Monthly Archives: May 2006

77 – Comments on Channel 9’s salinity exposé

On May 28 2006, the Sunday morning current affairs program on Channel 9 television in Australia ran a story about salinity in the Murray-Darling Basin. Parts of the story were accurate, parts were wrong, and parts were sort of semi-right but distorted in various ways to fit the thrust of the story.

The messages of the story included that:

(a) especially during the hey-day of salinity as a hot political topic, the likely future severity of the salinity problem was grossly exaggerated by scientists;

(b) trees are at least unhelpful for salinity management, if not positively bad;

(c) the rising groundwater theory of how salinity occurs in Australia is wrong.

Throughout the story, these and other separate issues were so confounded and muddled up with each other that it is difficult to untangle them, but I’ll try.

Message (a) is true, at least in the sense that the published numbers reinforced the atmosphere of alarm that existed in the late 1990s/early 2000s. In particular, the approach taken to the salinity assessment of the National Land and Water Resources Audit led to problems. They defined salinity hazard in a way that, without studious attention to detail in the reports, gave the impression of unrealistically large areas facing salinity. In at least one state the areas were exaggerated, even relative to that unfortunate definition. On the other hand, the state agencies were in a difficult situation. One of those involved has told me, “it was a politicised process and there was a prerequisite that an Australia-wide number be derived, despite protestations. What is obvious now is that it should have been argued that it was not possible at the scale required, rather than trying too hard with too little data to satisfy an ill-considered, if simple, request.” Also, it is true that the NLWRA reports do not say that all of the land identified would become salinised. The qualifications and explanations in the reports were almost always ignored when the numbers were used in political or public arenas.

Channel 9 did effectively convey the message about the over-selling of salinity. Jennifer Marohasy’s comments about salinity levels in the Murray River were well made. It is true that salinity levels in the river have been falling, and consequently true that claims of a salinity crisis in the river are overblown. The causes of the fall in salinity are well known: extensive pumping of saline groundwater, and a long period of below-average rainfall.

Despite this positive news, it is believed that, if rainfall returns to average levels, salinity from dryland areas will eventually overtake the effects of the groundwater interception schemes – river salinity levels will rise again. Indeed, if there is even a brief period of above-average rainfall, salinity levels will probably be elevated for some time afterwards. (It is now appreciated that salinity in the river is driven to a large extent by episodic flooding.)

The reporter did well to remind us of the appalling campaign by the National Farmers Federation and Australian Conservation Foundation for a $65 billion environmental program in 2000/2001, when the profile of salinity was at its peak. If their campaign had been successful, the resulting policy program would have been wildly wasteful of public money (see some prior comments of mine on this in Pannell, 2001). It was “interesting” to see Wendy Craik (who was then the executive head of the National Farmers Federation) admitting that, as a taxpayer, she was glad they didn’t succeed in their campaign back then.

Even today, other than in Western Australia, the available predictions of future salinity impacts are pretty weak. The blame for this is not just in the public sector (which came in for a hiding on the program). Many of the analyses from the private sector that we have been reviewing recently have also been very questionable.

My final comment on message (a) is that we should not forget that the likely future area of salt-affected land is still very large (probably something of the order of 6 million ha) and that for salinity’s impacts on water resources, infrastructure, and biodiversity, area is not the issue, anyway. The lesson is that salinity investments (like other environmental investments) need to deal with the issues soberly, based on the best available evidence.

Message (b) (that trees are unhelpful for salinity management) is correct in certain places, but not others. The situations where they are a problem are where rainfall is relatively high, and ground surface slopes are relatively high, so that significant surface runoff water reaches the waterway in a fresh state. Perennials (not just trees) tend to intercept this water and as a result there is less dilution of the salts that are entering the river from other locations. In addition, in these locations, the perennials reduce the amount of water available to downstream users and the environment. This has been well known for many years, but has not been adequately recognised in a number of government programs. They certainly should do so, but they also should not throw out the baby with the bathwater. Perennials, including trees, are still highly relevant in many areas where salinity is a looming or present problem.

