Biodiversity publications archive

Reimbursing the future: an evaluation of motivational, voluntary, price-based, property-right, and regulatory incentives for the conservation of biodiversity

Biodiversity Series, Paper No. 9
M.D. Young, N. Gunningham, J. Elix, J. Lambert, B. Howard, P. Grabosky and E. McCrone
CSIRO Division of Wildlife and Ecology, the Australian Centre for Environmental Law, and Community Solutions
Biodiversity Unit, Department of the Environment, Sport and Territories, 1996
ISBN 0 642 24429 4

Chapter 7: Designing optimal policy mixes

The lack of good professional organisational and policy responses constrains recovery efforts just as surely as good science.354

7.1 The need for a new approach

In the past, policy analysts, but not policy practitioners, have assumed that the various policy instruments available for biodiversity protection should be treated as alternatives to one another rather than as complementary mechanisms. They have tended to embrace one or other of these approaches without regard to the virtues of the others. Predictably, economists focused on incentives-based approaches, lawyers on regulation and so on.

This "single instrument" or "single strategy" approach is misguided, because all instruments have strengths and weaknesses, and because none are sufficiently flexible and resilient to be able to successfully address all biodiversity threats in all ecological, social, economic and institutional contexts. Accordingly, in the large majority of circumstances, a mix of instruments (regulatory, market, voluntary and institutional) is required. This mix should be tailored to specific policy goals. Combinations of instruments, appropriate to particular threats to the suite of biodiversity attributes at any location, will be the most effective response.

7.2 Biodiversity's special features

Biodiversity has a number of distinguishing features which differentiate it from more conventional resource management issues and which must be taken into account in designing policy mixes. First, in many circumstances, biodiversity loss is irreversible. Once lost, a species is lost forever. Second, many species – especially the invertebrates, microbes and viruses – have yet to be discovered. Much of the biodiversity loss that is occurring is in the form of loss of species we have yet to discover. Scientists argue that this is one of the prime reasons for protecting biodiversity. Third, ecosystem diversity exhibits threshold effects. Current scientific evidence suggests that:

there are limits to the ability of ecosystems to withstand the stress imposed by environmental degradation. If stressed beyond these limits, ecosystems will collapse. By reducing ecological resilience, biodiversity loss increases the likelihood that thresholds will be breached... the possibility of a major environmental catastrophe or system collapse cannot be ruled out.355

As a consequence, any policy which compromises the resilience of ecosystems may have uncontrollable effects and even small policy changes can have dramatic but unforeseen results. Fourth, information about the responses of species to biodiversity loss is extremely limited. For example, there is considerable uncertainty about the nature of ecological thresholds and about the consequences of transgressing them. Fifth, many biodiversity problems cannot be solved merely by proscribing certain behaviour, but only by ensuring positive ongoing management: thereby emphasising the importance of developing the custodianship ethic. Sixth, much of biodiversity has no immediate economic value, giving rise to substantial tensions between public and private interests. Seventh, the causes of genetic, species and ecosystem losses are extremely diffuse in nature, and involve many different sectors and forms of economic activity. That is, biodiversity is pervasive to social and economic systems, being affected by land and water-use decisions, by pollution and by economic use generally.356 At least three distinct types or levels – ecosystem diversity, species diversity and genetic diversity – are involved and each varies from location to location. Biodiversity conservation also has to address a variety of threats caused by actions both on and off the site where the valued attribute exists. A site which contains several endangered species, for example, may be threatened by agricultural practices such as the prospect of clearing to plant more crops, pollution from fertilisers and pesticides used on farms some 10 kilometres away, and salinity induced by tree clearing high up the catchment. This same site may also be the source of pollution endangering a fish population in an estuary at the bottom of a catchment. Simultaneously other policy objectives like enhancement of agricultural and fishery production and the development of ecotourism may be held for the site. Sometimes this means that biodiversity and more general resource management problems coincide. Our Western Australian wheatbelt case study, for example, illustrates that actions to arrest dryland salinity would also bring significant gains for biodiversity. However, even these actions are likely to be focused primarily on land conservation, and for this reason are likely to be only partially successful in addressing broader biodiversity concerns. Coincidence between soil erosion, water quality and biodiversity problems are observed in the fisheries and Macquarie Marshes case studies.

7.2.1 The First-Mover Problem

Against this backdrop of considerable uncertainty about the consequences of biodiversity loss, and ignorance about its extent, one particular problem which must be addressed in choosing instrument options is that of deterring opportunistic behaviour which could inflict irreversible damage. As a public good, there is often a large gap between the social and private values assigned to biodiversity. Moreover, because of the lack of information about biodiversity, administrators are not always aware of the size of this gap. As Bowers has pointed out, from time to time unforeseen contingencies may arise which offer opportunities for profit at the expense of biodiversity. These situation will give rise to the First Mover Problem, namely:

if others perceive these opportunities before they are perceived by the control authority, then they may damage biodiversity before the authority can act ... [For example] where a firm is constrained from polluting a lake by a pollution tax and the value of the activity which leads to the pollution increases it may become profitable to pollute the lake and pay the tax. In such circumstances, the firm is unlikely to ask the pollution control authority to increase the tax.357

One obvious example is the case of a person who applies for a clearing permit but omits to note the presence of an endangered species within the area covered by the application. There are two means of dealing with this problem. The first is for governments to invest in detection, monitoring and information gathering so as to reduce the risk of the first-mover losses occurring. Given the limited capacity of most bureaucracies to anticipate and respond quickly to change, however, this strategy is not a dependable one.

The alternative means is to design control instruments which reduce the first mover problem by providing incentives for individuals to act in the public interest. Mechanisms used to reduce the first mover-problem include sharing property-rights between government and resource users via co-management arrangements and negotiable property-right structures. Another common method is to offer compensation for the value of the income opportunity lost. This latter option, however, runs the risk of encouraging people to hold out for bigger and bigger rewards.358 We return to this issue in examining the optimal design of policy mixes below.

