What Value the Rural Environment?
by Jeff Bennett
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The implementation costs of environmental rehabilitation projects such as the National Action Plan for Salinity and Water Quality may outweigh the benefits.

Publicly funded resources have been vigorously applied to the rehabilitation and protection of environmental assets in rural and regional Australia over the course of the last decade. An alliance formed between rural industry lobby groups-notably the National Farmers Federation under its then Executive Director, Rick Farley-and conservationists-under the banner of the Australian Conservation Foundation led by Phillip Toyne-devised the concept of Landcare. The 1990s became the decade of Landcare and funds from the public purse began to flow. This culminated in the distribution of funds amounting to $2.5 billion generated by the partial sale of Telstra to

a plethora of predominantly local environmental rehabilitation projects through the Natural Heritage Trust.1

The pattern seems set to continue with the extension of the Natural Heritage Trust through a further

$1 billion of funding and the inception of the National Action Plan for Salinity and Water Quality.2 Under the Plan, $1.4 billion of Commonwealth, State and Territory funds will be distributed across 21 'priority regions' over a four year time span in an attempt to:

₯ΚΚΚΚ 'prevent, stabilise and reverse trends in salinity, particularly dryland salinity affecting agricultural production, the conservation of our unique environment and community assets (such as houses, roads, etc); and

₯ΚΚΚΚ improve water quality and secure reliable water supplies for human, agricultural and industrial uses and for the environment.'

Has it been worth it?

Questions have been raised regarding the performance of the first round of the Natural Heritage Trust. These have mainly focused on the effectiveness of the spending in achieving environmental improvement given its thin spread and lack of coordination. As a midterm review of the Trust noted in 1999, 'the Program will have very limited impacts on addressing loss of biodiversity because of the generally small scale and scattered distribution of on ground projects in relation to the scale of the problems.'3

The concentration of the National Action Plan on the 21 'priority regions' and its development of regional plans suggests that it may have been designed to address some of these deficiencies.

The problem is neither the past nor current schemes for addressing environmental decline in rural and regional Australia have been considered in light of the costs of their implementation relative to the benefits they are expected to generate. In other words, there has been no consistent or rigorous assessment of whether society is being made better off through the projects being implemented. Nor has there been any consideration of whether the projects that have been funded are the most cost-effective way of achieving the environmental goals sought, particularly given the long time periods between 'cause and effect' that often characterise environmental issues.

Rather, public funds have been allocated to projects on the basis of a public perception that an ecological disaster is imminent-thus providing the imperative that something must be done-and some calculations4 of the costs to the economy that have been caused by salinity.

The result has been the allocation of scarce resources by the public sector in the absence of any rigorous process of assessing the net gain or loss to society that would be generated. The possibility is that the costs of achieving some or even all of the environmental targets are greater than the benefits the environmental improvements create. This situation can arise because of the inappropriate setting of targets and/or the inefficiency of the mechanisms, such as government regulation, used to achieve the targets.

The danger this presents to Australian society is the prospect of rent-seeking behaviour. Those with the power to allocate public funds to environmental rehabilitation are able to secure political reward through providing gain to vested interest groups, notably farmers and conservationists. The attractiveness of providing rural and regional environmental largess from a political perspective is quite clear. Two sectors of the voting public that are frequently at odds with each other politically-farmers and environmentalists-can be wooed with a single policy instrument. The hope would be simultaneously to secure marginal electorates in both the bush and the suburbs.

Economic instruments

A feature of the National Action Plan is the development of salinity and water quality targets for each region, against which the achievements of the Plan will be assessed. Targets for in-stream salinity levels are also featured in the Murray Darling Basin Commission's Integrated Catchment Management Plan.5

A primary reason for the setting of targets is as a precursor to the use of economic instruments to provide incentives for environmental improvement. For instance, by setting salinity targets, property rights over the underground aquifer that was previously an open access resource can be defined. Hence, a market in which these property rights-perhaps called 'salinity credits'-are traded can be established. If the rights were established on the basis of the 'beneficiary pays principle', landholders who adopt management practices that result in reduced salinity levels would be rewarded for doing so through their sale of salinity credits so generated. Private individuals or corporations enjoying the benefits of reduced salinity may buy these permits. For instance, downstream farmers whose costs are reduced or production expanded because of lower salinity levels may be willing to buy credits. Downstream water supply agencies could buy credits to ensure better water quality for their customers.

Alternatively, if the rights were established according to the 'polluter pays principle', landholders whose existing practices can be shown to cause salinity would need to buy credits in order to continue their operations. The practicality of installing such a system of rights is limited by the ability of the landholders to pay for the credits or to fund changes to their existing practices so that they would no longer need to buy the credits.

Under a beneficiary pays rights allocation, many of the beneficiaries of salinity reductions may 'free ride'. Salinity reductions, for example, may prevent the loss of endangered plant and animal species. The benefits so generated for the general public are unlikely to be matched by financial payment because of the difficulty of excluding people who don't pay from enjoying the benefits. Hence, it is likely that governments would have to be key buyers of salinity credits if such schemes are to achieve the targets set for them.

