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Resource Assessment Commission Coastal Zone Inquiry - Final Report November 1993

Resource Assessment Commission, November 1993
ISBN 0 64429457

CHAPTER 13 ECONOMIC AND FINANCIAL INSTRUMENTS

13.01 There is greater scope to use economic and financial instruments to complement, and in some cases replace, regulatory approaches to coastal zone management. Economic and financial instruments currently being used in the management of the coastal zone are described in Section 4.4. This chapter discusses the potential for more extensive use of such instruments in achieving the objectives of the National Coastal Action Program.

13.02 Section 13.1 considers the effects of economic and financial instruments. The scope for greater use of such instruments is discussed in Section 13.2 and the criteria that should be considered in choosing and evaluating them are discussed in Section 13.3. Section 13.4 provides a summary of the main strengths and limitations of those instruments that appear particularly useful for integrated coastal zone management. Conclusions are reached and recommendations made in Section 13.5.

13.1 THE EFFECTS OF ECONOMIC AND FINANCIAL INSTRUMENTS

13.03 Economic instruments use markets for goods and services to achieve resource management objectives. They generally involve imposing charges or taxes on the use of resources or providing subsidies for particular activities; they may also involve assigning rights to the ownership or use of resources. The main function of economic instruments is to affect the allocation of resources by influencing the decisions of buyers and sellers of goods and services. In contrast, financial instruments are used to induce financial transfers. The distinction between economic and financial instruments is not always clear, however, because some instruments (for example, taxes and charges) have both resource-allocation and revenue-raising effects. Box 13.1 lists the main kinds of economic instruments that can be used to achieve resource management objectives.

13.04 Economic instruments usually affect resource allocation by changing the prices at which goods and services are exchanged in markets; for example, charging a higher price for water will normally reduce the quantity of water sold while simultaneously increasing the potential revenue of the water authority. A tax levied on a particular good or service will generally reduce both the quantity sold and the revenue obtained by the seller; at the same time it will increase government revenues by the amount of tax collected. Conversely, a subsidy provided by a government normally lowers the price of the good or service concerned and increases the quantity sold; the cost of the subsidy is met from the budget of the government, thus reducing the funds available for other purposes.

Box 13.1 Principal types of economic instruments

The following major kinds of economic instruments can be used for coastal zone management purposes.

Charges and taxes
l effluent charges: charges paid on discharges into the environment, based on the quantity and/or quality of discharges.

l user charges: charges paid to reflect the costs of provision and management of facilities such as parks, beach maintenance, car parking, sewerage and water.

l product charges: charges included in the price of products in the production or consumption phase or for which a disposal system has been provided, based on some product characteristic or the product itself.

l administrative charges: charges paid for services; for instance, registration of commercial fishing licences and enforcement of regulations.

l tax differentiation: tax measures that lead to more favourable prices for 'environmentally friendly' products; for example, the tax differentiation between leaded and unleaded fuel.

Market creation
l tradeable permits or quotas: resource use rights are established and allocated in conjunction with regulations that generally establish a limit on resource use or emissions. A market develops in surplus permits or quotas, which are tradeable between resource users.

Other incentives
l deposit-refund systems: an incentive to encourage the reduction of waste, raw material and energy consumption whereby a deposit is refunded when the product (beverage containers, for example) is returned to the appropriate agent or other conditions are satisfied.

l subsidies: various forms of financial assistance (cash payments, tax relief, accelerated depreciation on capital equipment, and so on) can be used to encourage reductions in pollution or to finance measures necessary to reduce environmental degradation.

l enforcement incentives: non-compliance fees penalise polluters that exceed prescribed standards. Performance bonds are payable to authorities under a licence granted to the developer and are returned upon satisfactory performance.

Source: Adapted from Opschoor & Vos (1989), OECD (1993b), Hughes (1992).

13.05 When property rights already exist economic instruments such as user charges, taxes and subsidies can be used to create incentives by directly affecting the returns to resource users and by changing the prices for goods and services. When property rights do not exist it may be possible to create markets by conferring such rights; for example, by creating tradeable entitlements or permits to use water from rivers, to discharge wastes into rivers, or to catch prescribed amounts of fish. As a consequence, desirable reductions in discharges can be achieved at lower cost than by use of regulations. However, when non-point-source pollution occurs, such as nutrient
run-off from farms and urban stormwater drainage, individual polluters are difficult to identify and monitor and it is much more difficult to create a market. Even so, in some cases transactions can take place between point and non-point sources of pollution that will help achieve both an active market and significant cost savings (James 1993b, p. 18; Hahn 1989).

13.06 In addition to considering the effects of economic instruments that directly influence goods and services produced and consumed in the coastal zone, it is necessary to consider the effects of instruments used by governments to achieve objectives that are not directly associated with management of coastal zone resources but that nevertheless can have unintended and detrimental effects on those resources. For example, Industry Commission inquiries in areas as diverse as waste management (1993a), water (1992b), the dairy and sugar industries (1991a, 1992a) and statutory marketing arrangements (1991c) have found that both under-pricing of resource uses and government subsidies in these industries contribute to the over-use of resources and environmental degradation. Although the pursuit of ecologically sustainable development objectives requires an analysis of the 'external' consequences of economic and financial instruments as part of a holistic approach to resource management, information about these impacts is often not readily available and can be obtained only by thorough analyses of the impacts.

13.2 SCOPE FOR GREATER USE OF ECONOMIC AND FINANCIAL INSTRUMENTS

13.07 Although there are many instances in which more efficient resource allocation might be achieved through improvements to regulatory instruments (including negotiations with industries and other groups to obtain greater flexibility) in many instances well-designed and properly applied economic instruments or combinations of regulatory and economic instruments offer the most cost-effective means of achieving management objectives. Economic instruments are generally a less intrusive form of government intervention than regulatory approaches and they have greater potential to integrate resource management and other objectives such as economic efficiency. Their relative flexibility means that resource allocation objectives can be met at less cost than when other instruments are used. Box 13.2 summarises the potential benefits of greater use of economic instruments.

