DEDICATED TO MAKING A DIFFERENCE

How Economic Incentives Motivate Sustainable Development:

An Introduction
N E W Z E A L A N D B U S I N E S S C O U N C I L F O R S U S TA I N A B L E D E V E L O P M E N T NOVEMBER 2003

Full report also available to download from www.nzbcsd.org.nz/economicincentives

Section to Dedicated 1 making a difference NZBCSD Business Guide to a Sustainable Supply Chain

Dedicated to making a difference

WHAT IS THE NEW ZEALAND BUSINESS COUNCIL FOR SUSTAINABLE DEVEPLOMENT? The New Zealand Business Council for Sustainable Development (NZBCSD), established in May 1999, is a coalition of leading businesses united by a shared commitment to sustainable development via the three pillars of economic growth, environmental protection and social progress. The NZBCSD is a partner organisation to the World Business Council for Sustainable Development, a coalition of over 165 international companies with members drawn from more than 30 countries and 20 major industrial sectors. We also benet from the WBCSDs global network of 43 national and regional business councils and partner organisations, involving some 1000 business leaders globally. Global outreach to contribute to a sustainable future for developing nations and nations in transition. OUR MISSION To provide business leadership as a catalyst for change toward sustainable development, and to promote eco-efciency, innovation and responsible entrepreneurship. Best practice to demonstrate business progress in environmental and resource management and corporate social responsibility and to share leading-edge practices among our members. Policy development to participate in policy development in order to create a framework that allows business to contribute effectively to sustainable development. Business leadership to be the leading advocate on issues connected with sustainable development. Our objectives and strategic directions, based on this mission, include: OUR AIMS

Members
BP Oil New Zealand Ltd City Care Ltd Cowper Campbell DB Breweries Ltd Deloitte Touche Tohmatsu Fonterra Co-operative Group Ltd Griffins Foods Ltd Holcim (New Zealand) Ltd Hubbard Foods Ltd IAG New Zealand Ltd Infrastructure Auckland Interface Agencies Ltd Landcare Research Living Earth Ltd Meridian Energy Ltd Metro Water Ltd Mighty River Power Ltd Minter Ellison Rudd Watts Money Matters (NZ) Ltd Morel & Co MWH New Zealand Ltd NIWA Orion New Zealand Ltd Palliser Estate Wines of Martinborough Ltd Port of Tauranga Ltd Ports of Auckland PricewaterhouseCoopers Richmond Ltd Sanford Ltd Shell New Zealand Ltd Telecom New Zealand Ltd The Boston Consulting Group The Warehouse Group Ltd Toyota New Zealand Ltd Transfield Services (New Zealand) Ltd Transpower New Zealand Ltd Tranz Rail Ltd TrustPower Ltd Urgent Couriers Ltd URS New Zealand Ltd Vodafone New Zealand Ltd Waste Management N.Z. Ltd Watercare Services Ltd Westpac

Contact
Jo Hume, Operations Manager Tel: 64 9 488 7404 Fax: 64 9 488 7405 Email: ofce@nzbcsd.org.nz Web: www.nzbcsd.org.nz

CONTENTS

INTRODUCTION
Message from the Chairman 4

CHAPTER 1
Why economic incentives make sense for both business and communities 5

CHAPTER 2
How do incentive-based approaches work? 6

CHAPTER 3
Reducing societys waste mountain: taking an incentive approach 8

CHAPTER 4
Dealing with climate change: raising revenues and lowering taxes 10

CHAPTER 5
Beating trafc congestion: new approaches to road pricing 12

CHAPTER 6
Unhealthy urban air: creating the incentives to clear it 14

CHAPTER 7
Summing up: the case for using incentives 15

Section 1from the Chairman Message Getting into Energy Management

Introduction
Message from the Chairman
Sustainable development is all about economic growth that takes proper account of environmental effects and is socially responsible. The big question is how. As a business organization, we recognize that economic incentives are not the whole answer, but they are an important part of it. Businesses can provide incentives to their own people to curb waste, cut costs and improve the bottom line. This report identies ways in which companies are introducing user pays initiatives to good effect. However New Zealand will do a lot better if we can apply that same approach at the national level.
Stephen Tindall, Chair, New Zealand Business Council for Sustainable Development and founder of The Warehouse