This is exemplified by one type of economic instrument: the environmental auction. Under such schemes, governments allocate funding to achieve specific environmental goals. Members of the public are invited to bid for that funding in return for the implementation of projects that would help achieve the goals. The auction scheme is based on the 'beneficiary pays principle' insofar as the government buys environmental improvements on behalf of the general public who enjoy them. This may be despite the fact that those who are being paid to provide the improvements are the same people who created the initial environmental degradation. The alternative is to institute the polluter pays principle as the basis for rights determination but again, financial constraints faced by landholders may prevent society from achieving desirable environmental outcomes.

Economic instruments, including tradeable permit schemes and environmental auctions, are favoured by economists over purely regulatory systems because of the incentives they create for reducing the costs of achieving the environmental improvement designated by the target. Because a reward is achieved when salinity is reduced, for example, landowners and other entrepreneurs will seek out salinity reducing strategies to gain the benefit at the lowest possible cost. They allow flexibility and encourage innovation. This is in contrast to a regulatory system where, say, a government simply specifies a salinity reducing strategy that attracts a pre-defined subsidy.

Considerable effort is being devoted to the development of economic instruments with field trials already in place Victoria 6 and in the Liverpool Plains region of NSW.7 Their use is seen by some to answer many of the criticisms levelled at environmental rehabilitation schemes such as the Natural Heritage Trust.

It is important to note, however, that their operation is predicated on the setting of environmental targets. How these targets are set is therefore crucial to any assessment of the success of the approach. If they are set on the basis of the rent-seeking objectives of lobbyists, politicians and bureaucrats, the likelihood of the economic instruments achieving improvements in net social well-being will be greatly diminished. But if they are set in light of information about the costs and benefits to society, the outcomes are likely to be more positive.

It may be true that the use of economic instruments such as permit trading and environmental auctions is, in general, more cost effective than the use of more conventional regulatory mechanisms. But that provides no indication of their absolute cost. Targets set for the National Action Plan and for salinity in the sub-catchments of the Murray Darling Basin appear to have been defined without rigorous assessment of the expected costs society will have to bear to meet them. Furthermore, there seems to be little by way of assessment of the likely benefits the achievement of the environmental targets will generate for the community.

In other words, the (albeit limited) sophistication of the economic instruments being devised to achieve the targets set has not been matched by the setting of the targets themselves.

Estimating environmental values

One reason why the quantification of the costs and benefits of rural and regional environmental rehabilitation projects has been largely ignored is that the estimation in dollar terms of many of the values involved is problematic. The impacts of these projects are often on values that are not directly marketed. Salinity rehabilitation projects, for instance, may have impacts on aspects of river health such as biodiversity maintenance and recreation potential. Freshening a river may restore its capacity to act as habitat for endangered species or make it once again suitable as a venue for recreational fishing. Direct recourse to market data to establish the values people have for such impacts is not possible. Other impacts are on marketed values. Increased production of food and fibre from previously saline land can be valued with reference to market data. To enable the integration of market and non-market values into an assessment of the net impact on society of proposed environmental rehabilitation projects requires all the benefits and costs to be estimated in dollar terms.

One route taken by economists to fill the non-market value information gap has been the development of so-called 'stated preference' techniques. These techniques involve asking representative samples of people likely to be affected by proposed outcomes questions regarding their values for environmental changes. The simplest of these techniques-and perhaps the best known-is the contingent valuation method. In a basic contingent valuation application, survey respondents are asked how much they would be willing to pay, say as a levy on their taxes, to experience an improvement in environmental conditions. A more sophisticated stated preference technique-known as choice modelling-involves the presentation of a sequence of choices between alternative future environmental conditions to survey respondents. Respondents are asked to choose their preferred options. Given that one of the attributes used to describe the alternative options is a personal monetary cost, an analysis of the trade-offs inherent in the choices made can be used to derive a dollar estimate of the values held for a change in environmental conditions.

Two sets of issues arise in criticisms of stated preference techniques. One set involves philosophical objections to the estimation of environmental values using money. The other set involves more practical concerns regarding feasibility.

Should it be done?

Environmentalists such as Mark Sagoff 8 raise philosophical objections to attempts at assigning dollar values to environmental values. They argue that such values are beyond the market in that no amount of money could substitute for a loss of an environmental asset. In a sense, they believe that the environment is 'too valuable' to be considered alongside money and marketed goods. Many also worry about the uncertainty of future outcomes, given the long time horizons involved. The conclusion is that environmental valuation should not be contemplated. The logical progression from this conclusion is that the value of the environment is sufficient to trump any other call for resources-hence the imperative that something must be done.

The problem with this line of argument is that the imperative is not accepted by society. Something is not always done. Choices are made to sacrifice environmental values to achieve other goals. Risks are taken. Forests are logged to satisfy the community's demands for paper and timber. Rivers are dammed to supply water to irrigated crops of cotton so that peoples' demands for new shirts are met. Vegetation is cleared to graze cattle because people want to eat hamburgers.