13.08 A considerable number of Inquiry participants supported greater use of economic and financial instruments in the management of coastal zone resources. The Environment Management Industry Association of Australia submitted,

Above all else, Australia's environment policy should be underpinned with suitable economic instruments to encourage adjustment in investment, production and consumption patterns impacting on the environment. Environment policy must reward the innovator, ensure the polluter pays and acknowledge the cost of environment degradation in community resource and economic strategies. (Submission 515, p. 2)

Box 13.2 Benefits of economic instruments

Well-designed and properly applied economic instruments can assist the achievement of coastal zone management objectives in a number of ways, among them the following.

Compliance cost savings
Resource users are encouraged to choose the most efficient way of responding to standards, thereby achieving cost savings that would not be available from less flexible forms of regulation. In addition, where costs of environmental management vary between firms, those firms that can reduce their polluting activities at little cost will do so, while those that would face much higher costs will change their activities to a lesser extent. The result is an overall level of activity that minimises the sum of environmental damage and compliance costs.

Efficient resource use
Resource pricing based on total costs encourages resource users to reduce waste and over-exploitation, leading to more socially efficient resource use.

Dynamic incentive effects
Resource users respond to changes in environmental conditions, economic activity and technological change in the most efficient and innovative way for as long as the cost of doing so is less than that imposed by the instrument.

Revenue raising
Economic instruments raise revenues while improving environmental quality by discouraging environmentally damaging activities that cause economic losses. Revenues can be used to fund management programs, to make charges more effective by improving enforcement, and to compensate households bearing an unfair incidence of environmental charges.

Integration of environmental and economic goals
At the individual firm level, pecuniary rewards for environmental stewardship encourage resource users to incorporate environmental considerations in decision making. At the economy-wide level, by facilitating environmentally benign activities in cost-effective ways, economic instruments work to simultaneously enhance environmental quality, competitiveness and economic growth.

Source: Adapted from Government of Canada (1992).

Similarly, the then Department of the Arts, Sport, the Environment and Territories stated,

The need to develop realistic pricing mechanisms for the use of coastal zone resources is an area in which the Department would support more research being undertaken. Areas that could be profitably considered in this regard include a review of ... recovery [of] costs, royalty determinations and property tax rates. (Submission 352, p. 22)

13.09 Some participants, however, expressed reservations about the application of the user-pays principle without regard to its effects on particular user groups, such as local rate-paying residents and disadvantaged groups (ALP Mayfield Branch, Submission 547; City of West Torrens, Submission 439). The Inquiry also received similar feedback in response to the draft of its conclusions and recommendations which it issued during the Inquiry (RAC 1993g). The Commonwealth Department of Tourism expressed concern that taxes levied on the tourism sector should benefit the industry and not be used to subsidise unrelated activities (Submission 580). There was also concern, particularly on the part of local authorities, that the introduction of higher charges by some councils and not others could disadvantage those that did not introduce the charges, and that some user-pays systems are either not financially viable or offer low returns on the investment required to fund them (see Transcript, pp. 324, 1594).

13.10 The need to integrate economic and environmental decision making prompted the development of the National Strategy for Ecologically Sustainable Development. It is also fundamental to the Intergovernmental Agreement on the Environment. Both the Strategy and the Agreement strongly endorse the development and implementation of cost-effective and flexible policy instruments. The Intergovernmental Agreement on the Environment incorporates a number of guiding principles for policy making, including the polluter-pays and user-pays principles (1992, p. 14). It is also recognised that governments need to undertake further work on economic instruments and to gain experience of using them by developing pilot programs to test the viability and effectiveness of different combinations of market and regulatory mechanisms (National Strategy for Ecologically Sustainable Development 1992, pp. 58-79).

13.11 Overall, improving the complementarity of budgetary and environmental policies by increasing, modifying, reducing or removing existing taxes and subsidies for environmental reasons is becoming an attractive option for governments interested in both improving the tax system and promoting a better environment (see Box 13.3).

13.12 The scope for greater use of economic and financial instruments in coastal zone management may be illustrated by considering the manner in which a wide range of such instruments can potentially be used to help achieve management objectives associated with the multiple uses of catchments. The successful management of catchments is extremely important for achieving the objectives of the National Coastal Action Program. Riverine and estuarine environments support a diverse range of natural ecosystems, including wetlands and mangroves. Multiple use of many catchment areas includes the provision of water supplies for household and industrial uses (including mariculture and irrigation of agricultural areas), as well as recreation and tourism activities. Box 13.4 provides an overview of the range of instruments that can be used in catchment management.

Box 13.3 Taxation and the environment

Environmental taxes (including subsidies as negative taxes) have considerable potential to help control the environmental impact of economic activities and finance environmental improvement programs. Such taxes attempt to ensure that resource users are confronted with the full costs (or benefits) of their activities; they are being used increasingly in OECD countries as a result of the increased emphasis on environmental issues in the context of overall tax reform.

Environmental taxes can involve new taxes (for example, on polluting emissions or products) or changes to existing taxes (for example, changing the structure of energy taxes to reflect environmental effects). They can have a direct link to the pollution they aim to control, as in the case of taxes on polluting emissions, or an indirect link, as in the case of taxes on fuel. While direct taxes can be closely linked to the amount of pollution caused by a particular source, indirect taxes can be an effective instrument for controlling non-point-source pollution since they can be a proxy for the damage caused regardless of whether the emission can be measured.

Environmental taxes can potentially be used to shift some of the tax-revenue-raising burden from activities generating income, employment and profits onto activities generating pollution, inefficiency and waste. The gains of such a shift are improved environmental quality, reduced needs for infrastructure, higher rates of savings and investment, increased employment and productivity growth.

Although environmental taxes may have negative effects on the profits, employment or output of polluting sectors of the economy, they would probably receive public support since the community is generally in favour of the polluter-pays and user-pays principles. Community acceptance will be enhanced if taxes are seen to be linked directly with environmental improvements or to contribute to tax reductions elsewhere, and if taxpayers have opportunities to reduce their tax bills by acting in environmentally benign ways; for example, by saving water and recycling.