Message (c) (that the rising groundwater theory of salinity is wrong, and should be replaced by a theory based on soil health) is problematic, to say the least. Channel 9 interviewed almost all of the small band of scientists (the “soil-health team”) who have for some years been pushing this line, but not a single person who would be qualified to present the counter view. Now Australia is a big place, and there may well be different mechanisms in operation in different places. But for the soil-health team to claim that the rising groundwater theory is universally wrong is quite outrageous.

One of them rang me once and tried to convince me that their claim even applies in Western Australia. Since I had been working on a large number of statistical analyses of the relationship between watertable depths and rainfall (Ferdowsian et al., 2001), and since I could take him to any number of paddocks where salinity coincides exactly with shallow water tables, my caller’s arguments were not very convincing.

Contrary to the claims expressed on the program, there is copious evidence in support of the rising groundwater model, including a catchment in WA where groundwater and stream salinity levels have been monitored ever since the land was cleared. There are numerous areas where establishment of perennial vegetation has lowered watertables and thereby mitigated salinity (e.g. Burke’s Flat in Victoria, the Denmark River in WA). Powerful recent evidence in the Murray-Darling Basin has been the decline in saline discharge in many areas, due to extended periods of below-average rainfall. For example, in a site at Kamarooka (northern Victoria), there was formerly a large area of saline discharge, but the recent dry period has lowered saline groundwaters to 2 metres or more below the surface for the first time in 50 years. This widely observed recent phenomenon is completely consistent with the groundwater model of salinity, and (unless I’ve misunderstood it) completely inconsistent with the soil-health model. The same is true of the fall in salinity in the Murray River, which was rightly emphasised in the program. It was amusing to see the journalist putting forward two claims that can’t possibly both be true, but apparently failing to notice this.

I’d also be very interested to know how the alternative model explains the onset of salinity affecting roads and buildings in the middle of rural towns, or occurring within remnant native vegetation (where soil health is presumably pretty good). It seems to me that these things can only be explained by rising groundwater.

The program implied that the groundwater model represents salinity processes as occurring over very large areas (e.g. cause and effect being widely separated in space). While this can be true in some cases, in many, the opposite is true – groundwaters can rise or fall on a very local basis (Pannell et al., 2001). This is one of a number of ways in which members of the soil-health team have misrepresented the rising groundwater model or the prescriptions it gives rise to.

The proponents of the alternative theory need to subject their ideas to the standard method of quality assurance in science, by publishing their evidence in a peer-reviewed journal. They have not yet done that.

David Pannell, The University of Western Australia

Further Reading

Ferdowsian, R., Pannell, D.J., McCaron, C., Ryder, A. and Crossing, L. (2001). Explaining groundwater hydrographs: Separating atypical rainfall events from time trends, Australian Journal of Soil Research 39(4): 861-875. Full journal paper (718K pdf file)

Pannell, D.J. (2001). Public Funding for Environmental Issues: Where to Now?, SEA Working Paper 01/12, School of Agricultural and Resource Economics, University of Western Australia. Full paper (42K)

Pannell, D.J., McFarlane, D.J. and Ferdowsian, R. (2001). Rethinking the externality issue for dryland salinity in Western Australia, Australian Journal of Agricultural and Resource Economics 45(3): 459-475. Full journal paper (164K pdf file)

76 – Public benefits, private benefits, and extension

This is the fourth instalment of a series that examines a simple framework for choosing environmental policy instruments, as outlined in PD#73. The framework is based on levels of public and private net benefits of changing land management, and a set of simple rules. This time we focus on the use of extension and compare it to positive incentives.