That is not to say that 'the environment' is not valuable. In aggregate, the environment is infinitely valuable to humanity. Without the environment, humanity would no longer be able to exist. We are part of it. What it does say, however, is that changes to the environment at the margin are not infinitely valuable and as such society is willing to give up some of it to achieve other goals. Trade-offs between environmental degradation and the consumption of goods and services are made constantly by society. The trade-offs made give indications of the extent of the value society holds for the environment. What stated preference techniques do is to provide a formal context in which those trade-offs are made explicit.

Can it be done?

Much of the now voluminous technical literature on the subject of stated preference techniques focuses on the question of whether methods such as contingent valuation and choice modelling are capable of delivering accurate and reliable estimates of non-market values. The most frequent challenge directed at stated preference techniques is that respondents are unlikely to reveal their true preferences in the hypothetical scenario set out in a questionnaire. Criticisms of the early contingent valuation applications argued that respondents would not really be willing to pay in real money the bids made in answering a questionnaire.9

The validity of stated preference derived value estimates is difficult to assess. Because there is no benchmark of value provided by markets, there is no firm basis on which accuracy can be assessed. Many approaches have been taken to assess accuracy. These range from theoretical assessments right through to valuation experiments in which artificial markets have been created to act as benchmarks. An answer to the question of accuracy remains elusive and perhaps because of the nature of the question will always remain so.

Conclusion: to value or not to value

While the pragmatic consequences of the environmentalists' philo-sophical stance on valuation may appear untenable, there are many in the community who remain unconvinced of the merits of environmental valuation. Similarly, the accuracy of non-market value estimates remains a contentious issue even amongst economists. What then can be done to address the current inadequacy in assessing environmental rehabilitation and protection projects and setting environmental targets?

The answer to that question lies in a trade-off between the prospects of resource misallocation resulting from rent-seeking in the political process that currently drives environmental decision-making in Australia and the prospect of inaccurate information on values being delivered by stated preference valuation techniques.

The chances of this trade-off being resolved in favour of a greater reliance on stated preference valuation are lessened because of a reluctance on the part of special interest groups and decision-makers to see the potential for rent-seeking diminished. Without any information on the values held by the broader community for environmental change, the special interest groups and decision-makers have no checks on their power to claim that something must be done. It is unlikely therefore that there will be a push for stated preference valuation studies from the rural sector, environmentalists or politicians.

Certainly the technical advances that have been achieved by the economics profession in the design and application of stated preference techniques are moves in the right direction. Increased confidence in the validity of estimates will make it more difficult for special interest groups and decisionmakers to reject the information on values-and the process of benefit and cost assessment.

Supporters of the use of stated preference techniques may also be found amongst those who could be disadvantaged by the allocation of resources to rural and regional environmental projects. Other claimants to public sector resources may wish to test the relative strengths of community demands for allocations across education, health, defence, law and order as well as environmental claims. Indeed, it is possible that the complementarities between agricultural and environmental interests currently being exploited may be exhausted, as substitution between the two becomes more evident. Environmental interests, for instance, may begin to call for the retirement of agricultural land rather than the more environmentally friendly management currently required.

From the taxpayer perspective, however, the use of stated preference techniques as a means of providing a check on rent-seeking behaviour must be viewed as a positive.

Endnotes

1 ΚΚΚ See http://www.nht.gov.au/
2 ΚΚΚ See http://www.affa.gov.au/docs/nrm/actionplan/ action_index.html
3 ΚΚΚ Centre for International Economics (CIE), CSIRO and Resource ΚΚΚΚ Policy and Management, Midterm Review of the Natural Heritage Trust: Bushcare Program (Canberra: CIE, 1997), 7.
4 ΚΚΚ Virtual Consulting Group, Rescuing the Future (2000). Report prepared for the Australian Conservation Foundation and the National Farmers' Federation. http://www.virtualgroup.com.au
5 ΚΚΚ Murray Darling Basin Commission, 'Integrated Catchment Management in the Murray-Darling Basin 2001 2010: Delivering a Sustainable Future' (Canberra: MDBC, 2001).
6 ΚΚΚ G. Stoneham, M. Eigenraam, C. Duke, and L. Strappazzon, Permits Auctions and Output, paper presented to the 45th Annual Australian Agricultural and Resource Economics Society Conference (Adelaide: 2001).
7ΚΚΚΚ W. Moss, Environmental Services Up for Auction: Landscape Scale Change as a Basis For Regional Economic Growth, paper presented to the Sustainable Economic Growth for Regional Australia Conference (Ballarat: 2000).
8 ΚΚΚ M. Sagoff, 'Some Problems with Environmental Economics', Environmental Ethics 10 (1988), 55-74.
9 ΚΚΚ J. Bennett, 'The Contingent Valuation Method: A Post-Kakadu Assessment', Agenda 3: 2 (1996), 185-194

Author
Jeff Bennett is Professor of Environmental Management at the National Centre for Development Studies, The Australian National University.

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