Source: OECD (1993b), Repetto et al. (1992).

13.3 CRITERIA FOR CHOOSING INSTRUMENTS

13.13 As noted in Section 4.4, the Inquiry commissioned the Australian Bureau of Agricultural and Resource Economics to examine in detail the experience of a number of agencies using economic and financial instruments of relevance to integrated coastal zone management. One of the Bureau's main conclusions was that,

Australian governments and their agencies have frequently applied tradeable rights and charging systems to encourage efficiency in resource use. Charging systems are also used to recover management costs or to raise revenue. In general, governments have experienced some success in using these instruments to achieve their stated objectives. However, the effectiveness of tradeable rights and charging systems in addressing their respective objectives depends on a number of preconditions being met. In addition, the use of these instruments in isolation is not likely to ensure conservation of natural resources and may result in redistribution of incomes. In some cases the use of other instruments may be necessary to address these objectives. (ABARE 1993c, p. x)

Box 13.4 The scope for using economic instruments in catchment management

A variety of instruments can be used in catchment management and hence in the integrated management of building, tourism, mariculture and associated development.

The spatial distribution of activities should be managed to minimise their adverse environmental effects. Land use zoning is particularly useful for this purpose, but economic incentives can also be used to attract particular kinds of activities to particular areas (for example, by reducing prices or lease payments associated with Crown land, reducing rates paid to local councils, or subsidising activities of government agencies) or to discourage particular activities (for example, by imposing taxes).

At present pollution management mainly relies on regulations over the kinds, levels and spatial distribution of activities within a catchment. Economic measures can be used to encourage particular kinds of activity; for example, expenditure programs, tax concessions or other incentives can be used to attract particular industries or firms. Inputs to production that contribute to water pollution may be discouraged through taxes; for example, a tax on fertilisers.

Tradeable discharge permits can be used to limit total waste loads and promote cost minimisation by polluters. Trading zones can also limit pollution in specific sub-catchments, but they add to the complexity and cost of management. Efficiency gains from such schemes depend on whether there are sufficient players to trade permits and whether it is possible to identify diffuse sources and to monitor their discharge patterns with sufficient reliability to ensure compliance with the requirements of the scheme.

Discharge reductions and cost-effective controls can be encouraged by the imposition of effluent charges. As in the case of tradeable permits, the charges can be adjusted for different zones. An advantage of effluent charges is that they provide a continuing incentive for polluters to seek and use new pollution-abatement technology and management practices. Pollutant loads can also be reduced by transferring effluent via pipeline or truck to other discharge points such as ocean outfalls, where the assimilative capacity is greater. Economic instruments to support this technology could include environmental levies to fund the necessary infrastructure and other user charges to cover management costs. The costs of infrastructure to reduce discharges of pollutants to waterways, such as sediment traps and diversion drains, may be financed from mandatory developer contributions. Enforcement can be upheld by a variety of economic instruments, including penalties, fines, compliance bonds and proportional non-compliance fees.

Sewage effluent can be sold for irrigation purposes in agriculture and forestry, for watering recreation areas, for industrial cooling processes, for some domestic uses, and so forth. In many of these applications, nutrients contained in effluent have significant economic value to users. As well as making more efficient use of effluent, economic instruments designed to promote waste recovery and recycling can help to reduce or postpone the need for augmentation of water supply systems. Total nutrient loads in receiving waters may also be reduced. Similar economic approaches can be applied to sales of sludge from sewage, which can be converted to fertiliser and sold for a commercial return.

The introduction of user-pays pricing systems for water from reservoirs, rivers and streams can achieve greater conservation of water resources. Tradeable permits can also be used. Permits may be specified in terms of volume, reservoir capacity or security of supply. Trade in permits may involve long-term or short-term transfers. Leases and permits can be used to control the spatial distribution and intensity of use of riverine environments. Tradeable quotas may be applied to manage fisheries.

Economic instruments designed to prevent land degradation include tax incentives to landowners for investment in soil conservation and tree protection and direct financial grants to local governments to undertake improvement schemes. Performance bonds for the rehabilitation of land provide an economic incentive to maintain land condition. For parks, reserves and other recreation areas, user fees can be charged to cover management costs and help prevent land degradation resulting from visitor use.

In the design of tradeable permits for water entitlements, allowance should be made for flow volumes that are required for ecosystem protection; these volumes should be excluded from trading schemes. Effluent charges or tradeable permits for water quality management should similarly take into account permissible discharge limits.

Source: James (1993a).

13.14 In choosing instruments to implement coastal zone management policies, it is necessary in each particular case to take into account a number of important criteria, among them effectiveness in attaining the objectives being pursued, the efficiency of the instrument, distributional effects, administrative issues, and acceptability to those affected. These criteria are described in Box 13.5.

Box 13.5 Criteria for choosing economic instruments

The choice of resource management instruments requires consideration of five important criteria.

Environmental effectiveness
The environmental effectiveness of economic instruments is mainly determined by the responsiveness of resource users to incentives. The primary objective of economic instruments is to provide permanent incentives to environmentally benign activities, technical innovation and product substitution.

Economic efficiency
In a broad sense, economic efficiency is achieved by an optimal allocation of resources; in a limited but more operational sense, it implies that the cost of complying with environmental requirements is minimised.

Equity
The notion of equity introduces ethical and moral judgments about what is fair. Distributive consequences vary according to the type of policy instrument applied and how revenue generated by instruments is used. In the case of tradeable permits, distributional effects differ according to the initial allocation of permits.

Administrative feasibility and cost
All types of policy instruments involve implementation and enforcement structures, particularly those that relate to the ease and cost of monitoring discharges and the number of target groups involved, as well as the nature of the legal and institutional settings.

Acceptability
It is crucial that target groups be informed of and consulted about the instruments that may be imposed on them and about any changes in the use of these instruments.

Source: Adapted from OECD (1991a).