In PD#73 I showed how a set of simple and reasonable rules can lead to a map of efficient policy instruments (Figure 1). The context is an environmental manager considering prospective projects to change land use in particular ways on particular pieces of private land. The map below shows that the choice of instruments depends crucially on the levels of public and private net benefits from those projects. A particular project to change land use in particular ways on particular pieces of land would be represented by a dot somewhere on Figure 1. Depending on where the various dots lie, different types of policy response are recommended.

In PD#74 and PD#75 we focused on the use of positive incentives. This time we examine extension more closely.

Figure 1. Efficient policy mechanisms for encouraging land use on private land.

Extension (e.g. education, technology transfer, communications generally) is a relatively cheap policy instrument that helps landholders to learn about the available land management practices, including practices that environmental managers would like to see adopted. (By “cheap” I mean cheap per hectare of adoption that it generates, when used in appropriate circumstances, relative to, say, payment of financial incentives.)

Only for projects that fall in the top-right area is extension likely to accelerate adoption of the land practices with high public benefits (e.g. environmental benefits). We know that those are the practices with positive public benefits because they are in the top half of the graph. Extension can work to generate adoption for these projects because the private net benefits of adoption are positive – they are on the right side of the graph – and extension could help landholders to realise this. Extension alone could not generate sustained adoption for projects in say the Technology development area because, from the perspective of private landholders, those projects generate costs larger than the benefits.

In the simple framework of PD#73, we didn’t consider the fact that, even though private net benefits from land-use change are positive in the top-right area, there may still be costs and impediments to learning that must be overcome. We also did not discuss the effect that extension can have on the lags to adoption. In reality, extension may shorten, but will probably not eliminate, the lags.

In PD#75 we argued that adoption lags (in the absence of extension or incentives) would be related to the level of private net benefits, with longer lags for practices with lower private net benefits. If we use the illustrative adoption curve from PD#75, and make some other assumptions, then we can map the area where extension will generate sufficient public benefits to offset the costs of the extension – where the benefit:cost ratio (BCR) from extension is at least 1. For the purpose of this discussion, I will assume that (a) extension reduces the adoption lag for any project by two years, (b) the real discount rate is 5%, (c) extension costs about $2/ha/year (20% of the assumed learning costs associated with land-use change, expressed in annualised form). Given those assumptions, extension could pay off anywhere above the BCR =1 line in Figure 2.

Figure 2. Benefit:cost ratios from use of extension, allowing for adoption lags and learning costs

It is not worth paying for extension if the public net benefits are too low (below about $25/ha/year in this example).

If we require higher BCRs from our investment in extension, we need to select projects that will generate higher public net benefits, and also higher private net benefits, up to a point (the point where the lag without extension is shorter than the benefit of extension). As we move further to the right side of the graph, increasing the private net benefits starts to reduce the net benefits of extension, because landholders are more inclined to adopt the new practices even without extension.

Figure 2 above can be combined with the comparable graph for incentives (Figure 3 in PD#75) to generate a new map of where positive incentives or extension would be preferred (Figure 3, below). This is a modified version of the original map in Figure 1, allowing for the additional complexities we have now built in.

Figure 3. Revised map of efficient policy mechanisms allowing for adoption lags and learning costs.

The differences between Figure 1 and Figure 3 are:

• Public benefits need to be a little higher to justify positive incentives, so we would be slightly more likely to fall back on technology development;

• Extension is not worthwhile if public net benefits are not sufficiently high, and is replaced (or perhaps supplemented) by positive incentives if there are low private net benefits.

Realistically, a BCR of 1 is not sufficient to offset program fixed costs. Figure 4 shows a version of the map if we require a higher benefit:cost ratio of 2.0 to justify positive incentives or extension. The effect is to require higher public net benefits to justify the selection of projects.

Figure 4. Revised map of efficient policy mechanisms allowing for adoption lags and learning costs, if positive incentives and extension require BCR = 2.

This figure helps to identify how environmental programs should target their efforts to achieve high payoffs. It indicates that projects are more likely to generate high payoffs to investment in positive incentives or extension if the private net benefits are closer to zero. For those projects with net private benefits that are not too different from zero, land-use change can be prompted with modest incentives, or extension can accelerate the adoption of practices that would not otherwise be adopted quickly.

