Today, the level of industrial activities that release toxic effluents into the environment is increasing by the days. Conservation of the environment in the face of the high rate of pollution is a difficult task, yet there is a need to provide a clean and safe environment for the benefit of all organisms that exist in the ecosystem. Most natural resources are strained, a fact that demands quick action towards their conservation. Among the natural resources that need conservation is the Murray-Darling basin that has been adversely affected by the changes in land use patterns, water extraction as well as poor river management.
The ecosystem services or benefits that the natural resource provides is significant in supporting lives, thus it is important to ensure sound management of the river system. This paper discusses the strategies that the government should implement o ensure that the ecosystem services provided by Murray-Darling basin continues to be experienced. The main ecosystem services that the paper focuses on include provisioning, regulating and cultural benefits. The sources of market failure in provision of these ecosystem services are also discussed as well as the market interventions that can be used to contain the situation.
Key ecosystem services provided by the Murray-Darling Basin
Both the rural and urban dwellers in Australia benefit greatly from the basin through the provisions provided such as food. Farmers use the water from the basin in irrigation projects that yield food which is consumed by the population. Apart from irrigation, people use the river to source aquatic foods such as fish which supported by the basin. The public also use the fresh water from the basin and this helps improve their livelihoods. According to Chantarat et. al. (2007, p. 1262), there is a strong link between lack of food and poverty. A society that has food security is unlikely to be poor because it is able to engage in other development activities such as education. In light of this, it is accurate to conclude that the basin supports economic development through the ecosystem service of provisions.
The other ecosystem service that the Australian population gets from the basin is regulation in terms of the quality of air, water and diseases (Reid-Piko et. al. 2010, p. 5). The basin helps in controlling diseases by ensuring that people have clean air and water. The population using water from the basin is unlikely to suffer from water-borne illnesses as they consume clean water. The river purifies water for drinking through dilution of toxic substances deposited in the basin.
These are the non-material benefits that the people benefit from the basin including aesthetic values and cultural heritage (Reid-Piko et al. 2010, p.5). Although the cultural services are not material, they provide economic benefits to the society through creation of employment and generation of revenue from tourists visiting the area.
The Australian government needs to support the provisioning, regulation and cultural service because they have many benefits that enhance the well-being of the people. For instance, the provisioning services are important in promoting secure access of natural resources to the society, a fact that improves the security of the people. The services also enhance sufficient and nutritious food, leading to the development of the community. The government also needs to promote the welfare of the regulation services because they enhance personal security, protect people from disasters and ensure access to clean water and air. The cultural services are also important because they promote good social relations through creation of social cohesion. The services uphold the well-being of individuals, giving them freedom of choice and action. Consequently, the freedom enables people to achieve their desires fully and this promotes their quality of life even further.
Importance of regulation in the provision of ecosystem services
Despite the contribution of the ecosystem services towards the well-being of the society, they are unlikely to be provided at an efficient level in the market when there is no regulation. The main challenge with offering the services at the efficient level is the fact that people are unwilling to pay for non-excludable products such as clean air because they can always access the products without paying them (Jaeger 2011, p. 3). Such products are also non-rival, implying that people can use them without exhausting.
Externality in the market is also a factor that makes it hard for the ecosystem benefits to be provided at an efficient level. It entails the decisions made by individuals or companies that exploit resources without considering the impact of their activities on the environment. Whether an externality is positive or negative, it has an impact on the level of efficiency in the market. These features of the ecosystem services make it hard for the government to introduce a system in the market that addresses their efficient utility. There are cases where market mechanisms have been used to enhance environmental conservation such as the limit of carbon emissions or fishing fixing fishing quotas.
For the market mechanisms to be effective in conserving the environment, the government must ensure that there are strict regulations. The regulatory authorities are meant to ensure that the natural resources are not overused or polluted so as to ensure conservation. The regulatory markets work by selling the rights to extract water or organisms such as fish. Individuals and companies that engage in the activities that threaten environmental conservation have to obtain the rights from the regulatory authorities. The rights are only granted after the parties commit to observe the regulations such as fishing quotas.
The inefficient level that the ecosystem services are offered affects even the price level because of the forces of demand and supply. For instance, the inability of the government to collect optimum revenue for activities such as water purification leads to higher demand and lower supply of the cleans water. When the demand is higher than supply, the price of clean water appreciates. This is the case with most of the ecosystem services whereby the prices are directly affected by the inefficiencies in the market brought about by externalities as well as non-excludable and non-rival nature of the services. These are the same variables that lead to market failure; a situation characterized by inefficient allocation of resources.