13.15 Community resistance to user charges may add to the difficulty of setting charges that are high enough to achieve management objectives, particularly when demand for the goods or services concerned is not very sensitive to changes in prices. At times this resistance may be justified on the basis of equity considerations. The application of economic instruments may, however, result in more efficient resource use and management, contributing to lower costs for everyone. More importantly, pricing policies that do not reflect the full costs associated with resource use activities have equity impacts as well. New charges to eliminate an environmental subsidy to a product or service are not always welcome, but in a broad sense environmental costs are already being borne by someone, or will be in the future. And, as the Industry Commission notes, the cost of implicit subsidies 'is often borne from rates and taxation and other forms of charging which may fall on households less well-off than those to whom the subsidy through lower prices is accruing' (1993b, p. 235).

13.16 The instruments' effects on other industries and other regions may also need to be assessed. It is necessary to assess the impact of proposed measures on the international competitiveness of industries, and to consider the timing of the introduction of particular instruments and associated adjustment costs (Government of Canada 1992).

13.17 To facilitate the implementation of economic instruments it is advisable to adopt instruments that are simple and transparent, to implement them gradually and to monitor their effects (OECD 1993b). Compensatory arrangements to offset any undesirable social consequences or the earmarking of revenue obtained for specific coastal zone management purposes may also improve their acceptability.

13.18 The choice of instrument or instruments should ultimately be made in terms of net benefits; that is, it is necessary to examine the differences in the costs associated with the instruments as well as the differences in benefits obtained from achieving the objectives concerned. Comparisons should take into account the less predictable effects that economic instruments, as opposed to regulations, may have on resources and environmental quality. The perception that economic instruments can place the environment at risk because existing regulations may be modified or abandoned, limits their acceptability for some community groups; this concern needs to be dealt with by careful appraisal of the effects of the alternatives as part of the analysis of benefits and costs.

13.19 The effectiveness of any instrument depends on the way it is implemented, including the way it is integrated with other policy instruments (for example, direct regulation and educational instruments) and the specific nature of the management problem it attempts to resolve. Instruments may be implemented for a number of purposes-amenity or environmental protection, efficient resource allocation, revenue raising, or some combination thereof-but no single instrument is likely to be successful in achieving several objectives simultaneously. The best management arrangements are probably those that combine a variety of economic instruments with regulations and other policy measures.

13.20 Successful implementation of an instrument in one area does not guarantee its success elsewhere. Furthermore, success may require cooperation between different agencies and between different governments. Individual local or state governments may be ineffective in resolving resource problems because they cannot adequately control access to the resource or contain the full effects of resource use.

13.4 STRENGTHS AND LIMITATIONS OF SELECTED INSTRUMENTS

13.21 Although charges and taxes are already used in the coastal zone, there is scope for further use of such instruments to achieve the objectives of the National Coastal Action Program. This section provides a brief review of the strengths and limitations of charges and taxes and other economic and financial instruments. Together with the criteria discussed in the previous section, it provides a 'checklist' for coastal management agencies that may be examining whether particular instruments are appropriate to their circumstances or that are seeking to improve arrangements already in operation.

Charges and taxes

13.22 In general, charging systems can be used to meet a variety of objectives relating to resource allocation problems. Preconditions for an effective charging system include the ability to identify users and their level of use, the ability to identify an appropriate charge, and cost-effective collection and enforcement of charges. Charging systems aimed at raising revenue will usually have the lowest information requirements and be the simplest to operate. The use of charging systems to maintain the quality of a resource or to maintain a resource at a sustainable level will require considerable information about the relative social costs of resource use activities and the extent of services provided to manage resources.

13.23 Two areas in which better use of charging systems offers considerable potential in helping to achieve coastal management objectives are nature conservation and water management. In the case of the New South Wales National Parks and Wildlife Service, for example, the Inquiry notes in Section 4.4 that efforts to increase cost recovery rates are proving relatively successful; the Service is moving towards a structured fee schedule reflecting the level of services provided. The scope for further improvements in fee schedules is limited by the cost of collecting data on patterns of park use and expenditures related to the provision of particular services and by tension between efforts to increase cost recovery and the Service's over-riding responsibility to protect the environment. Further, since it is not cost-effective to collect user charges at every park in New South Wales, cross-subsidisation occurs between parks, with visitors to popular parks where fees are charged subsidising the provision of facilities at other parks. This may result in efficiency losses from the over-use of services in parks for which fees are not charged (ABARE 1993c, pp. 114-23).

13.24 In the case of water management, a recent Industry Commission review of water resources and waste water disposal revealed that charging arrangements often have not encouraged people to use water efficiently and that there have been associated environmental problems (Industry Commission 1992b). The Australian Bureau of Agricultural and Resource Economics' analysis of the Hunter Water Corporation, where a two-part pricing scheme has been introduced-a charge to cover the fixed costs in supplying water services and a charge for actual water use-shows that these measures have led to reduced household consumption of water, savings in infrastructure expenditure, and more efficient consumption patterns among industrial and domestic water users (ABARE 1993c). Many water suppliers are now switching to use-related charges, although there is evidence that further refinements to pricing structures need to be made to obtain the efficiency benefits associated with full cost recovery (Government Pricing Tribunal of New South Wales 1993).

13.25 Table 13.1 summarises the main strengths and limitations of user charges generally. The strengths and limitations of two particular types of user charges-developer contributions and accommodation taxes-are discussed in greater detail in the following paragraphs.


Table 13.1 User charges generally: strengths and limitations
Strengths                          Limitations                         

Provide supplier of the resource   It may be difficult to determine    
with an indication of the value    whether the charge meets            
consumers place on provision of    efficiency criteria; that is,       
resource services and the          whether it is equal to the cost of  
efficient level of services to     making additional resources         
provide; for example, valuing the  available                           
economic viability of a new water  Marginal cost pricing can only be   
supply source                      approximate where environmental     
Provide information about the      and social costs associated with    
impact of price on resource use    resource use are difficult to       
Reduce cross-subsidisation         identify or quantify                
Act as a demand-management tool    Where charges are limited to price  
by reducing 'unnecessary'          increases in line with inflation,   
resource use whereby individuals   inefficiencies can occur if         
adapt use to the point where the   marginal costs are rising more      
value they place on additional     quickly than general inflation      
consumption is equal to the price  It may be difficult to identify     
they face                          all user groups and determine the   
The revenue gained can ensure      cost of resource provision to       
that resource services are         different user groups               
supplied and disposed of more      Non-compliance and avoidance can    
efficiently                        be encouraged                       
                                   Revenue is lost when charges act    
                                   as a deterrent to use, but if       
                                   charges were previously less than   
                                   costs net revenue increases         



Source: Adapted from ABARE (1993c).