It is notable that the targeting of investment depends at least as much on the level of private net benefits as on public net benefits. Indeed, the choice of high BCR projects is even more sensitive to private than to public benefits.

David Pannell, The University of Western Australia

75 – Public benefits, private benefits, incentives and lags to adoption

This is the third instalment of a series that examines a simple framework for choosing environmental policy instruments, as outlined in PD#73. The framework is based on levels of public and private net benefits of changing land management, and a set of simple rules. This time we focus again on positive incentives, allowing for the cost of learning and the reality that there are lags to the adoption of new practices.

In PD#73 I showed how a set of simple and reasonable rules can lead to a map of efficient policy instruments (Figure 1). The context is an environmental manager considering prospective projects to change land use in particular ways on particular pieces of private land. The map shows that the choice of instruments depends crucially on the levels of public and private net benefits from a project. A particular project to change land use in particular ways on particular pieces of land would be represented by a dot somewhere on Figure 1. Depending on where the various dots lie, different types of policy response are recommended.

In PD#74 we focused on the “Positive incentives” triangle at top left. This time we further develop the framework for incentives, allowing for the possibility of paying incentives to accelerate adoption in the area that is currently labelled “Extension”

Figure 1. Efficient policy mechanisms for encouraging land use on private land.

The rationale for considering positive incentives in that area is that they may result in more rapid adoption than can be achieved through extension alone. Whether their benefits in this respect are worthwhile depends on how how slow adoption would have been without the incentives, and on the size of the incentives required.

In the simple framework of PD#73 and PD#74, we assumed that extension would be enough to prompt immediate adoption for any project in the “Extension” area. In reality, there are (a) lags to adoption that extension may shorten, but will probably not eliminate, and (b) costs and impediments to learning that must be overcome. Learning costs would include all factors that inhibit the transition from current management to the new management system. It may include the cost of obtaining and analysing information about the new practice, social pressures for or against its adoption, and constraints on financial equity. The existence of positive learning costs mean that landholders may not make the transition to a new practice, even if its adoption would ultimately yield positive private net benefits.

I will assume that in the “Extension” area, an incentive that is big enough to cover the costs of leaning will result in immediate adoption of the new land management system. In the “Positive incentives” area, the incentive needs to cover both the private net cost of the land-use change, and the costs of learning about it. I presume that the learning costs would be the same, regardless of the level of private net benefit.

Even without extension or incentives, the lag to adoption would probably be low if private net benefits are high enough. As private net benefits fall, the lag (in the absence of incentives) would increase, and it would probably be very long indeed as the benefits of adoption are reduced to zero. Figure 2 shows a plausible relationship for adoption that we will use for illustration.

Figure 2. Possible lag to adoption as a function of private net benefit from adoption.

Combining Figure 2, with learning costs of $10/ha/year (annualised), and a real discount rate of 5 percent, we can map out the area of the figure where positive incentives would generate sufficient public benefits to be worthwhile: anywhere above the BCR = 1 line in Figure 3.

Figure 3. Benefit:cost ratios from use of incentives, allowing for adoption lags and learning costs.

This area differs from Figure 1 in two ways:

  • The boundary of the positive incentives area (i.e. BCR = 1) has been raised by $10 in the left part of the figure, to cover learning costs. In other words, given higher costs of achieving land-use change, the resulting public benefits have to be correspondingly larger.
  • There is now a small area in the right side of the figure where positive incentives reduce adoption lags by enough for it to be worthwhile putting incentives in place. They would be paid where private net benefits of changing land use are low (so that, without intervention, the lags to adoption are long) and public benefits are sufficiently high.

In the left part of the diagram, the boundary rises as we move away from the vertical axis because the required incentive is increasing. In the lower-left part of the diagram, it is not worth paying incentives because the incentives required are larger than the public benefits they would generate.

