Sustainable Development of New Zealand Agriculture and Forestry
Application of sustainable development
Maintaining the life-sustaining capabilities of the biophysical environment and applying the previously discussed core economic governance model are necessary but not sufficient conditions of sustainable development. Other necessary conditions include guiding principles, robust underpinning science, technical solutions and tools that can be applied, and the socio-economic incentives to motivate their application. Sustainable development policies have often failed in the past because one or more of these key requirements has been missing. Therefore, MAF's approach to sustainable development and its scope and the above economic governance model for sustainability must be translated into practice through the integrated use of:
- guiding principles;
- underpinning biophysical science;
- technical solutions and tools;
- socio-economic tools.
Guiding principles
Sustainable development guiding principles can be primary or secondary. Primary principles are those principles that are widely applicable to sustainable development issues and that tend to be inviolable. That is, they should not generally be compromised or traded off. Secondary principles are those that give guidance on specific domain or context-dependent issues and may not have a wider application outside of that context. Secondary principles may need to be customised or modified to work effectively in specific situations. In some cases, they may be compromised or traded off.
Primary principles
Primary principles flow from the core assumption that sustainable development is about the relationship between the biophysical environment and the natural resources drawn from that environment to meet the wider socio-economic needs and aspirations of people now and for future generations.
Inviolability of the life-sustaining capabilities of the biophysical environment
The life-sustaining capabilities of the biophysical environment (for example, core genetic resources, climate and atmosphere functioning) must be seen as inviolable "bottom lines". This has many implications, including the need to commit to effective and efficient international agreements to address threats to the global biophysical environment such as depletion of the ozone layer and climate change.
Legitimacy of human modification of the environment
This principle legitimises human modification of the natural environment and natural processes, and therefore mandates sustainable development itself. It contrasts with one version of "the naturalistic fallacy" - the view that nature is always perfect. This principle also demystifies biodiversity and places it in the context of the human-focused nature of sustainable development.
Nature and natural processes are not always optimal in a sustainable development context. Likewise, approaches to biodiversity should focus not on its maximisation but on the role of biodiversity in optimal ecosystem functioning, in the provision of environmental services and in maintaining long-term "option value".
Precautionary approach
The precautionary approach holds that where there is a threat of serious or irreversible environmental or other damage, the lack of full scientific certainty should not be used as a reason for postponing measures to prevent it. This precautionary approach contrasts with, for example, the World Trade Organization Agreement on the Application of Sanitary and Phytosanitary Measures (the SPS Agreement) principles where evidence of actual (rather than hypothetical potential) risk is required before measures such as technical barriers to trade can be implemented. The precautionary approach must be used sparingly and prudently in association with cost-benefit analysis to ensure it is not applied where the damage that might occur is not especially serious or irreversible. The precautionary approach provides important guidance in sustainable development, provided "scope creep" and "cry wolf" behaviours are avoided. It needs to be complemented by assessments of the appropriate levels of risk that should be borne, and by the principle of relativity.
Relativity
Sustainable development is not based on absolutes but on relativities. Sustainable development issues typically involve competing priorities and choices between relativities - for example, pollution can never be completely eliminated, and some minor externalities may never be effectively addressed and may have to be accepted. Relativity recognises that risk cannot be eliminated but is rather relative to probabilities and to the magnitude of potential harm. It also implies that there is some very limited right to pollute in the sense that human activities invariably cause some level of pollution or other negative effects that have to be accepted.
Vesting decision-making in those in a position to optimise resource allocation
Sustainable development has to work locally and in the real world. Sustainable development decision-making should as far as possible be located with those who have the best information on which to act and who are most likely to bear the costs and benefits of their decisions.24
Obligations should not be imposed on people without the ability to meet them
Those required to address a sustainable development issue such as a negative externality should have available to them the tools to do so. This in turn requires some focus on ensuring that the appropriate tools are developed.
Secondary principles
Secondary principles need to be tailored to the particular problems being addressed in a fit-for-purpose way. They tend to be starting points rather than absolutes, and may have to be modified due to circumstances. There often needs to be careful consideration of how the principles relate to and modify each other and how they are applied in different contexts.