Developer contributions

13.26 Developer contributions are widely used by local authorities to help cover costs of physical and social infrastructure associated with development activities. Although there is evidence of a trend toward a much greater rate of cost recovery for development (see, for example, Government Pricing Tribunal of New South Wales 1993), there is, however, considerable variation among the states in the application of developer contributions (see Box 13.6) and undercharging appears to be more common than overcharging, especially in urban residential areas. For example, the Industry Commission estimated that full cost recovery for water and sewerage infrastructure would increase charges and rates by 16 per cent in Sydney and 14 per cent in Melbourne (1993b, p. 172). A coastal management strategy that aims to achieve full cost recovery from users, the elimination of cross-subsidies and the efficient use of available capacity will accordingly require more comprehensive use of developer contributions; the revenue from these contributions is particularly important in covering costs incurred by local authorities and government agencies.

13.27 In considering issues involved in extending developer contributions to cover the full costs of developments, the Australian Conservation Foundation identified three types of 'external costs' associated with new developments:

(i) the additional on-site engineering and construction costs that will be necessary to meet environmental standards imposed by government;
(ii) impacts that, despite additional works under (i), diminish the ecological, aesthetic or amenity values of resources now or in the future; and (iii) additional off-site costs to the community induced by the development such as extra wear and tear on public roads. (Submission 718, pp. 7-8)

13.28 According to the Foundation, developer charges should either be internalised into the project's engineering, construction, operating and environmental monitoring costs or, where this is not possible, be paid directly to the authority responsible for repairing the damage. A recent Industry Commission report notes that developer contributions are well suited to reflecting variation in costs by location (1993b, pp. 165-219).

13.29 Table 13.2 summarises the main strengths and limitations of developer contributions. Although the case for recovering costs associated with development is based firmly on the user-pays principle, determining the type and range of facilities and costs that should be covered by developer contributions is controversial, particularly in relation to expenditure on social infrastructure that benefits the whole community or is designed to meet the equity objectives of governments. Such expenditure should in principle be met from community-wide taxation. The effect of contributions connected with housing costs is also a matter of concern. Equity considerations may appear to justify subsidising many urban developments in the interests of housing affordability, but such subsidies involve major costs, including the income foregone from diminished investment activity in other sectors and a less efficient pattern of urban settlement (Spiller 1993, p. 3). It is more efficient if affordability is dealt with through such measures as effectively targeted direct assistance programs and differential rating systems, while avoiding the undercharging of costs associated with development in particular areas.

Box 13.6 Developer contributions in different states

Queensland
Developer contributions are generally limited to contributions towards water, sewerage, drainage and roads. A local authority can also require provision of open space equal to 10 per cent of the subdivision area.

New South Wales
Developer contributions can be charged for social infrastructure, including open space, recreation and community facilities. Developer contributions may also be levied for off-site roadworks that councils have a responsibility to maintain and for which there is a link between the proposed development and the need for the additional works. The contribution can extend to the maintenance of roads exhibiting excessive wear and tear resulting from a development. Developer contributions for roads funded by governments are not common. The Sydney Water Board has introduced developer contributions for major works (for example, trunk sewers and pumping stations) for development in established areas where the development draws on infrastructure provided in the last 25 years. In general, developer charges for established areas are less than those applicable to recently rezoned land for which entirely new systems are required.

Victoria
Developer contributions are well established for water supply, sewerage, drainage, electricity and gas infrastructure but are less well developed for roads, public transport and social infrastructure.

South Australia
The South Australian Urban Land trust publicly owns most of the 'greenfields' land and sells it directly to the private sector through joint-venture agreements. Under these agreements there is a coordinated approach to provision of social infrastructure. Under the existing legislation contributions (outside joint ventures) are allowed for water and sewerage and open space but not social infrastructure. The Commissioner of Highways can demand a contribution from a developer if road arterial capacity requires expansion as a result of traffic generated by the development. The provision of public transport services to new developments is not funded by developer contributions but rather by fares and subsidies from government.

Western Australia
Under the present planning Acts the State holds subdivision powers and can require contributions for open space, part of which can be for community facilities. Contributions for community facilities at the local level are negotiated between local authorities and the developer at rezoning. Developers also contribute to works on 'district distributors' within and sometimes abutting a new development, as well as off-site works such as sub-stations and low voltage overhead power lines.

Tasmania
With the exception of limited provision of open space (5 per cent of land subdivided), there is no legislative power for any kind of developer contribution. If it is 'unduly expensive' municipalities can reject a subdivision so developers usually provide reticulation of all local physical services.

Source: Briggs (1992b), Industry Commission (1993b), Victorian Department of Planning and
Development (1993).

Table 13.2 Developer contributions: strengths and limitations


Strengths                        Limitations                            

Are direct and familiar          Adverse affordability effects,         
Account for locational           especially for new home buyers         
variations in costs of           Inequitable if some house buyers pay   
infrastructure provision         for infrastructure they do not use     
Have funding benefits for        If the value of infrastructure funded  
governments                      is not fully capitalised into          
Can be used to contain adverse   property prices early buyers will      
amenity impacts associated with  cross-subsidise future buyers          
development                      May generate inefficiencies in the     
Can have efficiency benefits     pattern of development where major     
when people are able to choose   infrastructure thresholds are          
the level of infrastructure      encountered-development may be         
they want and pay for it         delayed or less efficient              
through house purchase prices    infrastructure designs will be         
                                 installed to fit the developer's       
                                 initial funding capacity               
                                 Counteract wider social objectives if  
                                 provision of low-cost housing is       
                                 discouraged because of underfunded     
                                 infrastructure                         
                                 May not recover the full costs of      
                                 infrastructure provision               
                                 May be difficult to justify when       
                                 insufficient research has been done    
                                 into the relationship between the      
                                 costs associated with development and  
                                 the proposed charge and the need for   
                                 such infrastructure.                   