Finally, while planning would not overcome the first mover problem, it might at least serve to mitigate it. Specifically, a staged approach, beginning with environmental studies to identify the nature of the threats and species and habitats in need of protection, followed by a regional plan (incorporating both prohibitions on clearance in some areas and permission to clear in others) might pre-empt some of this problem by identifying biodiversity considerations (eg endangered species) in advance, and providing a strategy to protect them. This would, at the very least, reduce the number of first movers where the temptation was to 'shoot, shovel and shut up.'

7.2.2 The Tinbergen Principle

The Tinbergen Principle359 provides another compelling reason for developing policy mixes rather than "single instrument" approaches. This principle suggests that, in situations where there are multiple objectives and problems, at least one policy instrument should be used to alleviate each threat and pursue each objective. When this approach is taken, each part of the mix can be adjusted without compromising other objectives. The reason for saying at least one instrument is that each organisation interested in biodiversity may wish to modify the emphasis given by other organisations. This is only possible if the mix of policies enables them to either add weight to an existing policy or add an additional one. Compliance with this principle ensures that, as knowledge, prices, technology and social values change over time, the resultant package can be adjusted efficiently and equitably. The reason for this is that if separate instruments are used for each link between a threat and an objective, then it is simpler to readjust the policy mix as circumstances change. Moreover, if the advantages of community and industry initiated conservation are to be pursued seriously, the number of instruments will need to be sufficient to accommodate each level of biodiversity and the web of institutions who act to conserve all attributes of biodiversity. Local government, industry and state government, for example, all need separate access to the means to protect an ecosystem of importance to them. As there are many threats and several objectives, the combination will involve more rather than fewer instruments.

This principle clearly applies to biodiversity protection which, as described above, is highly complex and involves many threats and levels. In these circumstances, any successful biodiversity strategy will need to rely upon a complex web of instruments and mechanisms.

7.2.3 Which combination?

At any location an optimal strategy will seek to harness the strengths of individual mechanisms while compensating for their weaknesses by the use of additional and complementary policy instruments. In practice, the introduction of a new instrument to the existing policy mix could have a variety of effects, not all of which are positive. These range from synergy (where the interaction of two instruments enhances each other's effects) to neutralisation (where the introduction of one instrument negates or dilutes the effects of the another). For example, the introduction of financial incentives for some landholders, at the same time as their neighbours are still subject to mandatory constraints, is likely to generate intolerable tensions which undermine the effectiveness of either approach. Similarly, subsidies for certain types of agricultural production and tax deductions for expenditures incurred in land clearance may effectively neutralise incentives for the conservation of remnant vegetation.360

What is needed then, is not simply the introduction of a broader range of policy tools, but the matching of tools with the particular suite of environmental and resource management problems at issue, with the party or parties best capable of implementing them, and with each other. The crucial question thus becomes: how, in what circumstances, and in what combinations, can the main classes of policy instruments achieve optimal policy mixes?

Unfortunately, no single policy mix will be universally applicable. For biodiversity to be conserved adequately throughout the landscape or marine environment, it will be necessary for the mix to accommodate a vast array of ecological, political, social and economic contexts. So complex and various are the causes of biodiversity loss and the circumstance in which they arise that no single instrument, and indeed no single mix of instruments, could conceivably be successful in addressing all or even most of them. As a result, generalisations are extremely hazardous. In short, the complexities of social, economic and ecological processes preclude simple broad-brush solutions.361 The only answer to the question: "what is the optimal combination of instruments and mechanisms?" is: "it all depends, and that the optimal combination will change with time and context."362 As one recent study put it: " a priori rules are inferior to case-by-case analysis".363 Rather than seeking to identify optimal mixes in the abstract, a context364 and threat-specific approach is preferable.

7.3 Design criteria

We believe that, in addition to the seven objectives identified in Chapter 6, four guidelines are paramount in designing policy mixes that promote the active conservation of biodiversity and its ecologically sustainable use. These are that (all things being equal):

Three factors justify the selection of these guidelines which apply when it is necessary for people to actively manage biodiversity. These are first, the findings of a wide range of psychological research on how people respond to different instruments and approaches (examined immediately below), second, the outcomes of the community consultation process (described in chapter 3 above) and third, experience in implementing economic policies. These three factors are mutually reinforcing.

7.3.1 Motivation and intervention instruments

In terms of the psychological literature, there is considerable evidence that, all else being equal, a policy instrument is more likely to produce both compliance and a positive attitude change if it is perceived as non-coercive.366 Thus, and as confirmed in our consultations and the literature,367 voluntary instruments are likely to be preferred by resource users over direct regulation because they are flexible, give individuals greater freedom and the opportunity to utilise and experiment with knowledge not generally known,368 and are less coercive.369

Accordingly, financially-attractive pricing mechanisms in furtherance of environmental protection tend to be perceived by those individuals as preferable to regulatory commands. Moreover, instrument mixes which are seen as offering a choice are likely to be perceived as more legitimate and may thus facilitate compliance. Thus the use of financially-attractive incentives and inducements for desired conduct are perceived as more "freedom enhancing" than the threat of negative sanctions.

By contrast, commands which are reinforced by threat may be honoured, albeit grudgingly. However, to the extent that the ends and means of such commands are perceived as unfair, they may well elicit defiance and resistance.370 There is, however, general support in the community for an underlying set of regulations to control the recalcitrant few who do not respond to voluntary measures and who seek to "free ride" on the positive actions of the majority. Accordingly, failure to include a regulatory safety net to force the small minority to comply with community aspirations can result in failure of the entire incentive mix because those who act voluntarily start to perceive that their actions are not worth the effort. Precautionary regulations, like a requirement to obtain a clearing permit, can also be used to encourage people to become actively involved in voluntary conservation programs.

