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Key departmental publications, e.g. annual reports, budget papers and program guidelines are available in our online archive.

Much of the material listed on these archived web pages has been superseded, or served a particular purpose at a particular time. It may contain references to activities or policies that have no current application. Many archived documents may link to web pages that have moved or no longer exist, or may refer to other documents that are no longer available.

Environmental Incentives:
Australian Experience with Economic Instruments for Environmental Management

Environmental Economics Research Paper No.5
Consultancy report prepared by: Dr David James, Ecoservices Pty Ltd
Commissioned by Environment Australia
Commonwealth of Australia, 1997
ISBN 0 642 26850 9

3. Overview of instruments

3.1 Areas of application

Each class of environmental or natural resource management problem has its own special properties or attributes, thus the suitability and kind of economic instrument must be considered on a case-by-case basis. General areas of application are:

3.2 Management of pollution

Command-and-control systems of regulation have been the most commonly used instrument for the management of pollution in all States and Territories in Australia. Controls are usually enforced at source, with prescribed conditions of discharge, although ambient pollutant concentration standards frequently form the basis for determining discharge limits. Dispersion models may be applied to analyse the linkages between emission/effluent rates at discharge points and ambient concentrations. This approach is common in the management of airsheds and catchments.

Command-and-control systems for managing pollution usually involve regulatory constraints on licensed premises, with prescribed upper limits for the mass or volume of pollutants discharged. Revenue is collected from licences and other fees, on a fixed charge basis.

Economic instruments for pollution control are designed to 'internalise' the external damage costs of pollution. The aim is to create economic incentives that induce dischargers to change their behaviour, production technology, pollution controls or management practices. The main objective in controlling discharges is to limit the impacts on ambient environmental quality and meet air and water quality objectives. To be effective, such systems of instruments should be designed and implemented on a catchment or airshed basis.

Several States have recently adopted newer approaches to pollution control based on economic incentives. South Australia established a system of effluent fees for discharges to marine and coastal waters under its Marine Environment Protection Act 1990, and Victoria has introduced a load-based licensing system for effluent discharges. New South Wales is introducing a similar scheme. In all three cases, instead of a fixed licence fee, payments are linked to the kind of economic activity, the kinds of pollutants discharged, the level of discharge and the sensitivity of the receiving environment.

Tradeable permits for pollution control are not yet common in Australia. They have been introduced for salinity control in the Murray-Darling Basin, but the prospect for trades is at present quite limited. The New South Wales Environment Protection Authority (EPA) has, however, introduced a pilot scheme for tradeable permits for salinity control in the Hunter Valley and is investigating the prospects for a 'bubble' approach for nutrient control in the Hawkesbury-Nepean area. The New South Wales EPA is considering other potential applications of tradeable permits.

The last few years have seen an extension of polluter pays or user pays systems of pricing for the treatment and disposal of solid and liquid waste. They range from charges for municipal waste disposal, to charges for the discharge of trade waste to sewerage systems, to charges for sewage treatment. The basic purpose of economic instruments in these instances is to cover the costs of management incurred by disposal authorities, to ensure that best practices and technologies can be implemented. To some extent, the newer pricing regimes have also encouraged dischargers to carry out abatement themselves, rather than pay the cost of having waste treated and/or disposed of by waste management authorities.

Materials reclamation and the recycling of materials and products are now important management objectives in solid waste management. Economic benefits associated with these objectives include conservation of materials from primary sources, reduced environmental impact and rationalisation of landfill areas, which are becoming increasingly scarce in urban regions of Australia. The National Waste Minimisation and Recycling Strategy and initiatives to achieve 'clean production' are supporting these management objectives. In many cases, economic benefits accrue to firms implementing the new techniques.

Governments have recently shown much interest in exploring the prospects for effluent reuse, particularly from sewage treatment plants, to conserve water supplies and to reduce the environmental impacts of effluent discharges to the environment. At present, however, the price structure tends to mitigate against the widespread implementation of effluent reclamation schemes, as follows:

With continuing improvements in treatment technologies, there has been increased interest in treating effluent to a potable standard and using it in the existing reticulation systems. As well as costs, it seems that community concerns and health regulations are significant obstacles to adopting such technologies at present in Australia. It is unlikely that effluent reuse will occur on a large scale in Australia until appropriate prices are charged for potable water from primary sources and for the environmental damage costs resulting from effluent discharges to the environment.