Rating and Other Revenue Powers and Resources (1990, p. 76).

Source: Adapted from Spiller (1993), Industry Commission (1993b), Lang (1991), National Inquiry into Local Government Finance (1985, vol. 2, pp. 292-394), Committee of Inquiry into Local Government
Accommodation taxes

13.30 Accommodation, or 'bed', taxes can be levied in several ways: a unit tax on each night's occupancy, an ad valorem tax assessed as a percentage of the price of an occupied room, or a mixture of both. In principle the proceeds can be used to cover the costs of providing government services (for example, tourism promotion); to pay for the costs of infrastructure and other resources used by tourists (for example, increased sewerage and road use); and to regulate the number of visitors to an area to prevent excessive impacts on the environment. Bed taxes are fairly common in other countries; for example, in Europe and many states in the United States. A bed tax was introduced in the Northern Territory in 1987 to raise revenue for tourism promotion and such a tax has been proposed-and rejected-at various times in the past in other states.

13.31 Doubts about the usefulness of bed taxes arise mainly from their potential negative effects on tourism and related industries; these effects may differ according to locality, property size and type of traveller. For example, studies suggest that changes in accommodation prices will have relatively little effect on demand in resort areas, greater effects on smaller properties (possibly because of a lesser ability to absorb increased costs) and greater effects on pleasure travellers than on business people (Heimstra & Ismail 1992; Fujii et al. 1985). There are also equity concerns, particularly in the absence of a comprehensive system of user charges covering visitors who would avoid the bed tax (for example, day trippers and those staying in private residences) and other industries in the coastal zone that may have equal or greater resource impacts. Taking these matters into account, a recent study concluded that an accommodation tax in general 'is a low yield, narrow and ineffective tax base' (Burgan 1990, p. 15).

13.32 Nevertheless, a well-designed bed-tax system has considerable potential as a means of financing coastal zone management; it is a relatively low cost, transparent and simple revenue-raising mechanism for state or local governments. And, as succinctly put by one commentator,

My first reaction when staying in New York was to wonder why I had to pay an accommodation tax. Then I began to think logically. I had used the bathroom, I had used the electricity, I had used the transport system and had used a whole range of utilities that we take for granted. And who pays for the infrastructure? The ratepayers and residents, of course, and why should they be expected to subsidise me? After all I was only a visitor. So user pays, what could be fairer? (Cole 1992)

13.33 Bed taxes would ensure that a proportion of those visitors who do not at present contribute directly to the costs of resource management in the zone, make a direct contribution to those costs, as occurs in many other countries. They can also be designed to ensure that those most able to pay do so. On the basis of the Northern Territory's experience, administration costs are likely to be minimal if the tax is collected by state treasuries, which already collect other indirect taxes (ABARE 1993c). The tax rate could be set at a relatively low proportion of accommodation charges, so that there will be little impact on the number of visitors to particular areas. The resulting revenue could be-and for public acceptability may need to be-specifically set aside for expenditure related to resources used for tourism; for example, to offset the tourism-induced resource management costs that are incurred by state and local governments. In principle, tax rates could be varied according to the costs incurred in particular areas, but this might be administratively difficult.

13.34 Table 13.3 summarises the main strengths and limitations of accommodation taxes.


Table 13.3 Accommodation taxes: strengths and limitations


Strengths                     Limitations                               

Shift some of the tax burden  May restrict tourist development          
from residents to             Inequitable between the tourist           
non-residents                 accommodation sector and other tourism    
Simple and efficient to       supply sectors                            
administer                    May reduce profitability of               
Reasonably predictable        accommodation and tourism industry,       
revenue                       thereby reducing company taxes            
Justifiable on the grounds    Tax revenue is likely to be subject to    
of progressivity and          seasonal conditions                       
ability-to-pay principles     Do not capture charges from visitors and  
Can be used to fund tourism   day trippers who do not use commercial    
promotion and contain any     accommodation; cannot therefore           
negative environmental        completely cover externalities            
impacts associated with       associated with tourism                   
tourism                       Increase competition and distortions      
                              between local areas if the tax is not     
                              implemented uniformly                     
                              May encourage visitors to go elsewhere    
                              or not travel                             



Source: Adapted from Burgan (1990), ABARE (1993c).

Tradeable resource use rights

13.35 Section 4.4 briefly reviews a number of coastal resource management agencies' experience with tradeable rights systems. In principle, markets based on private, transferable property rights allow resources to be directed to the uses that are most highly valued (Tasman Institute, Submission 478). Clearly defined individual rights specify the rights and freedom of individuals to use specified resources. They also provide individual users with the incentive to use resources efficiently.

13.36 Following its review of the use of tradeable rights in fisheries and water management, the Australian Bureau of Agricultural and Resource Economics concluded,

There are many resources within the coastal zone to which a tradeable rights system of management could be applied. Tradeable rights could, for example, be defined for the use of areas of natural habitats, such as wetlands, where there is conflict between urban or agricultural development and conservation for the protection of the flora and fauna. Once the resource for which the rights are to be assigned and the nature of the individual rights are clearly defined, the user rights could be allocated via a tendering process, administrative discretion or a lottery system. For a large number of individuals-such as those who may be interested in conservation of a resource-to effectively participate in the initial allocation process, they may need to be represented by an organisation. (ABARE 1993c, p. 14)

13.37 There are, however, both practical and in-principle considerations that limit the potential of tradeable rights systems. It is not always feasible to assign ownership of resources to private interests and create markets in which ownership rights are traded: private ownership of some resources such as beaches and foreshores might be totally unacceptable to the general community. In addition, the property for which the rights are defined and the individual user rights both need to be clearly defined for a tradeable rights system to work effectively, and this can also present considerable difficulties.