In summary, given their very great potential to alienate not only their immediate target but also the target's peers, coercive instrument mixes must be used with great sensitivity and restraint. The guideline is that prospects for biodiversity conservation will be greater if direct regulatory approaches are overlain with a web of mechanisms that create a financially-attractive and voluntary atmosphere that encourages cooperation and the sharing of information.

7.3.2 Financially-attractive instrument mixes

As a general rule, the more financially-attractive the incentive mix, the greater the likelihood that it will induce resource users and communities to actively contribute to the maintenance of biodiversity values. Financial inducements close the gap between social and private values. Moreover, when first introduced they can act as important 'circuit breakers' during a transition to a new regime. Most are characterised by the fact that initial participation is voluntary, which results in community acceptance of the circuit breaking change to a new regime, which gives prominence to biodiversity. The result, even when financial support is removed, is a more genuine and more durable attitude change. Once agreement has been reached over the new regime, however, the mix can involve significant penalties. If a landholder, for example, enters into a management agreement, non-compliance with it could incur substantial penalties. Instrument mixes with these characteristics maximise acceptance, are largely self-enforcing, and create a dynamic incentive to search for more cost effective solutions and, often, a continuing incentive to improve beyond the target.371

7.3.3 Preference for underlying causes

In chapter 2, the case for treating underlying causes and, if possible, fundamental causes was discussed at length. As fundamental causes like population growth are deeply entrenched in complex policy agendas, further progress and fewer irreversible consequences will be more likely through a focus on the underlying causes of threatening processes. If, for example, a tax concession is causing unacceptable vegetation clearance then, all other things being equal, the efficient solution is to remove the tax concession. In many situations however, simple treatment of the underlying cause of the threatening process may be insufficient. Thus, in practice, the most dependable strategy will require attention to the symptom as well as the cause – at least until the threatening process is no longer observable.

One of the underlying causes of biodiversity loss dealt with later in this chapter is institutional failure. Much Australian biodiversity policy initiative is located within structures that focus on conservation within reserves, on crown land and leased land. Considerable institutional reform may be necessary to overcome the barriers presented by existing structures. As suggested in the Kangaroo Island case study, in some specific cases, local government amalgamation may provide an important catalyst for the adoption of policies that drive the development of biodiversity values and ecosystems. A second reason for focusing on underlying causes is that mechanisms that remove underlying causes of a threat reduce the incentive for people to adopt actions that reduce biodiversity values. Often this achieved via changes that affect market prices. Unless markets, as restricted by regulation, property-rights and social norms, take account of biodiversity values then biodiversity will continue to decline. When resource users are made to pay for the true costs of biodiversity degradation to society, they have an incentive to avoid causing that degradation.

7.3.4 Designing for precaution

Perrings and Pearce have argued that the existence of irreversible threshold effects (and often fundamental ignorance about the implications of crossing a threshold) introduces uncertainty which renders the development of economic instruments in these circumstances problematic.372 If market incentives do not work as predicted, it may be too late to save the ecosystems or species concerned. They argue that in such situations, regulation is probably the most dependable strategy. Put differently, regulations are best seen as the safety net to prevent irreversible losses and guarantee that essential ecological processes are maintained.

Unfortunately, economists such as Perrings and Pearce may well have an over optimistic view of the virtues of regulation in this context. For while regulation does have considerable advantages over property-right mechanisms identified above, it is still not dependable enough to rely upon alone. Regulatory failure is not unknown. Effective implementation and enforcement are crucially important to regulation's dependability, and failures at this level are well documented and widespread.373 In circumstances of biodiversity protection, where properties are widely dispersed, enforcement resources are thin on the ground, and regulation is not invariably supported by rural constituencies, then the possibility of regulatory failure cannot be discounted.

Given the severity of the consequences of policy failure and the limited dependability even of regulation, there is a strong argument for building in a safety margin. Aircraft design deliberately incorporates multiple systems to compensate for the possible failure of any one (fail safe mechanisms) because the consequences of the failure of a single system without backup would be catastrophic. Similarly, to halt irreversible or threshold threatening biodiversity loss, all mechanisms and instruments should be used to halt the irreversible or threshold threatening biodiversity loss. What we do not suggest is that regulation alone – or indeed any other policy instrument – has sufficient dependability to act as a safety net in its own right. On the contrary, we see regulation as a last line of defence which is fallible. Accordingly, one of the functions of other instruments and mechanisms is to dissuade resource users from actions that, with minor mis-judgement, could result in an irreversible change in an ecosystem type, the demise of a species or the loss of genetic traits.374 Recognising that all instruments are prone to failure, the role of non-regulatory instruments is to increase dependability by reducing the need for regulatory mechanisms to be used as the first and last line of defence.

7.4 Towards an optimal policy mix

Figure 7.1: Major types of policy instruments

Figure 7.1: Major types of policy instruments

7.4.1 The Role of motivational, information and education incentives

In broad terms, we conceptualise the role of each of the main groups of policy instruments in terms of Figure 7.1. Motivation, information and education are located at the base of our instrument mix because of the major contribution they can make in reinforcing and making more effective each of the other incentive-based mechanisms.

If people are positively motivated, and persuaded that biodiversity conservation is worthwhile, they are more likely to respond positively to a range of instruments: voluntary, property-right, price and regulatory. For example, those who have been informed of the advantages of biodiversity conservation in certain contexts (eg eco-tourism) will be more inclined to develop self-regulatory mechanisms that seek to maintain biodiversity values by, for example, agreeing not to drop boat anchors on coral reefs and to drive only on designated tracks. Those who understand the reasons for government regulation, and can identify with its underlying purposes, will similarly be more accepting of it. If school children, for example, can explain why regulations are needed to protect native vegetation then their farming parents are more likely to accept these regulations.