In the right part of the diagram, the boundary rises because the lag to adoption in the absence of incentives is falling, so the benefit of paying incentives is falling. In the lower-right part of the diagram it is not worth paying incentives because the lag to adoption without them is not sufficiently long (due to the large private net benefits) and hence the benefits of incentives are low, especially where there are also relatively low public net benefits from the land-use change.

Examining the three different BCR lines in Figure 3, for a given level of public net benefits, the benefit:cost ratio of applying incentives is highest where the private net benefits are zero. In applying incentives, we should be looking for cases where the practices we hope to get adopted are borderline in their adoptability. This is where incentives have the greatest scope for causing practice change most cost-effectively.

Figure 3 has strong implications for the targeting of positive incentives, including incentive payments and other economic instruments (e.g. “market-besed instruments” such as conservation auctions or tenders), and command and control regulation. If they are to generate substantial net benefits, these instruments need to be carefully applied. For example, to cover the transaction costs of a program, we might decide to seek projects that fall in the area above the BCR = 2 line. This presumes that there are, in fact, projects available within that area. If not, then positive incentives are not the right instruments to use.

It is notable that the positive incentives area is a relatively small sub-set of the total. A project chosen at random has only a small chance of falling into the positive incentives area. Environmental managers need to take care to ensure that they are not applying incentives to inappropriate projects. There seems a high risk of this if environmental managers use simple instruments like incentive payments (subsidies) unless they have very good information about both the public and private net benefits.

In my experience, environmental managers do pay attention to the environmental (public) benefits of their funded works, but often neglect the private benefits. This framework reveals that the selection of cost-effective environmental projects is probably even more sensitive to private benefits than to public benefits.

A well designed auction process should identify any projects that do fall into the relevant area of the graph, because it will find projects that offer the best cost-effectiveness. However, the possibility that even the best is not good enough should be considered. For example, in the case of dryland salinity in Australia, it seems likely that very few projects will fall into the positive incentives area (even less than suggested by its small size) because of the high cost of the substantial land-use changes required, and the limited responses of groundwaters to those changes in many cases. These would combine to push projects towards the lower left of the graph.

Next time we compare incentives with an extension-only strategy.

David Pannell, The University of Western Australia

74 – Public benefits, private benefits, and incentives for changing land management

This article further examines the simple framework for choosing environmental policy instruments, as outlined in PD#73. The framework is based on levels of public and private net benefits of changing land management, and a set of simple rules. We focus here on one section of main figure: that for positive incentives. With additional analysis, the framework shows that the best projects tend to be those where the net cost of the change in land-use is lowest.

In PD#73 I showed how a set of simple and reasonable rules can lead to a useful map of efficient policy instruments (Figure 1). The context is an environmental manager considering prospective projects to change land use in particular ways on particular pieces of private land. Figure 1 shows that the choice of instruments depends crucially on the levels of public and private net benefits resulting from a project. A particular project to change land use in particular ways on particular pieces of land would be represented by a dot somewhere on Figure 1. Depending on where the various dots lie, different types of policy response are recommended.

In coming Pannell Discussions I will focus more closely on particular aspects of this diagram. This time we look at the “positive incentives” triangle at top left. (It is not really a triangle, as it is open at the top, but you know what I mean.)

Figure 1. Efficient policy mechanisms for encouraging land use on private land.

“Positive incentives” means that landholders are encouraged to change their land management in particular ways (e.g. planting perennial vegetation to control the watertable or provide habitat) using tools such as subsidies, conservation auctions, or, potentially, polluter-pays mechanisms such as a pollution tax (as a penalty for not changing).

The reasons for recommending positive incentives for this area of the graph are that (a) public benefits are positive (so it might be worth somebody bearing some cost to generate them), (b) private benefits are negative (so adoption of changed practices won’t occur without some additional incentive), and (c) public benefits are large enough to outweigh the private costs (so, as a society, we can afford to pay incentives that are large enough to prompt adoption without spending more than the resulting public benefits).

