexible enough to incorporate dynamic adjustments. Policy should be performance based, implementation transparent and agencies accountable. Policy should be clear and concise. Policy should result in low compliance costs. Policy should be enforceable and offer low probability of regulatory capture.
Several shortcomings of existing institutional and decision-making structures were highlighted. First, it is clear that the political intent of section 5 of the Resource Management Act (RMA) has not endured and we have witnessed the Environment Court developing its own interpretation. The Courts’ interpretation sits well alongside the key concepts of sustainable development. This may not be a surprise because language of the RMA is remarkably similar to the Brundtland definition. Second, the use of MBIs is severely constrained by legislation. For all intents and purposes they are not feasible. Third, where scope does exist for using MBIs administrators invariably shy away from their application. Command and control is the favoured instrument and BAT is often selected without economic analysis. In short, we have no idea of the costs and benefits of policies related to sustainable development.
Setting aside legal infeasibility, administrator preference for CAC might stem from three sources. First, interest groups might be able to exert influence on policy and mechanism design. Second, it might be argued that lower levels of government do not have the scientific knowledge necessary for using MBIs. Third, lower levels of government may not have the expertise to analyse and propose operational alternatives to CAC. If this characterisation is correct, then the last two problems can quite easily be addressed. We must recognise that CAC requires scientific knowledge therefore the issue has to do with the additional cost of knowledge and human capital necessary for implementing MBIs. Regulatory capture – if it exists – may prove more difficult to control. For example, legislation could be made more prescriptive or the locus of decisions could be raised to central government. Whether this makes economic sense is an empirical issue because of the costs and benefits involved with each alternative.
The environment is extreme in the extent that it is characterised by overlapping and shared authority. Indeed it is highly probable that some aspect of the environment touches every unit of government in New Zealand. Thus it is highly unlikely that we can match the primary scale of the problem with the primary scale of authority to manage the problem. Decision-making is often simultaneously pulled out toward international management and inward to regional and local management.
Meeting the challenge of sustainable development requires clear processes for identifying and integrating economic and environmental goals and efficiently implementing the goals at all levels of responsibility. Implementing sustainable development policy will require a transparent linkage between indicators and policy delivery mechanisms. It was argued above that it is not possible to provide an optimisation plan for achieving the goals of sustainable development. Policies are typically cross-cutting where the particular issue will span the domain of several ministries and yet no one ministry is responsible for the policy.
6.2 Recommendations for future research
This report builds on earlier work that focussed on developing an integrated framework for sustainable development. The set of instruments available to policy makers is relatively well understood. A brief survey of contemporary practice reveals that either the application of MBIs is infeasible in law, or in cases where it is feasible, administrators are reluctant to implement MBIs. The former can be corrected by law reform if government considers this necessary to achieving sustainable outcomes. Important externality problems can be addressed by law reform viz. the Resource Management Act. However, while reform may be necessary it is unlikely to be sufficient. This report illustrated situations where the use of MBIs is feasible yet administrators are reluctant to implement them.
There appears to be a significant skill gap vis-à-vis economic instruments at lower levels of government. Short courses and education programs might effectively plug this gap.
Part of the reason why CAC endures may well be the fact that we simply don’t know how much CAC costs the economy. Empirical estimates of these costs might prove useful to policy makers who can highlight the real cost of CAC. This can be achieved in two ways. Primary data could be gathered from a sample of firms to estimate compliance costs. There may be an existing database – for example, the Annual Business Enterprise Survey run by Statistics NZ – that could give an indication of compliance costs.
A second area of future work relates to sustainable development indicators. This was suggested in my first report. Internationally, there is some debate about whether to use micro-level or macro-level indicators. This topic could be further explored with the view of providing indicators for ex post assessment of progress and ex ante indicators for policy analysis.
