Tradable property / use rights for natural resources and the environment

Welcome to 2019! Two seemingly very different news stories caught my attention over the last few days. One was the big story about massive fish die outs in the Menindee Lakes and elsewhere in Western NSW.
The other was an obscure story about implementation of a tradable permit scheme to encourage production of electric vehicles in China.
A lot has been written and said about the Menindee Lakes incident, so I am just going to add few things. Firstly, while obviously linked to the wider Murray-Darling problem , the immediate cause of the Menindee incident was not so much about water quantity problems, but rather water quality issues. There seem to have been an algal bloom event, triggered by high temperatures and by high nutrient concentration in the water. These nutrients typically come from agriculture, as residues from phosphate and nitrogen fertilisers that runoff or leach. As nutrients build up in the water, algae start developing, and as algae die out they deplete the dissolved oxygen, which in turn causes suffocation of the fish, and hence the fish die. Now, the problem of nutrient water pollution is exacerbated by the lowering water volumes. The occurrence of algal blooms is more likely and more severe when it happens in a water body diminished in size, compared to a water body that is full. We researched this very issue in the case of the Warragamba Dam near Sydney, and we showed that how full or empty a water body is matters enormously for nutrient pollution and for the optimality of the efforts for its abatement. The paper was presented at last year’s World Congress of Environmental and Resource Economics in Gothenburg, Sweden (; search for ‘Ancev’) and is currently in preparation for submission to a journal.
Secondly, the Menindee incident was rightly linked to the overall Murray-Darling Basin situation, and specifically, to the MDB plan. Two points about this: one, a brand new paper by Quentin Grafton that provides detailed policy analysis of the MDB has just appeared in AJARE (also available on Researchgate). It is a comprehensive review, and pinpoints the key problems in the MDB that need to be rectified.
My second point, which kind of links to the Chinese electric vehicles story, is that the water reform in the MDB has been fundamentally based on the establishment of strong and tradable water use rights. Having well defined and tradable property/use right on natural resources is a necessary prerequisite for efficient management of those resources, but as the Menindee incident teaches us, it is not a sufficient condition for good management.
Little is known about the new Chinese rules around the support of electric vehicles, but it seems that there will be no new approvals for internal combustion engine only automobile factories, and that carmakers will face a quota on minimum number of electric vehicles that they have to produce. This quota will be managed through tradable credits, so that a non-complying carmaker could purchase credits from another that has surplus credits. It’s an excellent example of how tradable permit rights (TPR) (in this case, it is effectively a TPR on emissions from automobiles with internal combustion engine) could be used to attain certain environmental and energy policy goals in an efficient way.
The principles of tradable permit rights are the same in the case of water rights in the MDB and in the case of the new Chinese electric car scheme: tradable permits create incentives for most efficient users to use the resources, or to provide most pollution abatement. This makes TPR powerful economic instruments for natural resource/environmental policy. However, it needs to be kept in mind that simply implementing a TPR is not going to solve the problem in its own right, but that other institutional and policy factors need to be present for a successful outcome. Unfortunately, we were shockingly reminded of that in a most stark way at Menindee last week!

Author: Tiho Ancev

Tiho Ancev is a Professor of Agricultural and Resource Economics in the School of Economics, University of Sydney. His main research areas are agricultural, environmental, natural resource and energy economics. Tiho’s main contributions have been in water economics and policy, economics of energy, economics of air pollution and climate change policies, and economics of precision agriculture and agricultural input use. He has published widely on these topics in top international peer reviewed journals. Tiho has led and contributed to national and international research projects in these research areas. He is currently the Managing Editor-in-Chief of the Australian Journal of Agricultural and Resource Economics.