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Economic Instruments for the Environment

TR 2006/23
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Report: TR 2006/23

Author: Tim Denne (Covec Limited)

Abstract

This report explores the potential use of economic instruments for environmental purposes at the regional level. Economic or market-based instruments are policy tools that affect the monetary costs or benefits of private actions, either through directly changing market prices (charges or subsidies) or introducing markets where previously there were none, eg through allocating rights to use resources and allowing owners to trade these rights.

They are being considered for possible application by Environment Waikato because they:

  • have the potential to minimise the costs of achieving environmental outcomes
  • introduce incentives for environmental improvement that can exceed the incentives provided by traditional regulatory approaches
  • are a potential alternative means for raising revenue.

The conclusion is that there is scope for regional councils to introduce economic instruments to achieve environmental purposes under existing legislation. The assessment shows that the instruments showing most promise for implementation at the regional level are:

  • the use of financial contributions under the RMA
  • offsets
  • the use of differential rates under the Local Government (Rating) Act
  • transferable discharge permits
  • subsidies.

Economic Instruments for the Environment [PDF, 252 KB]

Contents
Executive Summary iii
1. Introduction 1
1.1. Purpose of the Report 1
1.2. Objectives of Economic Instruments 1
1.3. Economic Instruments as Least Cost Policy Measures 5
1.4. Approach to Analysis 6
2. Mechanisms for Introducing Economic Instruments at the Regional Level 7
2.1. Background 7
2.2. Resource Management Act 7
2.3. Local Government Act—General Competence 8
2.4. General and Targeted Rates 8
2.5. Financial Contributions 9
2.6. Transferable Permits 12
2.7. Subsidies 14
2.8. Conclusions 15
3. Case Studies 17
3.1. Purpose of the Case Studies 17
3.2. Financial Contributions—Emissions Charge for Thermal Power Generation 17
3.3. Transferable Water Rights 21
3.4. Offsets for Air Pollution 24
3.5. Transferable Discharge Consents for Water Pollution 25
3.6. Subsidising Renewables 26
3.7. Efficient Contracting—Auctions of Land Management Contracts 29
3.8. Differential Rates for Non-Point Pollution 30
4. Conclusions 33
4.1. Assessment of Individual Instruments 33
4.2. Most Promising Instruments 35
Annex A: Economic Instruments—What Are They and How Do They Work? 36
A1 Pricing under Competitive Markets 36
A2 Externalities 38
A3 Environmental Charges 39
A4 Transferable Permits 45
A5 Economic Effects of Charges and Tradable Permits 48
A6 Subsidies 49