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Approaches to Managing Nutrient Emissions in the Macalister Irrigation District

February 2008

EXECUTIVE SUMMARY

INTRODUCTION
- MACALISTER IRRIGATION DISTRICT
- IRRIGATION
- NUTRIENT MANAGEMENT
BACKGROUND
- CONCEPTUAL FRAMEWORK
- METHODS
METHODS
- Objective 1: Key assumptions
- Objective 2: Identify strategically critical information gaps
- Objective 3: Additional policy responses
FINDINGS FROM THE FIRST STAGE
- IRRIGATION BEST MANAGEMENT PRACTICES
- - Landholder responses
  - Organisational implications
  - Conclusion
- FERTILISER MANAGEMENT
- - Conclusion
- DAIRY EFFLUENT MANAGEMENT
- - Landholder responses
  - Organisational implications
  - Conclusion
- DRAINAGE MANAGEMENT OPTIONS
- - Landholder responses
  - Organisational implications
  - Conclusio
- CRITICAL DYNAMICS INFLUENCING NUTRIENT EMISSIONS IN THE MID
- - Changing reliability of water supply
  - Changing Landuse
  - Level of Control
  - Organisational Environment
  - Social Norms
- MARKET IN EMISSION PERMITS
RESULTS OF THE SECOND STAGE
CONCLUSION
REFERENCES

APPENDIX A: THE POLICY INSTRUMENT CHOICE FRAMEWORK

AN OVERVIEW OF THE POLICY INSTRUMENT CHOICE FRAMEWORK AND A WORKED EXAMPLE OF WHOLE FARM PLANNING IN THE NORTHERN IRRIGATION REGION
- Introduction
- Overview of Framework
- A worked example - Whole Farm Planning

APPENDIX B: APPLICATION OF THE POLICY CHOICE FRAMEWORK

IRRIGATION BEST MANAGEMENT PRACTICES
- Application of the PCF to irrigation management
FERTILISER BEST MANAGEMENT PRACTICES
- Application of the PCF to fertiliser best management practices
DAIRY EFFLUENT MANAGEMENT
- Application of the PCF to dairy effluent management

DRAINAGE MANAGEMENT

Application of the PCF to drainage management

APPENDIX C: EMISSIONS MARKET

NUTRIENT EMISSIONS MARKET
- A ‘cap and trade’ approach
- A market in phosphorus emission permits
CONCLUSION

Executive summary

The Gippsland Lakes Taskforce (GLT) engaged Practice Change Research to use the Policy Choice Framework (PCF) to identify opportunities for refining the policy instruments currently supported by the GLT to reduce nutrient emissions from the Macalister Irrigation District (MID) into the Gippsland Lakes. The PCF is a systematic method for selecting policy instruments to achieve natural resource outcomes that integrates research in the fields of economics, landholder decision making and behaviour, and organisational behaviour.

The study was delivered in two stages. The first stage was the application of the PCF to identify policy instruments for managing nutrient emissions in the MID and comparison of the results with the policy instruments supported under the Macalister Irrigation District Nutrient Reduction Plan. This stage involved reviewing relevant literature and discussions with key informants. The policy measures considered in this study included irrigation BMPs, fertiliser BMPs, effluent management and drainage management. The findings from the first stage were validated and refined in the second stage. This involved conducting in-depth personal interviews with landholders and key informants from a range of relevant organisations.

In addition the steering committee requested that the project team to:

Provide an opinion on the dynamics of variables that have the potential to affect the achievement of MID NRP targets.
Consider the issues surrounding a cap and trade market if the focus of the program were to shift to focus on the total load of phosphorous emitted in the MID.

The principal findings were as follows and were based on the assumption that the emphasis in reducing nutrient emissions is to change the timing of nutrient rich, low-flow emissions in summer.

Irrigation management

The application of the PCF to irrigation management resulted in the conclusion that regulation of irrigation through the development of enforceable technology standards may achieve greater reductions in nutrient emissions than the current program of extension and incentives, by compelling change in irrigation technology and management practices in situations where the private benefit of change is not sufficient to motivate voluntary adoption. However, to be feasible these standards would need to be flexible in order to accommodate the differences in farm contexts in the MID that influence the suitability of irrigation technologies. To reduce the likelihood of unfavourable reactions from landholders such standards could be introduced in an incremental, consultative fashion over a negotiated period of time. The risk of unfavourable reactions from landholders may also be reduced if the introduction of standards were accompanied by incentives. The regulation of irrigation technologies and associated practices could be supported by incorporating appropriate guidelines into IFPs.

The implementation of technology based standards for irrigation management would be an architectural change to the policy instruments used to influence irrigation management. Architectural innovations can render existing competencies, knowledge, processes, procedures and even organisational structures in agencies obsolete. Architectural innovations can also challenge fundamental organisational values. This suggests that the introduction of technology standards could trigger major organisational change in the agencies involved in their implementation. Such changes may require major investments in redeploying organisational resources and the acquisition of new skills and competencies. Implementation of such changes would also require a degree of sensitivity, cooperation and trust among the agencies involved. Consequently a staged approach to implementation of technology standards may be required, not only to increase acceptance among landholders, but also to provide agencies with adequate time to establish appropriate structures, skills and competencies.

Fertiliser management

The application of the PCF to fertiliser management resulted in the conclusion that the existing program of voluntary adoption of best practices for fertiliser management by landholders and a code of practice for fertiliser services, and promotion of these by extension, doesn’t call for change.

Effluent management

With respect to effluent management the results of the study indicated that the development of technology standards may support existing effluent regulations to achieve greater reductions in nutrient emissions. Such technology standards would need to be accompanied by process based standards to ensure effluent systems were managed appropriately. To be feasible these standards would need to be flexible in order to accommodate the variety of farm contexts in the MID.

The risk of unfavourable reactions from landholders may be reduced if such standards were accompanied by the provision of an effluent system inspection and liquid waste disposal service. Standards for effluent system technologies and practices could be incorporated into processes such as IFPs.

The implementation of technology and process standards would represent a modular change in the current regulation of dairy effluent. Delivery of technology and process standards for effluent management would probably require the acquisition of new skills, competencies, processes and procedures by agencies and may present challenges for affected sections of agencies with respect to their organisational values. This suggests the agencies involved would need to invest in developing appropriate skills, competencies, processes and procedures to implement technology and process standards for effluent management. This need would be increased if a system monitoring and effluent disposal service were implemented.

Drainage management

With respect to drainage management the application of the PCF resulted in the conclusion that extension activities to promote and facilitate the adoption of drainage management options were probably not required. The provision of incentives specifically for drainage management was also considered unnecessary because diversion of drainage flows create sufficient private benefit to motivate rapid voluntary adoption. Automation of regional irrigation infrastructure is likely to reduce drainage flows in the future and interest in drainage diversion by landholders.

To improve the effectiveness of drainage management, agreements and licences could include conditions relating to the installation of appropriately sized storage systems. This is an incremental change in policy and could be implemented using existing organisational skills and knowledge.

Critical dynamics

Agriculture in the MID is operating in a rapidly changing environment. Climate change, evolving water and natural resource policy, and international markets are all fundamentally changing the context for landholders in the MID. In the shorter term the modernisation of the regional irrigation infrastructure is likely to have profound consequences for reducing nutrient emissions in the MID.

Modernisation may increase the reliability of delivery of irrigation water to landholders which may allow landholders to voluntarily invest in technological innovations that reduce the volume of irrigation runoff and reduce nutrient emissions. Modernisation will also reduce system outfalls and therefore flows in the regional drainage system resulting in lower nutrient emissions.

Declines in the volume and variability in drainage flows means diversion by landholders may eventually become unnecessary. Presumably, the impact on nutrient rich emissions of landholders abandoning diversions in response to reduced flows in drains will be offset by the reduced flows themselves.

Emissions market

In principle, a cap and trade market in nutrient emissions could be established for landholders in the MID. Experience has shown, however, that the establishment of an emission markets is a major challenge requiring the investment of considerable resources over a number of years. The challenge lies in two key areas. The first is the difficulty and expense of measuring or modelling nutrient emissions from farms. The second is the need for major changes in organisational skills, competencies, processes and structures in order to establish and monitor a cap and trade market. Given these considerations we concluded that a cap and trade emissions market may be worth considering in the future should the policy emphasis on reducing emissions shift to reducing the nutrient load entering the Lakes.

Conclusion

Application of the PCF did identify opportunities to consider in order to improve on the policy instruments to reduce nutrient emissions from the MID into the Gippsland Lakes. Primarily these were the possible regulation of irrigation management through the development and enforcement of technology standards, and the development and enforcement of technology and process based standards to support regulation of effluent management.

1. Introduction

The DPI Practice Change Research team was engaged by the Gippsland Lakes Taskforce (GLT) to use the Policy Choice Framework (PCF) to identify opportunities for improving on the policy instruments currently employed by the GLT for reducing nutrient emissions from the MID into the Gippsland Lakes. The PCF is a systematic method for selecting policy instruments to achieve natural resource outcomes that integrates research in the fields of economics, landholder decision making and behaviour, and organisational behaviour (Johnson et al. 2006; Kaine et al. 2007).

The PCF has only been applied to nutrient reduction targets for the Gippsland Lakes. The research team was aware that natural resource management agencies were pursuing a number of natural resource objectives in addition to reducing nutrient emissions through their policies and programs. However, the focus of this study was reducing nutrient emissions hence the assessment of policy instruments in regard to these other objectives was beyond the scope of this study. This needs to be borne in mind when considering the findings presented in this report.

The project was delivered in two stages. The first stage was the application of the PCF to identify policy instruments for managing nutrient emissions in the MID and comparison of the results with the policy instruments supported under the Macalister Irrigation District Nutrient Reduction Plan (MID NRP) (Southern Rural Water 1998). This stage involved reviewing relevant literature and discussions with key informants.

The objectives for the first stage of the study were to identify the assumptions that underpin the policy instruments used to reduce phosphorus emissions from the MID and make suggestions to the project steering committee in regard to:

The appropriateness of assumptions in light of current context and desired practice change.
Identifying any information gaps that were strategically critical to the successful implementation of policy instruments.
Identifying if there were any additional policy responses and activities that could enhance the ability of meeting nutrient reduction targets.

The findings from the first stage were reported to the project steering committee for their study (Johnson et al. 2007). In light of the initial findings the steering committee directed that the findings from the first stage be validated and refined. This involved conducting in-depth personal interviews with landholders and key informants from a range of relevant organisations. Consequently, the objectives for the second stage of the study were to:

Explore with landholders and key informants agreed information gaps that were critical to the successful implementation of the additional policy instruments.
Investigate the potential for additional policy instruments to enhance nutrient reduction targets by accounting for landholder and agency responses.

In addition the steering committee requested that the project team:

Provide an opinion on the dynamics of variables that have the potential to influence achievement of MID NRP targets.
Consider the issues surrounding a cap and trade market if the focus of the program were to shift to focus on the total load of phosphorous emitted in the MID.

A summary of the findings of the first stage together with the findings and conclusions from the second stage of the study are reported here.

The next section of this report contains a description of nutrient emissions in the context of the MID and the Gippsland Lakes. This is followed in section two by a description of the methods used in the study. The third section contains a summary of the findings of the first stage of the study which includes options for modifying the policy instruments currently employed by the GLT for reduce nutrient emissions from the MID into the Gippsland Lakes. In the fourth section the results of the second stage of the study are reported and discussed. This includes the reactions of landholders and organisations to the policy options and consideration of the key issues identified by the project steering committee for the study. The report is concluded with a discussion of the implications of the findings of the study for policy instruments in regard to reducing nutrient emissions in the MID.

The appendices contain a description of the PCF, details of the application of the PCF to identify policy instruments to influence the irrigation practices, fertiliser practices, dairy effluent management and drainage management options, and a discussion of the issues associated with establishing a nutrient emissions market.

2. Background

Macalister Irrigation District

The Gippsland Lakes provide significant environmental, social, and economic value to the Gippsland region. Within the Gippsland region the Lakes and Corner Inlet are recognised as wetlands of international significance under the Ramsar Convention (WG CMA 2004). Agriculture in the MID and the surrounding catchments of the Avon, Macalister, Thomson, and Latrobe Rivers discharge nutrients into Lake Wellington which then flow into the Gippsland Lakes. Export of nutrients from the MID, primarily total phosphorus, has been recognised as a major contributing factor to increase the risk of algal blooms in the Gippsland Lakes (Southern Rural Water 2007b). Agriculture in these catchments is quite diverse, consisting mainly of irrigated dairying and, to a lesser degree, dryland sheep and beef farming (GHD 2006).

The MID is located in central Gippsland and covers an area of 60,133 hectares with an irrigated area of 39,500 hectares. The MID is the largest irrigation scheme south of the Great Dividing Range and covers 30 drainage sub-catchments that flow into the Avon, Macalister, Thomson or Latrobe rivers, or directly into Lake Wellington (Southern Rural Water 2007b). The topography of the region ranges from undulating areas characterised by short steep catchments to comparatively flat flood plains. Approximately 50 per cent of the MID has light porous soils.

Dairying is the major agricultural enterprise in the MID with approximately 500 dairy farms occupying 85 per cent of land in the District (GHD 2006). Phosphorus leaving the MID is derived largely from farm fertiliser use and dairy waste discharges and soil erosion (Southern Rural Water 2007b) which enter the drainage system through runoff. Commercial vegetable growing is a relatively new industry in the MID - currently using less than five per cent of irrigated land. Favourable soil types provide considerable scope for an expansion of the vegetable industry in the MID in the future (Southern Rural Water 2007a).

The loss of phosphorous to the waterways is the result of a combination of source and transport factors (WG CMA 2007). Consequently, policy measures aimed at reducing phosphorus emissions from the MID and improving water quality in the Gippsland Lakes must influence both the sources and transportation of phosphorus.

Irrigation

The MID is a rain shadow area and rainfall provides approximately 50% of total plant water requirements. Landholders irrigate to supplement rainfall using a range of sources of water namely irrigation supply, groundwater and drainage water. Since 2002, water allocations have averaged around 3ML/ha with some sales water being available six out of the last ten years. In recent years dry weather conditions have meant that the volume of water available for irrigation has declined and become more variable. In addition, the cost of accessing other sources of water has increased with groundwater resources becoming fully allocated while, at the same time, drainage diversions have become increasingly unreliable. Key informants believed that water entitlement would be worth $2000 ML if they could be traded permanently. Most of them also stated that the most common method for improving the security of irrigation supplies was to buy land with an attached water entitlement and transfer the water to their most productive pastures.

In 2002 Southern Rural Water (SRW) changed the way seasonal allocations of irrigation water were made. Previously, SRW calculated seasonal allocations based on the volume of water already in Lake Glenmaggie and predicted inflows using data on historic inflows. The change means seasonal allocations are based on the actual volume of water in storage and actual inflows rather than predicted rainfall and inflows. The new allocation method distinguishes between the phases when Lake Glenmaggie is filling, spilling and emptying. As the storage levels in Lake Glenmaggie are increasing (i.e. the filling phase) SRW increases and declares its seasonal allocation to irrigators. If Lake Glenmaggie fills to capacity and spills, all water already used for irrigation and all water subsequently used, prior to the commencement of an emptying phase, is referred to as ‘spill entitlement’ (Southern Rural Water 2003). Spill entitlement is not deducted from irrigators’ allocation for that season. All water used during the emptying phase is deducted from the irrigators’ allocation for that season.

The characteristics of farms in the MID vary considerably and, as a consequence, a range of irrigation technologies and practices are employed on farms across the MID. The literature review and key informants indicated that the characteristics that had the greatest influence on irrigation technology and practice were soil texture, topography, reliability and capacity of irrigation supply, access to alternative water sources such as drainage diversion and access to three-phase power (Kaine and Bewsell 2001a; Kaine and Bewsell 2001b; Kaine and Bewsell 2002; Southern Rural Water 2007a).

The efficiency of the MID irrigation delivery system has been judged to be relatively low and has been considered to have constrained the adoption of improved irrigation technologies and practices (Southern Rural Water 2007a). Water delivery is characterised by relatively long order periods of up to three days, unreliable and inflexible delivery times, and rates of delivery that are generally low and variable throughout the District (Southern Rural Water 2007a). The MID 2030 planning framework introduced by SRW proposed upgrading the delivery system, increasing its reliability and minimising systemic water loss. The resulting improvements in the delivery of irrigation supplies is expected to support farm investment in technology that will maximise water use efficiency and minimise runoff into the regional drainage network (Southern Rural Water 2007a).

Nutrient Management

Algal blooms have had a detrimental impact on water quality, recreation and tourism in the Gippsland Lakes, and caused damage to the natural ecosystem (WG CMA 2007). A single algal bloom event was estimated to have cost the Gippsland community $8.5 million and resulted in the loss of 85 jobs in the region due to reduced tourism and unfavourable impacts on the beneficial use of the water (Southern Rural Water 1998). Typically, the occurrence of algal blooms under natural conditions would be sporadic and relatively localised in a naturally healthy ecosystem (PJ Hallows and Associates 1998).

Phosphorus was identified as the key nutrient contributing to the increased occurrence of algal blooms. An estimated 302 tonnes of phosphorus enters the Gippsland Lakes each year of which 188 tonnes per annum is contributed by the Latrobe, Thomson and Avon rivers (GHD 2006). It is estimated that 70 tonnes of the phosphorus contributed by these rivers is derived from the MID (GHD 2006). Water and nutrient losses from both dryland and irrigated agriculture contribute to the nutrients transported into the Lakes (GHD 2006).

While algal blooms occur naturally it has been found that that there is a relationship between reducing nutrients and reduced algal blooms in the Gippsland Lakes (WG CMA 2007). Grayson and Argent (2002, cited in WG CMA 2007) estimated that the MID contributes 16 per cent of total phosphorus emissions into the Gippsland Lakes despite representing only 3 per cent of the area of the catchments draining into the Gippsland Lakes. Most of the emissions from the MID are from irrigated agriculture and are transported to Lake Wellington through the regional drainage network. It is estimated that between 5 and 30 per cent of the phosphorus from farms is stored within the sediments of the drainage system and is mobilised during moderate to heavy rainfall events (WG CMA 2007).

Given that phosphorus emissions from the MID are proportionately greater than other areas of the Gippsland Lakes catchment the GLT has invested heavily in programs to reduce nutrient emissions from agriculture in the MID. The MID Nutrient Reduction Plan (MID NRP) was formulated to improve water quality and reduce the frequency of algal blooms in Lake Wellington (Southern Rural Water 1998). The aim in the original Plan was to reduce total phosphorus discharged from the MID by approximately 10.8 tonnes per annum by 2005, equivalent to 40 per cent of total emissions as estimated at that time (WG CMA 2007). While the target reduction in emissions has remained at 40 per cent of estimated emissions, estimates have changed over time as a result of improvements in nutrient monitoring and methods for calculating the nutrient base load. Currently, total emissions from the MID into the Gippsland Lakes are estimated to be 70 tonnes per annum. Hence the target of a 40 per cent reduction in emissions translates into a reduction of 28 tonnes per annum (GHD 2006).

The management of phosphorus emissions from the MID to reduce the incidence and severity of algal blooms in the Gippsland Lakes needs to achieve two outcomes, namely –

The total load of phosphorus that is emitted over the long term needs to meet the long term assimilative capacity of the Lakes; and
The timing of phosphorus emissions needs to align with short term variations in the assimilative capacity of the Lakes.

The total load of phosphorus emissions over the long term is determined by the net importation of phosphorus into the MID over and above natural inputs. For the MID the net importation of phosphorus depends primarily on the use of fertiliser, imported feed and the efficiency with which these are converted into marketable products such as vegetables, meat and milk.

The timing of phosphorus emissions is influenced by -

Farm management primarily in relation to methods of fertiliser application, drainage reuse, effluent management and the release of irrigation runoff from the farm;
The storage of nutrients in the sediment of the regional drainage system; and
Rainfall events that mobilise nutrient rich sediment stored in the regional drains.