Noise is one area where economic charges have been applied. A relevant example is the noise tax imposed on aircraft using airports under the control of the Federal Airports Corporation.

Policy initiatives of the kind discussed above, especially where designed to have an incentive effect, represent an important step towards the adoption of economic instruments for pollution control by environmental agencies in Australia. Further details are provided later in this report.

3.3 Management of natural resources

Many natural resources are publicly owned and managed. The usual management aim is to control rates of exploitation of the natural stocks. Maintaining or enhancing the quality of natural stocks may be another kind of management objective. In practice, it may be difficult to trace the connections between management actions and the impact of those actions on resource stocks. Qualitative and quantitative constraints may affect the use of many natural resources.

There are major conceptual and practical difficulties in determining how economic instruments can be related to the objective of achieving ecologically sustainable management of natural resources. One policy problem is the extent to which management agencies should aim to cover the costs of management and the extent to which particular environmental attributes should be maintained or provided as a public good. These matters are of considerable importance in pricing policies for public forests and other natural areas.

In the case of mineral resources, environmental protection may require restoration and rehabilitation programs after temporary disturbance to the land. Most Australian States and Territories now use performance bonds for this purpose.

A commonly used economic instrument is tradeable water entitlements for inland rivers and streams, which a number of Australian States have recently established (ABARE 1993a).

With biologically renewable natural resources, such as forests and fisheries, the main management objective is usually to control harvest rates, allow regeneration or enhance natural stocks.

All States in Australia now have strategies to achieve sustained timber yields, and public forest management agencies have adopted innovative log pricing and allocation mechanisms to ensure that resource rents are fully paid. Increasingly stringent codes of forest management practice have led to the internalisation of environmental protection costs in pricing regimes (RAC 1992).

With fisheries, the main environmental threats are overfishing, stock depletion and dissipation of the resource rent generated by the resource. Rent dissipation can be attributed to a lack of control over access to the resource, too high a level of fishing effort and high average costs of operation resulting from stock depletion. These effects are well documented in the literature (Clark 1976; Lecomber 1979; Clark 1985; Munro & Scott 1985; Conrad 1995).

Various controls have been introduced to fisheries throughout Australia (Commonwealth of Australia 1989a). The aim has generally been to limit the catch and ensure that fishing effort is undertaken at least cost to the industry and community. Tradeable permits have formed the basis of management regimes in certain fisheries. In some cases, such as with southern bluefin tuna, the South East Trawl Fishery (ABARE 1993b) and abalone in New South Wales, management systems have been designed around the concept of tradeable catch quotas. Elsewhere, such as in the Northern Prawn Fishery (Haynes & Pascoe 1988), tradeable quotas have been used to limit fishing effort. With the Northern Prawn Fishery, quotas on fishing effort were recently reduced in an attempt to increase the resource rent within the industry, even though there was no real threat of resource depletion.

Various kinds of economic incentives have been adopted as a means of encouraging better land management. They include tax concessions for the maintenance of remnant vegetation and direct grants for land rehabilitation.

3.4 Management of natural areas and biodiversity

Natural environments are capable of sustainable use with appropriate management inputs. If managed carefully, the use of environmental amenities can be non-degrading. Natural areas support commercial activities (especially tourism), ecological functions (preservation of habitats and biodiversity), catchment protection, active and passive recreation, and education and research. Some values associated with natural areas may comprise 'existence' or 'option' values for which a financial return cannot be appropriated. Existence values usually are associated with ecosystem functions and characteristics, aesthetic attributes and heritage features. The commercial and economic values of natural areas have been well documented in a number of studies (Driml & Common 1995; Preece, van Oosterzee & James 1995).

Economic instruments can assist management programs designed to meet community uses and values for natural environments. Where there is active use of such environments, management actions should ensure that congestion does not become a serious problem and that the maximum carrying capacity for recreation and other activities is not exceeded. The preservation of biodiversity may be an additional management objective.

Economic instruments are widely applied in Australia on a user pays basis for the use of environmental amenities such as national parks, nature reserves and recreation areas. The instrument most commonly used is user fees. In the case of national parks, for example, fees may be imposed for gate entry, for the use of facilities or in the form of concessions for private operators. Fees have been used for some years by the Great Barrier Reef Marine Park Authority, with an increase in fees for visits to the marine park being announced in the August 1996 Commonwealth Budget.

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