For these reasons, we believe that motivational instruments and mechanisms are so fundamental to a successful incentives-based biodiversity conservation package that they should be invoked in almost all circumstances, and incorporated in almost all policy mixes. Put differently, they form a necessary foundation upon which all other instruments must rely if they are to achieve their optimal impact. As demonstrated in chapter 5, one of the most effective ways to build motivation is to pursue structures that build community and industry ownership of decisions about biodiversity. If changes are to be achieved, individuals must be supportive and directly involved in conserving biodiversity.375

However, there is also evidence that there is sometimes a considerable gap between attitudes and behaviour. That is, even when people perceive the need for biodiversity conservation, they will not necessarily take appropriate action if this conflicts with other goals and interests.376 For this reason, it would be most unwise to rely on motivational approaches alone to protect biodiversity.

Beyond this, we conceive that in most circumstances an optimal package will require some combination of voluntary incentives, market based and regulatory incentives. We emphasise that the particular instruments within each segment, the relative size of each segment, and the precise combination of instruments and sectors will vary with the nature of the threat and with the social, economic and political context in which it arises.

The case studies contained in appendices 2.1 to 2.7 and summarised in Chapter 4 illustrate the benefits of, and provide some examples of, this approach. However, at a conceptual level, some general principles concerning the respective roles of voluntary, property-right, price and regulatory incentives can be identified which will assist in designing optimal policy mixes.

7.4.2 Voluntary instruments and policy mixes

The extent to which voluntarism can be relied upon as a principal policy tool, the extent to which it needs to be combined with other categories of incentives and what those other categories should be, will depend upon a number of factors. As indicated in Chapter 6, voluntarism is likely to work best and have greatest dependability, when there is a substantial coincidence between public interest in biodiversity conservation and the private interests of resource users; for example, when land users may profit directly from protecting biodiversity. Voluntary mechanisms include self-regulation by industry; support for projects undertaken by non-government organisations and community groups; and direct contracts.

However, even where public interest and private interest substantially coincide, voluntarism can only work if resource users appreciate the value of biodiversity protection, and their own self-interest in protecting it. The sort of informational and educational incentives described in Chapter 6 will be extremely important in this respect, again illustrating the point made immediately above: that motivational incentives can almost invariably reinforce other policy instruments.

When the gap between public interest and private interest is greater, the challenge is to build, rather than hinder the development of a custodial ethic, and to make biodiversity conservation part of the 'community norm.'377 Well designed policy mixes use voluntary incentives to harness altruistic behaviour. In doing this, policy makers need to be aware of the traps of over-using financial incentives. If payments for biodiversity conservation are the norm, and these payments are subsequently withdrawn then the benefits of that conservation may be lost unless measures, like a conservation covenant, are used to prevent the work paid for being undone. Moreover, removal of the financial support may convert a carefully cultivated custodial ethic into one that is antagonistic towards the non-local benefits of biodiversity conservation. One mechanism used to reduce the risk of this last problem is to make it clear that any payments will only be of a transitional nature.

Even when resource users do have full awareness of their self-interest in protecting biodiversity, there is still some danger in relying solely on voluntarism to the exclusion of more interventionist mechanisms. Not all resource users will necessarily behave with rationality. Policy must also take account of the minority who may be irrational, incompetent or intransigent.

Moreover, resource users' self-interest in biodiversity protection cannot be realised for some time, such that there may still be a temptation to sacrifice long-term gains for short term profits (eg clear the land and sell the timber now, rather than gain benefits from ecotourism which may take years to develop). Accordingly, voluntarism lacks sufficient dependability to be relied upon as an exclusive instrument to deliver biodiversity conservation. Where the threats to biodiversity require active participation, then voluntary mechanisms are essential but in virtually all cases they need to be supported by other mechanisms like price and property-right mechanisms and regulation.

Having said this, we emphasise that self interest is not a full explanation of behaviour. As indicated above, altruism and respect for broad conservation objectives may be evident on the part of some, and mechanisms which seek to support and harness such behaviour can play a supporting role in the policy mix, provided they can be justified in cost benefit terms. For example, if limited resources were put into encouraging and supporting landholders willing in principle to enter voluntary agreements. This might provide a cost effective mechanism, even though it is only applicable to a small minority. If it were coupled with appropriate tax concessions, then many more landholders might be encouraged to participate.

Already in existence are such programs as Land for Wildlife in Victoria, with objectives including fostering attitudinal change, and which currently has over 40,000 hectares of land being voluntarily managed as wildlife habitat without offering any direct financial assistance.378 Such programs have the added benefit that they may also promote awareness of biodiversity conservation, thereby contributing to motivational change – a factor acknowledged in the Convention on Biological Diversity and the National Strategy for the Conservation of Australia's Biological Diversity.379

The conclusion is that, except in those limited circumstances where the public interest in protecting biodiversity conservation and private interest substantially coincide, and where biodiversity loss is reversible, voluntary mechanisms should be used to build a biodiversity conservation ethic and to supplement other instruments. In virtually all cases they need to be supported by mechanisms that ensure dependability and recognise the need for precaution to avoid irreversible loss.380

7.4.3 Property-right, price-based and regulatory approaches

In this section, we explore the overall role of property-right, price and regulatory instruments in the broader policy mix, and the optimal relationship between these types of instruments.

