7  Relevant Australian experience

New Zealand should also be able to draw usefully on Australian experience with using property rights and other market-based instruments in environmental policy, given the geographical proximity of, and legal and political similarities between, the two countries.

Australia has applied a wide range of market-based instruments in environmental policy. These include trading mechanisms, information disclosure (auctions or labelling to address asymmetric information), fees, taxes and subsidies and individual negotiations. The targets have been effluent, trade waste, ozone depleting substances (IC, 1997). There have also been a range of environmental resource goals “such as conserving biodiversity, reducing salinity, rehabilitating wetlands, allocating water within environmental limits and reducing in-stream nutrient levels” (Action Salinity & Water Australia, 2002, piv).[66] Specific examples of instruments include a salt credits scheme to address river salinity, and tax and rate concessions for preserving native vegetation (IC, 1997).[67]

Evidence from Australian studies suggests that the success of markets depends on the cost of defining and enforcing ownership, certainty, information and liquidity. Climate change measures have therefore been suggested as promising candidates for markets in ecosystem services (based on the criteria in Table 8) while biodiversity is significantly more difficult.

The biggest problem areas identified in market design in Australia have been scientific uncertainty, market liquidity and the role of regulation (PC 2001 and 2002, IC 1997). A major proportion of the Australian experience relates to forms of water rights.

Australian water policy focuses on allocating limited water resources and managing salinity problems. Water use is similar to New Zealand, with Irrigated farming accounting for 75 per cent.[68] Use rose by about 65 per cent between 1983 and 1997, mostly because of increased irrigation, while urban and industrial water use declined.[69]

A national water framework was agreed by the Council of Australian Governments (COAG) in 1994 for implementation by states and territories by 2001 (in 1999 full implementation was extended to 2005). Implementation was included under the National Competition Policy (NCP), with payments from the Commonwealth based on progress.[70] The framework includes pricing reforms to achieve full cost recovery, revising rights to ensure allowance for environmental needs, and giving farmers a legal property right to the revised allocations. Allocations are to be specified clearly in terms of ownership, volume, reliability, transferability and quality and be separate from land title. For urban supply, the process includes two-part tariffs (access and volume), transparency (and preferably removal) of cross subsidies, and separate disclosure and payment of community service obligations. New rural supply developments must be economically viable and ecologically sustainable. Institutional reform involves devolution of irrigation scheme management , and separating water resource management from standard setting and enforcement.

There has been some progress on water trading.[71] New South Wales now has 10 year licences with varying degrees of supply security, administratively determined licence charges and market prices for transfers (geographically restricted but including some inter-state trades within catchments). Most traded water was not being used (Sharp, 2002). Victoria limits transfers out of an irrigation district to 2% of the total entitlement, and allows only downstream trading in unregulated streams.[72] All states are required to have intra-state trading systems by June 2003 and an allocation method between farming and environmental needs, with an inter-state trading system by June 2004.[73]

Revision of rights has been delayed, partly due to a dispute over whether there should be government compensation to farmers for the initial reductions in their allocations.[74] This reflects the manner in which incompletely defined rights can become effectively vested over time, leading to windfall gains for recipients (see discussion in Section 4.2) and illustrates the range of technical and institutional constraints that can hinder implementation of a property rights approach to water management. Such issues should not , however, affect the longer-term outcomes of such an approach as long as effective trading arrangements are put in place.