Externalities should be addressed preferably through voluntarily contracted property rights-based solutions
Economic theory (Coase, 1960) proposes that where there are well-defined property rights relating to an environmental phenomenon, no transaction costs and no wealth effect then the outcome of bargaining between relevant parties will be Pareto optimal (meaning it is not feasible to change the outcome in such a way that someone is made better off and no one is left worse off). Inability to reach an agreement through bargaining is an indication that the transaction costs are too high to motivate the establishment of a market in the phenomenon. This in turn suggests that the absence of an agreement may be socially optimal, including a level of pollution or other negative externality being acceptable. However, a Coasean property rights approach may fail where there are more than two parties to negotiate with and transaction costs therefore increase, or where there is asymmetric information.
Because of these limitations, the voluntary agreement and property rights approach to externality issues will apply in some but not all cases.
Externalities should be internalised to those who produce them
Externalities (both negative and positive) should be sheeted home to those who produce them (whether individuals or nation states). This principle is secondary not primary. This is partly because the transaction costs of addressing some externalities may be prohibitive, in which case the externalities may have to be accepted. Also, the "polluter pays" principle is about equity rather than resource allocation efficiency, which would have to encompass the minimisation of efficiency losses including any transaction costs likely to be incurred.
Upholding private property rights
Personal autonomy and the inviolability of private property rights is an important societal principle consistent with optimal resource allocation. However, it is issue-specific rather than more universally applicable, and private property rights may need to be violated in particular exigencies, for example, where the public good is paramount.
Compensation for regulatory takings
Compensation for regulatory takings reflects common law principles and guards against predatory activity by government and "fiscal illusion".25 However, a critical requirement is to specify property rights in ways that allow markets to work efficiently while allowing the future evolution of a property rights regime that accommodates new knowledge, new values and new forms of property right. For example, improved water allocation may occur by vesting in individuals' specific water use rights, with the stipulation that the right may be modified over time in the light of better understanding of the hydrological cycle or the size and rate of replenishment of a groundwater resource. This suggests that a property right may need to be attenuated or (in extraordinary cases) even taken away without compensation for valid reasons. However, in such cases the initial property right specification could embody an explicit recognition of risk and therefore the market and resource allocation could adjust accordingly.
No retrospectivity in legislation
In principle, people should not be punished for action they took or investment they made lawfully in a past time period. Therefore, legislation and regulation should not have retrospective effects. However, it may be inappropriate to totally ban retrospective effects in legislation and regulation because retrospective environmental regulation may come about because of a combination of increased knowledge and a need to manage cumulative effects. Prohibiting retrospectivity entirely might encourage extreme caution on the part of regulatory agencies in their a priori decision-making. This may have the perverse effect of decreasing the certainty of property or use rights still further, for example, issuing of extremely short-term resource use consents leading to suboptimal investment decisions being made. In some cases, society may need to compensate or at least co-fund the costs incurred when legislation or regulation has a retrospective effect.
Continuity
Resource use and investments made reflect the rules, understanding and technological opportunities that existed at the time. Sustainable development should aim to avoid radical and unplanned disruptions to both ecosystems and to people's lives and businesses. So, changes in farm systems to address problems such as water quality or greenhouse gas emissions should, as far as possible, be incremental and evolutionary rather than require a total redesign of farm systems. This means that radical resource-use changes required by regulation, as an example, may need to involve compensation or active assistance to deal with the cost of change.
Underpinning biophysical science
Understanding of sustainable development issues and effective decision-making requires sound science, systems thinking and robust biophysical datasets and indicators to track the essential life-sustaining capabilities of the biophysical environment. Sustainable development policies and practice must be evidence- and science-based, not driven by inadequately informed public, media or political opinions.
The biophysical sciences must be applied in an integrated and systems-based way. For example, it may not be possible to address nitrogen in the environment without understanding the role of carbon and of hydrological processes, and water quality cannot be addressed without understanding the role of soil.
Technical solutions and tools
Technical solutions and tools make it possible to address sustainable development problems in a practical and economic way, for example, new fertiliser technology that prevents excess nitrates seeping into groundwater. Such technical solutions will often boost productivity as well as reduce environmental harm. Good examples that have achieved both economic and environmental benefits include integrated pest management in pipfruit and biological control of glasshouse-crop pests.
Two important priorities for MAF will be ensuring it has direct links to crown research institutes and other science providers, and influencing these providers to deliver technical solutions and tools to farmers, foresters and other resource managers, as well as serving the needs of central and local government agencies.
Socio-economic tools
Sustainable development requires a "tool box" of socio-economic tools that can be applied in practical applications and that aim to create incentives for behavioural change. Key socio-economic tools include:
- tools to assess and manage risk;
- property rights and contracts;
- taxes and subsidies;
- prescriptive legislative and regulatory interventions;
- education, awareness and promotion initiatives.