As we have indicated in chapter 6, a strength of property-right incentives is their cost-effectiveness and lack of intrusiveness. These considerable virtues of property-right instruments suggest that they should play a central role in most policy mixes. Most property rights begin by defining what may be done and then restrict this by using covenants and conditions to say what may not be done. Sometimes easements and other legislative arrangements are used to grant rights to other people. A conservation covenant, for example, might prohibit clearing. An individually transferable fishing right might keep fishing activity within the confines of a management plan. But should they be combined solely with voluntary and/or motivational incentives, or do they also need to be underpinned by regulation? How can price-based instruments complement their effectiveness and dependability? And to what extent do price-based instruments themselves need to be underpinned by regulation?

This last question is central, because while price mechanisms, like charges and levies, have considerable virtues, they also lack dependability. For example, a key characteristic of some approaches is that a price is set and the market then decides how much biodiversity conservation to deliver. This encourages people to find efficient ways to profit from this trade-off and seek ways to do more or less damage depending upon the way that the instrument operates. In contrast, property-right mechanisms set ecological constraints and then ask the market to trade-off profit opportunities within that framework. In the former, biodiversity objectives are tradeable. In the latter, prices and costs are traded as circumstances change. This is further complicated by the fact that, for many attributes of biodiversity, the feedback mechanisms are poorly developed and involve long time lags.

A further problem with relying on prices and economic incentives rather than compulsion is that prices are not well suited to dealing with those who will not respond "rationally" to those incentives and may provide less certainty than regulation. It may be that only those "at the margin" respond in the preferred direction. But for a variety of reasons, ranging from incompetence or ignorance to intransigence, there is likely to be a minority who, in the absence of more directive or even coercive policies, will continue to behave in a manner which threatens biodiversity conservation.381 While relatively small, this minority cannot be ignored. If left unchecked, it will have a substantial impact on biodiversity, not just directly through its own behaviour, but also through its impact in demotivating other target group members. For example, there is evidence that land users and others who contribute to voluntary programs such as Landcare, may become dispirited if others are free to continue to degrade adjoining land. In many circumstances, the creation of a level playing field may be an essential prerequisite to the success of the sort of positive, less interventionist approach that we envisage for the large majority of circumstances.

In contrast, regulatory approaches decide how much conservation is required and then let the market reveal the economic consequences of doing this. The latter regulatory approach is often preferred as it is changes in physical processes and quantities, not prices, that affect ecosystems most directly. Arguably, there is more dependability when ecological constraints are set and then price, demand and technological forces are allowed to work themselves out.

In summary, where persuasion and education fail, where enterprises are unwilling to improve their environmental performances voluntarily, and where economic incentives lack dependability, then regulation may be the only technique capable of exerting pressure and compelling resource users and others to protect biodiversity. Thus even those who do not behave with economic rationality and respond to economic incentives can still be persuaded to halt destructive practices. A further advantage of regulation that it has a moral and educational influence which economic incentive based strategies lack. In some circumstances, the very fact that certain behaviour is prescribed by law may be sufficient to create moral inhibitions against engaging in that behaviour.

How should the tension between achieving dependability (which implies a need for regulation) on the one hand, and cost-effectiveness, flexibility and non intrusiveness (through property-right incentives and voluntarism) on the other be resolved? How might it be possible to maintain a net positive and financially attractive policy mix, consistent with the design principles stated above?

The extent to which property-right mechanisms (often in conjunction with voluntary and/or motivational incentives) need to be underpinned by regulation will depend on whether, in the circumstances to be addressed, there is a danger of irreversible biodiversity loss , and whether that loss may give rise to threshold effects. This is because dependability becomes the most important objective when irreversibility or threshold breach is at stake, but not otherwise. Moreover since, in the interests of equity, regulation must be applied universally, it is in consequence a fairly blunt instrument.

Finally, and crucially, regulatory control instruments invoking sanctions typically lack the capacity to overcome the first mover problems identified earlier. For example, if product or land prices change making it worthwhile for a land user to clear land and face a fine which is now less than the value of the gross benefits from clearing, that land user is unlikely to notify the government and suggest higher fines before taking the decision to clear.

A further argument against invoking regulations alone, even in these circumstances, is that this approach commonly addresses symptoms rather than the underlying forces creating the problem.

In any event, there is no strict dichotomy between regulation and other mechanisms. In practice, these other mechanisms rely on a substantial underpinning of government regulation for their effective implementation. Individual transferable quotas for example, incorporate the flexibility and cost-effectiveness of market approaches, but are overlaid with a degree of government regulation that reduces the risk of their being systematically breached. Moreover, precautionary regulations are often used as a means to trigger the adoption of instruments. A precautionary regulation, such as a requirement to apply for a clearing permit, for example, might result in approval of clearing in one area conditional upon a conservation covenant being placed on another area supported by a management agreement that would re-imburse the landholder for the cost of completing special fencing requirements.

7.4.4 General guidelines

In the above discussion, we have moved through a series of arguments that began by pointing out the need for instrument mixes and how the strengths and weaknesses of each instrument can be harnessed to build a framework that is as dependable as possible in terms of preventing irreversible losses and within this constraint trades-off criteria like efficiency, equity, precaution, dynamism, administrative costs and community acceptability. Having argued first for dependability, which implies the need for precautionary regulations and precautionary standards underpinned by a firm regulatory safety net that prohibits irreversible actions – the next weight should be given to mechanisms that build community support which requires that the standard be both equitable and have acceptable administrative costs.

The mere fact that the State makes clear its willingness to escalate to regulation if voluntary, property-right and price mechanisms fail, means that the latter are likely to work more effectively, since resource users' decisions concerning the utilisation of voluntary and property-right incentives will be coloured by their knowledge of the existence of a background of regulation. So paradoxically, the backdrop of regulation is likely to render positive instruments more attractive – and thus more effective – to industry, by presenting them with an unpalatable alternative.

As a general rule, less interventionist incentive mixes, underpinned by regulations to prevent and exclude irreversible actions, are likely to deliver more efficient outcomes than more interventionist mixes. The reason for this is that less interventionist incentives permit trade-offs and encourage innovation. They also address underlying causes of threats to biodiversity which if removed or countered by a compensating mechanism make further administrative action rarely necessary.