Market-based instruments (MBIs) for improving the provision of ecosystem services
Management of the environment in the modern days is enhanced by the use of market-based instruments that create and deliver incentives to encourage good use of natural resources. This is an efficient mechanism that can be applied by the Australian government in managing Murray-Darling basin to ensure that the ecosystem services are gained. Unlike the traditional methods that use regulations, the market-based instruments use incentives and this makes them more desirable compared to the regulated systems. The following are the types of market-based instruments that can be adopted to ensure that the society continues to benefit from the ecosystem services.
This type of market-based instrument is suitable for the provisional services because they involve tangible products such as food, wood and fiber. The instrument aims at fixing a certain price to be able to achieve the desired environmental outcome (Whitten et. al. 2009, p. 5). For the provisional services there is a rising needs to protect the river banks by ensuring that deforestation reduces in the form of wood harvesting. The government can use the price-based instrument by increasing the amount of taxes that companies involved in the business pay. This is meant to discourage the act because it will increase the prices of wood. In the long-run, consumers will find alternative methods of meeting their need for wood. With limited market share, most companies will exit the business leading to conservation of trees.
This is a unique instrument because it demands a lot of support from the regulatory authorities for it to be effective. It is suitable in improving the regulation ecosystem services such as the provision of clean air and water. The instrument involves using rights that are traded to the parties whose business may lead to depletion of natural resources or pollution of the environment (Whitten et. al. 2009, p. 6). It is not possible to have clean air or water in an environment where the level of pollutants that can be released is uncontrolled. For the Australian government to improve the regulation services, it needs to limit the quantity of pollutants allowed into the river. The companies engaging in industrial activities that release toxic effluents should only be issued with production rights after agreeing to consent to the limit regulations.
Market friction MBI
The market-based instrument is important in improving the cultural services that are provided by Murray-Darling. The instrument works by ensuring that the society has access to the relevant information they require to conserve the environment (Whitten et. al. 2009, p.7). The government can do this by encouraging firms involved in activities such as tourism pass information about the need to conserve the environment to the clients. The companies can do this by labeling important environmental information on the tour vans or even the furniture. Such companies should also be allowed to collect donations from the tourists to contribute towards environmental conservation strategies.
If the MBI instruments are implemented effectively, they will lead to more efficient methods of determining prices in the market, thereby achieving an efficient level in the market. In regard to the price-based instrument, the market price of the ecosystem will be determined by forces of demand and supply. The low profitability of the venture that will result from increased taxes will discourage firms from the business. The reduced supply of wood in the market will eventually increase their prices towards the equilibrium. For the quantity-based instruments, the price of the ecosystem will be determined by the specifications of the rights. A small limit of pollutants will imply a reduced level of production thus limited products in the market. The ecosystem price for the cultural services will be determined by the commitment of the firms operating in the industry to promote environmental conservation.
In my opinion, I think that the price-based, quantity-based and market friction MBIs will be more efficient than the regulatory system that has been in operation. This is because the approach is more flexible as it does not strictly spell out the activities that firms have to tale to increase their profitability. For instance, the quantity-based instrument reduces the amount of profits that a company earns due to the limits on pollutants and this gives the companies freedom to use other methods of production which may be even more efficient. Compared to the command-and-control mechanisms, the MBIs are more effective as they act as innovation tools as well.
Potential effects of climate change on ecosystem services
The nature of ecosystem services makes them vulnerable to climate variations thus reducing their benefits. These services are concerned with products affected by the climate change easily such as food. The rising temperatures that result from climate change may lead to increased demand for water for the irrigation schemes along the Murray-Darling basin. The increased demand for water may not be sustainable in the long run, especially if there are prolonged periods of dry spells in the region. The increased groundwater that may result from climatic change reduces the amount of water available for flow into the basin, thus threatening its sustainability.
According to Grafton et. al. (2014, p.1088), the level of groundwater is set to reduce by 12% in fourteen years’ time. The total water inflow into the basin has reduced in the recent years due to climate change and this is projected to continue. Most of the water that flows into the basin is reduced by high demand for underground water, evaporation due to increased temperatures and channel and pipe losses (Grafton et. al. 2009, p. 1089). This is a threat to food security that is provided by the provisions services. The ecosystem services also provide fuel through generation of hydroelectric power but this will be impossible going by the predictions about reduction of water level by 2030.