These tools are often complements rather than substitutes. For example, economic instruments such as property rights, taxes and subsidies typically need legislative and regulatory underpinning, and many complex issues need multiple tools (for example, combinations of economic incentives and prescriptive regulation) to be applied. High-quality information is needed for market-based and regulatory interventions to be effective.
The structure of government may impact on the choice of instruments to apply. For some centrally driven sustainable development policies the operational practice may be devolved to local government, together with a flexible mandate on how it delivers on a centrally prescribed desired outcome. However, this can lead to inconsistency, for example, because of information asymmetry resulting from the arms-length relationship between policy (central government), regulatory delivery (local government) and land and resource owners and managers. This may mean that central government directions to local government may need to be prescriptive to ensure consistency, however, this can erode the operational flexibility needed to optimise outcomes.
Tools to assess and manage risk
Risk cannot be fully eliminated and therefore needs to be managed. Commonly, new risks are subject to more stringent regulation than old ones. For example, new species that were accepted biosecurity risks a hundred years ago (for example, kiwifruit) might well be banned from importation today. Related to this, legal and regulatory protection for existing uses (for example, a Historic Places Trust building) typically is much stronger than protection of a possible future use of a site or building. It is difficult to treat old and new risk equally because individuals and communities have typically already arranged their affairs and behaviours around old risks and there is less flexibility than would apply to new ones.
One means of managing risk is a "suite approach", for example, in the case of biodiversity, by maintaining governance arrangements and tools ranging from wilderness areas and national parks through to Queen Elizabeth the Second National Trust sites and private voluntary action.
Property rights and contracts
Defining property rights creates transparency in resource ownership and in the attribution of both positive and negative externalities, and creation of incentives for efficient resource management and addressing of externalities.
A fundamental theorem in welfare economics is that Pareto optimality26 is achieved in a competitive equilibrium where all goods can be assigned property rights and therefore be traded, no individual and no organisation can affect prices, producers maximise their profits, consumers their utility and all markets clear.
4. The above suggests that all we have to do is assign wealth and property rights and the market allocation mechanism will achieve optimality. However, a property rights approach will fail where there are excessive transaction costs and where it is impossible, for example, to identify the sources of pollution or other externalities. For these and other reasons, taxes, subsidies and legislative and regulatory interventions may be appropriate.
Taxes and subsidies
Pigovian taxes aim to bring market prices in line with social values. They may be more effective than quotas as they prevent capture of resource rents and give greater incentive to exploit resource-saving technological innovation. Pigovian taxes may be able to achieve a "double dividend", for example, through recycling of revenue, though there is technical debate over the effects of this in practice.
Prescriptive legislative and regulatory interventions
Prescriptive legislative and regulatory interventions range from regulation of production processes, of land use and of waste emissions.
Farming and other practices have different environmental impacts on different sites, and farmers face different abatement costs. Effective regulation recognises local differences rather than taking a one-size-fits-all approach. Prescriptive regulation may fail to address differences in abatement costs. It therefore may not minimise the costs of achieving a target total reduction in a pollution problem. Prescriptive regulation may provide no incentive to pursue further reductions in pollution beyond levels required for compliance. Prescriptive legislative and regulatory interventions often set bottom lines or floors and don't create any incentive to lift standards beyond that. The effectiveness of standards may also be undermined by changes in technology or new entrants to an industry.
The use of regulation to achieve an outcome may appear cost free, however, this may reflect fiscal illusion by imposing costs that are either hidden or transferred from government to other parties, in so doing distorting resource allocation and creating perverse incentives.
However, regulation can achieve greater certainty over behaviour and therefore of likely outcomes, and can do so in a transaction cost-efficient and equitable way. Regulation can drive innovation and technological change. In some cases it may allow new sustainable technologies to achieve a critical mass and widespread adoption. Regulation is therefore always likely to be a key part of effective environmental and natural resource management.
Regulatory interventions should be outcome-oriented and be supported through cost-benefit analysis. This analysis in many cases could aim to identify the prices that would have emerged if voluntary transactions were possible and had been entered into.
Education, awareness and promotion initiatives
Education, awareness and promotion initiatives can change behaviour to contribute to sustainable development, and should form part of a wider sustainable development policy and strategy.
Contact for Enquiries
Peter Winsley
Director
Strategy Development
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Tel: +64 4 894 0682
Fax: +64 4 894 0746
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