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Betting on Markets: Australia's Five-Million Dollar Experiment with Market-Based Instruments

Joshua Goldstein

Australia launched the National Market-based Instruments Pilots Program two years ago with a five million dollar investment in eleven pilot projects designed to explore the utility of market-based conservation mechanisms on agricultural land. This appears to be moving Australia and its farmers ever closer to a brand of agriculture that might just save the planet, as well as feed it. The Ecosystem Marketplace takes a look.

Australia launched the National Market-based Instruments Pilots Program two years ago with a five million dollar investment in eleven pilot projects designed to explore the utility of market-based conservation mechanisms on agricultural land. This appears to be moving Australia and its farmers ever closer to a brand of agriculture that might just save the planet, as well as feed it. The Ecosystem Marketplace takes a look. If environmental policy-makers in Australia are successful, a revolutionary kind of farm may be just over the horizon. Alongside golden fields of wheat, Australia's "farms of the future" would employ the latest-and-greatest technologies to maximize yields for a very different variety of ecosystem service-based commodities: carbon, salinity, and biodiversity credits. Afloat in a sea of environmental ills — from salinity poisoned agricultural fields to concrete covered coastlines — Australia has become a world leader in pioneering bold new approaches to tackle environmental problems. While great problems certainly exist, so do exciting opportunities for solving them. In this high-stakes gamble, Australia anteed up and launched the National Market-based Instruments Pilots Program (NMBIPP) with $5-million in funding provided by Commonwealth, State, and Territory Governments in April 2003. The goal of the NMBIPP is to "investigate ways to use innovative financial arrangements to encourage better land and water management and to reduce salinity in irrigation-based agriculture." To advance this plainly stated but ambitious goal, the government funded eleven two-year pilot projects, ranging from a cap-and-trade system designed to tackle salinity problems to an innovative auction of contracts to support biodiversity. As these projects draw to a close, policy-makers in Australia and across the world are eager to decipher what happened with this bold national-scale experiment in environmental problem solving. Which market-based instruments (MBIs) worked? Which did not? And where will Australia go from here?

Learning to walk before you run

When designing the program, NMBIPP's architects were fortunate not to have to start with a blank slate. In 2001, the State of Victoria launched a market-based program, called BushTender, to award government contracts to property owners willing to enhance native plant cover on their land. By employing a reverse auction model in which those property owners that offered to do the most conservation for the least money won contracts, BushTender pioneered the use of market-based instruments in achieving conservation goals at the lowest possible cost to the government. "The success of this approach to environmental mechanism design and the resulting success of the mechanism in the field were the catalysts on which the NMBIPP was built," says Gary Stoneham, who played a central role in BushTender and is now the Chair of the MBI Working Group for the NMBIPP. As Stoneham and others readily acknowledge, however, BushTender represented just the first step down the long road that might one day lead Australia to the widespread adoption of market-based conservation. Along the way, MBIs must prove their worth to farmers in a wide variety of areas, under a wide variety of circumstances. And so, with the NMBIPP, Australia is now putting MBIs to the test in some of the country's toughest terrain. One such testing ground is the Desert Uplands region of central-western Queensland: a place where Beef cattle operations dominate the countryside, and the ever-growing pressure for new grazing areas has become a potent threat to the region's native plants and animals. Not content to sit on the sidelines and watch the story unfold, the NMBIPP funded a project designed to create vegetation corridors that slice across the region from east to west, ensuring a place for biodiversity in the Desert Uplands landscape. Since cattle grazing and biodiversity preservation don't always coincide perfectly and conservation doesn't yet have a price tag in the financial world, the project designers knew that it would be critical to compensate ranchers who undertook the conservation work necessary to build a corridor. The Desert Uplands project team, led by Dr. John Rolfe from Central Queensland University, thus invited landholders to participate in four workshops exploring creative auction and negotiation options. "[We] saw how the experimental workshop process could be an extremely valuable communication tool in facilitating the adoption of new approaches," says Dr. Stuart Whitten, an economist on the project affiliated with the Commonwealth Scientific and Industrial Research Organization's (CSIRO) Sustainable Ecosystems division. Landholders learned that, under the terms of the new program, native vegetation would represent a means of making money on their terms, not just an obstacle to expanding grazing areas. No real dollars were exchanged during this exploratory phase, but a number of important lessons emerged concerning how programs should be designed to ensure the smooth functioning of real trades in the future.