How large would the created incentives have to be? They would need to be large enough to at least offset the private net cost. Let’s assume that they would exactly offset the private net costs. Given our simple assumption that the landholder would rapidly adopt change if private net benefits were positive, this seems a reasonable rule for setting the incentive. For example, if the incentive was created by paying a subsidy, to pay more than the private net cost would just provide a windfall gain to the landholder without further altering his or her behaviour, eating into the funds available for investment in environmental protection elsewhere. Our funding rule means that, for a set of projects with the same positive level of public net benefit, as we move to the right, the require incentive falls. It reaches zero where the private net benefit is zero.

The required incentive is a cost that hits either the environmental manager, if beneficiary-pays instruments are used, or the landholder, if polluter-pays instruments are used. In either case, we can divide that cost into the public benefit for every point in the triangle, and come up with a map showing all projects that generate a particular benefit:cost ratio (BCR) (Figure 2).

Figure 2. Benefit:cost ratios for projects in the “positive incentives” area.

The figure shows that benefits are greater as we move from bottom to top of the diagram (obviously!), but also as we move from left to right for a given level of public net benefit. As we approach the vertical axis, the required incentive (the cost) approaches zero, so the BCR gets bigger and bigger. The best projects in the triangle are those where private net benefits are very slightly negative (and, of course, those where the public net benefits are large). In other words, the best projects are those where the net cost of the change in land-use is lowest. It makes intuitive sense. This highlights the need for environmental managers to pay close attention to the farm-level economics of the practices they would like to see adopted.

For projects that lie on the diagonal line that bounds the region, the costs of land-use change exactly offset the gain in public benefits, so the BCR is 1.0. There is nothing to be gained by pursuing these projects, while projects further to the left have a BCR below 1.0 and a Net Present Value below zero.

In reality, the incentive required to achieve change might be greater than we have allowed for here, to get landholders over the learning hump. Also, the simple assumption about rapid adoption of all projects with positive private net benefits may not hold up. We would expect adoption to be rapid if the private net benefits were large, but otherwise, not necessarily. We will examine the consequences of these more realistic assumptions another time.

Finally, some comments on the choice between polluter-pays and beneficiary-pays instruments. The “Positive incentives” area includes both possibilities. Either could work to create an incentive for land-use change. For example, we could offer landholders a payment out of public funds (beneficiary pays in the sense that the public benefits from the environmental improvements), or we could charge them a tax for the pollution that they generate as a result of not changing land use (polluter pays). The choice depends on who is considered to have the property rights. Do farmers have the rights to farm as they wish, irrespective of any off-site costs they generate, or does the public have the right to be free of those off-site costs? The choice is essentially political (Pannell, 2004), and the politics can work in either direction. In Australia, programs like the Natural Heritage Trust and the National Action Plan for Salinity and Water Quality use beneficiary pays to influence farmers, but there are also state regulations on things like land clearing that apply polluter pays. In practice, if often seems to be the case that beneficiary pays is used to encourage landholders to change their current land management in environmentally beneficial ways, while polluter pays is used to discourage landholders from changing their current land management in environmentally damaging ways. (That is the rule of thumb we use in SIF3: Ridley and Pannell, 2005).

David Pannell, The University of Western Australia

Further Reading

Pannell, D. J. (2005) Someone has to pay … any volunteers? Voluntary versus regulatory approaches to environmental protection in agricultural landscapes of Australia. SEA Working paper 1801. CRC for Plant-based Management of Dryland Salinity, University of Western Australia. http://dpannell.fnas.uwa.edu.au/dp0406.htm

Ridley AM and Pannell DJ (2005). SIF3: An investment framework for managing dryland salinity in Australia. SEA Working paper 1901. CRC for Plant-based Management of Dryland Salinity, University of Western Australia, Perth. http://dpannell.fnas.uwa.edu.au/sif3.htm

73 – Public benefits, private benefits, and the choice of policy tool

Public benefits and private benefits are much discussed in environmental policy circles, but I’m not aware of any clear written explanation of their meanings, their significance, and their consequences for policy mechanism choice. Here is my attempt to provide one.

