Durable institutions matter

Dr Eric Crampton
Insights Newsletter
6 September, 2019

The great legacy of the reforms of the 1980s and 1990s were the durable institutions that have since guided how we are governed.

The Fiscal Responsibility Act set a framework for balanced budgets that has withstood many changes in government. Had it mandated particular spending levels, it would have been fragile and would have broken with a change in government. Instead, the Act only required honest accounting, balanced budgets, and prudent debt levels.

Durable institutions matter. It is hard for anyone to operate when policy varies wildly with changes in government.

This week, Environment Minister David Parker announced some of the outcomes he would like to see in improving freshwater quality. The coming national policy statement will require substantial reductions in nutrient load in our rivers and lakes. A lot of those changes really are necessary for environmental sustainability. But without a strong enabling framework, the policy change will be fragile, and any improvement in environmental quality ephemeral.

A lot of farming activities have been by-right for ages. Business plans, investment decisions, and mortgages are all based around certain expectations about the regulatory framework within which farming operates. Requirements to massively reduce nutrient load in some catchments can easily bankrupt many farms – many of which will have played fair by every rule they have ever faced.

It does not make for a just transition.

Neither does it make for a durable environmental framework. The hardship caused by the changes will build political pressure to reverse them as soon as there is a change in government.

But there is a better way.

Cap-and-trade systems can achieve every one of Minister Parker’s environmental objectives, while building in a just transition. Existing use rights, whether irrigation consents or the implicit existing right to discharge nutrients, are turned into more formal and tradeable rights. Over time, the quantity of those rights allocated to existing emitters reduces. Additional rights would be provided to iwi in recognition of any rights to water they hold that have not been extinguished by contract, sale or treaty.

Crown buy-backs of rights within the system would reduce total use to sustainable levels.

As I explain in the latest issue of Policy Quarterly, such a system would be far more durable.

We can have the outcomes Minister Parker wants but only with a much better way of getting there. The environment is too important for fragile institutions.

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