13.38 In some circumstances the costs of enforcement and other administrative difficulties may make it impractical to include all users of the resource in a tradeable rights system. For example, where there are many recreational fishers along the coastline the costs of enforcing individual catch quotas would be exorbitant, as might be the costs of administering a trade in quotas between commercial and recreational fishers. Where some users of the resource are not included in the tradeable rights system, the total allowable use of the resource assigned to the users who can trade rights would have to be reduce accordingly (ABARE 1993c).

13.39 Despite these qualifications, tradeable rights systems will play an increasing role in coastal resource management and are currently being considered by governments in a number of states, particularly in relation to water management. Important initiatives include the recent proposal by the Victorian Government to establish trading of rights between water authorities and the New South Wales Environment Protection Authority's investigation of how tradeable discharge credits could be applied to deal with the inter-relationships between point and non-point sources of pollution. For example, in the Hawkesbury-Nepean catchment, where
non-point sources contribute significantly to nutrient loads, the Authority is considering the possibility of extending tradeable credits to sources as a more efficient way of lowering nutrient loads than requiring further upgrades to sewage treatment for plants that are already at a high level of treatment.

13.40 Table 13.4 lists the main strengths and limitations of tradeable resource use rights.

Other incentives

13.41 Performance bonds, deposit-refund schemes and subsidies are examples of other incentive-based instruments that can be used by coastal resource managers to achieve the objectives of the National Coastal Action Program. Table 13.5 summarises the main strengths and limitations of performance bonds. Together with
non-compliance fees, they are potentially a very useful instrument for ensuring that developers are accountable for the costs of environmental damage associated with their activities, including the long-term costs.


Table 13.4 Tradeable resource use rights: strengths and limitations


Strengths                        Limitations                            

Remove the incentive to          Monitoring and enforcement of rights   
over-exploit resources           are required so that owners of rights  
Owners of rights are able to     are confident that others cannot       
organise their operations to     circumvent the system and thus         
maximise individual efficiency   diminish the value of their rights     
and profits                      In some cases enforcement may rely     
Provide individual holders of    largely on the integrity of the        
rights with security over        owners of the rights                   
resource use                     Resource sustainability is not         
Ensure that the resource is      guaranteed; for example, fishers may   
used by the most efficient       dump smaller or damaged fish to        
operators                        maximise the value of their catch      
Costs of monitoring and          Rights can be enforced only for user   
surveillance can be recovered    groups that can be easily identified   
through levies on owners of      and assigned a share of a resource;    
rights                           inclusion of all users in the          
Can be used as a tool to reduce  tradeable rights systems may not be    
resource use and at the same     possible                               
time provide compensation to     The resource and access to the         
those forced to sell use rights  resource must be well specified both   
                                 geographically and biologically        

Any increases or decreases in    Resource use may be diverted to other  
total allowable resource use     resources experiencing                 
can be equitably shared across   over-exploitation and                  
all owners of use rights         overcapitalisation                     
                                 Overall effectiveness depends on the   
                                 certainty with which total allowable   
                                 resource use can be defined            



Source: Adapted from ABARE (1993c).

13.42 The effectiveness of performance bonds depends largely on the extent to which they provide an incentive for resource users to comply with the bonds' conditions and thus change their behaviour toward the use of resources; it also depends on the ability of the management agency to enforce the conditions. In most cases enforcement incentives operate as a mechanism of last resort and become active only when direct regulation has failed. One of the case studies commissioned by the Inquiry was into the use of performance bonds by the Great Barrier Reef Marine Park Authority; the bonds have been used four times since they were introduced in 1987 (ABARE 1993c, pp. 148-64).


13.43 Although performance bonds are increasingly common requirements of development applications, especially for exploration and mining activities, they do have

Table 13.5 Performance bonds: strengths and limitations


Strengths                                            Limitations                                                

Diminish the risk to governments and taxpayers of    Lack of information about the costs of rehabilitation may  
having to meet the costs of any required clean-up    result in bonds being insufficient to cover costs where    
May facilitate agreement to proceed with a           operators fail to meet their permit conditions             
development                                          Need to clearly define the level of obligation of users    
Give the developer the incentive to rehabilitate a   with respect to rehabilitation of the site-it is usually   
site from own funds using the most cost-effective    difficult to assess whether adequate rehabilitation has    
techniques when the cost of rehabilitation is        taken place                                                
likely to be less than the value of the performance  Where uniform regulations are stipulated across sites,     
bond, thereby entitling the developer to a refund    developers would be expected to rehabilitate a site to an  
of the bond                                          average quality                                            
Encourage developers to consider the level of risk   Administrative costs may outweigh the benefits of using    
associated with their project and to take into       bonds for clearly defined works of a minor nature and      
account the likely cost of rehabilitation at an      works that do not have an impact outside the site          
early stage of the project, thus encouraging them    In the case of cash bonds, substantial liquid assets that  
to choose the most efficient scale and type of       could be used for other economically beneficial projects   
operation                                            are locked away                                            
For developments with potential significant          Developers may face an increased risk of financial         
impacts, performance bonds are likely to be a more   failure as a result of decreased operational and           
cost effective way of achieving the objective        investment flexibility                                     
rather than legal action                             Costs associated with legal action are generally not       
Can be applied in many diverse situations in the     considered when determining bond values                    
coastal zone where compliance with specific          Bonds need to be regularly reviewed to account for         
operating conditions is necessary                    changes in the consumer price index and changes in the     
                                                     use of the site                                            
                                                     Small operators with a high risk of financial failure are  
                                                     disadvantaged                                              
                                                     Effectiveness depends on the management agency's ability   
                                                     to enforce the legal document that specifies the bond and  
                                                     associated rehabilitation conditions                       



Source: Adapted from Queensland Department of Housing, Local Government and Planning (1993a), ABARE (1993c, pp. 148-64).


limitations. One major difficulty is determining the size of the bond required. For example, in the aforementioned case study bonds have proved useful, but a lack of knowledge about the costs of rehabilitation has caused difficulties in ensuring that they are sufficient to cover the costs of clean-up and removal of unwanted material from sites.