In PD#22 I wrote about the distinction between public goods and public benefits and discussed some of the confusion that arises about these concepts. In talking with people involved with environmental policy in Australia, I find that there is quite a shallow understanding of public benefits and private benefits, and why the difference matters. When I sat down to try to get things straight in my own mind, I found that there is actually quite a lot to the issue, most of which I’ve never seen written down. So this is a start at writing it down.

The issue relates to cases where problems of environmental conservation or natural resource management require changes in land management on privately owned lands. Many government programs around the world have been created to attempt to encourage such changes. These programs use a range of mechanisms to encourage change, including education, awareness raising, technology transfer, research and development, regulation, subsidies and other economic instruments. In practice, the choice among these possible policy mechanisms is often not very sophisticated. Programs tend to rely primarily on a small number of mechanisms, sometimes as few as one. Here I show how the choice between policy mechanisms can be greatly helped by an appreciation of the levels of public and private net benefits that are likely to result.

The meanings of these terms are not universally agreed. I am defining them in very specific ways. ‘Private net benefits’ refer to benefits minus costs accruing to the private land manager as a result of the proposed changes in land management. ‘Public net benefits’ means benefits minus costs accruing to everyone other than the private land manager. Defining them in these ways is helpful because the private net benefit dimension provides insight into the behaviour of the landholder, while the public net benefit dimension relates to the effects on everyone else that flow from the landholder’s behaviour. Economists call these latter effects ‘externalities’ (see PD#35) and argue that their existence can be an important potential justification for governments taking action to try to influence behaviour.

The private net benefits of a project (i.e. a specific set of land-use changes) would depend on:

  • the financial returns from the new land uses;
  • the financial returns from the land uses that are replaced (the “opportunity costs”);
  • any change in risks faced as a result of the change;
  • indirect impacts on other aspects of the farm system or on the farmer’s lifestyle;
  • the farmer’s own interest in the environmental outcomes.

The public net benefits would depend on:

  • the value or importance of the environmental assets that are affected by the changes;
  • the degree of degradation that the assets were facing or had already suffered;
  • the extent to which that degradation can be prevented or alleviated by the changes;
  • any lags in the response of the biological or physical system to the land-use changes.

In the graphs that follow, the net benefits relate to the benefits and the costs of the proposed land-use changes, assuming that those changes do occur. They exclude any costs borne by the environmental manager in the process of intervening to encourage the change in land management. This is to allow us to compare the benefits of an intervention with its costs, which we will do in a later PD.

Having established the definitions, the starting point for the framework is the recognition that environmental managers can invest in a range of projects involving changes in land management or land use on private land, and that the available options vary widely in the levels of public and private net benefits they generate, potentially including negative net benefits.

Figure 1 illustrates a hypothetical sample of possible projects with various levels of public and private net benefits. The top half of the graph is for projects with positive public net benefits, while the right half is for projects with positive private net benefits. The figure illustrates that any combination of positive or negative public or private net benefits is possible.

 

Figure 1. Each point represents a potential project, involving specific changes in land management in specific locations.

Figure 2 shows the sets of potential projects that would generate positive net benefits overall: areas A, B, and C. In area A, public net benefits outweigh private net costs. In C, private net benefits outweigh public net costs. In B, there are positive net benefits for both.

The six labeled areas in Figure 2 are relevant to the choice of policy mechanism, because a different mix of policy mechanisms can be identified as being most appropriate in each case. The range of policy mechanism categories is shown in Table 1.

Figure 2. Areas for which different policy mechanisms may be preferred. The units on each of the axes are dollars, and the line passing diagonally through the figure is at exactly 45 degrees to the axes.