At present the Taskforce supports a number of measures to reduce nutrient emissions through the Macalister Irrigation District Nutrient Reduction Plan (MID NRP). Broadly speaking these measures can be categorised as those that reduce irrigation runoff, those that reduce emissions of dairy waste, those that reduce fertiliser in run-off and those that increase diversion of drainage flows; hence they primarily influence the timing of phosphorus emissions. They were:

Irrigation Best Management Practices (BMPs) such as irrigation farm plans (IFPs), spray irrigation, and reuse systems.
Fertiliser BMPs such as scheduling of irrigation and fertiliser applications, and short watering.
Dairy effluent management such as extension of BMPs, regulation and enforcement by the EPA.
Management of flows in drains including heads of drains, drain diversion and drain harvesting.

We applied the Policy Choice Framework to each of these four categories of measures and the policy instruments that have been used to implement them. In the next section we describe the PCF and methods used in both stages of the study.

3. Methods

Conceptual framework

The Policy Choice Framework (Kaine, 2007) integrates a number of economic and behavioural frameworks to predict the likely responses of landholders and agencies to the implementation of policy instruments. Knowledge of these responses may be used by natural resource policy makers to assist them in choosing packages of policy instruments that may be more effective in influencing the behaviour of landholders and organisations.

The PCF contains six separate conceptual frameworks that are grouped in three broad stages (refer Figure 1 in Appendix A). The first stage contains frameworks that address the justification for public intervention and the technical feasibility issues that influence the initial selection of policy instruments on the grounds of economic efficiency (Pannell 2006). The frameworks in the second stage of the PCF reveal and incorporate the behavioural responses of landholders to a policy instrument into the instrument selection and design process (Johnson et al. 2006). The frameworks in the third stage of the PCF reveal and incorporate the behavioural responses of agencies responsible for implementing policy into the instrument selection and design process (Kaine, 2006). The frameworks in each stage provide the basis for our questioning of key informants and interviewees, analysis of their responses, reviewing of key documents and subsequent conclusions and recommendations. A more detailed description of the PCF is presented in Appendix A.

Methods

To determine the appropriateness of policy instruments to reduce nutrient emissions from the MID we used a case study approach. First, we conducted an analysis of the documentation associated with MID nutrient reduction and held discussions with key informants from relevant agencies. These documents and discussions provided us with an understanding of the regional context to allow a preliminary assessment of policy instrument choice for nutrient reduction in the MID using the PCF. From this preliminary analysis key assumptions, information gaps and the potential for additional instruments were identified for further investigation. The project steering committee then discussed and agreed on these areas for further investigation as part of the second stage of the project.

In the second stage of the project semi-structured interviews were conducted with landholders and additional key informants from relevant agencies. Fourteen interviews were conducted with MID landholders selected from a DPI CAS database. These landholders represented a range of enterprise types including dairy, beef, vegetable growers and mixed farming, and a variety of topographies and irrigation systems. Fourteen interviews were conducted with key staff from the EPA, DSE Sustainable Irrigation, an irrigation designer, the Wellington Shire Council, DPI and SRW to obtain further information on current approaches to nutrient reduction and inform the analysis of the organisational implications of the potential additional policy instruments. These key informants provided expert knowledge and insights into the selection of policy instruments based on their extensive involvement in the implementation of agricultural and natural resource policy in Gippsland.

The interviews were conducted by two researchers using a semi-structured approach. This involved the use of laddering techniques with open-ended questions to assist interviewees to explore and articulate their experiences (Grunert and Grunert 1995). Follow-up interviews were conducted as necessary to clarify the information obtained from the initial interviews. Interview responses were transcribed by the interviewers and the resulting notes were later analysed using case and cross case analysis (Patton 1990). Data from these interviews were used to provide answers to the decision points in each of the PCF decision trees (see Appendix A).

Where possible, uncertainty concerning key informant’s recall of events or information was clarified using relevant documents. The analysis and interpretation of the information obtained from the key informants, interviewees and supporting documents was completed by the study team. Consequently, any errors or omissions are the responsibility of the study team. Furthermore, the information collected during the study represents a perspective on policies and programmes at a particular point in time. These perspectives will evolve as circumstances change.

In the next section we summarise the findings from the first stage of the study.

4. Findings from the first stage

Preliminary analysis of the regional context leading to nutrient emissions in the MID using the PCF, and comparison of the results of this analysis with the policy instruments currently implemented under the MID NRP, lead to the identification of the following key assumptions, information gaps and additional policy responses for consideration by the steering committee.

Objective 1: Key assumptions

Analysis of policy documents and interviews with key informants revealed that the MID NRP was founded on two key assumptions. These were:

That changing farm practices and technologies would influence the timing of phosphorous emissions in the short term, and phosphorous load in the long term, and therefore influence achievement of the nutrient target.
That the priorities of landholders as expressed in the Irrigation Farm Plan program will align with, and deliver, public benefits in the form of reducing nutrient emissions.

Broadly speaking these assumptions appear to be justified given the current context and the desired practice change. The challenge for the GLTF lays in securing permanent changes in farm technologies and practices on a scale sufficient to achieve the desired reduction in nutrient emissions.

Nutrient emissions are an environmental externality, a public net cost, arising from the creation of private net benefits through agricultural production. These externalities may be reversed by encouraging technology and practice change through positive incentives (subsidies, discounts, deregulation), or by compelling technology and practice change through the use of negative incentives (regulation, charges, markets). Currently, a mixture of positive and negative incentives is used in relation to the MID NRP.

We used the PCF to identify new ways of securing permanent changes in farm technologies and practices to achieve the desired reduction in nutrient emissions. Analysis using the PCF indicated that, in the first instance, negative incentives should be employed to restrict nutrient emissions and so prevent the creation of public net costs in the future. This means instruments such as regulations, emissions markets and charges to compel changes in farm technologies and practices should generally be given first consideration when choosing instruments to reduce nutrient emissions.

Objective 2: Identify strategically critical information gaps

The following strategically critical information gaps that might influence program effectiveness were identified in the first stage of the study:

The application of the PCF suggested the regulation of irrigation technologies and practices was an option to consider as an additional policy instrument to reduce nutrient emissions. The feasibility of designing such regulations, and the likely reaction of landholders to them, was not known.
The impact that continuing implementation of MID 2030 modernisation program may have on farm context and the implementation of irrigation BMPs, including conversions to spray systems and use of high flow irrigation, and the need for drainage diversions.
The extent that contextual factors such as capital costs, access to three phase power and paddock layout might constrain the responses of landholders to the modernisation of the supply system.
Understanding the contribution, if any, of system design and management to non-compliance in the management of dairy effluent.
The organisational consequences of changing policy instruments for agencies responsible for implementing the policy measures.

Objective 3: Additional policy responses

A number of additional policy instruments were identified through the application of the PCF in the first stage. When evaluating these additional instruments we considered whether the policy instruments supported under the MID nutrient reduction plan would result in permanent reductions in nutrient emissions.

Irrigation best management practices

Application of the PCF to reducing nutrient emissions through irrigation management suggested that the regulation of irrigation BMPs was an additional policy instrument that could be considered, and that regulation might be feasible provided it was sufficiently flexible and accompanied by incentives. Regulation of irrigation technologies and practices could be given affect by incorporating appropriate rules into processes for developing IFPs and incentives to encourage implementation.

Changes in irrigation management made by landholders that were technology based such as conversion to spray irrigation, installation of irrigation reuse systems and high flow irrigation were believed to result in permanent reductions in nutrient emissions. However, some irrigation practices such as short watering were believed to have only a temporary effect on nutrient emissions because voluntary implementation of such practices could not be expected to continue indefinitely.

Fertiliser best management practices

Application of the PCF to reducing nutrient emissions through fertiliser management suggested that regulation of fertiliser practice was unlikely to be effective because of the difficulties associated with auditing and enforcement. Hence, the current reliance on voluntary adoption of best practices by landholders, supported by extension and a voluntary code of practice for fertiliser companies, could not be improved upon.

We believe any reduction in nutrient emissions that might result from adoption of best practice for fertilisers were likely to be temporary, primarily because voluntary implementation of such practices could not be expected to be continued indefinitely. Given the insurmountable practical challenges of monitoring fertiliser practice, regulation of fertiliser management was not feasible. Voluntary mechanisms such as industry codes of practice, in conjunction with an extension program promoting the savings from the use of desirable fertiliser practices, seem the most practical policy instrument in these circumstances.

Dairy effluent management

The application of the PCF to dairy effluent management indicated regulation of effluent management was appropriate and consistent with current policy. However, the results of the PCF suggested that the current regulations might be improved upon through the formulation of technical standards for effluent management.

Any reductions in nutrient emissions resulting from changes in dairy effluent management were judged to be temporary in the current circumstances in the absence of a long term program of auditing and enforcement. The permanency of emission reductions resulting from changes in the effluent management program may be improved through the development of design standards that simplify compliance; the implementation of an effluent monitoring and disposal service, and incorporating guidelines for dairy effluent management in Irrigation Farm Plans.

Drainage management

The application of the PCF to drainage management, which includes drainage diversion, heads of drains and drain harvesting, indicated that because landholders obtained a private benefit from diversions the provision of incentives or an extension program to promote diversions was unnecessary. Provision of an extension program to promote drainage diversion may be warranted if awareness of opportunities for drainage diversion was low among landholders or upgrading of landholders skills would increase the rate of adoption of drainage management.

Drainage diversions were believed to generate a permanent reduction in nutrient emissions because diversion reduced the volume of nutrient rich low flows entering the Lakes during the summer period.

5. Results of the second stage

In the light of the findings from the first stage the study team was asked by the project steering committee to consider the following objectives in the second stage:

Explore with landholders and key informants agreed information gaps identified in the first stage that were critical to the successful implementation of the additional policy instruments.
Investigate the potential for additional policy instruments to enhance nutrient reduction targets by accounting for landholder and agency responses.

The steering committee also requested that the study team:

Provide an opinion on the dynamics of variables that have the potential to influence achievement of MID NRP targets.
Consider the issues surrounding a cap and trade market if the focus of the program were to shift to focus on the total load of phosphorous emitted in the MID.

The results of our explorations of critical information gaps with landholders and key informants, and our predictions about the responses of landholders to the additional policy instruments and their organisational consequences for relevant agencies are summarised here. The likely responses of landholders to the additional policy instruments were predicted by using interviews with landholders to assess their concern about nutrient emissions and the scale of change in their farm technologies and practices, if any, that would be associated with the implementation of an additional policy instrument. See the I3 component of the PCF in Appendix A for more detail.

The potential organisational consequences of the additional policy instruments for agencies involved in implementing policy were predicted by considering the magnitude of change the additional policy instrument represented for the different agencies. These predictions are based on the proposition that, over time, agencies implement procedures, policies and structures; acquire specialised skills and competencies; and develop organisational cultures that facilitate the efficient delivery of the policy instruments they are charged with implementing. Consequently, changes in policy instruments will require corresponding changes in organisational processes, policies, skills and competencies. Sufficiently large changes in policy instruments may require changes in organisational structures and culture and the acquisition of entirely new skills and competencies, for agencies to implement the changes. See the Policy Innovations component in Appendix A for more detail.

Detailed descriptions of the analyses are reported in Appendix B where the information obtained from the interviews has been incorporated into the application of the PCF. The results for irrigation management are presented first, followed by fertiliser management, effluent management and drainage management.

Following the presentation of these results we provide our opinion on the dynamics of variables that have the potential to influence achievement of MID NRP targets. We then briefly canvass the key issues associated with the design of cap and trade markets in phosphorus emissions (refer also to Appendix C for more detail on the issues associated with the implementation of emission markets).

Irrigation Best Management Practices

Application of the PCF to irrigation technologies and practices in the first stage suggested the regulation of irrigation management based on technology based standards for the irrigation BMPs might have merit provided the standards were sufficiently flexible, and accompanied by incentives. Regulation of irrigation practice was proposed as a means of securing permanent changes in farm technologies and practice to prevent nutrient emissions in the future on the basis that the use of negative incentives would reduce resource misallocation associated with the creation of environmental externalities. The likely responses of landholders to such regulation, the potential organisational consequences of such regulations for agencies involved in implementing policy, and their implications were as follows (see Appendix B for more detail).

Landholder responses

While landholders may consider reducing nutrient levels in the Lakes to be important for the community, the management of emissions was not a key criterion in their decisions about farming practice. Such decisions were based on criteria such as labour costs, cost and availability of water, and pasture productivity. This is consistent with the findings of Kaine and Bewsell (2001a) in their study of irrigation and fertiliser management on dairy farms in the MID.
Landholders identified a range of irrigation management technologies and practices that would retain irrigation water on farm. The suitability of these practices to individual farms depended on contextual characteristics such as topography, soil type, landuse, water access, climatic events and reliability of irrigation supplies.
Compliance with regulations on technology standards for irrigation management may be achieved by some landholders at little or no cost because they would not be required to make any major changes to their irrigation technologies or practices. We predict that these landholders would tend to exhibit relatively weak reactions to the regulation of irrigation management. For other landholders complying with technology standards for irrigation management may entail substantial expenditures on changing technologies and practices. Hence, the costs of complying with regulations on irrigation management may be substantial for these landholders and their reactions to such regulation would tend to be strongly unfavourable. Some landholders may exhibit strong, unfavourable reactions to the concept of regulating farm practices.
The technology standards suitable to farms will depend on contextual characteristics such as soil type, topography, rates of flow of irrigation supplies, reliability of irrigation supplies and access to power. Consequently, the potential for unfavourable reactions from landholders will depend on the degree to which the standards accommodate the relevant contextual characteristics of individual farms. The strength of unfavourable reactions to the regulation of irrigation management may be reduced by introducing such regulations in an incremental, consultative fashion over a negotiated period of time. See the analysis of the regulation of irrigation management in Appendix B for more details.
The potential for landholders to comply with guidelines or technology standards for irrigation management but operate in a manner that is inconsistent with the objective of reducing emissions was investigated by considering how landholders utilise the current incentive program for irrigation BMPs. Both key informants and landholders confirmed that landholders may qualify for incentives but implement works and manage systems in ways that were not consistent with the intention of the policy. This was particularly so with respect to the design and management of reuse systems and the design and management of high flow irrigation.
There may be potential for limiting such behaviour through careful design and, ultimately, rigorous enforcement of technology standards. This reinforces the importance for flexibility in the design of technological standards to account for contextual differences across farms in the MID. In addition, consideration of nutrient emissions may be given greater emphasis in the design of IFPs.

Organisational implications

The implementation of technology based standards would be an architectural change to the policy instruments used to influence irrigation management. Architectural innovations can render existing competencies, knowledge, processes, procedures and even organisational structures in agencies obsolete. Architectural innovations can also challenge fundamental organisational values. This suggests that the introduction of technology standards could trigger major organisational change in the agencies involved in their implementation. Such changes may require major investments in redeploying organisational resources and the acquisition of new skills and competencies. Implementation of such changes would also require a degree of sensitivity, cooperation and trust among the agencies involved. Consequently a staged approach to implementation of technology standards may be required, not only to increase acceptance among landholders, but also to provide agencies with adequate time to establish appropriate structures, skills and competencies.

Conclusion

With respect to irrigation management the results of the second stage of the study largely confirmed the findings from the first stage. The application of the PCF to irrigation management resulted in the conclusion that regulation of irrigation through the development of enforceable technology standards may achieve greater reductions in nutrient emissions than the current program of extension and incentives. However, to be feasible these standards would need to be suitably flexible in order to accommodate the variety of farm contexts in the MID, be introduced in an incremental, consultative fashion over a negotiated period of time. The risk of unfavourable reactions from landholders may also be reduced if such regulations were accompanied by incentives. Regulation of irrigation technologies and practices could be supported by incorporating appropriate guidelines on nutrient management into processes such as IFPs.

In conclusion we suggest that the GLT considers:

The feasibility of developing technology standards for irrigation management that can accommodate the variety of farm contexts across the MID to reduce nutrient emissions from farms.
Linking such technology standards to the provision of incentives for IFPs and investment in irrigation works on farms.
Identifying the resources that may be needed to support approval and auditing services to ensure compliance with the technology standards.
That modernisation of irrigation infrastructure as part of the MID 2030 program may have implications for landholders’ compliance with technology standards and therefore their interest in extension and incentives.
That the implementation of technology standards for irrigation management may have profound consequences for the agencies involved.

Fertiliser management

Application of the PCF to fertiliser management in the first stage suggested the regulation of fertiliser practices through the development of process standards as a possible additional policy instrument. However, enforcement of such standards was judged to be problematic. Hence the current program employing extension to promote best practice supported by a voluntary industry code of practice could not be improved upon (see Appendix B for more detail). The decision was made in conjunction with the steering committee not to explore fertiliser practices further in the second stage.

In summary the results from the application of PCF to fertiliser management in the first stage of the project were:

Interviews with key informants suggested that while landholders may consider reducing nutrient level in the Lakes to be important the management of emissions was not a critical criterion for them when making decisions about fertiliser management. Instead decisions were based on criteria such as labour costs and practicality.
The recommended fertiliser practices do not require substantial extra labour or specialised technology therefore were unlikely to impose extra costs on farm businesses, nor were they likely to introduce changes that could have substantial or unpredictable consequences for farm management generally. However, the regulation of the timing of fertiliser application was considered unreasonable and unfair given the lack of precision in weather forecasting, the potential for variation in delivery of irrigation supplies, and the logistical practicalities associated with contracting for fertiliser services.
Furthermore, enforcement of process standards for fertiliser management was considered impractical. Consequently, voluntary adoption of standards by landholders and voluntary codes of practice for fertiliser services, and promotion of these by extension, were the only practicable policy instruments.
Since the analysis with the PCF did not identify any additional policy instruments there were no organisational implications to be investigated.

Conclusion

The application of the PCF to fertiliser management resulted in the conclusion that the current program of voluntary adoption of best practices for fertiliser by landholders and a voluntary code of practice for fertiliser services, and promotion of these by extension, cannot be improved upon.

Dairy Effluent Management

Application of the PCF to the management of dairy effluent in the first stage suggested the regulation of effluent management based on technology standards was appropriate. In addition, an effluent monitoring and disposal service was proposed as a means of reducing the effort landholders needed to invest to ensure their compliance with existing effluent regulations. After interviewing landholders and key informants in the second stage we have concluded that both process based and technology based standards may be needed to further reduce nutrient emissions in the MID. The likely responses of landholders to such regulation, the potential organisational consequences of such regulations for agencies involved in implementing policy, and their implications were as follows (see Appendix B for more detail).

Landholder responses

There were a broad range of technologies available for managing dairy effluent. Interviews with landholders suggested that the cost of effluent ponds and associated infrastructure can be substantial. Topography, soils and other characteristics of farms can influence the suitability of different effluent systems. Consequently, compliance with effluent regulations can be an issue in some farm contexts due to the limited effectiveness of the systems. The effort and cost involved in managing dairy effluent depends on the type of effluent system installed and the interaction between the system and other aspects of farm infrastructure and farm practice. Therefore process based standards may be needed to regulate the practices landholders employ to manage dairy effluent. Such process standards would need to be supported by appropriate technology based standards.
Interviews with landholders and key informants suggested that while landholders may consider reducing nutrient levels in the Lakes to be important, the management of emissions were not a significant criterion taken into account when making decisions about their effluent management practices (EPA Victoria 2003).
The results from interviews with landholders in the MID suggest that dairy farmers in the region approach effluent disposal regulation in a similar manner to dairy farmers in a recent study undertaken in Northern Victoria (Davies et al. 2007). That is, dairy farmers are prepared to invest considerable effort in choosing an effluent management system to install. However, the effort they devote to management of the system once it has been installed tends to be limited.
Landholders in the MID indicated that their management of effluent was influenced by characteristics that were specific to individual farms such as the type of effluent system installed, irrigation infrastructure, soil, topographical and other characteristics of the property and farm management preferences. Landholders were likely to have an unfavourable attitude towards the regulation of effluent management because regulation would constrain their management discretion and compliance may be impractical in some instances.
The potential for unfavourable reactions to the regulation of effluent management could be reduced by ensuring technology and process based standards were sufficiently practical and flexible to accommodate variety in farm characteristics.
Auditing may not always detect non-compliance. Therefore there is merit in considering actions to improve compliance by reducing the effort landholders must invest in effluent management. These actions could include designing effluent systems that are easier to manage and providing a subsidised system inspection and liquid waste disposal service. The feasibility of such a service would depend on the volumes of waste involved.
The effectiveness of effluent regulation in reducing nutrient emissions may be improved by incorporating technology and process standards into IFPs and nutrient management plans, and by maintaining an appropriate level of auditing into the future.

