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Securing Water for Dairy into the Future

Practice Change Research - Projects

Market Mechanisms to Drive Water Use Efficiency Improvements in the Irrigated Dairy Industry of Northern Victoria

Background

The dairy industry in northern Victoria is a major contributor to the national and regional economy and community, and is also a major user of irrigation water in the region (around 50%). Sustainable use of water resources in the irrigation areas of northern Victoria is a priority for stakeholders, including dairy farmers, industry, community, service providers and natural resource managers. There has already been significant investment by industry and stakeholders in a range of research, extension and policy initiatives to improve water use efficiency (WUE) on dairy farms. Although these programs have had significant success, some groups believe change isn't happening fast enough. To accelerate change, a broader range of policy instruments now needs to be utilised to include farmers who have not modified their practices sufficiently to achieve outcomes that have high levels of public benefit when compared to the private benefit.

Project Objectives

The project will deliver on the following objectives:

  • To identify and document a range of market-based instruments that could be implemented (using case studies where possible) to illustrate their intended and potential unintended consequences.
  • To recommend market based instruments appropriate for the improvement of WUE in the dairy industry in northern Victoria.
  • To develop implementation strategies for the recommended market-based instruments.

Project Outline

First the project sought to identify the outcomes required from improving WUE from the perspective of different stakeholders. Then the project determined if WUE was the most appropriate mechanism for achieving the outcomes identified.

The project investigated the concept of market-based instruments and their historical development and use in addressing natural resource management issues nationally and internationally. The aim was to identify the different types of market-based instruments and develop an understanding of the context in which each instrument is most appropriate.

Given the newness of some market-based instruments in natural resource management eg cap and trade markets, the project investigated ways in which they could help build the capacity of decision makers in selecting and designing different instruments in line with their current programs.

Results, Implications and Benefits

Four key conditions need to be satisfied if a market-based instrument is to be implemented. These are:

1. The outcome, in this case water use efficiency, needs to be defined and agreed to by the key stakeholders.

  • The policy outcomes need to be defined from each stakeholder's perspective to avoid confusion and conflict. The outcomes should be defined in terms of:
    • Environmental (eg 50% reduction of phosphorus reaching the Murray River);
    • Economic (eg maximise economic efficiency at a catchment scale);
    • Social (eg community has an equal opportunity in creating and delivering the solution); and
    • Political (eg maintainance of the community support for the Catchment Management Authority Board) perspective.
2. The enabling institution needs to be in place and willing to implement the market-based instrument. To achieve this:

  • Decision-makers want evidence that new market-based instruments such as tenders and cap and trade markets will provide increased benefit at lower cost than current instruments before they will be motivated to implement such instruments.
  • To aid decision-makers in the process a Decision Support Framework was developed. The DSF provides a methodology for assessing the existing policy instruments and identifying gaps for additional market-based instruments that will have synergistic effects in achieving the outcomes.
  • The ability to implement market-based instruments will in part be dependent on the institution's capability, such as skills, knowledge and resources.
3. Market-based instrument needs to be designed to deliver the outcome

  • The design of a market-based instrument should consider:
    • Clearly defining and agreeing on the outcome
    • The context in which it will be implemented - One size does not fit all.
    • Building on the impact of current instruments
    • The wealth effects resulting from the allocation of (new) property rights
    • The roles, motivation and capabilities of institutions
  • The process of designing a market-based instrument identifies the technical feasibility of the instrument to achieve the outcome.
  • However, designing an instrument is but one of the steps required in implementing a market-based instrument.
4. The market-based instrument needs to be successfully implemented.
  • The roles and responsibilities for designing and managing the market are divided amongst a number of institutions, each with different business objectives. Given this complex institutional environment, an implementation strategy is required.

The enabling legislation outlining the roles and responsibilities of each institution, must be in place.

Project Leader:

Fiona Johnson

Research Staff:

Melinda Leth, Brigette Keeble

Collaborators:

Funding Sources:

Water for Growth

Project Duration:

July2001 to June 2004