Environmental Markets

Overview

There is growing interest in the use of markets to help protect the environment.

Historically, the main mechanisms used in environmental policies for this purpose have been providing information, providing payments, imposing regulations, and creating improved technologies. Now there are several types of environmental markets in use around the world, and there is momentum that seems to mean that their use will continue to grow. Markets complement the use of some market-like mechanisms – reverse auctions and competitive tenders – that have been utilised in Australian environmental policy since about 2000 (Blackmore and Doole 2013; Blackmore et al. 2013).

In Australia, agricultural water markets are well established and working relatively well (Pannell and Rogers 2022). Trade in water increases agricultural efficiency and creates opportunities for securing water for environmental purposes. The experience of developing water markets, starting in the 1980s (National Water Commission 2011), is highly relevant to the creation of other markets, including of markets for environmental goods that don’t involve ownership of a physical resource or product.

Since then, we’ve seen markets being used to contribute to the management of air pollution (SO2) in the US, greenhouse gas emissions in Europe, water pollution in the catchment area for the Great Barrier Reef, and development offsets in various countries. Currently in Australia there is much attention on the use of markets to enhance biodiversity, with private schemes, such as that being developed by Accounting for Nature, and the Federal Government’s proposed Nature Repair Market.

Unlike other commodity markets, environmental markets don’t emerge spontaneously. There are several reasons for this, including that the goods being bought and sold are themselves somewhat intangible. They are packages of rights and promises rather than physical products. Environmental markets can also require quite high administrative costs and transaction costs, in order for the schemes to operate with integrity.

For these and other reasons, there are challenges in getting environmental markets established and working well (Zadek and Herr 2023). In many examples, significant modifications to market operations have been required over a couple of rounds of reform. It is realistic to expect that any new markets will need similar flexibility and change over time as problems with their performance come to light.

Nevertheless, environmental markets can be very effective and efficient. CEEP has conducted research and been involved in outreach and engagement on various aspects of environmental markets.

Key resources on the topic

We recommend the following resources:

National Water Commission (2011). Water Markets in Australia: A Short History
Opinion Article (2022): The government hopes private investors will help save nature. Here's how its scheme could fail
Rolfe, J. (2008). Water Trading and Market Design. In: Water Policy in Australia: The Impact of Change and Uncertainty, ed. Lin Crase, pp 202-215. Washington: Resources for the Future.
Zadek, S. and Herr, D. (2023). The Future of Biodiversity Credit Markets: Governing High-Performance Biodiversity Credit Markets. Consultation Paper, Nature Finance and Taskforce on Nature Markets.

Our engagement with industry on this topic

We work with academics and government representatives to better understand the environmental markets that are operating in Australia and provide advice and information for policy development. A selection of work is presented below.

The Australian Department of Climate Change, Energy, Environment and Water
WA’s Department of Water and Environmental Regulation in Western Australia
NSW’s Department of Planning, Industry and Environment
Eco-Markets Australia, the operators of the Reef Credits market.
394. Creating an environmental market
392. Environmental markets don’t emerge spontaneously
104. How would a carbon market work?
102. A national market for biodiversity?
Plus, various posts on soil carbon and its role in the Australian Carbon Credit Units scheme.
For all blog posts, visit: Pannell Discussions
1. Do Australians care about carbon farming and its co-benefits?
2. WA Agriculture's carbon-neutral challenge amid a changing climate
3. Auctions for buying back groundwater for environmental purposes: which design performs better?
4. Could soil carbon sequestration ever be a worthwhile climate policy
Preparation of a brief paper on property rights in environmental markets for a government audience
Member of the Technical Advisory Panel for the Reef Credit market at Eco-Markets Australia

Our body of research on this topic

A selection of work is presented below.

Brown, J., Burton, M., Davis, K. J., Iftekhar, M. S., Olsen, S. B., Simmons, B. A., Strange, N., & Wilson, K. A. (2021). Heterogeneity in Preferences for Nonfinancial Incentives to Engage Landholders in Native Vegetation Management. Land Economics, 97(2).
Bryan, B.A., Runting R.K., Capon, T., Perring, M.P., Cunningham, S.C, Kragt, M.E., Nolan, M., Law, E.A., Renwick, A., Eber, S., Christian, R. & Wilson, K. (2016). Designer policy for carbon and biodiversity co-benefits under global change. Nature Climate Change, 6: 301–305.
Dumbrell, N., Kragt, M., Gibson, F. (2016). What carbon farming activities are farmers likely to adopt? A best-worst scaling survey. Land Use Policy, 54, pp. 29-37.
Iftekhar, M. S., & Fogarty, J. (2022). Benefits of a groundwater allocation trading arrangement in a water-stressed environment. Agricultural Water Management, 269.
Olita, H. T., Iftekhar, M. S., & Schilizzi, S. G. M. (2023). Optimizing contract allocation for risky conservation tenders. Environmental Economics and Policy Studies, 25(1), 63-85.
Olita, T. (2019). Investigating the potential of insurance as a mechanism to enhance the performance of risky conservation tenders. [Doctoral Thesis, The University of Western Australia].
Pannell, D. and Crawford, M. (2022). Challenges in making soil-carbon sequestration a worthwhile policy, Farm Policy Journal, Autumn 2022.
Pannell, D. (2021). Soil Carbon Policy Faces Big Challenges. EuroChoices, 20(2), 46-47.
Pannell, D., & Rogers, A. (2022). Agriculture and the Environment: Policy Approaches in Australia and New Zealand. Review of Environmental Economics and Policy, 16(1), 126-145.
Rolfe, J., Schilizzi, S., & Iftekhar, M. S. (2022). Increasing environmental outcomes with conservation tenders: The participation challenge. Conservation Letters, 15(3).
Skurray, J. and Pannell, D.J. (2012). Potential approaches to the management of third-party impacts from groundwater transfers, Hydrogeology Journal 20(5), 879-891.
Skurray, J., Pandit, R. and Pannell, D.J. (2013). Institutional Impediments to Groundwater Trading: the case of the Gnangara groundwater system of Western Australia, Journal of Environmental Planning and Management 56(7), 1046–1072.
Skurray, J., Roberts, E.J. and Pannell, D.J. (2012). Hydrological challenges to groundwater trading: lessons from south-west Western Australia, Journal of Hydrology. 412-413, 256-268.
Thamo, T. and Pannell, D.J. (2016). Challenges in developing effective policy for soil carbon sequestration: perspectives on additionality, leakage, and permanence, Climate Policy 16, 973–992.
Thamo, T., Pannell, D., Kragt, M., Robertson, M. and Polyakov, M. (2017). Dynamics and the Economics of Carbon Sequestration: Common Oversights and their Implications, Mitigation and Adaptation Strategies for Global Change 22(7): 1095-1111.
ARC’s Discovery Projects:
Designing for uncertainty in conservation auctions
ARC’s DECRA projects:
Using improved markets to reduce over-extraction of groundwater
Australian Research Council