Organisational implications

The addition of technology and process based standards to the regulation of effluent management involves a substantial change in the components and component principles of the policy regulatory instrument. There is a major shift in the components and component principles away from landholder discretion as to how effluent regulations are complied with to administrative rules governing the definition of appropriate technologies and practices.

Associated with this is a modification in the architectural principles of the instrument. However, the introduction of a system inspection and waste disposal service tempers this shift by providing landholders with an alternative management option. Given this, we classified the change in the policy instrument as modular.

Modular changes result in mild to moderate organisational disruptions to agencies. For example the introduction of a waste removal service would probably require the acquisition of new skills and competencies by the delivery organisations. Given this, the agencies will need to consider which of them would be best placed to provide this service. Delivery of standards for the regulations may present challenges for agencies with respect to their organisational values. For example, agencies that implement voluntary change programs may be less comfortable with delivering and enforcing standards than agencies that already implement regulatory programs. Naturally, these organisational changes need to be appropriately resourced.

Conclusion

With respect to effluent management the results of the second stage of the study confirmed the findings from the first stage that the development of technology based standards may support the existing regulatory framework to achieve greater reductions in nutrient emissions. The results of the second stage also indicated that such technology standards would need to be accompanied by process based standards to ensure systems were managed appropriately.

To be feasible these standards would need to be flexible in order to accommodate the variety of farm contexts in the MID. The risk of unfavourable reactions from landholders may be reduced if such regulations were accompanied by the provision of a system inspection and liquid waste disposal service. Standards for effluent system technologies and practices could be incorporated into processes such as IFPs.

The implementation of technology and process standards would represent a modular change in the current regulatory policy instrument. Delivery of technology and process standards for effluent management would probably require the acquisition of new skills, competencies, processes and procedures and may present challenges for affected sections of agencies with respect to their organisational values. This suggests the agencies involved would need to invest in developing appropriate skills, competencies, processes and procedures to implement technology and process standards for effluent management. This need would be increased if a system monitoring and effluent disposal service were implemented.

In conclusion we suggest that the GLT considers:

The development of process based standards for effluent management that integrate with technology standards for effluent management systems.
Incorporating process and technology standards for effluent management into IFP guidelines and Nutrient Management Plans.
Investigating the feasibility of instituting an effluent monitoring and disposal service to reduce the effort involved with compliance for some landholders.
That the introduction and enforcement of standards, and provision of effluent disposal services will require changes in the skills, competencies, processes and procedures of agencies that implement effluent management policy.

Drainage Management Options

Currently, access to drainage flows is regulated by licences and agreements. Application of the PCF in the first stage to drainage management suggested that while incentives and extension programs could be considered to promote drainage management, these may be unnecessary because landholders obtain substantial private benefits from diversions. Interviews with landholders and key informants in the second stage confirmed this finding. However, extension may be warranted to accelerate awareness and adoption of drainage management. The likely responses of landholders an extension program and the potential organisational consequences for agencies involved in implementing policy, and their implications were as follows (see Appendix B for more detail).

Landholder responses

Interviews with landholders and key informants indicated that while landholders may consider reducing the nutrient level in the Lakes to be important the management of nutrient emissions was not a critical criterion in their decisions about drainage diversions.
Key informants suggested that diversions were an important source of irrigation water for many farmers. Landholder interviews confirmed this was the case. Landholders indicated that they were seeking additional sources of water and that flows in drains flows were an important and relatively inexpensive source of water. However, landholders anticipated that modernisation of the irrigation infrastructure in the region would reduce the volume and reliability of drainage flows and that diversion may become uneconomic. Some landholders were delaying decisions on investing in infrastructure for drainage diversion until the impact of modernisation on flows in drains becomes clear.
Those landholders that were in a position in the catchment to capture drainage flows were likely to have a strong and favourable attitude towards drainage diversion because diversion of drainage flows creates substantial private benefits. This suggests that the provision of incentives to encourage diversions is unnecessary but that landholders are unlikely to react favourably to the withdrawal of the discount on charges for drainage flows.
Factors such as modernisation were expected to reduce the supply of drainage flows for diversion. While this may mean that some landholders may be unable to divert drainage water in the future, the reduction in flows may be expected to reduce emissions from irrigation run-off and channel outflows entering the Lakes correspondingly.
Despite the decline in reliability of drainage diversions over the last few seasons the landholders we interviewed were still particularly interested in drainage diversion. Awareness of, and interest in investing in, drainage diversion is high among landholders suggesting an extension program to promote awareness is unnecessary.
Landholders that take over the responsibility of heads of drains confirmed that converting these into re-use systems was appealing. Some landholders were experiencing challenges in managing backflows.
The implications for the management of nutrient emissions resulting from moderate to heavy rainfall events of modernisation were unclear. Modernisation could result in reduced investment, or disinvestment, in drainage management by landholders thereby reducing capacity to contain rainfall run-off. On the other hand, modernisation may mean reduced rainfall run-off. The documentation relating to nutrient cycling and the scope for containing run-off from moderate to heavy rainfall events through drainage management was unclear.

Organisational implications

The analysis using the PCF indicates only minor changes to the current policy instrument. The suggested change in the policy instrument is to the inclusion of criteria relating to the construction of storages of an appropriate size in agreements for heads of drains, drainage diversion and drainage harvesting. If incentives for reuse systems are continued then eligibility conditions for incentives should include criteria to ensure storages of an appropriate size are constructed where reuse systems incorporate drainage management. An extension program was not considered worthwhile given the scale and rate of adoption of drainage management in the MID. Landholders appear to possess the skills and knowledge to invest in, and manage, drainage. The introduction of a condition on storage size into agreements for drainage diversion and harvesting is in an incremental change to the original policy instrument.

DPI currently delivers the irrigation BMPs which includes the financial incentives for reuse systems. The condition on storage sizes for drainage management could be incorporated into their guidelines for IFPs.

Conclusion

With respect to drainage management the results of the second stage of the study largely confirmed the findings from the first stage. The application of the PCF to drainage management resulted in the conclusion that incentives are unnecessary and that extension activities to promote drainage management options may not be required.

In conclusion we suggest that the GLT considers:

Incorporating criteria relating to the installation of appropriately sized systems in licences and agreements on heads of drains, drainage diversion and drainage harvesting.
Clarify the impact of modernisation on the scope to contain nutrient emissions caused by run-off associated with moderate to heavy rainfall events.

Critical dynamics influencing nutrient emissions in the MID

The project steering committee asked the study team to consider the dynamics operating in the MID that had the potential to affect the achievement of the MID NRP targets. The view of the research team was that irrigation in the MID is operating in a rapidly changing environment.

Climate change, evolving water and natural resource policy, and international markets are all fundamentally changing the context for landholders in the MID. In the future these changes may impact on the choices landholders make and ultimately the frequency and occurrence of algal blooms in the Gippsland Lakes.

Changing reliability of water supply

There are three key factors that are changing the reliability of water supply. The first is the implementation of modernisation which increases the reliability of delivery of irrigation water to landholders. The increase in reliability enables landholders to be more precise when managing irrigation and makes it worthwhile to invest in technological innovations that reduce the volume of irrigation runoff. In summary, increasing reliability has the potential to improve nutrient management practices and technologies on their farms.

The second factor is the decrease in reliability of drainage flows due to the implementation of modernisation. Although landholders see drainage management as an important source of water for irrigation there is a point where the volume and variability in drainage flows means efforts to maintain and operate drainage diversion infrastructure are no longer worthwhile. Presumably, the impact on nutrient rich emissions of landholders abandoning diversions in response to reduced flows in drains will be offset by the reduced flows themselves. Whether this is, in fact, the case was unclear.

The third factor is the potential impact of climate change. The general prediction for South Eastern Australia is a drier climate with more extreme climatic events, in particular drought. This suggests that over time there will be a reduction in the number of years where Glenmaggie will ‘spill’. A reduction in the ‘spill’ years would reduce the reliability of irrigation water in the MID. This could have a number of impacts such as reducing the area of land irrigated, changes to how irrigated land is used and changes in cultural practices. Any of which could have an impact on nutrient emissions. Conversely, climate change could also lead to more extreme rainfall events and more flooding of the region. This would be a very different dynamic to that of drought and would have impacts on nutrient emission reductions from the region with respect to timing of loads entering the Gippsland Lakes.

Changing Landuse

The suitability of the MID for vegetable growing compared with other irrigation areas is one example of landuse change that is occurring in the MID. The major impact of changing landuse will be on the long term load of nutrients entering the Lakes. Clearly, the type of land use change will determine if the total load will increase or decrease.

Level of Control

Two key factors emerged that will influence the level of control that landholders and agencies such as SRW can have over the timing of nutrient exports into the Gippsland Lakes from the MID. The first is the impact of climate change on the size and occurrence of rainfall events. Rainfall leads to uncontrolled runoff from the catchment. To manage nutrient emissions landholders need to be able to match the amount and timing of runoff with their ability to capture nutrient rich flows in reuse and drainage diversion systems. If the incidence of high rainfall events were to increase but the capacity of the region to capture and utilise runoff from the MID remained the same nutrient emissions would logically increase.

The second factor is the implementation of system modernisation which, through automation of the delivery system, is increasing the reliability of water delivery and hence increasing the ability of landholders to predict and control irrigation runoff. This would improve the ability of landholders to minimise runoff and reduce nutrient emissions.

Organisational Environment

From time to time government policy, funding and institutional arrangements change and impact on the contribution that natural resource management agencies can make to the successful implementation of the MID NRP targets.

Social Norms

The behaviours that are acceptable to society change over time. It is possible that the social norms associated with the MID NRP targets could change over time. For example, the importance of managing algal blooms could change, similarly the social license to regulate offsite impacts from agriculture could also change over time. If this were the case, the support by the wider community for the Taskforce’s approach to supporting policy measures to implementing NRP could also change over time. This could lead to changes in approach, for example increased algal blooms could lead to community expectations for stricter control of diffuse source of phosphorus emissions or, alternatively, a desire to relax controls over agricultural emissions.

Market in emission permits

If the nutrient load entering the Lakes over the long term is above the assimilative capacity of the Lakes, and considered unacceptable, then a cap and trade emissions market may have merit as a method to reduce emissions.

In principle, a cap and trade market in nutrient emissions could be established for landholders in the MID. Experience has shown, however, that the establishment of an emission market is a major challenge requiring the investment of considerable resources over a number of years. The challenge lies in two key areas. The first is the difficulty and expense of measuring or modelling nutrient emissions from farms. The second is the need for major changes in organisational skills, competencies, processes and structures in order to establish and monitor a cap and trade market.

There is the possibility that the nutrient load entering the Lakes may need to be substantially reduced over time. This may mean a market in nutrient emissions permits may be worth considering in the future despite the challenges it entails. Consequently, we have given some consideration to the design of such a market. In Appendix C we have summarised the main features of a market in emission permits and canvassed the key issues entailed in establishing a market.

6. Conclusion

The opportunities for modifying policy instruments and the suggestions for the GLT that follow from them, were made after careful consideration of the responses of landholders and the consequences for the agencies responsible for implementation of the MID NRP. Three sets of suggestions have been offered in regard to changes to policy instruments, complementary policy strategies in regard to landholders and, where relevant, complementary policy strategies in regard to agencies. The suggestions in regard to complementary strategies were made on the basis that they may contribute to more effective implementation of policy.

The opportunities we identified for modifying policy instruments with respect to irrigation management and effluent management would represent a considerable change in the manner in which the GLT seeks to influence landholders in the MID, in particular the introduction of technology and process standards to ensure public benefit is delivered from public investment.

Two important challenges have been revealed during this study. While landholders may consider reducing nutrient levels in the Lakes to be important for the community, the management of emissions was not a key criterion in their decisions about farming practice. Such decisions were based on criteria such as labour costs, cost and availability of water, and pasture productivity. As a consequence, landholders are likely to respond unfavourably to policy instruments in regard to nutrient emissions that increase their costs and reduce their managerial discretion. This is problematic since nearly all farmers would need to implement best technologies and practices if the targets for phosphorus emissions are to be met in the long term. The second challenge is that some of the suggested changes in policy instruments will have profound consequences for some agencies responsible for implementing policy. Hence, effective implementation of the suggestions would require careful attention to supporting the implementing agencies.

These suggestions for modifying policy instruments should be considered in light of the planned modernisation of the regional irrigation infrastructure. Modernisation may increase the reliability of delivery of irrigation water to landholders which may allow landholders to voluntarily invest in technological innovations that reduce the volume of irrigation runoff and reduce nutrient emissions. Modernisation will also reduce system outfalls and therefore flows in the regional drainage system resulting in lower nutrient emissions from this source.

However, the impact of modernisation on the scope to contain emissions associated with moderate to heavy rainfall events needs clarifying.

Finally, if the issue of the total load of phosphorus entering the Gippsland Lakes becomes a priority, the GLT should consider investing in the development and implementation of a cap and trade market in phosphorus emissions.

7. References

Davies, A, Kaine, G and Lourey, R 2007, 'Understanding Factors Leading to Non-compliance with Effluent Regulations by Dairy Farmers. Environment Waikato Technical Report 2007/37 ', Environment Waikato, Hamilton

DPI 2006, 'Gippsland Nutrient Extension Program Evaluation', Department of Primary Industries, Ellinbank.

EPA Victoria 2003, 'Macalister Irrigation District Dairy Farms: Dairy Farms within the central Gippsland Drain No 2 catchment, findings and recommendations '. Report prepared by EPA Victoria for the Gippsland Lakes Task Force, Melbourne, Australia

GHD 2006, 'Review of the Macalister Irrigation District Nutrient Reduction', GHD, Melbourne.

Grunert, K and Grunert, S 1995, 'Measuring subjective meaning structures by the laddering method: Theoretical considerations and methodological problems', International Journal of Research in Marketing, vol. 12, pp. 209-225.

Hassall & Associates Pty Ltd 2007, 'DairyGain$ Stocktake 2007. Identifying priority diary communities in relation to effluent management. Final Report', AU1-454, Hassall & Associates Pty Ltd, Sydney.

Johnson, F, Kaine, G, Ford, J and Leth, M 2006, 'A Framework for Selecting Policy Instruments in Natural Resource Management', Milestone Report, Department of Primary Industries Victoria.

Johnson, F, Kaine, G, Ford, J and Lourey, R 2007, 'Understanding approaches for managing nutrient emissions in the Macalister Irrigation District: Milestone Report', Department of Primary Industries, Victoria.

Kaine, G and Bewsell, D 2001a, 'Managing irrigation and fertiliser in dairy farming: interim report', School of Marketing University of New England Armidale, New South Wales.

Kaine, G and Bewsell, D 2001b, 'Managing irrigation and fertiliser in dairy farming: second interim report', School of Marketing University of New England Armidale, New South Wales.

Kaine, G and Bewsell, D 2002, 'Managing irrigation and fertiliser in dairy farming: third report', School of Marketing University of New England Armidale, New South Wales.

Kaine, G, Ford, J, Leth, M and Johnson, F 2007, 'Policy Choice Framework', Working Paper 02/07, Department of Primary Industries Victoria.

Pannell, DJ 2006, 'Public benefits, private benefits, and the choice of policy tool for land-use change, SIF3 Working Paper 0601', Retrieved 2007/03/29/, from http://cyllene.uwa.edu.au/~dpannell/dp0601.htm

Patton, MQ 1990, Qualitative interviewing: a technique for qualitative data collection, Sage Publications, USA.

PJ Hallows and Associates 1998, 'Macalister Irrigation District - Phosphorus reduction options study', PJ Hallows and Associates, Consulting Water Resources Engineers, Hawthorn, Victoria.

Southern Rural Water 1998, 'Macalister Irrigation District Nutrient Reduction Plan', Southern Rural Water and Department of Natural Resources and Environment, Victoria.

Southern Rural Water 2003, 'Southern Rural Water Factsheet: Changes to Water Allocation Policy', from http://www.srw.com.au/updated_info/information_sheets/MID_Allocn_Pol_Chng.pdf.

Southern Rural Water 2007a, 'MID 2030 Draft Strategy: An opportunity to maximise the full potential of the MID', Southern Rural Water, Maffra.

Southern Rural Water 2007b, 'Nutrient management in the Macalister Irrigation District (MID)', from http://www.srw.com.au/environment/default.html.

WG CMA 2004, 'West Gippsland Regional Catchment Strategy', West Gippsland Catchment Authority.

WG CMA 2007, 'Macalister Land and Water Management Plan: community consultation draft', West Gippsland Catchment Management Authority.

Appendix A: The Policy instrument Choice Framework

An overview of the Policy Instrument Choice Framework and a worked example of Whole Farm Planning in the Northern Irrigation Region

Introduction

Traditionally, natural resource policy has relied on regulatory, statutory and legal instruments to influence the behaviour of individuals and agencies in ways that protect the natural environment (Ward et al 2005). Over the past decade or so there has been a growing interest among policy makers in considering a wider range of instruments to influence behaviour and contribute to natural resource policy (Hatton MacDonald et al 2004). This has resulted in an increasing need for frameworks that assist policy makers to choose between different types of policy instruments (Hatton MacDonald et al 2004; National Action Plan for Salinity 2005; Ward et al 2005).

A variety of frameworks have been proposed by economists and policy experts to assist policy makers in choosing between the different types of policy instruments (Connor and Bright 2003; Hatton MacDonald et al 2004; Martin and Verbeek 2006; Ridley and Pannell 2005; Tietenburg and Johnstone 2004; Whitten et al 2006; Ward et al 2005; Young et al 1996; Young and Hatton MacDonald 2003). While these frameworks differ in their scope and detail, there is broad agreement that the following criteria should be used when choosing between policy instruments (Hatton MacDonald et al 2004):

The potential of different instruments to ensure environmental policy objectives are met.
The potential of different instruments to reduce the cost of meeting environmental policy objectives.
The responses of the individuals or groups that are the target of the policies and instruments.
The feasibility of instruments in the current institutional settings.

Our view is that the various frameworks that have been recommended to date for choosing between policy instruments do not contain a systematic and practical process for anticipating the variety of responses of different groups to proposed policy instruments. Furthermore, they do not contain systematic and practical methods to predict the responses of public, private and community agencies to proposed policy instruments. Hence, the various frameworks that have been recommended to date lack rigorous and practical processes for evaluating policy instruments in relation to the third and fourth criteria above.

The absence of methods for assessing the magnitude of variety in individual and institutional responses to policy instruments increases the risk of policy failure (Hatton MacDonald et al 2004; Kaine et al 2006; Martin and Verbeek 2006). Hence, frameworks for choosing policy instruments could be improved by including processes that both reveal whether a policy instrument will provoke an undesirable response from a community or organisation and suggest how the policy instrument could be altered to avoid this type of response.

The intent of this paper is to describe a new framework that enables all four of the criteria presented above to be considered when choosing between policy instruments by incorporating processes that reveal and account for differences in the responses of landholders and agencies to policy instruments. The use of the framework is illustrated by application to a case study of whole farm planning as a regulation in the Shepparton Irrigation Region.

Overview of Framework

The intention of the Policy Instrument Choice Framework (PCF) is to assist natural resource policy makers to choose between policy instruments when the focus of policy is on changing the behaviour of landholders. The PCF contains a six component frameworks that link systematically through a series of decision trees. Although the decision trees appear to be sequential steps, they contain feedback loops that support an iterative approach to policy instrument selection (see figure 1).