The regulation services are also affected by the climatic changes experienced in the region. This has the potential to frustrate the efforts by the government to provide a healthy environment for the community. The ecosystem services on regulation enhance the well-being of the society by aspects such as disease control. The changing climate has the potential to alter this by providing a conducive environment where bacteria and other disease-causing agents thrive. This is as a result of the high temperatures. The changed climate may also interfere with purification of water due to effects such as acid rain that result from climate change and pollution. This has the probability affecting the welfare of the society negatively.
The climatic changes also have a potential impact on the cultural services provided by the Murray-Darling basin. The climate may lead to extreme high temperatures or low temperatures that has the potential to reduce the attraction of the basin by tourists. The cultural heritage of the region is also threatened by climate change because it will no longer be the same in terms of ecosystem services provided.
The use of financial instruments to reduce environmental risk
The use of catastrophe bonds is one way that the Australian government can ensure that the welfare of the citizens is protected against the climate changes. The bond requires the insured party to pay premiums to the insurer against a certain risk so that in the event of a catastrophe, the insured can be indemnified (Cummins 2008, p. 4). This implies that the insurer bears the loss because they have to ensure that the insured party’s financial position remains unaffected by the occurrence of a catastrophe. The bonds are based on catastrophic events such as hurricanes, floods and earthquakes, which are likely to occur due to factors such as climatic changes. The financial instrument is helpful to the government in managing environmental risks such lack of disease control. The amount of money provided by the bond can be used to purchase more advanced medical equipment as well as fund research activities aimed at eliminating the disease outbreak. The financial instrument can also be used to enhance the cultural ecosystem services by ensuring that the attraction cites that are destroyed by catastrophes are restored.
The main advantage of the catastrophe bond is that the owner is guaranteed of compensation in case the insured event occurs. Using the bond, the individual can still access loans from financial institutions to finance other activities that may be economically viable. The instrument thus contributes to economic welfare of the society. However, the main disadvantage is that the insured event or catastrophe may never occur thus leading to financial loss by the insurer who would otherwise have used the money in other income-generating activities.
The weather derivatives are a perfect choice of solutions that the government can reduce environmental risks. The financial instrument involves payment of premiums by the investor who bears the financial cost for compensation by the buyer of the derivative in case the weather change affects their activities adversely (Chantarat et. al. 2007, p. 1262). This is a suitable instrument that can be used to hedge against the environmental risks that may result from climatic changes, among them variation of weather patterns. The financial instrument is especially important in reducing the risk of food security that may result from shortage of water for irrigation. The farmers need to sell the weather derivatives because the buyers will compensate them in case weather patterns changes the food production.
The advantageous aspect of weather derivatives is that they are proficient. This is because they cover losses that are highly likely to occur unlike catastrophe bonds that cover risks that may never occur. Therefore, the investors get the true value for their money. The other merit is that the investors are able to continue with their activities as they are indemnified in case of a loss and this enhances their economic status. However, the weather derivatives may not be effective for small companies due to high amount of premium that may be demanded. The fact that they cover highly probable events implies that the financial risks are also as high. Investing in the catastrophe bonds and weather derivatives is effective because of the fact that both strategies ensure that that the investor does not suffer loss.
Chantarat, S., Barrett, C.B., Mude, A.G. and Turvey, C.G., 2007. Using weather index insurance to improve drought response for famine prevention. American Journal of Agricultural Economics, 89(5), pp.1262-1268.
Cummins, J.D., 2008. CAT Bonds and Other Risk‐Linked Securities: State of the Market and Recent Developments. Risk Management and Insurance Review, 11(1), pp.23-47.
Grafton, R.Q., Pittock, J., Williams, J., Jiang, Q., Possingham, H. and Quiggin, J., 2014. Water planning and hydro-climatic change in the Murray-Darling Basin, Australia. Ambio, 43(8), pp.1082-1092.
Jaeger, W.K., 2011. Ecosystem Services and the potential role for markets. Corvallis, Or.: Extension Service, Oregon State University.
Reid-Piko, C., Crase, L., Horwitz, P. and Butcher, R., 2010. Ecosystem services and productive base for the basin plan.
Whitten, S.M., Coggan, A., Reeson, A. and Shelton, D., 2009. Market based instruments for ecosystem services in a regional context. RIRDC publication, (08/196).