Emerging Lessons

"We have tried to regard the environment as a 'missing market' problem," says Stoneham. "There are value-creating exchanges out there, but the mechanisms needed to facilitate these exchanges have not evolved naturally, as is the case with commodity markets. These mechanisms are missing and need to be designed for this purpose." In designing these "missing mechanisms," veterans of the Desert Uplands project say they have realized the importance of maintaining transparency. While Queensland Government ecologists on the project might have developed a world class set of biological indices to capture every nuance of the Desert Uplands landscape, or the economists might have run twice the number of experiments to explore the subtleties of auction design, such detailed studies would likely have detracted value from the project as a whole, since simple is better when it comes to creating a system that makes sense to all of the stakeholders involved. Landholders bidding for conservation contracts care first and foremost that the auction process is fair. They want to understand how their bid will be evaluated, and even more importantly, they want to be assured that their neighbor's bid will be evaluated on the same grounds. Interestingly, landholders participating in the mock auctions proved to be quick learners, as researchers saw a significant increase in the sophistication of bid calculations after just one round. Keeping things simple at the beginning to build trust is the right approach, report those involved in the Desert Uplands project, and fine-tunings can be made from there. Balancing the environmental and economic aspects of a project is essential, but it is already one step beyond an even more fundamental question: how do you know that it is wise to implement a MBI in the first place? Even Australia's strongest supporters of MBIs admit that they are not a miracle cure for all environmental ills. Economic theory highlights the fact that MBIs work best when there are lots of different players with varied production costs in the marketplace, since these conditions allow parties to reap gains from trade by channeling money toward its most efficient use under dynamic conditions. But there are still many hurdles to surmount in turning theory into practice, and researchers like David Shelton from CSIRO's Sustainable Ecosystems division are tackling this problem in an ongoing study funded by the Rural Industries Research and Development Corporation and CSIRO. For instance, when determining if a MBI is the appropriate problem-solving tool for addressing salinity problems, Shelton says three basic conditions must be considered: "Are some land parcels more degraded by salinity problems than others? Are there multiple land management activities with different operating costs that can be implemented to improve salinity levels? And, do landholders have varying goals that drive their management decisions? The greater the range in each of these factors, the higher the likelihood that a MBI will be the policy tool of choice." The Desert Uplands project has proved successful, in part, because the would-be vegetative corridor will stretch across both highly degraded and highly prized natural habitat. Some properties are worth more than others when it comes to biodiversity conservation, and landholders have a variety of management options available to them. This heterogeneity, says Stuart Whitten, is a key feature of the program. "There is no single corridor solution, but rather a range of alternatives that landholders can offer, each of which impacts on their management differently. Landholders can continue to ranch as before or they can agree to adapt their patterns of land use in exchange for conservation payments." By linking conceptual ideas with practical features of the Desert Uplands landscape, exciting opportunities have emerged for biodiversity conservation on private land.

Round Two

As the sun sets on the first round of pilot projects funded by the NMBIPP, researchers and policy-makers are already looking ahead to what will come next. "Round one has raised many interesting design issues that could be addressed," says Stoneham. "These include aspects of auction design and contract design that need further work, analysis of cap-and-trade where there are multiple, intersecting property rights, the role and design of offset schemes, and designing systems where there are combinations of different mechanisms that need to operate in an integrated way." For some of the successful pilots, including the Desert Uplands, emphasis will be placed on scaling up to full-blown operations where contracts are signed and money changes hands. Funding for these expansions will likely come from regional or national governments, as appropriate. Scaling-up brings with it the challenge of determining how to efficiently manage the larger project while also keeping operating costs down. Fortunately, realism and adaptability seem to be strong suits for those experimenting with MBIs in the nation down-under. Josh Goldstein is a PhD student in the Interdisciplinary Graduate Program for Environment and Resources at Stanford University. He may be reached at joshuag@stanford.edu.

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