The six component frameworks of the PCF can be grouped together in three broad stages. In the first stage the case for the policy intervention is made explicit and a category of policy instruments appropriate to the issue at hand are identified. In the second stage the responses of landholders to the policy instrument and subsequent modifications to the instrument are considered. In the third stage, the responses of agencies and subsequent modifications to the instrument are considered (see figure 1).

Stage one: justification and initial instrument selection

Figure 1 Stages in the Policy Instrument Choice Framework including feedback loops.

Figure 1 Stages in the Policy Instrument Choice Framework including feedback loops.

This stage entails the application of Pannell’s (2006) framework for analysing the private and public net benefits of an intervention. Pannell (2006) has developed a simple framework derived from economic theory that can be readily applied to select between broad categories of policy instruments. The principle aim of the framework is to choose policy instruments on the basis of allocating public funds efficiently. The framework is based on relative levels of total public and total private net benefits of changing land management.

Private net benefits refer to benefits minus costs accruing to the private land manager as a result of the proposed changes in land management (Pannell 2006). Public net benefits means benefits minus costs accruing to everyone other than the private land manager (Pannell 2006). The private net benefit dimension provides insights into the behaviour of the landholder, while the public net benefit dimension relates to the effects on everyone else that flow from the landholder's behaviour. Logically, different policy instruments are required to influence behaviour for different combinations of total private and total public net benefit.

Pannell (2006) proposes the following rules be used to select policy instruments based on the criterion of maximising efficiency:

These rules result in instrument choices as indicated in figure 2.

Figure 2 Public net benefit and Private net benefit

Do not use positive incentives to promote a change in land management unless public net benefits of the change in land management are positive.
Do not use positive incentives to promote a change in land management if the change in land management creates private net benefits.
Do not use positive incentives to promote a change in land management if the private net costs outweigh the public net benefits.
Do not use extension unless the change in land management would create private net benefits.
Do not use extension where the change in land management would create public net costs.
If the private net costs of a change in land management outweigh the public net benefits consider investing in research to reduce private net costs (or to increase public net benefits to the point where they outweigh private net costs).
If the private net benefits of a change in land management outweigh the public net costs no intervention is required.
If the public net costs of a change in land management outweigh the private net benefits use negative incentives to reduce the extent of change.
If a change in land management creates public and private net costs no intervention is required
In all cases, the suggested intervention must be weighed up against a strategy of no action.

Given the assessment of the private and public net benefit resulting from changing land management at a particular point in time depends on the distribution of property rights within the community we propose the following rules assist in the application of Pannell’s (2006) framework:

Where the public net benefit of a change in land management is the reversal of an externality then negative incentives should be used to promote the change.
Where negative incentives are used to promote a change in land management that reverses an externality to create a public net benefit then income transfer mechanisms should be considered to offset any undesirable redistribution of wealth.
Where the public net benefit of a change in land management entails the reversal of an externality at private net cost but the efficacy of the change is unknown then positive incentives may used to promote the change on grounds of fairness.

The first of these additional rules is based on the economic principle of ‘polluter pays’ to ensure efficient resource use. The second additional rule is based on the principle of maximising the allocative efficiency of resource use by avoiding the introduction of distortions in resource markets to achieve equity in the distribution of wealth. The third additional rule allows the policy maker discretion in the use of policy instruments to promote changes in land management whose impacts are highly uncertain.

The private and public net benefits resulting from changing land management may vary across locations. This means a particular land management change that creates a public net benefit may produce a private net benefit in one location and a private net cost in another. This suggests that a portfolio of instruments targeting different combination of private and public net benefit may be required to promote the change in land management. The I3 Response Framework (see below) can be used to identify whether landholders will experience a net cost or benefit from changing their land management practices.

The identification of a specific instrument from among the category of positive and negative incentives is made by considering the technical feasibility of the different options using principles derived from the literature on regulatory and market instrument design (Hatton MacDonald et al 2004; Whitten 2006; Gunningham et al 1998; Gunningham and Sinclair 1999; Gunningham and Sinclair 2002).

Stage two: Landholder responses

Figure 3 I₃ Response Framework (Adapted from Murdoch et al. 2006)

Figure 3 I₃ Response Framework (Adapted from Murdoch et al. 2006)

In the second stage the likely responses of landholders to the selected instrument are identified and the implications for the feasibility and design of the instrument are considered. There are three component frameworks in this stage - I3 Response Framework, use variety framework and the scoping framework (Kaine and Higson 2006b; Kaine and Johnson 2006; Murdoch et al 2006).

The I3 Response Framework provides prediction of the responses of landholders to proposed changes in land management and the policy instruments supporting those changes. The responses of landholders are assumed to depend on their involvement and attitudes towards the policy issue at hand, and their involvement and attitudes towards the policy instrument itself. Involvement is a social psychology construct and describes the motivational state of an individual with regard to some issue or activity. The strength of involvement depends on the relevance of the issue or activity to the achievement of the individual’s utilitarian, social or hedonic goals (Mittel and Lee 1989). Involvement predicts the level of effort an individual will invest in decision-making about the issue or activity. Effort includes dimensions such as the extensiveness of decision-making, the number of factors evaluated in a decision, the number of alternative actions considered and the time spent to reach a decision (Dholakia 2001; Kapferer and Laurent 1986; Mittal and Lee 1989; Poisesz and de Bont 1995; Verbeke and Vackier 2004; Zaichkowsky 1986).

The concept of involvement is used in the I3 Response Framework to predict the likely behavioural responses of landholders to a policy instrument depending on:

Their degree of involvement in the policy issue
Their attitudes towards the policy issue if involvement in the issue is high
Their degree of involvement in the policy instrument
Their attitudes towards the policy instrument if involvement in the instrument is high

In broad terms involvement in the instrument will be high and positive (negative) if the land management change creates large private net benefits (costs).

The two dimensions of involvement, involvement with the issue and involvement with the intervention are combined to predict different categories of behavioural response among landholders to a policy instrument (see figure 3). In particular it is able to identify behavioural responses that will lead to policy failure, such as non compliance and outrage, once identified it suggests alterations to policy or new policy instruments that reduce the risk of eliciting these types of response from landholders.

The I₃ response framework is followed by the use variety framework. In this framework the policy instrument is evaluated by considering the potential for landholders to comply with the policy instrument in ways that are counter-productive to the achievement of the policy objective (Kaine and Higson 2006b). Where the potential for use variety is unacceptably high this potential may be reduced by introducing modifications to the instrument or employing supplementary instruments. Policy instruments are eliminated from consideration where landholders are most likely to use them in counter-productive ways and this cannot be managed.

So far we have evaluated the response of landholders to proposed policy instruments and modified or eliminated those instruments that could fail as a result of landholder responses, as well as those that could be implemented but be counter-productive to the policy objective. We have yet to evaluate the remaining options in terms of whether or not they elicit a behavioural response that will result in the achievement of the policy objective. There are two aspects to this – whether the responses of landholders would be of a scale sufficient to achieve the policy objective and whether the landholders will respond at a sufficient rate to achieve the policy objective (Kaine and Johnson 2004). Again we use the concept of involvement to assess landholders’ responses in regard to these criteria.

In this framing, policy instruments that affect the scale of the responses of landholders are those that change the decision making criteria used by landholders to evaluate the benefits of changes to agricultural enterprises, practices and technologies. Policy instruments that affect the rate of the responses of landholders do not change the decision making criteria used by landholders to evaluate the benefits of changes to agricultural enterprises, practices and technologies but reduce the costs of introducing those changes (Kaine and Johnson 2004). For example, extension reduces the effort the landholder must invest in obtaining the information needed to evaluate a land management change or the effort the landholder must invest in acquiring the skills needed to implement a change to agricultural enterprises, practices or technologies. Evaluating policy instruments on this basis leads to the selection of a policy instrument that is most likely to have the affect on both the scope and rate of landholder responses that is needed to achieve the policy objective.

Stage three: Organisational responses

The third stage of the PCF reveals the responses of agencies to the proposed policy instrument. Proposed policy instruments are classified into types of innovations using a framework adapted from the organisational change literature that predicts the response of agencies to the introduction of innovations (Kaine and Higson 2006a; Kaine et al 2006). This involves comparing the principles underpinning the proposed instrument with the principles underpinning the policy culture of the agencies that would be implementing the instrument. Differences in these two sets of principles suggest changes may be required to cultures, structures, procedures and technical characteristics of these agencies depending on the degree of difference. Predicting the consequences of introducing a new instrument into the institutional environment allows judgements to be made as to whether the instrument can be implemented using existing capability or whether new organisational capabilities must be acquired.

In conclusion, the PCF consists of a series of component frameworks that are linked together through decision trees. Unlike other frameworks for choosing between policy instruments the PCF contains components that facilitate structured and systematic consideration of the behaviour of landholders and institutions when choosing policy instruments.

A worked example - Whole Farm Planning

The world has changed markedly since a collection of regional stakeholders in the Northern Irrigation Region of Victoria introduced Whole Farm Plans (WFP) into the planning regulations of Local Government in 1991. The following is a brief description, provided by key informants and relevant documents, of the issues and events leading up to the introduction of WFP in 1991.

According to the key informants the introduction of laser grading technology from the construction industry led to widespread redevelopment of the irrigation region in the 1980s. There were a number of features associated with redevelopment that made the technology attractive to landholders in the SIR:

Relatively large areas of land could be redeveloped.
Water could be more effectively and efficiently managed during irrigation.
Irrigating land became less labour intensive.
Properties could be redeveloped to use more water than they had in the past.

However with the new technology large volumes of water could be moved quickly across irrigation bays. This sometimes resulted in unwanted waterlogging or flooding. In addition the technology in siting, designing and constructing farm delivery channels and drains lagged behind that of laser levelling. As a consequence the following difficult issues arose for the community in the SIR around laser levelling of irrigated land:

Large volumes of irrigation tail-water flooded neighbouring properties or roadsides.
Regional water tables rose because of increased waterlogging.
Floodwaters were unable to drain naturally because of obstructions associated with irrigation redevelopment.

The response by government and the community to these issues led to a number of linked initiatives between 1987 and 1991. These were:

The introduction of Irrigation Management Grants Program in 1987. This program included a financial incentive for WFPs.
Incorporation of minimum design standards for WFPs in the eligibility criteria for Irrigation Management Grants in 1988.
The development of community and stakeholder consultation and coordination processes through the activities of Salinity Pilot Program Advisory Council.
Development and implementation of the Water Act (1989), that described the rights and responsibilities of landholders and government.
Development and implementation of the Local Government Act (1989) that described the rights and responsibilities of Local Government to other tiers of government as well as the community.
Incorporation of regulatory guidelines for earth movement into Local Government planning controls in 1991.

The application of the PCF to the decision to implement a regulatory program is summarised in Table 1. We concluded from the results of this case study that:

The application of the PCF to the development and implementation of regulations for WFPs enabled a complex decision making process involving a range of stakeholders, each of whom played a unique role in the process, to be described systematically.
The application of the PCF to the initial regulation for WFPs suggested the use of financial incentives would be important in ensuring the effectiveness of the instrument as incentives would reduce the risk of unfavourable community responses. These suggestions mirrored the actions made by decision makers at the time.
Given the complexity of both the issues involved and the policy instrument, it was necessary to incorporate multiple perspectives from a variety of sources to get the information needed to work through the PCF (eg irrigation designers, Local Government, DPI staff and CMA staff).

In terms of institutional change it became evident in the regulation for WFPs case study that each organisation involved in the implementation of a policy instrument should be considered separately as they all faced different challenges. The failure of any of these agencies to successfully perform their role in the design and implementation process would have endangered the implementation of the policy instrument.

Table 1: Application of PCF to the regulation of Whole Farm Planning

Public Net Benefit, Private Net Benefit Framework
There were large variations in public costs associated with irrigation redevelopment in the 1980s. Irrigation redevelopment carried out with the newly introduced ‘laser grading technology’ often led to the obstruction of natural drainage lines and very long bay lengths leading to waterlogging. It follows that the public net benefit associated with unplanned irrigation redevelopment in the 1980s was characterised by widespread damage to farmland and public infrastructure resulting from: Redirection of floodwaters onto neighbouring properties, roads and public land. Water logging and high accessions to water table. On the other hand the private net benefits of redeveloping a farm using the new technology in the 1980s could be characterised as labour saving and being able to irrigate large areas of land more effectively. This was because longer and fewer irrigation bays meant that a farmer could irrigate larger areas of land in a given time and better siting of channels and less undulating bays meant that it was easier to effectively irrigate more land than in the past. Redeveloping a property also meant that waterlogging associated with flood events could be avoided by strategically placing channels or check banks to divert water. Given that these actions directly increase farm productivity and reduce labour costs it can be assumed that there was a high level of private benefit associated with these actions. The nature of the public costs and private benefits associated with redeveloping irrigation farms during the 1980s suggests that the public costs (public net benefits) were greater than the private net benefits associated with increases in farm productivity and profitability. This places the redevelopment of irrigation farms in the SIR in the 1980s in section D of the private/public net benefits framework Conclusion: Go to negative incentives decision tree
Regulation, Charges or Market
The two main public cost issues addressed by whole farm plans are flood management and irrigation induced salinity. The resources associated with these issues are functional drainage lines and a water table more than two metres from the surface. Although easily conceptualised and broadly mapped at the time, it was not possible in a practical sense to define these resources in terms of their ‘supply’. Hence a market instrument was infeasible. However it was still important to control the impact individuals had on flooding and salinity since the actions of one individual could affect many others, particular in the case of flooding. The precise impact of individual’s actions was, if not impossible, then prohibitively expensive to measure, as they were generally confounded with the actions of others. Hence, both a market instrument and a charge instrument were unlikely to be feasible. This means a regulatory instrument was likely to be the most practical instrument to implement. Conclusion: Go to Regulation Tree.
Regulation
Two key opportunities emerged to introduce regulatory instruments as part of the WFP program to overcome the public costs associated with irrigation development. The first related to the introduction of minimum design standards for WFPs eligible for a CMA grant. The second was to link WFPs with the approval processes under the Planning regulations, Local Government Act, 1989. Conclusion: Incorporation of design standards into a Whole Farm Plan and link this to the approval

processes under the Local Government Act. Go to I₃ Framework.

I₃ Response Framework

The involvement of landholders in the issue of flooding leading up to 1991 was high since large areas of the SIR had been regularly flooded throughout the 1980s. The issue of the involvement of landholders in salinity is more difficult to judge, particularly since much of the promotional material at the time referred to the “underground flood” instead of salinity. We assumed that the widespread community support for the 1989 Salinity Management Plan (SMP) indicated that the community was also highly involved in the issue of salinity at that time.

Key informants suggested that there were two groups of landholders involved in the current WFP process. The first, and far more numerous, group was characterised by their positive attitude toward the WFP process. These landholders used the opportunity to develop a long-term irrigation development plan for their farm.

The second, smaller, group was those landholders that had been forced to engage in the WFP process by local government. These landholders generally had a negative attitude about the process. Looking back to when the WFP policy instrument was being developed up until the introduction of planning controls in 1991 landholders had not been subjected to controls over earth works they carried out on their land. Hence, it is likely that the number of landholders in the second segment was much larger in 1991 than is the case now.

Adjusting policy to account for unfavourable responses by landholders

Given that there was likely to be a significant proportion of landholders with a negative attitude toward WFPs in 1991 when they were introduced an alternative route needed to be taken through the I3 Response Framework to understand how the PCF might have guided the decision-makers at the time.

The decision makers at the time actively used a number of strong principles in their decision making, the two relevant here were as follows:

The beneficiary pays principle - parties contribute proportionally based on the level of benefit they gain from changes in on farm practices.
Prioritise actions and policies that are most likely to gain and maintain community support for the SMP.

Given these strongly held principles it was probably considered that substituting annual planning permits for WFPs would not gain or maintain community support for the newly developed SMP. There was also an added risk that if WFPs were not supported throughout the community the SMP itself would be put in danger since the implementation of WFPs was to account for a third of the impact of the SMP.

These risks were addressed by continuing the financial incentive for WFPs and giving WFPs an exemption from the need to annually renew the planning permit once gained. These modifications were consistent with both the beneficiary pays principle since government received benefits from WFPs and community values since they financially rewarded landholders for good works.

Conclusion: Modify involvement in the regulation by including financial incentives for the development of the WFP, planning permit application fee and renewal exemption. Go to use variety tree.

Use Variety Tree

The key informants we interviewed suggested that the potential for use variety was high and could be described as follows:

Not fully implementing a WFP.
Making small undocumented changes to a WFP.
Farm subdivision.
Not implementing any works.
During litigation, property sales and compulsory purchase of land.

However, the key informants believed that, in reality, use variety was rare. For example, in practice the use of WFPs for litigation purposes has occurred in only a few cases. The most common form of use variety was thought to be using WFPs to cost works but not undertaking them (approximately 10% of WFPs).

The key informants believed that currently 80% of landholders implement their WFPs to the point where 100% of the environmental benefit of implementing the WFP is realised. Documents dating from the introduction of the regulation suggest that policy makers had similar beliefs about the likely effectiveness of WFPs. Given this we believe the potential for use variety was not considered to be sufficiently large to endanger the objectives of the policy.

Conclusion: Regulation is feasible. Go to Scoping Tree.

Scoping Tree

The original 1989 SMP assumed that three percent of landholders would adopt a WFP on their property each year given existing levels of property redevelopment so that at the end of 30 years 90% of landholders had adopted a WFP to implement best management practices on their properties. Changing WFPs from a voluntary mechanism to one that is more or less compulsory would logically increase the rate and scope of adoption. This suggests that in 1991 it was reasonable for decision-makers to assume that the base line of three percent of landholders per annum was an achievable target.

Conclusion: Regulation is feasible. Go to Policy Innovation tree.

Policy Innovation Tree

The move to incorporate WFPs into a regulatory framework, making them more or less compulsory for landholders, was a considerable change to the underlying principles by which government influenced on-farm irrigation development in comparison to its earlier voluntary approach. However, if considered from the point of view of the different agencies this change is not as great as first appears. The regulatory process was split into modules and each module delegated to that organisation with the relevant expertise. The following is a list of agencies involved in the WFP process and the type of policy innovation the incorporation of WFPs into the Local Government planning process represented to them.

	Pre Implementation	Post Implementation	Type of change
Rural Water Authority (G-MW)	Played a role in designing and commenting on on-farm works from at least the 1960’s to 1980’s. Played an important role in developing guidelines for WFPs in late 80s.	Received referrals from local government to make recommendations on whether to accredit WFPs.	Incremental – technical skills and personnel already exist in organisation. Require funding to increase resources.
SPPAC (to become GB-CMA)	Coordinating stakeholders around: Catchment drainage. On farm works. Tree planting.	Manages payment of incentives to landholders.	Incremental – incorporation of more stakeholders into WFP coordination.
SPPAC (to become GB-CMA)	Coordinating stakeholders around: Catchment drainage. On farm works. Tree planting.	Manages payment of incentives to landholders.	Incremental – incorporation of more stakeholders into WFP coordination.
DARA (to evolve into DPI)	Promotion and administration of financial incentives for WFPs. Extension and advice on on-farm works.	Promotion and administration of financial incentives for WFPs. Extension and advice on on-farm works. However number increases due to compulsive nature.	Incremental – increase in demand for WFPs leading to more resources required.
CNR (to evolve into DSE)	Referral authority for local government planning processes.	Referral authority for WFPs where biodiversity is potentially affected.	Incremental – increase in demand for WFPs leading to more resources required.
Irrigation Designers	Already providing accredited plans to meet WFP incentive guidelines.	All WFPs have to be accredited and not just those subject to an incentive.	Incremental – increase in demand for accredited plans leads to industry expansion.
Local Government	Introduction of earth moving regulations in 1991 meant that planning permits were required for earth moving anyway.	Local Government planning decisions are guided by comments of referral authorities. Local Government plays collaborative role in SPPAC with other stakeholders.	Modular – Move from command/control to cooperative regulatory approach. Effort directed at collaboration instead of enforcement.

Ultimately the policy innovation brought about by the incorporation of WFPs into the Local Government planning process was either incremental or modular. This suggests that it would have been a relatively straightforward policy instrument to implement for the agencies involved. Interestingly where there was the greatest change, in Local Government and SPPAC, both agencies had considerable incentive to undertake the relevant change. The new policy would assist Local Government to protect public roads that were deteriorating rapidly, and increase the rate and scope of adoption of on-farm best management practices for SPPAC.

Conclusion: Level of institutional change resulting from implementation of instrument is acceptable to the agencies involved, implement instrument.

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Appendix B: Application of the Policy Choice Framework

Irrigation Best Management Practices

According to the MID NRP (Southern Rural Water 1998) the underlying assumption about Irrigation Best Management Practices (BMPs) is that they will improve water management on farm so as to reduce the amount of water running off irrigated pastures. This is seen as an effective approach to reducing nutrient emissions off farms as phosphorus loss is proportional to the volume of run-off.

There are a number of agencies involved in the implementation of the MID NRP namely the Gippsland Lakes Taskforce (GLT), West Gippsland Catchment Management Authority (WG CMA), Department of Primary Industries (DPI), Department of Sustainability and Environment (DSE) and Southern Rural Water (SRW).

The GLT invests in a range of activities aimed at encouraging landholders to adopt irrigation BMPs. These include financial incentives, research and extension to reduce the off-site impacts of irrigation and to increase water-use efficiency.

The WG CMA manages the funds distributed through the incentive program which focuses on the development of infrastructure on farms. Incentives are provided for Irrigation Farm plans (75% of cost up to $86.25/ha plus GST), conversion from flood to spray irrigation (15% of cost up to $430/ha plus GST) and construction of tail-water reuse systems (50% of cost up to $17,400/system plus GST). Farmers applying for financial incentives from the incentive program have twelve months to complete their farm plan, reuse system or spray conversion. The WG CMA also leads facilitation of planning processes that underpin the nutrient reduction program (e.g. Macalister Land and Water Management Plan).

The focus of DPI staff working in the region is on extension activities such as workshops, field days and courses to improve the irrigation practices of landholders as well as in the implementation of the incentives program. DPI also provides technical support and leadership in the development of programs for nutrient reduction and planning processes. SRW play a role in monitoring the nutrient discharge of the irrigation drains within the MID.

Irrigation Farm Plans (IFPs), spray irrigation and reuse systems have been an important activity in terms of their impact on reducing nutrient emissions, and hence effective expenditure by the GLT on farm initiatives. Subsequently, financial incentives have remained a key activity in the most recent Land and Water Management Plan to achieve the behavioural change associated with irrigation BMPs (WG CMA 2007).

Application of the PCF to irrigation management

Public Net Benefit, Private Net Benefit Framework
Dairy production as currently practised in the MID creates private net benefits for dairy farmers. The installation of particular irrigation technologies and implementation of associated irrigation practices to reduce nutrient emissions from dairy farming in the MID creates a public net benefit by reversing an environmental externality, namely the emission of phosphorus into the Gippsland Lakes. The reversal of an externality should, in principle, impose private net costs. The MID NRP (Southern Rural Water 1998) assumes that the installation of irrigation reuse systems and the use of irrigation practices such as short watering create private costs for dairy farmers of approximately $100 and $20 per kg of phosphorus respectively. Spray irrigation is considered to offer a positive private net benefit of approximately $15 per kg of phosphorus based on labour and water savings, and productivity improvements. However, this benefit is strongly influenced by farm topography, soil types, level and reliability of water delivery, and power costs. The private net benefits gained from changing irrigation technology and practice have also been influenced in recent years by a decline in availability of surface water and groundwater, and the corresponding increase in the purchase price for permanent and temporary transfers of water entitlements via land transactions. The time and effort required of landholders to upgrade their irrigation technology will also influence the private net benefits of spray irrigation and high flow flood irrigation. On the grounds of economic efficiency, disincentives should be employed to reverse an externality that is the result of private actions (See Appendix A). Hence, the installation of irrigation technologies and implementation of irrigation practices to reduce nutrient emissions should occur through the deployment of negative incentives such as emission markets, charges or regulations. Conclusion: Recommend negative incentives to promote change in irrigation technology and practice in order to reverse externalities in the form of nutrient emissions associated with dairy production. Go to Negative Incentives Decision Tree.
Technical Feasibility – Negative Incentives
Question 1. Can the aggregate supply of the resource be defined? Yes, the resource is defined as the capacity of the Gippsland Lakes to assimilate nutrients without the creation of undesirable changes in the quality of water in the Lakes. This translates into a 40% reduction in total phosphorus emissions reaching the Lakes. Question 2. Does individual use of the resource need to be controlled to avoid spatial externalities? No, individual use of the resource does not need to be controlled to avoid spatial externalities. Question 3. Can individual use of the resource be measured or modelled? No, the measurement or modelling of individual use of the resource in the current operating environment would be difficult and expensive. However, in the long term, there is the possibility that the total nutrient load entering the Gippsland Lakes may need to be substantially reduced. This may result in a market in nutrient emissions permits deserving consideration in the future despite the difficulty and expense of measuring or modelling nutrient emissions from farms. Consequently, we have given some consideration to the design of such a market (Refer to Appendix C). Conclusion: We have assumed that the creation of a market in nutrient emissions permits is impractical because of the difficulty and expense of measuring or modelling nutrient emissions from farms, and the emphasis on changing the timing of emissions to reduce algal blooms by reducing nutrient rich low flow emissions in summer. Therefore regulation is the most appropriate negative policy incentive. Go to Regulation Tree.
Technical Feasibility – Regulation
Question 1. Are the environmental impacts of individual emissions easily measured? No, environmental impacts of individual emissions are not easily measured. Question 2. Is it possible to introduce new technology relatively simply and cheaply? It is possible to introduce a number of new practices relatively simply and cheaply however some key practices such as spray irrigation and high flow flood irrigation require the installation of expensive technologies. This suggests that technology based standards may be an appropriate mechanism for reducing nutrient emissions by changing irrigation management. Conclusion: Regulation based on technology standards to ensure irrigation runoff remains on farm is the most appropriate approach. Go to I₃ Response Framework.
I3 Response Framework
Question 1. What is landholders’ level of involvement in the issue? Our interviews with key informants and landholders made it clear that while dairy farmers may consider reducing nutrient levels in the Gippsland Lakes to be important, they did not consider the management of emissions as a criterion in their management of dairy production. Farmers’ decisions about adopting irrigation management practices were based on criteria such as labour costs, water use efficiency and pasture productivity (see also Kaine and Bewsell 2001). This evidence indicates that dairy farmers in the MID are not highly involved in the issue of reducing nutrient emissions into the Gippsland Lakes. Question 2. What is the level of involvement landholders have in the policy instrument? The policy instrument is the regulation of irrigation management using technology standards. Involvement may vary from low to high, depending on the consequences of standards for individual farm businesses. A policy instrument such as a regulation based on technology standards would be likely to impose some additional costs on many farm businesses and may have unpredictable consequences for some farm business. Farms are complex systems and alterations to these systems can lead to unpredictable changes to the system as a whole. Interviews with landholders identified a range of irrigation technologies and practices that would retain irrigation water on farm. The farmers indicated that the suitability of these practices to them depended on contextual issues such as topography, soil type, labour requirements, landuse, climatic events, water access and reliability. For some farmers, the introduction of a regulation based on technology standards may impose little or no additional cost as little change would be required to their farm systems to comply with these standards. Hence, we would predict these landholders to have low involvement with the policy instrument. For others, the cost of complying with technology standards is likely to be high because they need to make major changes to their farm systems. In short, the level of involvement will depend largely on landholders’ context. Question 3. What is the type of involvement landholders have in the policy instrument? Negative. To the degree that compliance with technology based standards imposes additional costs on farm businesses and may reduce managerial discretion of landholders, reactions to standards may be unfavourable. Presumably, the intensity of negative response would be proportional to the level of change required and cost imposed. If landholders feel technology standards are imposing substantial costs then strongly unfavourable reactions could be expected. Question 4. Will negative involvement endanger policy outcome? Possibly, given the likelihood of unfavourable reactions to the prescriptive nature of the policy and the potential impact on farmer choice and costs. Question 5. Can the policy instrument be modified to change involvement by accommodating landholder concerns? Yes. There are a number of design options that could be considered to neutralise unfavourable landholder reactions. These include (Gunningham 1998): Designing standards that are as minimally prescriptive as possible. For example, regulation of irrigation technology and practice needs to account for the considerable topographical and other contextual variations that influence the suitability of different irrigation systems throughout the MID. Given that these topographical variations largely determine the type of irrigation technology and practices that are appropriate, any regulation must be flexible enough to account for them. The regulations must also account for the contextual realities that can increase the costs of changing irrigation technology and practices in the longer term. According to Kaine and Bewsell (2001) and key informants these include previous investment in other types of irrigation infrastructure, land tenure and reliability of irrigation supply infrastructure. This was supported by interviews with landholders. Additionally, some landholders also indicated that climate events such as drought and flood can unpredictably impact on the timing of future investment in irrigation technology and practices. Providing incentives to support compliance with standards. For example, incentives to accelerate investment in irrigation technology such as automated irrigation systems, and consideration of incentives to offset costs such as installation of three-phase power supplies. Investment in irrigation infrastructure to improve water delivery may also be considered for irrigation options such as high flow flood irrigation. Landholder interviews highlighted uncertainty in the capability of the channel delivery system to deliver adequate flow rates for this type of irrigation system. Designing standards using processes that are as collaborative with industry as possible. Standards may be introduced as voluntary codes of conduct, becoming enforceable over a negotiated time scale. Providing information about complying with standards. Reduce administrative and compliance costs through financial incentives or subsidised services. Reducing the cost of compliance by funding all stakeholders involved in the regulatory process to play their role without having to recoup funds by charging landholders. A problem identified within organisational interviews was gaining access to reliable, ongoing resources for agency staff to develop and administer technical standards as a regulation. Consider a number of different options for complementary policy instruments: In summary this means that a regulation based on technology standards may be acceptable in the long term if the regulation is suitably flexible, accompanied by appropriate incentives and implemented using collaborative and negotiated processes. Conclusion: Regulation in the form of technology standards is feasible provided it is flexible, and accompanied by complementary policy instruments that reduce the impact of the regulation on the farm business. These complementary instruments include collaborative development of standards, financial incentives to reduce costs of meeting standards, information provision, and resourcing of participation in the regulatory process. Go to Use Variety Tree.

Use Variety Tree
Question 1. What is the potential for use variety? High, particularly with respect to the standard of the implemented irrigation technology being different from the specified standard; the landholders’ management of the technology reducing the effectiveness in reducing emissions; and the design of individual irrigation components being done in isolation from the whole farm and hence limiting the effectiveness in reducing emissions. Question 2. Is use variety a problem? Yes. Key informants and landholder interviews confirmed that current best management practices are implemented in ways that do not achieve the environmental objective. That is use variety was evident in the variation in design and management of reuse systems, the design of spray irrigation systems and the design and management of high flow irrigation. Question 3. Can use variety be reduced by placing conditions on the policy instrument? Yes, potential modifications to the instrument are – Making payment of financial incentives conditional on technology standards being met in design of IFPs. Making payment of financial incentive for head of drain reuse, reuse systems and spray irrigation conditional on implementation according to technology standards. Incorporating technology standards into related statutory or co-regulatory framework that can be invoked if use variety becomes an issue. The incorporation of technology standards into some form of statutory framework has potential since it allows offenders to be reported by others in the community. This model is the basis for monitoring the compliance and enforcement of Native Vegetation Retention Controls and is considered by government to be reasonably effective (Ford 2004). Question 4. Have the new conditions changed landholder involvement? The modifications to the instrument to limit use variety are likely to constrain management options available to irrigators. This raises the potential for unfavourable reactions to the imposition of standards. This reinforces the need for complementary policy instruments to offset such reactions. Conclusion: There is potential for use variety but this could be limited by incorporating standards into IFPs and making incentives conditional on compliance with standards. Go to Scoping Tree.

Use Variety Tree

Question 1. What is the potential for use variety?

High, particularly with respect to

the standard of the implemented irrigation technology being different from the specified standard;
the landholders’ management of the technology reducing the effectiveness in reducing emissions; and
the design of individual irrigation components being done in isolation from the whole farm and hence limiting the effectiveness in reducing emissions.

Question 2. Is use variety a problem?

Yes. Key informants and landholder interviews confirmed that current best management practices are implemented in ways that do not achieve the environmental objective. That is use variety was evident in the variation in design and management of reuse systems, the design of spray irrigation systems and the design and management of high flow irrigation.

Question 3. Can use variety be reduced by placing conditions on the policy instrument?

Yes, potential modifications to the instrument are –

Making payment of financial incentives conditional on technology standards being met in design of IFPs.
Making payment of financial incentive for head of drain reuse, reuse systems and spray irrigation conditional on implementation according to technology standards.
Incorporating technology standards into related statutory or co-regulatory framework that can be invoked if use variety becomes an issue. The incorporation of technology standards into some form of statutory framework has potential since it allows offenders to be reported by others in the community. This model is the basis for monitoring the compliance and enforcement of Native Vegetation Retention Controls and is considered by government to be reasonably effective (Ford 2004).

Question 4. Have the new conditions changed landholder involvement?

The modifications to the instrument to limit use variety are likely to constrain management options available to irrigators. This raises the potential for unfavourable reactions to the imposition of standards. This reinforces the need for complementary policy instruments to offset such reactions.

Conclusion: There is potential for use variety but this could be limited by incorporating standards into IFPs and making incentives conditional on compliance with standards. Go to Scoping Tree.

Scoping Tree
Question 1. Will numbers of landholders affected achieve the policy objective? The use of technology standards is expected to create greater reductions in nutrient emissions than could be achieved by relying on a purely voluntary approach. Such standards would be expected to create nutrient reductions off farm by requiring landholders to change irrigation technologies in situations where the private benefit of change is insufficient to motivate voluntary change. The implementation of appropriate irrigation technologies was also expected to contribute to permanent reductions in emissions. Given that the suitability of irrigation technologies such as spray irrigation and high flow irrigation depend on the volume and reliability of irrigation supplies then the implementation of MID 2030 may offer opportunities for landholders to change irrigation technology and reduce emissions. Question 2. Will landholders change quickly enough? The rate of change will depend on the time frame for implementation of standards and the magnitude of incentives on offer for investing in technology to comply with standards and other factors influencing when landholders decide to redevelop their irrigation. The rate of change will also be influenced by factors such as implementation of MID 2030 and the profitability of the dairy industry and other land uses. Question 3. Can the instrument be modified to increase the rate of change? The offering of incentives can be expected to increase that rate of change together with implementation of MID 2030. Conclusion: Technology based standards for irrigation may be capable of achieving greater nutrient emission reductions than reliance on voluntary change alone. The rate of change could be increased by offering incentives to reduce the private costs to landholders of changing irrigation technology and being aware that the implementation of MID 2030 will affect the rate of change possible and landholders’ opportunities to change irrigation technology and their interest in incentives.

Scoping Tree

Question 1. Will numbers of landholders affected achieve the policy objective?

The use of technology standards is expected to create greater reductions in nutrient emissions than could be achieved by relying on a purely voluntary approach. Such standards would be expected to create nutrient reductions off farm by requiring landholders to change irrigation technologies in situations where the private benefit of change is insufficient to motivate voluntary change. The implementation of appropriate irrigation technologies was also expected to contribute to permanent reductions in emissions.

Given that the suitability of irrigation technologies such as spray irrigation and high flow irrigation depend on the volume and reliability of irrigation supplies then the implementation of MID 2030 may offer opportunities for landholders to change irrigation technology and reduce emissions.

Question 2. Will landholders change quickly enough?

The rate of change will depend on the time frame for implementation of standards and the magnitude of incentives on offer for investing in technology to comply with standards and other factors influencing when landholders decide to redevelop their irrigation. The rate of change will also be influenced by factors such as implementation of MID 2030 and the profitability of the dairy industry and other land uses.

Question 3. Can the instrument be modified to increase the rate of change?

The offering of incentives can be expected to increase that rate of change together with implementation of MID 2030.

Conclusion: Technology based standards for irrigation may be capable of achieving greater nutrient emission reductions than reliance on voluntary change alone. The rate of change could be increased by offering incentives to reduce the private costs to landholders of changing irrigation technology and being aware that the implementation of MID 2030 will affect the rate of change possible and landholders’ opportunities to change irrigation technology and their interest in incentives.

Policy Innovation Tree

PCF analysis of irrigation management suggests one main change to current policy instruments. This is the establishment of enforceable technology based standards for irrigation and linking these standards to the provision of incentives for farm planning and investment in irrigation systems. The standards would result in a shift towards uniformity in the management of irrigation at the expense of the discretion for landholders’ choice in their irrigation management systems and practices. However, the development of technology based standards would need to accommodate variety in the characteristics of farms in the MID that influence the suitability of different irrigation technologies.

PRODUCT TERMINOLOGY	CURRENT POLICY INSTRUMENT	PROPOSED CHANGES TO THE POLICY INSTRUMENT
Instrument Concept	Financial incentives with prescribed technologies and extension
Instrument components	Incentive program: Funds List of prescribed technologies Eligibility criteria Design principles/guidelines Rules for allocation of funds, Landholder agreements, Payment process, Site assessment and recommendations Inspection Landholder visits, field days, training courses, publications, media Extension: Farm trials of irrigation technologies Research and Investigations	Incentives: Eligibility criteria that are consistent with technology standards Rules: Technology based standards Standards incorporate criteria relating to variety in farm context Inspection prior to payment of incentives to confirm works meet standards
Component principles	Principle for component 1:. Incentives Prescribed irrigation technologies contributes to the reduction of emissions Financial reward will promote behaviour that contributes to adoption of technologies Cost shared between public and landholders IFP process will encourage management practices that contribute to environmental outcome Principle for component 2:. Extension Awareness of the irrigation technologies and BMPs will change landholder behaviour Developing landholder skills and knowledge will result in improved irrigation management practices Media and experiential learning media is the most effective way to promote technologies and educate landholders Principle for component 3: Investigations and trials will lead to better irrigation and nutrient reduction practices Investigations are useful for trialling new approaches in the local context	Additional component principles:. Technology standards: Flexibility in design standards Incentives: Linking standards to incentives will encourage compliance with best practice to reduce nutrient export off farm
Instrument Architecture	Voluntary adoption of technologies and practices supported by incentive and extension	Enforceable technology standards supported by incentives and extension
Architectural Principles	Private benefit has greater priority than public benefit Voluntary participation Similar rewards for similar contribution to reducing nutrient emissions Farmers priorities drive technology choice and implementation Education will accelerate voluntary change	Public benefit has greater priority than private benefit Compulsory participation Different costs imposed on different landholders to reduce emissions Environmental priorities drive technology choice and implementation Enforcement of standards will reduce likelihood of unsuitable irrigation systems Regulation will increase likelihood of desired behavioural change

Analysis of irrigation management using the PCF indicates that nutrient emissions may be reduced further and more rapidly by the introduction of technology standards which could be supported by the use of incentives. The introduction of technology based standards for irrigation management involves a major change in the architectural principles of the policy instruments used to reduce emissions by influencing irrigation management. The changes in these principles result in subtle changes in the principles underpinning the components of policy instruments though many of the components themselves remain unchanged. The component principles now have a regulatory and compliance emphasis reflecting the shift from voluntary to regulatory architectural principles. Hence we classified the change in the policy instruments used to influence irrigation management as architectural.

Architectural innovations can render existing competencies, knowledge, processes, procedures and even organisational structures in agencies obsolete. Architectural innovations can also challenge fundamental organisational values. This suggests that the introduction of technology standards could trigger major organisational change in the agencies involved in their implementation. Such changes may require major investments in redeploying organisational resources and the acquisition of new skills and competencies. Implementation of such changes would also require a degree of sensitivity, cooperation and trust among the agencies involved. Consequently a staged approach to implementation of technology standards may be required, not only to increase acceptance among landholders, but also to provide agencies with adequate time to establish appropriate structures, skills and competencies.

Conclusion: The implementation of technology based standards would be an architectural change to the instruments used to influence irrigation management. Such changes would have major consequences for the agencies involved. This means that additional resources would need to be provided to ensure these agencies were able to develop the necessary capabilities, procedures and structures.

Fertiliser Best Management PracticesThe original MID NRP did not have an over-arching principle that defined fertiliser BMPs. Instead they were defined in terms of the following specific landholder behaviours:

Leaving a buffer zone on which fertiliser is not spread at the bottom of each irrigation bay.
Scheduling the fertiliser application on a pasture at least four days prior to the next irrigation to allow phosphorus to leach from fertiliser granules to the soil.
Prevent or minimise runoff to the drains for at least two and preferably three irrigations following fertiliser applications.
Spread fertiliser at times when the weather is more predictable.

Since the implementation of the MID NRP in 2000 the main activities undertaken in relation to fertiliser BMPs have been research to clearly define fertiliser BMPs and dissemination of this information to landholders through an awareness raising campaign (GHD 2006). Future policy initiatives described in the 2007 Macalister Land and Water Management Plan suggest that fertiliser BMPs will become incorporated into the Whole Farm Planning (WFPs) process (WG CMA 2007).

Application of the PCF to fertiliser best management practices

Public Net Benefit, Private Net Benefit Framework
Dairy production as currently practised in the MID creates private net benefits for dairy farmers. The implementation of fertiliser BMPs to reduce nutrient emissions from dairy farming in the MID creates a public net benefit by reversing an environmental externality, namely the emission of phosphorus into the Gippsland Lakes. The reversal of an externality should, in principle, impose private net costs. The MID NRP (Southern Rural Water 1998) assumes that the adoption of fertiliser BMPs such as short watering and strategic timing of fertiliser applications creates a private benefit for dairy farmers of approximately $15/kg of phosphorus saved. However it is unclear how much of this private benefit is actually realised in practice. On the grounds of economic efficiency disincentives should be employed to reverse an externality that is the result of private actions (see Appendix A). Hence, in principle the implementation of fertiliser BMPs to reduce nutrient emissions should be promoted through the deployment of negative incentives – emission markets, charges or regulations. To the extent that there may be private net benefits from implementing fertiliser BMPs in some circumstances the implementation of an extension program may also be warranted. Conclusion: Negative incentives should be considered to promote implementation of fertiliser BMPs. Develop extension program to promote fertiliser BMPs. Go to negative incentives decision tree.
Technical Feasibility – Negative Incentives
Question 1. Can the aggregate supply of the resource be defined? Yes, the resource is defined as the capacity of the Gippsland Lakes to assimilate nutrients without the creation of undesirable changes in the quality of water in the Lakes. This translates into a 40% reduction in phosphorus emissions of 70tonnes/yr. The estimated contribution of fertiliser in runoff to these emissions is approximately 70%. Question 2. Does individual use of the resource need to be controlled to avoid spatial externalities? No, individual use does not need to be controlled to avoid spatial externalities. Question 3. Can individual use of the resource be measured or modelled? No, individual use of the resource cannot be measured or modelled. Conclusion: Regulation is the most appropriate negative policy incentive. Go to regulation tree.
Technical Feasibility – Regulation
Question 1. Are the environmental impacts of individual emissions easily measured? No, environmental impacts of individual emissions are not easily measured. Question 2. Is it possible to introduce new technology relatively simply and cheaply? No, the BMPs are processes rather than technologies. Conclusion: Regulation based on process standards is the most appropriate. Go to I3 Response Framework.
I₃ Response Framework
Question 1. What is the landholders’ level of involvement in the policy issue? (The issue being reducing nutrient emissions entering the Gippsland Lakes). Our interviews with key informants made it clear that while dairy farmers may consider reducing nutrient levels in the Gippsland Lakes to be important they did not consider the issue highly involving enough for management of emissions to be a critical criterion in their management of dairy production. Farmers decisions about adopting fertiliser management practices are based on criteria such as labour costs and practicality (see also Kaine and Bewsell in 2001). This evidence indicates that dairy farmers in the MID are not highly involved in the issue of nutrient emissions into the Gippsland Lakes. Question 2. What is the level of involvement landholders have in the policy instrument? (The policy instrument being the regulation of process based standards for fertiliser management) A regulation based on process standards would prohibit spreading fertiliser on or near farm drains or prior to an irrigation event. Such standards would not require extra labour or specialised technology – hence they would be unlikely to impose extra costs on the farm business. Nor would these standards be likely to introduce changes to the farm system that could lead to unpredictable changes in the farm system as a whole. However, regulation of fertiliser practice was judged to be unfair and unreasonable given the lack of precision of weather forecasting and logistics in regard to fertiliser services. However, regulations would place restrictions on what farmers can and cannot do on their farms, which is at odds with traditional agrarian values of mastery and independence. This suggests that while regulation of fertiliser practice may contribute to reducing costs to farm businesses there may be some unfavourable reactions among farmers to the imposition of such regulations. Hence, the level of involvement among farmers with regard to the regulation may be either low, or high and unfavourable. Question 3. What is the type of involvement landholders have in the policy instrument? Where involvement is high farmers are more likely to exhibit unfavourable attitudes towards the regulation of fertiliser practice because the regulation constrains independence and may be regarded as impractical and unreasonable in many situations. Question 4. Will negative involvement endanger policy outcome? Possibly, we do not have sufficient information to answer this question with confidence. Question 5. Can the policy instrument be modified to change involvement by accommodating landholder concerns? Yes. There are a number of design options that could be considered to neutralise unfavourable landholder reactions. These include designing (Gunningham 1998): Regulations which are as minimally prescriptive as possible. For example, regulation of fertiliser BMPs needs to account for differences between farmers and contractors that influence the practicality of fertiliser BMPs throughout the region. The regulations must also account for the contextual realities such as land tenure, availability of contractors’ services or the reliability of weather forecasts that prevent implementation of practices. Regulations that provide a financial incentive to change. For example, price premiums associated with adopting an Industry Codes of Practice. Regulations which are as collaborative with industry as possible. Regulations may be introduced as voluntary codes of conduct, becoming enforceable over a negotiated time scale. Regulations that move up an ‘enforcement pyramid’. Providing information about complying with regulation. Reducing the cost of compliance by waiving fees for permits. Reducing the cost of compliance by funding all stakeholders involved in regulatory process to play their role without having to recoup funds by charging landholders. Consider a number of different options for complementary policy instruments: In summary this means that a regulation based on process standards may be acceptable in the long term if the regulation is suitably flexible and accompanied by appropriate incentives. Conclusion: Regulation based on process standards may be acceptable in principle if the regulation is suitably flexible and accompanied by appropriate incentives however compliance may by impractical in many situations and enforcement is problematic. Go to Use Variety Tree.

Use Variety Tree
Question 1. What is the potential for use variety? Low. Question 2. Is use variety a problem? No. Question 3. Can use variety be reduced by placing conditions on policy instrument? Not necessary. Conclusion: Regulation of fertiliser practice is unlikely to be effective. Voluntary mechanisms such as codes of practice together with extension may foster adoption of desirable practices. Go to Scoping Tree.
Scoping Tree
Question 1. Will the numbers of landholders affected achieve the policy objective? Unlikely. Depends on the numbers of farmers that employ contractors operating by industry codes of practice. Also depends on how many farmers are prepared to voluntarily implement fertiliser BMPs. If some form of incentive was offered to implement voluntary fertiliser BMPs through auditing processes associated with EMS it is more likely that fertiliser BMPs would be adhered to. However monitoring of compliance is problematic. Question 2. Will landholders change quickly enough? Unclear. According to the MID NRP review (GHD 2006) all of the fertiliser spreaders operating in the MID adhere to the industry codes of conduct. Conclusion: Given the challenge of enforcing process standards for fertiliser management and the likelihood that fertiliser BMPs cannot be implemented in many circumstances, the regulation of fertiliser management is unlikely to substantially advance achieving phosphorus emission targets. Voluntary mechanisms such as industry codes of practice, in conjunction with an extension program promoting the savings from the use of desirable fertiliser practices, seem the most practical policy option in these circumstances.

Use Variety Tree

Question 1. What is the potential for use variety?

Low.

Question 2. Is use variety a problem?

No.

Question 3. Can use variety be reduced by placing conditions on policy instrument?

Not necessary.

Conclusion: Regulation of fertiliser practice is unlikely to be effective. Voluntary mechanisms such as codes of practice together with extension may foster adoption of desirable practices. Go to Scoping Tree.

Scoping Tree

Question 1. Will the numbers of landholders affected achieve the policy objective?

Unlikely. Depends on the numbers of farmers that employ contractors operating by industry codes of practice. Also depends on how many farmers are prepared to voluntarily implement fertiliser BMPs. If some form of incentive was offered to implement voluntary fertiliser BMPs through auditing processes associated with EMS it is more likely that fertiliser BMPs would be adhered to. However monitoring of compliance is problematic.

Question 2. Will landholders change quickly enough?

Unclear. According to the MID NRP review (GHD 2006) all of the fertiliser spreaders operating in the MID adhere to the industry codes of conduct.

Conclusion: Given the challenge of enforcing process standards for fertiliser management and the likelihood that fertiliser BMPs cannot be implemented in many circumstances, the regulation of fertiliser management is unlikely to substantially advance achieving phosphorus emission targets. Voluntary mechanisms such as industry codes of practice, in conjunction with an extension program promoting the savings from the use of desirable fertiliser practices, seem the most practical policy option in these circumstances.

Dairy Effluent Management

The disposal of dairy effluent is regulated under the State Environment Protection Policy (SEPP), Water of Victoria Schedule 5, which is enforced by the Environment Protection Authority Victoria (EPA). This regulation requires landholders to contain effluent on their land and to prevent effluent from leaving their property or entering a waterway. The EPA does not prescribe processes or technology in regard to effluent management.

Dairy effluent management systems are made up of a number of interdependent components which need to be integrated into a farming system. In the MID dairy effluent is generally pumped to a holding pond or ponds for storage. The liquid portion of the stored effluent is then irrigated onto pasture. The solids that accumulate in the bottom of ponds are periodically removed by a vacuum tanker and sprayed onto, or injected into, pasture. By returning dairy effluent to the pasture phosphorus should be recycled on farms with minimal losses to irrigation drains. The effectiveness of effluent systems is influenced by a number of farm characteristics which can limit the landholder’s effectiveness at retaining nutrients on farm.

The current program to encourage improvements in effluent management has a number of elements that are spread across the EPA, DPI, SRW and the CMAs. The role of the EPA is enforcement; they have the authority to conduct audits, fine landholders and respond to complaints. The DPI provides a range of nutrient extension activities including assisting farmers in the development of Effluent Management Plans that cover the design of effluent systems and Nutrient Management Plans that incorporate a range of farm practices including fertiliser application and effluent disposal. SRW can report instances of non-compliance. The CMAs fund EPA audits and DPI extension depending on catchments’ priorities and they may manage incentive funds for agencies such as the Gippsland Lakes Taskforce.

The partnership between the EPA, who audit farms, and the DPI, who provide technical advice to landholders on request, has resulted in improved effluent management practices (DPI 2006). Key informants indicated that although compliance has improved, it has been shown that state-wide up to 30 per cent of farmers have been found to be non-compliant in follow-up audits. It is considered that this improvement in compliance decreases when the risk of audit is reduced (Hassall & Associates Pty Ltd 2007). Key informants indicated that the use of measures such as Effluent Management Plans by landholders is driven by EPA enforcement.

A partnership, DairyGains, has been established between industry and government to improve dairy effluent management. DairyGains will develop a framework to identify stakeholder roles and responsibilities and options for an integrated approach.

Application of the PCF to dairy effluent management

Public Net Benefit, Private Net Benefit Framework

Dairy production as currently practised in the MID creates private net benefits for dairy farmers. The management of dairy effluent to reduce nutrient emissions from dairy farming in the MID creates a public net benefit by reversing an environmental externality, namely the emission of phosphorus into the Gippsland Lakes. The reversal of an externality should, in principle, impose private net costs.

The MID NRP (Southern Rural Water 1998) assumed that the adoption of improved dairy effluent practices would occur in compliance with the EPA regulations governing the management of animal waste and did not estimate private net costs for compliance with regulation. The magnitude of the public benefit associated with increased compliance was larger than originally predicted in the MID NRP (Southern Rural Water 1998) because effluent was found in a recent EPA audit to contribute a greater proportion of phosphorus emissions than previously thought (GHD 2006). Broader potential risks associated with effluent management, such as health and biosecurity risks, were not considered in this report.

On the grounds of economic efficiency, disincentives should be employed to reverse an externality that is the result of private actions (See Appendix A). Hence, the implementation of improved effluent management to reduce nutrient emissions should be promoted through the deployment of negative incentives such as emissions markets, charges or regulations.

Conclusion: Negative incentives to be considered for dairy effluent management. Go to Negative Incentives Decision Tree.

Technical Feasibility – Negative Incentive

Question 1. Can the aggregate supply of the resource be defined?

Yes, the resource is defined as the capacity of the Gippsland Lakes to assimilate nutrients without the creation of undesirable changes in the quality of water in the Lakes. This translates into a 40% reduction in phosphorus emissions in the total emissions of 70tonnes/yr.

Question 2. Does individual use of the resource need to be controlled to avoid spatial externalities?

No, individual use does not need to be controlled to avoid spatial externalities.

Question 3. Can individual use of the resource be measured or modelled?

No, individual use of the resource cannot be measured or modelled.

Conclusion: Regulation is the most appropriate negative policy incentive. Go to Regulation Tree.

Technical Feasibility – Regulation

Question 1. Are the environmental impacts of individual emissions easily measured?

No, environmental impacts of individual emissions are not easily measured.

Question 2. Is it possible to introduce new technology relatively simply and cheaply?

No. There are a broad range of technologies for managing dairy effluent. However from interviews with landholders the costs of the effluent ponds and associated infrastructure for disposal can be substantial. Topography, soils and other characteristics of farms can influence the suitability of different effluent systems. Consequently, compliance with effluent regulations can be issue in some farm contexts due to the limited effectiveness of the systems. The effort and cost involved in managing dairy effluent depend on the type of effluent system installed and the interaction between the system and other aspects of farm infrastructure and farm practice. Therefore process based standards may be needed to regulate the practices landholders employ to manage dairy effluent. Overall, process based standards appear appropriate for reducing emissions. Process based standards place constraints on inputs into the management processes farmers use for effluent management such as defining a rule for determining the area needed for effluent disposal. Such process standards would need to be supported by appropriate technology based standards given the interaction between technologies and management practices.

Conclusion: The most appropriate forms of regulation for dairy effluent management are process based standards and technology based standards. Go to I3 Response Framework.

I₃ Response Framework

Question 1. What is landholders’ level of involvement in the issue?

Our interviews with key informants made it clear that while dairy farmers may consider reducing nutrient levels in the Gippsland Lakes to be important they did not consider reducing emissions was a critical criterion in their management of dairy production. A survey by EPA Victoria (EPA Victoria 2003) found that dairy farmers did not take phosphorus emissions into account when making decisions about effluent systems. This suggests that the level of involvement in the issue of limiting nutrient emissions to improve water quality in the Gippsland Lakes is low for farmers when making decisions about managing dairy effluent.

Question 2. What is the level of involvement landholders have in the policy instrument?

The policy instrument in this instance is the regulation of dairy effluent management using technology and process based standards. Dairy effluent management involves a number of components including water management, solids stockpiling, pond management, and reuse and application. Evidence from a recent study in the Shepparton Irrigation Region (Davies et al. 2007) suggests that the level of farmers’ involvement in the installation of effluent management systems is high due to their cost and managerial consequences but farmers’ involvement in the management of these systems once they have been installed tends to be low. This is consistent with the statements of landholders we interviewed in Gippsland. They indicated that interest in the regulation of dairy effluent management tends to low.

This could change if process and technology based standards were introduced as these may force landholders to change their practices and require them to modify their systems. Landholders could be required to increase attention and effort in effluent management and incur more costs. This could lead to higher involvement and unfavourable reactions (provided auditing is suitably frequent).

Question 3. What is the type of involvement landholders have in the policy instrument?

Negative. Farmers are likely to exhibit unfavourable attitudes towards the implementation of standards for effluent management because the regulation would constrain their managerial discretion and may be impractical in some situations. The characteristics of farms such as existing effluent and irrigation infrastructure influence the suitability of different systems for managing effluent. Interviews with landholder in Gippsland suggest that while landholders may have received advice from DPI on system design not all are putting in the recommended systems possibly because they fear this may lead to management problems or significant costs. Some landholders may face constraints with regard to suitable sites for disposal. Hence, some landholders may view the creation of standards unfavourably.

Question: Will negative landholder involvement endanger the policy outcome?

Yes, negative landholder involvement could endanger the policy outcome.

Question: Can the instrument be modified to change involvement by accommodating landholders’ concerns?

Yes, provided the standards were flexible enough to take into account the farm characteristics that influence the suitably of different systems and practices. There are a number of options that could be considered to neutralise unfavourable landholder reactions. These include designing (Gunningham 1998):

Regulations which are as minimally prescriptive as possible. For example, standards for effluent need to account for differences between farms that influence the practicality of effluent management throughout the region.
Regulations that provide a financial incentive to change. For example, incentives associated with adopting effluent systems that meet the standards.
Regulations which are as collaborative with industry as possible. Regulations may be introduced as voluntary codes of conduct, becoming enforceable over a negotiated time scale.
Regulations that move up an ‘enforcement pyramid’.
- Providing information about complying with regulation.
- Reducing the cost of compliance by waiving fees for permits.
- Reducing the cost of compliance by funding all stakeholders involved in regulatory process to play their role without having to recoup funds by charging landholders.
Consider a number of different options for complementary policy instruments:
Providing an inspection and waste disposal service to reduce the time landholders must invest in effluent management and enable landholders to comply with EPA regulations in circumstances where current technologies are unsuitable.

Conclusion: Regulation based on process and technology standards may be acceptable if the standards are suitably flexible and accompanied by appropriate incentives. Go to Use Variety Tree.

Use Variety Tree

Question 1. What is the potential for use variety?

Low. However, the potential for non-compliance is high. Effluent systems are made up of many technological and management practice components. These components are interdependent and need to be managed accordingly, and within the constraints of the farm system as a whole. The management options available to landholders include reducing water into the system, managing solids, ponds and reuse and effluent application. The complexity of effluent systems means they may be improperly managed once installed and yet detection of improper management is infrequent. Davies et al. (2007) found, for example, a wide variation among dairy farmers in the period of time they allowed to pass between successive de-sludging of their effluent ponds.

Question 2. Is use variety a problem?

No but compliance is. The EPA survey (EPA Victoria 2003) of MID dairy farms suggests that most farmers have an adequate effluent pond system however these are not maintained in a manner that ensures they can be effectively managed all year round. Interviews with key informants suggested that follow-up EPA audits have continued to identify issues with the management of effluent systems. This suggests there is a need to make the process of managing effluent easier by, where possible, changing the design of effluent systems to reduce the potential for non-compliance, and presenting alternative management options such as disposal off farm. In addition, an inspection and liquid waste removal service could be implemented which would reduce the difficulties for farmers in circumstances that are unsuited to current systems. This would be a particularly useful option for landholders whose farm context means that the cost of an appropriately sized pond and/or disposal system is prohibitive.

Question 3. Can use variety be reduced by placing conditions on policy instrument?

Not applicable.

Question 4. Have the new conditions changed involvement?

Not applicable.

Conclusion: The effectiveness of the existing regulation of dairy effluent could be improved by –

defining technology and processes standards to be used by landholders to manage dairy effluent,
promoting correct management processes and changes in the design of effluent management systems and ensure that they are incorporated into IFP guidelines and Nutrient Management Plans,
ensuring appropriate levels of auditing for compliance,
the provision of a system monitoring and effluent removal service for those with farms that cannot achieve compliance within reasonable cost.

Go to Scoping Tree.

Scoping Tree

Question 1. Will numbers of landholders affected meet the policy objective?

Yes, only if supported by appropriate auditing and the effluent removal service.

Key informants stated auditing of regulations has resulted in behavioural change across the MID that has resulted in measurable reductions in phosphorus emissions. However, it is not clear that behaviour change is the source of reductions in emissions. We regard the permanency of this change in effluent management and any associated improvement in emissions as depending on continued auditing. This suggests that the regulations and standards might have to be supplemented by other measures such as changes in system design and the introduction of a system monitoring and effluent removal service.

Question 2. Will landholders change quickly enough?

Yes. Increased rates of compliance have been seen with the EPA - DPI audit extension approach. However the changes in effluent management practices appear to depend at least partly on continuing enforcement and there are still landholders who continue to be ‘at risk’ or non-compliant. From landholder interviews in Gippsland where recent conditions have reduced farm incomes, there was little willingness to place a high priority on investment in effluent systems.

Conclusion: The scope and rate of change would be sufficient if the level of auditing of standards is appropriate and a service to ensure maintenance of systems is provided.

Policy Innovation Tree

Currently the policy instrument for effluent management includes regulation and extension. Analysis of this instrument with the PCF resulted in three key innovations to the policy instrument being proposed. First, the establishment of process and technology based standards to increasing the certainty of achieving the environmental outcome. Second, to retain landholder choice in management options and to offset the potential unfavourable responses to standards by providing support for landholders such as provision of a waste removal service was proposed. Third, linking effluent standards to planning instruments to increase the integration with existing programs such as IFPs.

PRODUCT TERMINOLOGY	CURRENT POLICY INSTRUMENT	PROPOSED CHANGES TO THE POLICY INSTRUMENT
Instrument Concept	Managing performance through regulation and extension
Instrument components	Rules: Containment of waste on farm Preventing effluent waste entering waterways or groundwater systems from farms Auditing and monitoring Letter of warning/fines Referrals to case management Enforcement Processes: Waste storage Disposal Solids management Guidelines for farm practices: farm visits & assessment Effluent Management Plans¹ Nutrient Management Plans Case management (voluntary) Promotion of desirable management processes Extension:	Rules: Process based standards (procedures & parameters) for effluent management e.g. frequency of storage emptying, setting limits on storage capacity Technology based standards e.g. weeping walls for storage. Practices: Guidelines align with standards Link to IFPs and NMPs New components: effluent monitoring and removal service from farm
Component principle	Principle for component 1: Containment of waste will reduce nutrient emissions into waterways and lakes Compliance with these rules is essential for effluent to be managed appropriately Regulation will result in prevention of effluent waste contributing nutrient emissions into the waterways and lakes li>Landholder discretion in the management of effluent subject to conditions of the consent (enabling management solutions to fit their farm context) Principle for component 3: Audits will discourage mismanagement of dairy waste Penalties for non compliance which will effectively deal with offenders Case management referrals will motivate landholders to seek and develop appropriate practices for dairy waste Improved landholder performance will be reinforced through regular monitoring Principle for component 3: The adoption of these practices will reduce effluent waste emissions into waterways and the Gippsland Lakes Principle for components 4 and 5: Once landholders are aware of the best practices for dairy waste they will change their behaviour Developing landholder skills and knowledge will result in improved dairy waste management practices Effluent Management Plans will result in landholders managing their dairy waste appropriately	Additional component principles associated with new rules: Standards will provide clear direction on what constitutes compliance Standards will address the risk of non compliance in waste containment and effluent management practices Standards will result in greater precision in compliance with the regulation Additional component principles associated with new practices: Standards for management and disposal will simplify and clarify compliance requirements Additional component principles associated with new instrument component (effluent monitoring & removal service): Providing a service for effluent disposal will enable landholders choice of management options in order to comply with standards A service will offset circumstances where current systems are unsuitable or particularly expensive
Instrument Architecture	Regulation by prescribing outcome	Regulation by prescribing outcome and the technologies and practices to reach that outcome
Architectural Principles	There is a priority on ecologically sustainable resource use and preventing harm to others Landholders can be compelled to reduce emissions Landholders choose methods of reducing emissions Polluter pays Enforcement will accelerate compliance with effluent management requirements Education will encourage the voluntary adoption of best practice and encourages voluntary compliance	Prescribing technologies and practices will enable better management of emissions, more effective enforcement, and so increased chances of achieving the outcome

The addition of standards to the regulatory component of the policy instrument involves a substantial change in the components and component principles of the policy instrument. There is a major shift in the component principles away from landholder discretion in management of effluent to regulated technologies and practices, with an associated modification in the architectural principles of the instrument. However, the introduction of a waste disposal service tempers this shift by providing landholders with an alternative management option. Given this we classified the change in the policy instrument as modular.

Modular changes result in some disruptions to agencies. For example the introduction of a waste removal service would probably require the acquisition of new skills and competencies by the delivery organisations. Given this, the agencies will need to consider which of them would be best placed to provide this service. Delivery of standards for effluent management would probably require the acquisition of new skills, competencies, processes and procedures and may present challenges for agencies with respect to their organisational values. For example, agencies that implement voluntary change programs may be less comfortable with delivering and enforcing standards than agencies that already implement regulatory programs. On the other hand, some agencies deliver both voluntary and regulatory programs. Naturally, these organisational changes need to be appropriately resourced

Conclusion: The implementation of technology and process standards would represent a modular change in the policy instrument. This suggests the agencies involved would need to invest in developing appropriate skills, competencies, processes and procedures to accommodate this change. This need would be increased if a system monitoring and effluent disposal service were implemented.

Drainage Management

The MID NRP (Southern Rural Water 1998) proposed drainage management options for reducing nutrient emissions. Originally four options were proposed namely - channel injection, increased drain water diversion, drains water harvesting and wetlands storage. The channel injection option was not progressed as it was considered unacceptable due to potential water health and quality implications that were unacceptable from a community and irrigator perspective. The wetland storage option was rejected due to economic considerations and unknown nutrient benefits. The remaining options have been progressed and are considered in the PCF. Subsequent to the initial NRP development SRW have initiated management option of heads of drains and this also has been applied through the PCF. A review (GHD 2006) also stated that implementation of the chosen drainage management options were the primary responsibility of Southern Rural Water. A brief description of the drainage management options are outlined below.

Heads of drains: This option involves the transfer of drains at the top of the catchment from SRW to landholders by agreement. The maintenance and management of the drain then becomes the responsibility of the landholder. Typically landholders convert these drains to reuse systems. There are some fees paid by the landholder associated with the transfer however the water captured has no cost or restrictions attached. In 2005, 49 heads of drains had been transferred to landholders (GHD, 2006).
Drain Diversions: Landholders along the length of the drains are able to apply for a drainage diversion agreement. This agreement allows them to capture low flow irrigation tail water runoff from regional drains for immediate use (Hydro environmental, 2002). Water captured is charged at a reduced price (approx. $6 - $12.55/ ML) to reflect its lower reliability. Some investment in infrastructure (e.g. pumps, sump) is required and this investment is the responsibility of the landholder.
Drain Harvesting: Landholders at the end of drains are able to purchase a drainage harvesting agreement. This entitles them to capture high flow, primarily rainfall runoff, from regional drains for storage and later use as irrigation water (Hydro environmental, 2002). As with drainage diversion, the water is charged at between $6 – $12.55/ ML and the costs incurred with transferring and storing the water on the farm are the responsibility of the landholder.

A number of factors influence the reliability of drainage water available to landholders. These include climate (dry seasons can mean less water), landholder management upstream (keeping water on farm results in less irrigation outfalls to drains) and system modernisation (particularly the reduction of channel outfalls to drains).

The MID NRP Review (GHD, 2006) reported that a number of changes had been made to drainage diversion agreements; these included the introduction of rules for operating drainage diversions and the introduction of transferring head of drains to landholders where appropriate.

Application of the PCF to drainage management

Public Net Benefit, Private Net Benefit Framework
Dairy production as currently practised in the MID creates private net benefits for dairy farmers. Drainage diversions create a private net benefit for those landholders as a source of inexpensive, nutrient rich water for irrigation. The private net benefit varies among landholders depending on the cost of the associated infrastructure, the costs of managing the infrastructure, and the cost and reliability of the water. Reliability of flows in drains depends on climate, the number and management of other upstream landholders and diverters, and delivery system modernisation. Drainage management creates a public net benefit because landholders are reversing an environmental externality, namely the emission of phosphorus into the Gippsland Lakes, created by the broader dairy industry. The degree to which the public benefit is realised depends on the affect diversions have on the timing and concentration of phosphorus reaching the Lakes. All three drainage management options provide a mechanism for landholders to capture and use the nutrient emissions of other farmers. This places drainage management options in area B of Pannell’s framework. The appropriate policy instrument for this area is extension to promote adoption of the practice. Conclusion: Implement an extension program to promote adoption of drainage management options. Go to I3 Response Framework.
I₃ Response Framework
Question 1. What is the landholders' level of involvement in the issue? Our interviews with key informants and landholders made it clear that while landholders may consider reducing nutrient levels in the Gippsland Lakes to be important management of emissions was not a critical criterion in their management of dairy production. Landholders’ decisions about drainage management were based on criteria such as labour costs and practicality (see also Kaine and Bewsell in 2001). This evidence indicates that landholders in the MID were not highly involved in the issue of reducing nutrient emissions into the Gippsland Lakes. Question 2. What is landholders' level of involvement in the policy instrument? The policy instruments here are regulation of access to drainage flows through agreements and incentives for installation of reuse systems where such systems include drainage management. Involvement was likely to be high among landholders in the appropriate locations given drainage management provides them with relatively inexpensive access to valuable supplies of water. In interviews landholders confirmed that they were seeking additional water supplies and that drainage water was one of the important sources they were considering. This was consistent with the opinions of key informants who suggested that drainage diversions were an important source of irrigation water for many farmers in the MID. Question 3. What is the type of involvement in the proposed policy instrument? Positive. Drainage management creates a private benefit for landholders and an extension program would assist them in evaluating options and decision making. Conclusion: Promotion of voluntary adoption of drainage management options is appropriate. Go to Use Variety Tree.
Use Variety Tree
Question 1. What is the potential for use variety? Low, except in regard to: Storages being kept full with drainage water, or not being of an adequate size, and hence being unable to capture nutrient rich water at critical times. Question 2. Is use variety a problem? Possibly. The installation of inadequately sized storages or mismanagement of storages could reduce the public benefit. Question 3. Can use variety be reduced by placing conditions on policy instrument? Yes. The potential modification to the instrument is: Inclusion of criteria governing size of storages for diversions in agreements for drainage diversion and harvesting. Conclusion: An extension program is viable and the potential for use variety can be addressed to protect the public benefit. Go to Scoping Tree.
Scoping Tree
Question 1. Will the number of landholders affected meet policy outcome? According to key informants drainage diversions in the MID are characterised by relatively high proportion of diverters at the head and bottom of drainage catchments with relatively few diverters in the mid-catchment. Currently 16,557ML/yr is being diverted which is 123% of the original NRP target (GHD 2006). This suggests that the private benefits of drainage diversion are sufficient for landholders to invest in diverting drain flows wherever this is economic. Key informants indicated that a number of factors such as channel automation will reduce the volume and reliability of drainage flows in the future. This suggests that the need for private diversion of drainage flows will decline in the future. Question 2. Will landholders change quickly enough to meet policy outcome? Yes, drainage diversion and harvesting agreements have been rapidly adopted. This also appears to be the case with heads of drains agreements. This suggests that an extension program to promote rapid adoption is unnecessary. Furthermore, the need for rapid adoption is unlikely to continue if modernisation substantially reduces drainage flows in the future. Conclusion: The voluntary adoption of drainage management options has occurred rapidly among MID farmers. This suggests that an extension program to further promote the adoption of drainage diversions may be unnecessary.

Policy Innovation Tree

Currently the policy instrument for drainage management includes licence and agreements to access drainage water and incentives in the form of discounted charges for drainage water. Analysis with the PCF indicated incentives and extension may be unnecessary except that criteria for determining the size of storages could be incorporated into diversion and harvesting agreements. Criteria for determining the size of storages could also be incorporated into standards for IFPs.

PRODUCT TERMINOLOGY	CURRENT POLICY INSTRUMENT	PROPOSED CHANGES TO THE POLICY INSTRUMENT
Instrument Concept	Licences and agreements for water access, incentives in the form of discounted charges for drainage water
Instrument components	Agreements and licences For heads of drains: Guidelines for transfer and farm practice. eligibility criteria approval processes For drainage diversions: Guidelines for diversion licences eligibility criteria approval processes For drainage harvesting Guidelines for diversion licences eligibility criteria approval processes discounted charges for drainage diversions (high and low flows) Incentives	Inclusion of rules for storage size included in eligibility criteria for drainage agreements and licences
Component principles	Principle for component 1: Private diversion of flows in drains will reduce nutrient emissions into waterways and lakes Principle for component 2: Discounted charges for drainage water will increase that rate of adoption	Additional component principles: Guidelines for storages will reduce the risk of inadequate sizing of storages
Instrument Architecture	Regulated access with incentives to promote rapid adoption
Architectural Principles	Private benefit is sufficient to ensure public benefit is achieved Landholders choose to divert flows Incentives will accelerate adoption

The change in the drainage policy instrument is to include a condition on drainage licences storages of an appropriate size are constructed should be considered. Analysis using the PCF indicates this is a minor change to the instrument components and principles. There are no changes to the instrument architecture. Therefore introduction of a condition on storage size into agreements for drainage diversion and harvesting is classified as an incremental change to the original policy instrument.

Incremental changes in instruments result in minimal disruption to the implementing organisations. Incremental change can be implemented using existing organisational skills and knowledge. Hence, while relatively minor adjustments to procedures may be needed to incorporate a new condition regarding storage size into licences and agreements we expect these adjustments could be implemented with existing organisational knowledge and skills.

Conclusion: Consider the introduction of a condition a condition in regard to storage size into agreements for drainage diversion and harvesting.

Appendix C: Emissions market

Nutrient emissions market

Cap and trade schemes are being trialled in a number of countries as a policy instrument for managing nutrient emissions from diffuse sources such as agriculture, (Higson and Kaine 2004). A few, such as the Grasslands Selenium Trading Scheme, the Lower Boise Nutrient Trading Scheme in the United States and the Dutch Nutrient Trading Scheme, have been implemented. A tradable emission scheme is also being implemented by Environment Waikato for managing nitrogen emissions from agriculture in the Lake Taupo catchment in New Zealand (Kaine and Higson 2004).

In this appendix we summarise a hypothetical cap and trade scheme for agricultural emissions of phosphorus in the Macalister Irrigation District (MID).

A ‘cap and trade’ approach

A market in tradable phosphorus emission permits may be preferred to other policy instruments such as voluntary adoption of best management practices because the ‘capping’ of emissions provides greater certainty that the environmental objective can be achieved.

In addition, cap and trade markets offer flexibility to landholders to adopt different management practices and production processes over time in response to changes in economic conditions, abatement measures and production technology. In doing so, a market in emissions permits enables the environmental objective to be achieved at the lowest possible economic cost to the community, at least in theory (Montgomery 1972).

There are some critical difficulties in establishing a cap and trade market for diffuse source emissions such as phosphorus from agriculture. Probably the most important technical difficulty is the problem of defining the emissions of individual landholders. For emissions to be tradable they must be measurable and controllable.

There are also important social and political difficulties with emission markets. It is compulsory for landholders that generate emissions to participate. The capping of emissions effectively places the importance of achieving water quality targets before the existing rights of landholders. Capping emissions effectively redistributes wealth between landholders and the rest of the community. Furthermore, the allocation of emission permits among landholders influences the distribution of wealth among them.

In the remainder of this appendix we describe how the technical difficulties of a cap and trade market in phosphorus emissions from irrigated agriculture might be overcome.

A market in phosphorus emission permits

A cap and trade market consists of three components. The first is a ‘cap’ or limit on total phosphorus emissions leaving the catchment. This limit may be defined with respect to the whole catchment or specific areas within the catchment.

The second component is an emission permit that embodies a property right specifying the volume of phosphorus emissions each landholder is legally entitled to discharge. The total volume of discharges allowed by the emissions permits must equal the cap for the catchment.

The third component is a market mechanism where emission permits can be traded, either in whole or in part, and on a temporary or permanent basis.

A fundamental problem in designing tradable permit schemes for emissions from diffuse sources are the technical difficulties associated with measuring and controlling emissions. This has a number of consequences for designing a market in phosphorus emissions from agriculture. First, emissions from diffuse sources can only be estimated on the basis of proxies that are associated with emissions such as numbers of livestock, types and amounts of fertiliser applied, areas of annual crops and pasture, soil type, and so on. Hence, the market depends on the use of simulation models to estimate the phosphorus emissions of individual landholders.

Second, the volume of emissions into rivers in the short term can depend on factors beyond the control of landholders such as rainfall. A consequence of landholders’ lack of control over emissions in the short term means the volume of emissions can, in aggregate, potentially diverge from the assimilative capacity of the rivers in the catchment.

The phosphorus emission cap

The cap and trade market in phosphorus emission permits described here is based on the assumption that the local or regional drainage network intercepts virtually all runoff from irrigated agriculture in the catchment. The drainage network may include natural streams. These networks then drain into one or more lakes in the catchment for which maximum phosphorus concentrations have been set. These concentrations may be defined for points in the landscape such as end of valley, end of river, end of drain or end of river reach, depending on the preferences of stakeholders.

The maximum phosphorus concentrations, together with the volume of water in the rivers over a period of time, define for our purposes the assimilative capacity of the rivers with respect to phosphorus. This capacity is the ‘cap’ aspect of cap and trade markets. The phosphorus emissions cap is the total amount of phosphorus emissions available for distribution among landholders. The cap is the total amount of phosphorus emissions landholders in total may legally generate.

Hence, the phosphorus emissions cap defines the supply of the resource (assimilative capacity of the rivers) available for trading among landholders. The smaller the cap relative to the emissions of landholders the scarcer and more valuable is the resource, and the more valuable the right to generate phosphorus emissions.

For the purpose of phosphorus emission permits the phosphorus emission cap can be defined between two points in a river as the average annual assimilative capacity of the river in the long term. In principle, the long term is a period chosen such that landholders’ uncontrolled emissions of phosphorus in the short term equate with the average assimilative capacity of the lake over that period. This period may be a number of years.

Phosphorus emission permits

Phosphorus emission permits entitle landholders to a specified share in the phosphorus emission cap. That is, the permit entitles the owner to a percentage of the long term, average annual assimilative capacity of the relevant river. The phosphorus emission permit can be expressed either as a percentage of the cap or as the equivalent load in kilograms per relevant unit of time.

The period of time in which emission permits are denominated is a critical issue in market design. On the one hand emission permits should not be denominated in periods of time that are shorter than the rate at which at least some landholders can implement abatement actions. Otherwise landholders may find themselves inadvertently contravening the conditions of their permits yet lacking the capacity to comply with these conditions. On the other hand, permits should not be denominated in periods of time that are substantially longer than the rate at which most landholders can implement abatement actions. To do so would unnecessarily reduce the rate of transfer of emission permits between alternative land uses thereby reducing the efficiency of the market and imposing economic losses on the community.

The dynamic behaviour of the supply of the natural resource is another consideration in determining the time of denomination of permits. Generally speaking the aggregate volume of emissions authorised through the permits should change over time in accord with changes in the capacity of the environment to assimilate emissions.

In the context of Gippsland, landholders may vary their emissions in the long term by, for example, altering their mix of livestock, use of fertilisers or use of feed supplements. However, they do not have the capacity to adjust their emissions in line with short-term variations in the assimilative capacity of rivers or lakes. By defining emission permits as shares of the long-term average of the assimilative capacity of the lake, the short term rate of phosphorus emissions which is beyond the control of landholders is divorced from the long term volume of emissions which can be influenced.

Since actual emissions of phosphorus produced by individual landholders cannot be measured their share of the cap must be translated into proxies. That is, measurable production inputs related to phosphorus emissions. The translation of the share of the phosphorus cap into measurable production inputs also describes the control landholders can exert over their emissions of phosphorus in the longer term. The only practical means by which this translation can be done is through the use of phosphorus budgeting models. Hence, as is the case with nitrogen emission market being introduced in New Zealand (Kaine and Higson 2004, Environment Waikato 2003) the cornerstone of the emissions market would be a nutrient budgeting model for agricultural land uses.

In using a nutrient budgeting model to calculate phosphorus emissions the model acts as a mechanism for imputing landholder’s use of their share of the phosphorus emissions cap. To achieve the cap the total volume of imputed emissions calculated using the model should be less than or equal to the cap. Therefore, each landholder should have an emission permit sufficient to match their imputed emissions. Furthermore, the total of the emissions calculated using the model for all landholders with permits should approximate emissions of phosphorus across the catchment in the long term. This means the phosphorus budget model must be reasonably accurate at a catchment scale and as free of bias as possible at the level of the individual.

By defining emission permits in terms of processes embodied in the nutrient budgeting model the difficulty of measuring actual phosphorus emissions is avoided. Hence the, measurement difficulties typically associated with diffuse source pollution are circumvented. Furthermore, as emissions are determined in the model on the basis of estimated relationships between emissions and contextual characteristics, the model can be used to infer constraints on those characteristics, which are related to agricultural production processes such as soil or fertiliser type. This means that the phosphorus emission permits for a particular landholding can also be expressed in terms of the contextual characteristics of that holding as well as units of phosphorus emission.

This creates a number of advantages. First, because permits can be expressed in terms of contextual characteristics then, in principle, permits can define constraints on the permissible combinations and levels of inputs into agricultural production processes such as amounts of fertiliser applied to annual and perennial irrigated pasture. This allows the landholder to evaluate phosphorus emission permits in terms of the economic value of the combinations of production inputs and management practices possession of the permit allows. The inputs would be translated to give the emission equivalent of tonnes of phosphorus per annum to facilitate trading. In other words, the permits can be expressed in terms of the opportunities for using land they make available, which is precisely the basis on which landholders will value the permits.

Second, expressing emission permits in terms of contextual characteristics such as livestock numbers and fertiliser use means that trades can be visualised in terms of familiar farm management measures which facilitates the exchange of emissions between landholders.

Third, a unit of phosphorus emissions creates different economic opportunities in different locations depending on the farming context. Conversely, a particular combination of livestock classes will require a different volume of emission permits in different contexts. Hence, any trade in emission permits between landholders requires determining the relevant changes in the production possibilities for each of the landholders. In other words, an exchange rate must be calculated to determine the rate at which emissions in one context convert to a unit of emission in another context. This exchange rate is embodied in the phosphorus budgeting model and is given by the relationship between estimated emissions and the contextual characteristics, including inputs to agricultural production processes.

Fourth, expressing emission permits in terms of permissible combinations and levels of inputs into agricultural production processes such as numbers of livestock facilitates monitoring of landholder compliance. In principle, inputs to agricultural production processes are measurable whereas emissions are not.

Fifth, by expressing emission permits in terms of stock numbers, fertiliser applied, best management practices and water use, emission permits are defined and documented in a manner consistent with the new regulatory framework planned for governing the use of water. For example, the proposed water use component of an ‘unbundled’ water right is likely to be defined by variables such as: permitted crops and pastures; best management practices; and maximum limits on water use (Victorian Department of Sustainability and Environment 2004).

The purpose of water use licences is to provide a policy mechanism specifically for regulating the environmental effects of the use of water including the effects of the use of water on water quality (Victorian Government Department of Sustainability and Environment 2004). In this regard, the intent of the emission market is entirely consistent with the purpose of water use licences. In addition, the national policy for managing water resources specifically endorses the concept of market mechanisms as a means for regulating water use (Productivity Commission 2005). Consequently, we believe the market design presented in this paper is, in principle, consistent with the concept of a water use licence and provides one means of giving expression to such licences with respect to regulating phosphorus emissions.

One disadvantage of using a nutrient budgeting model to estimate emissions is the scope that it offers for litigation. As emission estimates are based on an imputed rate of emissions rather than actual emissions the imputation process embodied in the model may be subject to legal challenge.

A second disadvantage is that a nutrient budgeting model is required for each type of land use that generates phosphorus emissions. Construction of models covering a range of agricultural land uses would be required.

Note that by describing emission permits as shares in the long run assimilative capacity of a lake and defining those shares in terms of a production process embodied in a phosphorus budget model, the permits are defined, and the market operates largely independently of actual phosphorus emissions in the short term.

Trading rules for phosphorus emission permits

Trading rules should be simple and enhance the managerial flexibility of permit holders (Stavins 2001). Generally, trading in phosphorus emission permits should be allowed to occur between market participants at anytime and throughout the region.

A central register could be established by a suitable organisation such as the Catchment Management Authority that would record details of permits and record those interested in buying or selling permits. This would help coordinate market transactions in a number of ways by reducing compliance costs and reducing search costs for landholders. For example, the establishment of a central register would facilitate enforcement of the conditions attached to ownership of permits.

As described earlier, and for a number of practical reasons, emission permits were expressed in terms of the contextual characteristics of land holdings such as stock numbers and management practices as well as shares in the emission cap. Consequently, when a trade is negotiated between landholders, the limits on these characteristics must be adjusted correspondingly for both landholders. Presumably, the Catchment Management Authority would calculate these adjustments and amend their records accordingly, especially if the authority is responsible for monitoring and enforcing compliance with conditions attached to emission permits.

In addition, trades in phosphorus emission permits would require matching adjustments in the contracts both landholders have arranged for the disposal of their emissions.

In principle, trading of permits may be initiated in two ways. Landholders would initiate trading in response to changes in their circumstances. Trading of this type should be possible at any time. However, trading may also be initiated in response to changes in the parameters and relationships in the phosphorus budgeting model. These changes may arise perhaps as a result of recalibration of the model with new information on aggregate phosphorus emissions, the introduction of new agricultural technologies and practices, or changes in the cap on emissions.

A change in the parameters and relationships in the phosphorus budgeting model may require landholders to reconcile the difference between their existing permits and their revised emission estimates by buying, selling or leasing permits, or by changing land use.

A change in the parameters and relationships in the phosphorus budgeting model may also mean that the total volume of emissions as estimated with the model may differ from the cap for phosphorus emissions defined by the assimilative capacity of rivers. This raises the problem as to how emission permits should be adjusted in aggregate to match direct, or indirect, changes in the phosphorus emissions cap. A variable cap and trade program is one approach to resolving this issue (Higson and Kaine 2004). Alternatively, this matter could be resolved by implementing a fixed cap and trade program and authorising the Catchment Management Authority to trade emission permits.

Modifications to the phosphorus budgeting model or the emissions cap could introduce a significant element of uncertainty into the emission permits market, both for landholders and the Catchment Management Authority. A number of possibilities involving insurance, futures and options may be considered that would allow market participants to manage their exposure to this uncertainty.

Monitoring of compliance

Consistency requires that compliance with emission permit conditions would be evaluated in terms of the way in which the agricultural inputs that serve as proxies for emissions are specified in the nutrient budgeting model.

Monitoring may entail monthly, quarterly or annual self reporting of inputs and management practices by landholders with random checks conducted under the auspices of the Catchment Management Authority.

Penalties for illegal emissions

Landholders should be liable to pay a penalty for emissions in excess of their entitlement and the penalty for unauthorised emissions must be sufficient to deter landholders from illegally discharging on a systematic basis.

The determination of the penalty to be exacted per unit of emissions needs careful consideration since the penalty will effectively place a ceiling on the prices at which permits are traded. If the penalty is set too low the penalty for discharging illegally will be lower than the cost of purchasing emission permits to discharge legally. Consequently, the demand for permits could fall to zero. Hence, if penalties are not set at sufficiently onerous levels the price of permits could be bid down to the level of the penalty. Since the price of permits cannot rise above the ceiling imposed by the penalty the market for emission permits would fail to function effectively.

Ideally, for the market to function without being unduly influenced by the penalty, the penalty must be set at a rate higher than the highest marginal net benefit a landholder will gain from phosphorus emissions. Repeat offenders may be penalised by forfeiting their permits.

The likelihood of prosecution for unauthorised emissions must also be sufficiently high to deter landholders from illegally discharging on a systematic basis. This means legislative support must be available so that landholders can be prosecuted for breaching the terms of either their emission or discharge permits. If prosecutions for recovery of penalties and forfeiture of permits do not have a high probability of success then penalties can be effectively evaded. In such circumstances, establishing a market in emission permits is problematic as the right to discharge is no longer exclusive to those in possession of emission permits.

Distribution of gains and losses

The setting of a standard for water quality, both in terms of an acceptable phosphorus concentration within the lake and tonnes of phosphorus allowed to discharge into the lake, is the most important determinant of distribution of adjustment costs between landholders and the rest of the community. As noted earlier, the limited control landholders can exert over emissions of phosphorus effectively prevents them from substantially adjusting their emission rate in the short term without making highly disruptive changes in their land management. Consequently, in practical terms, the more rapidly emissions need to be reduced in the short term to achieve the desired standard of water quality, the greater the burden of adjustment that will fall on landholders.

The distribution of adjustment costs between landholders, and between landholders and the rest of the community is influenced by the procedure employed to distribute emission permits. Broadly speaking, permits may be allocated by sale, by gifting on the basis of historical emissions and gifting on the basis of averaging.

Sale

The allocation of permits by sale requires landholders to purchase permits to cover their emissions, usually through some form of auction or tender process. This approach to allocating permits may appear attractive to many as an application of the ‘polluter pays principle’. The application of this principle deserves careful consideration for three reasons.

First, landholders will have experienced a diminution in their rights and an associated loss of wealth simply because of the loss of their previously unrestricted right to discharge phosphorous. This is because the restriction of their right to discharge phosphorus translates into either restrictions on their land use and income, increased production costs entailed in implementing abatement measures, or both. That is, landholders must bear the costs of either implementing abatement measures or else bear losses associated with scaling down, changing or closing enterprises. Many in the community may consider it unfair for landholders to have to purchase their initial endowment of emission permits as well as bearing these costs and losses.

Second, establishing standards for water quality places a constraint on phosphorus emissions in a catchment. That is, standards set a limit or cap to emissions in the catchment. In establishing a standard for water quality the community, at least in principle, sanctions a restricted volume of phosphorus emissions. In other words, the water quality standard defines the volume of emissions that are deemed acceptable by the community. Consequently, because landholders are discharging phosphorous within the cap they have the sanction of the community. Creating a legal right to discharge phosphorus within the constraints of the cap means the term ‘polluter’ – with its reprehensible connotations - is not an accurate way to describe the status of landholders as dischargers of phosphorus. Hence, the validity of applying the polluter pays principle is questionable in this context.

Third, for emission rights to be valuable the volume of emission permits available for purchase must be less than the current or anticipated rate of emissions in aggregate. This means that at least some landholders must be in a position to immediately reduce emissions as not all landholders will be able to purchase emissions permits. As noted earlier, the limited control landholders can exert over emissions of phosphorus effectively prevents them from substantially adjusting their emission rate in the short term without making highly disruptive changes in their land management. Consequently, allocating emission permits by sale becomes problematic if the allocating authority wishes to avoid imposing serious economic losses on landholders.

However, the sale of emission permits may be appropriate when the number of emission permits is being expanded. This may be appropriate if the initial allocation was found to be too restricted and additional permits were made available in confidence the water quality standard would not be breached.

The alternative to selling emission permits is to gift them to landholders. The method used to gift emission permits is an important determinant of the way in which adjustment costs are distributed among landholders themselves. While there are many variants, there are essentially two approaches to gifting permits – gifting on the basis of historical emissions and gifting on the basis of averaging.

Gifting by historical emissions

The gifting of emission permits on the basis of historical emissions means that landholders are simply given emission permits equivalent to their estimated emissions over a relevant period of time prior to the establishment of the market. The granting of emission permits on the basis of historical emissions means the introduction of the market does not require landholders to make any immediate change to the management of their enterprises. Should landholders wish to increase their emissions, to intensify their operations for example, they would need to purchase additional permits.

Gifting on the basis of historical emissions is often criticised on the grounds that landholders that have reduced their emissions by implementing best practices would receive a smaller endowment of permits than landholders that have not reduced their emissions. In other words, landholders that have implemented abatement measures in the past are penalised while landholders that have not taken such socially desirable actions are rewarded with greater endowment of permits. The validity of this criticism depends on a number of factors.

First, this criticism may be unjustified in circumstances where emissions were not known to create problems or where emissions were known to create problems but landholders were not expected to reduce emissions.

The validity of this criticism also depends on the extent to which abatement measures are uniform in their effectiveness and efficiency. Some landholders may have been able to implement abatement measures at relatively low cost. The cost to others of implementing similar measures may have been prohibitively high. Alternatively, the measures may be ineffective in the circumstances faced by some landholders. In some cases relatively inexpensive measures may be effective whereas in other cases only relatively expensive abatement measures would be effective.

Failure to implement abatement measures in the form of best practice does not necessarily signal then, a lack of concern for the environment or a lack of willingness to behave in a socially desirable manner. The fact that a particular landholder has not adopted best practices is not, of itself, sufficient grounds for concluding that the landholder has disregarded the rights of others, and should necessarily be allocated a smaller endowment of emission rights.

The validity of this criticism is also limited if incentives were paid to support landholders to implement best practice. To the degree that landholders did not bear the full cost of implementing best practice, and possibly obtained commercial benefit from the best practice, the landholders have already been rewarded for engaging in such socially desirable actions.

Allocation of permits on the basis of historical emissions does, however, raise the issue as to how the initial allocation of permits should be reduced over time to be consistent with the emissions cap. One approach is to institute proportionate reductions in the emissions each permit allows until the aggregate volume of emissions matches the cap. These reductions may be phased in over a period of time. This approach places the burden of the cost of adjusting to the cap on landholders.

This approach does distribute the costs of adjusting to the cap unequally among landholders. Those landholders that are least able to adjust their emissions will bear a relatively greater proportion of the adjustment costs compared to landholders that are better able to adjust their emissions.

A case might be made that the community should at least partially compensate landholders for the adjustment costs they incur if a relatively rapid reduction in emissions is desired. Such compensation could be made in a variety of ways such as using public money to purchase and retire land from agricultural production, or using public money in an incentive program or cost share program to support landholders investing in abatement measures.

An alternative approach to adjusting the initial allocation of permits is for the Catchment Management Authority to institute a program of purchasing emission permits from landholders until the volume of emission permits remaining in the ownership of landholders matches the emission cap. The program may operate over a considerable period. This approach places the burden of the cost of adjusting to the cap on the rest of the community, assuming the government provides the funding for the purchasing program. This approach is consistent with the view that, as the cap on emissions is instituted at the expense of landholders for the benefit of the community, the community should meet the costs of adjustment.

Gifting by averaging

A second possibility when gifting emission permits is to allocate the same volume of emission rights to all landholders irrespective of their historical emissions. Allocating emission rights equally among landholders may appear attractive because it provides a mechanism for compensating, to some degree, apparent differences among landholders in terms of lost opportunities. These lost opportunities may take the form of foregone future income or a decline in asset values. For example, where emissions are correlated with farm intensification some may argue that to allocate permits on the basis of historical emissions unfairly penalises those landholders that have not yet taken the opportunity to intensify their operations.

Alternatively, allocating emission rights equally among landholders may appear attractive because it provides a mechanism for compensating, to some degree, those landholders that have implemented best practices prior to the establishment of the market. The criticisms made previously on the validity of adjusting the allocation of emission permits to reward landholders that have implemented best practice apply here.

Allocating permits by averaging has two potential disadvantages. The first is that this procedure may be politically impractical. Logically, if all landholders receive an equal share of emission permits then landholders with relatively high emissions will be required to immediately implement abatement measures or obtain additional emission permits from landholders with relatively low emissions. As argued previously, landholders may have little capacity to implement abatement measures immediately. Hence, landholders with relatively high emissions may face serious economic losses. For this reason, allocating emission permits equally among landholders may not be politically feasible.

The second disadvantage relates to the distribution of adjustment costs among landholders. If all landholders are allocated the same volume of emission permits, those landholders who face relatively high costs in reducing their emissions may be required to purchase emission permits from landholders who face relatively lower costs. Consequently, this type of allocation may serve to redistribute adjustment costs among landholders in such a way as to transfer wealth from those experiencing the greatest economic disruption to those experiencing the least economic disruption.

Note that, if compensating landholders for losses in terms of foregone opportunities is considered justified, then economic theory suggests that compensation should be made in the form of direct income payments.

Conclusion

In this appendix a hypothetical cap and trade market in transferable phosphorus emission permits for irrigated agriculture has been outlined. The outline was based on our knowledge of the market in salt discharges operating in the Hunter Valley of New South Wales, the market in nitrogen emissions proposed for Lake Taupo, New Zealand and our research into markets for phosphorus and salt emissions in northern Victoria (Ford et al 2006; Leth et al 2006).

References

Environment Waikato, 2003. Protecting Lake Taupo: A Long Term Strategic Partnership. Environment Waikato, Hamilton, New Zealand

Ford J, Kaine G and Leth M (2006) A tradable permit scheme for salt emissions in North Central Victoria, Practice Change Research Working Paper 01/06, Department of Primary Industries, Tatura, Victoria

Higson M and Kaine G (2004) Tradable Permit Systems for Natural Resource and Environmental Management, Social Research Working Paper 03/04, AgResearch, Hamilton, New Zealand

Kaine G and Higson M (2004) A Tradable Permit Program for Nitrogen Emissions to Lake Taupo, Social Research Working Paper 08/04, AgResearch, Hamilton, New Zealand

Montgomery, W.E., 1972. 'Markets in Licenses and Efficient Pollution Control Programs.' Journal of Economic Theory, 5: 395-418

Productivity Commission, 2005. 'Rural Water Use and the Environment: The Role of Market Mechanisms.' Productivity Commission Issues Paper, Australian Government, Canberra

Stavins, R., 2001. 'Experience with market-based environmental policy instruments.' Discussion Paper 00-99, Resources for the future, Washington

Victorian Government Department of Sustainability and Environment. 2004. Securing Our Waters Future Together. 1-171

Foot Notes

¹Please note Effluent Management Plans deal with the design of the storage system and application of waste. Nutrient management plans deal with all nutrient management of which dairy effluent is a component

Disclaimer:

This publication may be of assistance to you but the State of Victoria and its employees do not guarantee that the publication is without flaw of any kind or is wholly appropriate for your particular purposes and therefore disclaims all liability for any error, loss or other consequence which may arise from you relying on any information in this publication.

Acknowledgements

The research reported here was funded by the Gippsland Lakes Taskforce and Department of Sustainability and Environment and the West Gippsland Catchment Management Authority. We would like to thank those we interviewed during the project for sharing their knowledge and expertise in helping us to apply the Policy Choice Framework to policy instrument choice to enhance nutrient reduction in the MID.

We would particularly like to thank the landholders who generously gave up their time to contribute to the project.

We would also particularly like to thank Helen Murdoch for her assistance with interviewing and analysis.

Department of Primary Industries

agriculture

Approaches to Managing Nutrient Emissions in the Macalister Irrigation District

Table of Contents

Executive summary

1. Introduction

2. Background

Macalister Irrigation District

3. Methods

Conceptual framework

4. Findings from the first stage

5. Results of the second stage

6. Conclusion

7. References

Appendix A: The Policy instrument Choice Framework

Bibliography

Appendix B: Application of the Policy Choice Framework

Irrigation Best Management Practices

Dairy Effluent Management

Drainage Management

Appendix C: Emissions market

Nutrient emissions market

A ‘cap and trade’ approach

A market in phosphorus emission permits

The phosphorus emission cap

Phosphorus emission permits

Trading rules for phosphorus emission permits

Monitoring of compliance

Penalties for illegal emissions

Distribution of gains and losses

Sale

Gifting by historical emissions

Gifting by averaging

Conclusion

References

Foot Notes

Disclaimer:

Acknowledgements