Thus we conclude that the financially-attractive instruments are rarely adequate on their own and often need to be underpinned by precautionary instruments, and ultimately by a regulatory safety net to deal with recalcitrant resource users (who in well designed systems should be few in number). Otherwise, as indicated earlier, the interests of the many who willingly participate will be undermined by the few who behave irresponsibly.

7.5 Reimbursement, compensation and cost internalisation

In building any strategy for biodiversity conservation, it is obvious that biodiversity conservation must be achieved at least cost to government. As biodiversity conservation is a public good some effort will need to be paid for by government but, consistent with the National Strategy for Ecologically Sustainable Development some can be made a normal part of any acceptable form of resource use. Some of the benefits, like work in recovering an endangered species, are shared by everyone and for this reason the costs of such activity have normally been paid for by governments on behalf of the people it represents. Other benefits, like values that benefit ecotourism on Kangaroo Island, for example, are confined more to the tourists and the people who supply services to them. Still others, like the protection of vegetation which reduces the incidence of dryland salinity, can be of direct benefit to local land users. Recognising the role of each of motivational, voluntary, property-right, price and regulatory instruments, the question is one of where should the line between costs imposed on industry, the community and government be drawn.

As a general proposition, we suggest that in the first instance a general assessment of the likely costs and benefits of the proposed change in the incentive mix be made and if that indicates a favourable outcome, then as a general set of guidelines (as set out in Figure 7.2.):

Figure 7.2: Guidelines for the use of compensation in the development of a policy mix which aims to prevent irreversible declines in biodiversity values

Figure 7.2: Guidelines for the use of compensation in the development of a policy mix which aims to prevent irreversible declines in biodiversity values

To these general guidelines about payments, we need to add guidelines about the payment of compensation for changes in actual property rights and those of a speculative nature. On equity grounds and to encourage efficient investment, Australian and most State law provides a right to compensation for the removal of an actual property right.383 At the same time, local government, all states and territories have reserved the right, from time to time, to redefine the nature of the opportunities that attach to those rights and have encouraged people to speculate on the profits and losses associated with such action. Thus, establishing a precedent for the payment of compensation for declines in land values should be seen as a very fundamental reform to the Australian economy. If some room for speculation as a valid form of economic activity remains then the case for compensation collapses to one of the need to achieve and retain political and community acceptability during the transition period when assumed, but unspecified, property rights are redefined. The guideline is that where compensation is necessary, it should only be offered for a transitionary period as an equitable means of bringing about a rapid and irreversible transition. Administrative costs may be less if the initial policy change is accompanied by a plan to diminish the proportion of compensation payable by, say, 20% per annum. Such an arrangement, however, leaves one factor unconsidered. If irreversible losses are to be avoided people need a positive incentive to reveal new findings. If, for example, a farmer discovers that remnant vegetation on her property contains an endangered species or, more seriously, one thought to be extinct, then unless there is a guarantee of compensation they have a strong financial incentive to fail to act to protect it.384

Finally, we point out that, any policy mix of biodiversity policies needs periodic review and as part of that process ongoing data collection and monitoring is necessary.

No apology is made for the complexity of the guidelines presented in Figure 7.2. They are consistent with recent decisions and past experience with the introduction of clearing controls in Australia. Compensation payments are limited largely to the buy out of existing uses. They are consistent, also, with the OECD's Polluter-Pays Principle, which recommends that the costs of pollution control and prevention should be met by those who cause the problem, so that these people have an incentive to either pass these costs on to consumers or find means of avoiding the need to pollute. Stressing the importance of tackling underlying causes of biodiversity loss, the framework is also consistent with the notion of making users pay for the full costs of resource use. As illustrated in our fisheries case study, wider application of both these principles would do much to reduce many of the core threats to biodiversity conservation.

The concept of making polluters and users pay, however, creates a problem for those costs of biodiversity conservation that can not be passed on to consumers. This is particularly so, when the issue is not one of pollution, but rather one of achieving efficiencies in the delivery of non-marketable services. Take, for example, the control of vermin in an area that may not be grazed because it provides essential habitat for an endangered species. In this latter situation, it can be argued that the beneficiaries of this species protection (taxpayers on behalf of society) should, at least, reimburse providers of those services for any costs incremental to normal production costs.385 The World Bank's Global Environment Facility describes this concept as one of reimbursing the incremental cost of providing benefits to society. The notion is simply one of paying people to do work which, if they did not do it, would be undertaken by government on behalf of future generations and society in general. Payments should be limited to expenditure which can not be recovered from the market place.386 Our guidelines are consistent with these concepts. Under these guidelines, imposition of clearing controls would attract compensation only when a government had given a prior explicit approval to clear vegetation.

7.6 Other ingredients of successful policy mixes

7.6.1 Instrument ordering

In principle, it would seem sensible to remove existing perverse economic incentives first, since these would otherwise distort or reduce the effectiveness of new policy instruments. Where more than one instrument might achieve the intended policy outcome, it would also be appropriate to introduce less intrusive and interventionist instruments first. Beyond this, appropriate ordering is likely to emerge as each threat to biodiversity is individually addressed. For example, if the policy concern is with ecosystem sustainability and there is a serious possibility of thresholds being crossed, then the imposition of precautionary standards will be essential, probably in combination with the use of market based instruments, for reasons discussed earlier.

7.6.2 Which parties should implement policy mixes

Implicit in the use of a broader range of instruments is the use of a larger range of actors to implement them. This means not only the involvement of governments (first parties) landholders or other users (second parties) but also a range of other interested actors (third parties). In this context it is important to note that scrutiny on the part of citizens' and public interest organisations can exceed vigilance by government agencies. We need to take advantage both of the democratic benefits which direct stakeholder participation can bring, and of the leverage in implementation which broader third party engagement can provide.