13.44 According to the Industry Commission, determining the value of the bond on the basis of the most probable value of rehabilitation costs is inadequate because it ignores the non-market values associated with resource conservation and the small but real possibility of catastrophic outcomes. Providing for catastrophic outcomes could significantly increase the amount of bond required and groups with differing attitudes to risk-for example, miners and conservationists-would have considerable problems agreeing on the scenarios to be considered and the likelihood of their occurrence. Similarly, estimating non-market values can be very difficult. These limitations may mean that performance bonds are best used in association with other incentive and regulatory mechanisms (Industry Commission 1993b).

13.45 Some commentators are critical of the effect of performance bonds on development costs, the administrative tasks they impose on government authorities, and the fact that they lock up substantial liquid assets that might otherwise be applied to purposes that are economically more beneficial. In view of this, a number of local governments in Queensland are replacing performance bonds with simpler
non-monetary assurance measures, despite the higher risks these measures can entail (Queensland Department of Housing, Local Government and Planning 1993a).

13.46 In the Inquiry's view performance bonds are a properly attributable cost of development; where lodgment of a bond facilitates agreement to proceed with development it also benefits the developer. Alternative non-monetary measures, such as access restriction strips to road frontages and withholding plan approval, are best applied only where the development application involves clearly defined works that are minor in nature and are unlikely to have any significant off-site impacts.

13.5 CONCLUSIONS AND RECOMMENDATIONS

13.47 Greater use of economic and financial instruments can help reduce
over-exploitation of coastal zone resources and ensure that future resource uses meet the objectives of the National Coastal Action Program. Correctly applied, such instruments enable the recovery of costs associated with resource uses, encouraging more efficient uses of those resources and providing incentives to minimise the cost of complying with standards for the use of resources.

13.48 Improving the management of water and wastes that are discharged into rivers and other water bodies is one of the most important challenges facing coastal zone managers. Inefficient uses of water must be discouraged and the use of more efficient waste disposal mechanisms must be encouraged.

R.42 The Inquiry recommends that

state governments require all authorities responsible for the supply of water and the disposal of water and other wastes to take urgent steps to introduce charges that reflect the costs of supplying these services.

13.49 The use of emission permit trading should be extended to encourage reductions in the discharge of wastes, particularly into river systems and the ocean.

R.43 The Inquiry recommends that

state governments take urgent steps to facilitate the use of tradeable permit systems designed to encourage resource users to meet water quality criteria.

13.50 The general principle of user-pays should not be limited to water and waste disposal: it should be adopted for all resource use activities in the coastal zone, although there will be circumstances in which modifications will be necessary in the interests of equity and efficiency. The application of user charges (such as national park fees, camping fees and car parking charges) designed to cover the costs of management and provision of facilities in the coastal zone should be extended.

R.44 The Inquiry recommends that

all government agencies responsible for coastal zone resources review existing charges with a view to recovering costs from users;

charges be applied to limit resource uses in areas where those uses have adverse environmental consequences;

concessional charges or exemptions be applied to lower income groups to ensure that they continue to have access to such areas.

13.51 As a general principle, developers should contribute to the cost of extensions to physical and social infrastructure necessary to meet demands arising from the development, and they should contribute to the continuing cost of monitoring and managing environmental impacts arising from the development.

R.45 The Inquiry recommends that

developer contributions be required to ensure that the full, identifiable social, ecological and economic costs arising from new developments in the coastal zone are met by the developers and thus included in the calculations of financial and economic returns before investment is undertaken;

the identification and funding by governments of costs associated with social or community service obligations be undertaken on a case-by-case basis;

the proceeds of developer contributions be distributed to agencies that meet the costs associated with each development.

13.52 Relevant agencies in all spheres of government must have funds available to remedy environmental damage arising from development that fails to comply with approved conditions, and to provide incentives for improved environmental performance generally.

R.46 The Inquiry recommends that

the use of performance bonds be extended to all new development projects in the coastal zone, unless equally effective alternative enforcement measures can be demonstrated to exist.

13.53 In recent years some governments have introduced specific levies to help finance resource management. Such levies have the potential to generate considerable revenue to assist in funding the National Coastal Action Program, but the community must be able to have confidence that the levies are fair and necessary and are applied only to the use for which they were introduced.

R.47 The Inquiry recommends that

specific levies be used to help finance coastal zone management, provided that the measures are shown to be necessary for resource management purposes, that the revenue generated is set aside for these purposes, and that arrangements are fully transparent to the community.

13.54 Another funding option is an accommodation tax on visitors to the coastal zone. The administrative costs associated with implementing such a tax would probably be minimal because of existing tax collection arrangements, and revenue could potentially be allocated to areas of greatest need or importance.

R.48 The Inquiry recommends that

state governments introduce a tax on accommodation charges in the coastal zone;

state governments levy the tax throughout the coastal zone within their jurisdiction using existing tax collection arrangements;

state governments distribute the revenue obtained to state agencies and local government authorities on a competitive basis, such agencies and authorities being required to submit expenditure proposals according to criteria designed to achieve agreed coastal zone management objectives, particularly those related to resources used for tourism purposes.

13.55 As part of the National Coastal Action Program, there is a need for increasing awareness among government agencies and the general public of the potential benefits of economic instruments.

R.49 The Inquiry recommends that

the Department of the Environment, Sport and Territories, in collaboration with the Department of Primary Industries and Energy and state coastal coordinating committees and other relevant agencies, initiate pilot programs in which specific economic and financial instruments appropriate to coastal zone management are further researched, designed, implemented and promoted.

13.56 Recent Industry Commission reports on various industries operating in the coastal zone have raised questions about the undesirable environmental impacts of those industries but have not considered them in detail. These matters should be further investigated to ensure that the consequences of current policies are fully understood.

R.50 The Inquiry recommends that

the Bureau of Resource Sciences, the Bureau of Industry Economics and the Australian Bureau of Agricultural and Resource Economics examine the following matters: