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John Quiggin

Environmental evolution

John Quiggin Australian Financial Review

5 January 2006

One of the great perceived conflicts of the second half of the 20th century was that between the environment and the market. Environmentalists regarded the pursuit of profit as the main source of ecological destruction. Supporters of the free market responded in kind with vitriolic attacks on ‘greenies’, who were alleged to resemble watermelons, being green on the outside and red on the inside.

Increasingly however, environmentalists are learning, if not to love the market, at least to recognise the power of market-based instruments to achieve environmental goals. The process began in the US, where strict design regulations on emissions of pollutants such as sulphur dioxide were imposed under the Clean Air Act. These restrictions were modified to allow plants at a given site to form a ‘bubble’ within which the plants could work out how to reduce their aggregate emissions most effectively.

The success of bubbles led to the ‘cap and trade’ approach. The idea was that a source that achieved more than the required emissions could trade its unused allowance with another source where reductions were more expensive. Although a few environmentalists remain opposed to emissions trading, the general consensus is that the process has generated significant reductions in air pollution at a much lower cost than a ‘command and control’ system.

The crucial change in environmentalists views came in the negotiations over the Kyoto protocol. Initially opposed to trade in emissions permits, environmentalists came to realise that this was the only way reductions in emissions of greenhouse gases could be achieved at an economically and politically sustainable costs. Ironically, opponents of Kyoto like Bjorn Lomborg attacked the use of market-based instruments, claiming they were politically infeasible . Some even quoted the hardline environmentalist opponents of US emissions trading in support of their case.

A similar paradox is evident in Australia’s support for the Asia Pacific Partnership on Clean Development and Climate. To the extent that it is not simply a front for inaction, the Partnership favours reliance on government-led technological change.

In Australia, the use of market-based instruments has expanded rapidly. One important area is that of biodiversity protection, particularly in relation to coastal development. Traditionally, the central instrument of control has been an environmental impact assessment that either approves or rejects projects. As pressure for development has grown the limits of this process have become more evident.

Increasingly, approaches similar to cap and trade are being used. Development in some areas in sensitive regions is being permitted in return for contributions of of land and financial resources to protect biodiversity in the region as a whole. Done well, such a process can yield both environmental and financial benefits.

Governments are now taking the process further, with tender-based initiatives such as Victoria’s Bush Tender and Queensland’s Vegetation Incentive Program. In these programs, landholders offer to preserve particular areas, under binding covenants, in return for a payment from government. The government chooses which tenders to accept or reject.

The private sector can also play a significant role in preserving important sites and species. For most of the 20th century, this task was undertaken mainly through national parks, which grew rapidly in this period. Increasingly, however, private-sector conservation, funded by a mixture of voluntary contributions, government support and revenue from eco-tourism and similar ventures is playing an important role.

Enthusiasm for market-based instruments should not blind us to their pitfalls. Naive enthusiasm for markets led reformers to transform licenses to use water, historically allocated free of charge to landowners, into tradeable property rights. The idea was to ensure that water was allocated to its most valuable use.

But the reformers had not taken account of ‘sleeper’ licenses. These were licenses that had been allocated but never used, often because the land to which they were tied was not suitable for irrigation. Once markets were introduced, these sleeper licenses became valuable property, and their activation led to an increase in the demand for water that was already overcommitted. Many of the difficulties now being encountered by the National Water Initiative result from these early mistakes.

Similar problems could be envisage with unrestricted biodiversity trading. If threatened ecosystems become tradeable commodities, there is an incentive to create threats where none existed before. It is important to remember that market-based policy instruments are still instruments of policy, requiring careful use and management. Naive enthusiasm for markets is just as dangerous as reflexive opposition.

Still, there is little doubt that the role of market-based instruments in environmental policy will continue to grow.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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