Again, most examples will be context and threat specific. For example, we argued in Chapter 6 for the benefits of biodiversity audits. The credibility and balance of these audits would be considerably strengthened if the audit team included not only scientific experts, and local resource users, but also a representative of a community group or other appropriate NGOs. Similarly, if clearing restrictions are challenged by landholders who wish to argue a case for further clearing beyond the legislative threshold, then third parties such as environmental groups should have a right of standing, thereby acting as a countervailing force. The model here might be that of a number of pieces of NSW legislation which provide "any person" with standing to bring a court action in cases of non-compliance. Similarly, in the United States, the right to bring "citizen suits" can enable local conservation groups to sue private developers where their activities threaten endangered species. This approach has the particular virtue of compensating for lack of resources, and sometimes lack of political will, on the part of government enforcement agencies, and of leveraging substantially increased enforcement capability. The "dob-in" factor is also an important one, capable of being harnessed in the public interest, although it may be of only limited value where illegal activity largely corresponds with local community mores. There are also more practical difficulties for individuals in relatively isolated communities acting in this role.

7.6.3 The need to encourage ongoing management

Policy instruments which merely halt existing biodiversity loss are important, particularly in gaining breathing space during which more constructive policies can be developed, but they do not in themselves ensure that resources will be appropriately managed so as to preserve biodiversity. For example, although the South Australian approach under the Native Vegetation Management Act 1985 (subsequently repealed by the Native Vegetation Act 1991) suggests that compensation backed by legislation can have considerable success, even this mix remains, in one aspect, seriously inadequate. The South Australian model is essentially one of prohibition on clearance coupled with compensation, with only very modest provision for management of land subject to clearance controls.387 For this reason, it is likely to be far more successful in preventing clearance than in ensuring effective ongoing care of native vegetation and woodland habitat on private land. Farrier, in particular, has argued that those who are forcibly constrained from clearing land are unlikely to be enthusiastic land managers, and that for this reason, regulation must be combined with adequate financial incentives but that "these should take the form of forward looking payments for management rather than backward looking compensation".388 He suggests a reordering of the National Landcare Program and the Rural Adjustment Scheme as possible ways of meeting this objective. In his view:

The priorities of these initiatives need to be adjusted to ensure that greater emphasis in placed on the retention of existing native vegetation rather than replanting, and that restructuring in local communities is not based exclusively on short term productivity concerns, but also takes into account the much longer term economic interest that the community has in conserving biodiversity.389

The final element is some mechanism (eg a covenant or easement) to ensure that protection is ongoing and does not cease with the termination of the management agreement.

Economic conditions

A final factor for consideration is the socio-economic and biological conditions that exist at any location. Obviously, marginal agricultural land will provide a different economic context and require a different instrument mix from an area on the verge of intensive tourist development.

All else being equal, voluntary mechanisms and management agreements will be more attractive to the economically secure primary producer. By contrast, transferable tax credits and subsidies will be more appealing to those (such as the subsistence farmer) who are "up to their ears in red ink". Accreditation and labelling schemes will be more applicable to those interests (such as the ecotourism industry) which may be influenced by purchasing power.

7.7 Conclusion

This chapter, building on the previous instrument option chapters, has focussed on policy mixes. The guidelines that emerge are that:

Principles to be followed in deciding when to pay money to those responsible for conserving biodiversity are:


354. Backhouse, G.N. and Clark, T.W. (1995) 'Case studies and policy initiatives in endangered species recovery in Australia: Introduction.' Chapter 1 in Bennett, A.; Backhouse, G. and Clark, T. (eds) People and nature conservation: Perspectives on private land use and endangered species recovery. Surrey Beatty and Sons, Chipping Norton.

355. Barbier, E.B.; Burgess, J.C. and Folke, C. (1994) Paradise lost? The ecological economics of biodiversity. Earthscan Publications Ltd, London, p184.

356. OECD (1996) Making markets work for biological diversity: The role of economic incentives measures. OECD, Paris. (In press).

357. Bowers J. (1994) Incentives and mechanisms for biodiversity: Observations and issues. CSIRO Division of Wildlife and Ecology Canberra, p19.

358. Bowers J. (1994) Incentives and mechanisms for biodiversity: Observations and issues. CSIRO Division of Wildlife and Ecology Canberra, p19.

359. Tinbergen, I. (1950) On the theory of economic policy. Elsevier, North Holland.

360. OECD (1989) Water resource management: Integrated policies. OECD, Paris, p112.

361. Turner, K. and Opschoor, H. (1994) 'Environmental economics and environmental policy instruments: Introduction and overview.' In Opschoor, H. and Turner, K. (eds) Economic incentives and environmental policies: Principles and practice. Kluwer Academic Publishers, Dordrecht.

362. For example, tradeable rights can operate effectively where natural resources are not site-specific and where "acceptable overall-impacts can be determined", but they are not appropriate where resources are site-specific, as is commonly the case with habitats or ecosystems.

363. Opschoor, H. and Turner, K. (1994) Economic incentives and environmental policies: Principles and practice. Kluwer Academic Publishers, Dordrecht, p35.

364. The OECD suggests that the key variables include:

See OECD (1996) Making markets work for biological diversity: The role of economic incentives measures. OECD, Paris. (In press).

365. We define a financially attractive mix as one which, at the point of introduction, has the potential to increase the wealth or income of those who participate

366. Muir, W.K (1967) 'Under what circumstances can law bring about attitude change?' In Grossman and Grossman (eds) Law and Change in Modern America. Goodyear Publishing Co., Pacific Palisades, CA.

