A basis for future market-based instruments

The Hunter River Salinity Trading Scheme uses a market-based instrument to successfully address a serious environmental problem. Market-based instruments influence the behaviour of those who manage natural resources and environmental assets in a number of ways

  • by using cap-and-trade mechanisms, which reduce pollution
  • through price signals, which discourage undesirable activities
  • by improving the way current markets work
  • by creating new markets for environmental services

The success of the Hunter scheme demonstrates the applicability of market-based instruments to achieving environmental goals and provides a sound precedent for the prospects of other similar reforms. Aspects of the scheme with far-ranging significance beyond the Hunter Valley and salinity include the following

  • The scheme transforms the role of the environmental regulator and the practice of environmental regulation. Rather than the regulator dealing one-on-one with each polluter, the scheme has set a community-driven environmental goal which is being transparently delivered by a market mechanism. The self-interest of each credit holder is harnessed to affect the actions of each discharger.
  • Discharge privileges are explicitly based on a quantitative environmental goal, rather than available abatement technology. Because the scheme is performance-based, it encourages individual innovation and facilitates cooperation and the sharing of resources to ensure environmental goals are achieved at least cost.
  • The 24-hour online credit exchange makes trading faster and easier. It enables participants in the scheme to trade emission credits at any time in response to changing river flows and discharge needs.

Lessons for future schemes can also be drawn from other operational schemes which are using market-based instruments, such as

  • load-based licensing, which sets a cap on pollutant loads and creates a price signal to provide incentive for cost-effective pollution abatement
  • South Creek Bubble Licensing Scheme, a cap-and-trade system that allows its three participants to adjust their individual discharge below a set cap and achieve a cost-effective reduction in pollution
  • BioBanking, which addresses the loss of biodiversity and threatened species by creating a market in biodiversity credits, providing incentives to protect biodiversity values.

The NSW Catchment Management Authority Chairs' Council has assessed the potential for CMAs to use market-based instruments in natural resource management. A BDA Group-CSIRO background paper (PDF 607KB) provides an overview of experiences with the use of market-based instruments in natural resource management and a framework for selecting them across various biophysical, economic and stakeholder contexts.

For more information on the use of market-based instruments to manage natural resources, visit the following web pages

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