The NZ Initiative's Eric Crampton on all things freshwater; the state of play, irrigation, quality, cap & trade, water management, prices & more

This week's Top 10 is a guest post from Eric Crampton, chief economist at the New Zealand Initiative.

As always, we welcome your additions in the comments below. If you're interested in contributing a Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

The government’s planning changes to freshwater management. Earlier this month, the government released consultation documents outlining its intended approach to improving freshwater quality. The government wishes to improve water quality, to provide better management regimes with a stronger role for local iwi, and to set water allocation regimes that recognise both the interests of existing users and of potential new users.

I’ve been doing a bit of work looking at freshwater policy as well and think there’s a lot of promise in the government’s approach. So this week’s Top 10 hits some of my favourites in water policy.

First up, we need a decent picture of the current state of play.

1) Massey University’s Brendan Moyle last year provided a Beginner’s Guide to Freshwater Policy in New Zealand. It explains the roles of regional councils, central government, the Resource Management Act, the 2014 National Policy Statement on water quality and what the National Government’s Clean Water Package meant for swimmable rivers.

2) For another picture of the state of play, we can look to Koordinates’ thorough mapping of New Zealand’s irrigated land area, as of 2017. Canterbury’s deep blue is no surprise, but would you have guessed the extent of irrigation around Blenheim and Napier? The Ministry for the Environment’s version of the map goes into more depth about the types of irrigation in use.
 

3) Neither of those mention New Zealand’s innovation in improving freshwater quality: Taupo’s nutrient management scheme. Nitrogen emissions around Lake Taupo are capped and consented. Farmers can trade their nitrogen consents with each other. Why does that matter? Tradeable permit regimes let farmers profit by reducing emissions. On-farm improvements in practice that reduce a farm’s nitrogen emissions let the farmer sell nutrient emission permits to others. Motu’s research note covered the basics of Taupo’s cap-and-trade regime while its report went into rather greater depth.

Cap and trade?

4) The first substantial application of cap-and-trade was in America’s Acid Rain Programme in the 1990s. Sulphur dioxide emissions, mostly from coal-fired power generation plants, acidified rain and harmed lakes. The Acid Rain Programme capped total sulphur dioxide emissions, allocated emission allowances to companies mostly based on their historic emissions, then let them trade emission permits. America’s Environmental Protection Agency recommends this summary of thirty years’ experience with cap-and-trade.
 

5) The politics of getting to cap-and-trade for sulphur dioxide were difficult. Smithsonian Magazine provides an excellent summary of both the scheme, and of the politics behind it.

The basic premise of cap-and-trade is that government doesn’t tell polluters how to clean up their act. Instead, it simply imposes a cap on emissions. Each company starts the year with a certain number of tons allowed—a so-called right to pollute. The company decides how to use its allowance; it might restrict output, or switch to a cleaner fuel, or buy a scrubber to cut emissions. If it doesn’t use up its allowance, it might then sell what it no longer needs. Then again, it might have to buy extra allowances on the open market. Each year, the cap ratchets down, and the shrinking pool of allowances gets costlier. As in a game of musical chairs, polluters must scramble to match allowances to emissions.

Getting all this to work in the real world required a leap of faith. The opportunity came with the 1988 election of George H.W. Bush. EDF [Environmental Defence Fund] president Fred Krupp phoned Bush’s new White House counsel—Boyden Gray—and suggested that the best way for Bush to make good on his pledge to become the “environmental president” was to fix the acid rain problem, and the best way to do that was by using the new tool of emissions trading. Gray liked the marketplace approach, and even before the Reagan administration expired, he put EDF staffers to work drafting legislation to make it happen. The immediate aim was to break the impasse over acid rain. But global warming had also registered as front-page news for the first time that sweltering summer of 1988; according to Krupp, EDF and the Bush White House both felt from the start that emissions trading would ultimately be the best way to address this much larger challenge.

It would be an odd alliance. Gray was a conservative multimillionaire who drove a battered Chevy modified to burn methanol. Dan Dudek, the lead strategist for EDF, was a former academic Krupp once described as either “just plain loony, or the most powerful visionary ever to apply for a job at an environmental group.” But the two hit it off—a good thing, given that almost everyone else was against them.

…

“Almost 20 years since the signing of the Clean Air Act of 1990, the cap-and-trade system continues to let polluters figure out the least expensive way to reduce their acid rain emissions. As a result, the law costs utilities just $3 billion annually, not $25 billion, according to a recent study in the Journal of Environmental Management; by cutting acid rain in half, it also generates an estimated $122 billion a year in benefits from avoided death and illness, healthier lakes and forests, and improved visibility on the Eastern Seaboard. (Better relations with Canada? Priceless.)”

“In 1968, John H. Dales, an obscure Canadian economics professor, came back from a sabbatical determined to write a book that would lay out a new approach to solve the problems of pollution.

He was weary of industries arguing how their emissions did very little harm to the environment. He was equally weary of environmental groups presenting themselves as the forces of good in a battle against greed and evil.

Dales, a modest, soft-spoken man, started out his book, "Pollution, Property & Prices," by saying it contained "virtually no factual information and very little in the way of outraged denunciation of evil."

It was a purely academic exercise for Dales, who died in 2007 after a lengthy illness. As far as he knew in 1968, when his book was first published by the University of Toronto Press, the ideas he presented were not likely to go very far. Friends describe Dales as a thinker, definitely not a promoter.

Yet this was not a modest proposition. It was the beginning of what we now call "cap and trade." Dales invented a market where companies traded government-issued permits granting them rights to emit a certain amount of pollutant, permits that gradually declined over time. While few people recall the paternity of this idea, 43 years later cap and trade is rapidly spreading around the world as a useful and politically palatable tool to limit emissions of gases that cause climate change.”

7) The same kind of system has been applied to water management in rather a few countries. In places where water is scarce, caps can be placed on the total amount of water drawn, permits issued for drawing water, and trading facilitated. Peter Debaere and co-authors survey water markets in Northern Colorado, Texas, the Murray-Darling Basin in Australia, and Chile. The environmental gains come from the caps. Trading makes it easier to achieve any of the caps, which also opens up opportunities for tighter caps than might otherwise be possible. Terry Anderson’s book on water markets also provides excellent background.

8) Canterbury already has something approaching a cap and trade system for water. Water resource consents issued by regional council can be traded at HydroTrader. But trading is difficult. Buyers and sellers need to have their proposed trade approved by regional council, after an assessment of effects on the environment. Former Canterbury University Senior Lecturer (now with the RAND Corporation) John Raffensperger, with Canterbury colleague Mark Milke, developed a smart market system that could substantially simplify trading by making environmental considerations an automatic part of the trading platform. I’m rather a fan of it.

9) Do prices really encourage conservation? You’d better believe it. When Kapiti began charging for residential water use at a metered rate, water use dropped by 26%. Kapiti combined water charges with rates remission for low-income large families, avoiding potential equity issues. Now imagine what could happen if agricultural and urban water users in a combined catchment could trade water with each other.

Councils able to achieve reductions in water use by fixing leaking pipes or by implementing water metering could sell water back into the system. Funds raised could defray other rates increases, cover the cost of fixing the leaky pipes, or both. And if urban and rural waste emissions were put into the same cap-and-trade regime, councils might find it worthwhile to fix leaking sewer pipes. Urban water is far from pristine.

10) Finally, one fun thing: Gisborne’s Rere Rockslide. National Geographic visited it earlier this year and provided this video. I can’t wait to get the kids out there to try it.