367. Kelman, S. (1983) 'Economic incentives and environmental policy: politics, ideology and philosophy.' In Schelling, T. (ed) Incentives for Environmental Protection. Massachusetts Institute of Technology Press, Cambridge, USA.

368. Grabosky, P.N. (1994) 'Green markets: Environmental regulation by the private sector.' Law and Policy 16(4):419.

369. On the other hand, it should be noted that in the industrial sector, companies have often preferred the predictability of (stringent) regulation to untested economic instruments.

370. Sherman, L. (1993) 'Defiance, deterrence and irrelevance: A theory of the criminal sanction.' Journal of Research in Crime and Delinquency 30 445-473.

371. Schelling, T. (ed.) Incentives for environmental protection. Massachusetts Institute of Technology Press, Cambridge, USA and Grabosky, P.N. (1993) Rewards and incentives as regulatory instruments. Working Paper No. 13, Administration, Compliance and Governability Program, Research School of Social Sciences. Australian National University, Canberra.

372. This is in part because threshold effects invalidate the normal test for efficiency in the allocation of resources. See Perrings, C. and Pearce, D. (1994) 'Threshold effects and incentives for the conservation of biodiversity.' Environmental and Resource Economics 4:13-28.

373. For a general review see Gunningham, N. (1987) 'Negotiated non-compliance: A case study of regulatory failure.' Law and Policy 9(1)69-97 and references therein. Much of the existing legislation is supported by grossly inadequate budgets, leaving enforcement agencies with an almost complete incapacity to discharge some of their statutory functions. When this problem is compounded by a lack of political will and a desire on the part of politicians not to offend rural constituencies, then the impact of the legislation may be very modest indeed. On the other hand, in South Australia, where the law is clear, simple and well known, it has had a very substantial impact and may well have succeeded, over time, in making the prohibition of broad acre clearing acceptable to local communities.

374. In the context of uncertainty, it is very difficult to know if a threshold is being approached. A precautionary approach would be to prohibit clearing unless those proposing it could prove it did not have threshold effects.

375. Bennett, A.F. (1995) In Bennett, A.; Backhouse, G. and Clark, T. (eds) People and nature conservation: Perspectives on private land use and endangered species recovery. Surrey Beatty and Sons, Chipping Norton, p125.

376. For example, the South Australian experience has been that even when people were well informed and were supportive of the need for biodiversity conservation, they were still willing to clear their own land, and only regulation (coupled with compensation) prevented them from doing so. Personal communication, John Bradsen 5/10/95.

377. Bennett, A.F. (1995) In Bennett, A.; Backhouse, G. and Clark, T. (eds) People and nature conservation: Perspectives on private land use and endangered species recovery. Surrey Beatty and Sons, Chipping Norton.

378. See Appendix 1.

379. See Article 13 of the Convention on Biological Diversity and 5.1 of the National strategy for the conservation of Australia's Biological Diversity. Department of the Environment, Sport and Territories, Canberra.

380. For example, to avoid the possibility that industry self-regulation becomes a sham, it is necessary for it to be underpinned by external oversight and monitoring. The capacity should exist for government to step in and regulate directly, where self-regulation turns out to be ineffective.

381. The existence of such a minority was acknowledged by a wide diversity of stakeholders during the consultation process.

382. We do not, however, consider that mechanisms used should allow those who diminish biodiversity values to compensate society. If biodiversity conservation is a precondition to ecologically sustainable development, then all opportunities for further loss need to be removed. This interpretation is stricter than that taken by the OECD who, following Filion (1994), argue for a framework that requires 1) Users (beneficiaries) to reimburse those who provide biodiversity; and 2) those who damage biodiversity to compensate both the providers and those who would otherwise gain from its conservation. Our position is based on the importance of and government commitments to the maintenance of inter-generational equity. Filion, F. (1994) 'Estimating the economic value of biodiversity.' Proceedings of the First North American Conference on Social and Economic Incentives for Conservation of Biodiversity. Different Drummer Summer 1994, pp 20-23

383. There is a specific clause in the Commonwealth Constitution prohibiting the removal of property without just compensation, but this right is not guaranteed by any State Constitution.

384. Bowers J. (1994) Incentives and mechanisms for conserving biodiversity: Observations and issues. CSIRO Division of Wildlife and Ecology Canberra, p13.

385. Young has suggested that this should be called a Beneficiary-Compensates Principle. In this report, however, we stress the idea that following an appropriate transition period, payment should be limited to reimbursement of costs incurred in the course of maintaining biodiversity values. Young, M.D. (1992) Sustainable investment and resource use: Equity, environmental integrity and economic efficiency. Man and the biosphere series. Parthenon Carnforth and Unesco, Paris.

386. Where the objective is to prevent activity (not cover ongoing costs), usually it is more appropriate to change the use rights that attach to land. Otherwise the landholder has an incentive to maximise profits by holding the biodiverse attributes to ransom. Without such a mechanism, a landholder who may be protecting the last site for an endangered species could threaten to make it extinct unless society buys that species' future from him or her.

387. A permit is required to clear native vegetation, which is likely to be refused in a very large majority of cases. Payment of compensation under a heritage agreement, which was automatic under the 1985 Act, is no longer so under the 1991 legislation. Nevertheless, the system still contemplates the offering of financial incentives for foregoing development rights, and financial assistance with the management of reserved stands of native vegetation and planned revegetation.

388. Farrier, D. (1995) 'Policy instruments for conserving biodiversity on private land.' In Bradstock, J. (ed) Conserving biodiversity: Threats and solutions. Surrey Beatty, Chipping Norton. Forthcoming, p1.

389. Farrier, D. (1995) 'Policy instruments for conserving biodiversity on private land.' In Bradstock, J. (ed) Conserving biodiversity: Threats and solutions. Surrey Beatty, Chipping Norton. Forthcoming, p1-2.