Table 1.  Alternative policy mechanisms for seeking changes in management of private lands.

CategorySpecific policy mechanisms included
Positive incentivesFinancial or regulatory instrumentsA to encourage change
Negative incentivesFinancial or regulatory instrumentsA to inhibit change
ExtensionTechnology transfer, education, communication, demonstrations, support for community network
Technology developmentDevelopment of improved land management options, such as through strategic R&D, participatory R&D with landholders, provision of infrastructure to support a new management option.
No actionInformed inaction

AFinancial or regulatory instruments include polluter-pays mechanisms (command and control, pollution tax, tradable permits, offsets) and beneficiary-pays mechanisms (subsidies, conservation auctions and tenders).

The aim is to identify which policy mechanisms are likely to be suitable for each of the six labelled areas in Figure 2. To start with, we use the simple assumption that landholders will adopt all land-management practices with positive private net benefits (projects in areas B, C, D), provided that they are able to learn about those practices.

To select policy mechanisms, the following set of rules is proposed.

1. Do not use positive incentives for land-use change unless public net benefits of change are positive: no positive incentives for C, D, E.

2. Do not use positive incentives if landholders would adopt land-use changes without those incentives: no positive incentives for B.

3. Do not use positive incentives if private net costs outweigh public net benefits: no positive incentives for F.

Rules 1, 2, and 3 narrow the use of positive incentives down to area A.

4. Do not use extension unless the change being advocated would generate positive private net benefits. In other words, the practice should be sufficiently attractive to landholders for it to be ‘adoptable’ once the extension program ceases.

5. Do not use extension where a change would generate negative net public benefits.

These rules narrow extension down to area B. This is referring to cases where extension is used as the main tool to achieve land-use change. Extension could also be used to support any of the other policy mechanisms, playing a supporting role, rather than being the main tool.

6. If private net costs outweigh public net benefits (area F), consider technology development to create improved (environmentally beneficial) land management options that can be made adoptable (with or without positive incentives).

7. If private net benefits outweigh public net costs (area C), the land-use changes should be accepted if they occur, implying no action.

8. If public net costs outweigh private net benefits (area D), use negative incentives.

9. If public net benefits and private net benefits are both negative, no action is necessary. Adverse practices are unlikely to be adopted.

10. In all cases, the suggested action needs to be weighed up against a strategy of no action.

These rules lead to Figure 3.

Figure 3. Recommended efficient policy mechanisms based on a simple set of rules.

This is quite a simple framework, but it’s a good start. It significantly narrows down the range of policy tools that environmental managers should be considering depending on public and private net benefits in a particular situation. We can make it more sophisticated in various ways, including by allowing for uncertainty and for adoption lags, which we will look at another time.

As a preliminary look at one aspect of uncertainty, in area C if it is not known whether private net benefits are sufficient to outweigh public net costs, a relatively flexible negative incentive instrument might be used to communicate the public net costs to land managers (e.g. a pollution tax, or a property-rights-based approach such as tradable permits), leaving the ultimate decision about land-use change to the land managers. Inflexible negative incentives, such as command and control, should not be used in this case, as they might result in changes where the costs outweigh the benefits. Flexible policy instruments (if implemented properly) would not actually result in any additional public benefits (if the project was really in area C) as the positive incentive they created for land-use change would not be enough to outweigh the private costs of that change. Depending on the way they were set up, they might result in a redistribution of wealth (e.g. from polluters to pollutees).

Finally, it is worth noting that the rules underlying Figure 3 are based on an objective of efficiency (biggest environmental benefit per dollar spent). In practice, governments often also consider perceived equity or fairness in deciding how to spend their resources.

David Pannell, The University of Western Australia

p.s. This version has been edited in response to helpful comments from Peter Sullivan (about the definition of public benefits) and Mike Young (about area C, property rights and equity – see the last two paragraphs). Thanks to both. It has also been revised in response to questions and comments from the audiences of several presentations.