New Zealand faces critical development problems, affecting business as well as everyone else, that can only be resolved if public authorities create the right incentives. Aucklands trafc congestion is a prime example. This booklet makes the case for public authorities to use economic incentives to achieve sustainable development. It also shows that such incentives are a value proposition for business. Incentive-based approaches are not new. Almost twenty years ago, tradable shing rights were introduced to curb the wasteful, unsustainable use of our sheries resources. The result was of huge benet, both environmentally and economically. That farsighted move laid the foundation for our prosperous modern shing industry. In another example Living Earth has just celebrated a decade of protable business built on waste that used to go to landll. Similar examples and case studies provided by member companies of the NZ Business Council for Sustainable Development were part of the raw material for this report. Moreover governments around the world are grappling with this issue and are starting to use economic incentives to promote sustainable development: examples include tradable water entitlements in Australia, waste levies in Denmark and a levy on plastic bags in Ireland. Here in New Zealand, the sheries Quota Management System is widely recognized as best practice. I believe sustainable development is the type of development most New Zealanders are looking for today. Economic incentives can help us get there faster, at less cost, and with less hassle than other approaches. Lets get on with it. Stephen Tindall

Businesses do well when they provide incentives to their own people to curb waste. New Zealand itself will do a lot better if we can apply that same approach at the national level.

Chapter 1: Why Economic Incentives Make Sense For Both Business and Communities NZBCSD Business Guide to a Sustainable Supply Chain

Why Economic Incentives Make Sense For Both Business and Communities

WHY ECONOMIC INCENTIVES MAKE SENSE FOR BOTH BUSINESS AND COMMUNITIES
New Zealanders are passionate about their environment and the quality of life in their communities. Businesses are passionate about achieving growth in shareholder value, and to do that they must keep costs under control. Communities and businesses usually acknowledge each others goals, but often, their different perspectives lead to conict. To achieve sustainable development, New Zealand needs to get much better at resolving these differences constructively. Incentive-based approaches to sustainable development could be a big help: They give affected businesses choices about how to respond to community goals; By doing so, they can nip conict in the bud, and lower the total cost of meeting the communitys goals. Because they facilitate least cost solutions, economic incentives are a key component of any business-friendly route to sustainable development. They present a great opportunity for a country that needs to improve its rate of economic growth, while achieving its broader environmental and social goals at the same time.
There is often value in waste. Economic incentives can help to ensure that value is realised and at the same time, bring business and community closer together.

A VALUE PROPOSITION FOR BUSINESS

For some business sectors, economic incentives are not a new idea. The introduction of tradable shing rights almost twenty years ago put a brake on over-shing, restored stocks to sustainable levels and increased shermens prots. Tradable rights can be an effective model for dealing with issues such as water allocation, waste reduction, and cleaning up urban air. In certain other cases, such as tackling road congestion or climate change, a system of charging those who cause the problem may be more appropriate. With charging systems, sizeable revenues can be raised, and it is important that these are recycled back through the economy. Recycling these revenues would lead to tax reductions, or in the case of transport charges, to new investments in the transport network. In such cases, well-designed incentives will ensure most businesses and individuals are better off than they were before.

Chapter 1: Why Economic Incentives Make Sense For Both Business and Communities

Both types of economic incentive can provide lasting value to business by: discouraging excessive resource use and waste generation; stimulating cost-saving innovation; and in many cases, creating sustainable business opportunities. Properly designed, economic incentives reward sustainable practices, and prevent unsustainable businesses from undercutting those who take a more responsible approach. Disciplined frameworks, that assist business in applying innovation and forward thinking improvements, can provide improved cost structures and margins. This positions a business to deal more effectively with external, and often increasingly volatile, factors that are cost drivers. This introductory booklet aims to whet your appetite for this promising new approach to sustainable development. If you would like to see more details and working examples from overseas, please refer to our main report on www.nzbcsd,org.nz/economicincentives or www.ecologic.org.nz

Chapter 2: How do Incentive-Based Approaches Work? NZBCSD Business Guide to a Sustainable Supply Chain

How do incentive-based approaches work?

HOW DO INCENTIVE-BASED APPROACHES WORK?
Consider an all-too-common example: a river where too many water permits have been issued by the regional council or its predecessors. The river may meet the demands of irrigators and processing factories most of the time, but during the summer when it is most sought after for swimming, canoeing and shing it is reduced to a slimy trickle. The community wants to restore the river, but it does not want to lose jobs in the enterprises that draw on its water. After receiving scientic reports on how much water needs to be left in the river during low ows to restore the river to a shable and swimmable quality, the council decides it ought to reduce the summer peak draw-off of water by 30 percent. But how to do this? The existing permits to take water are about to expire. But the council knows that if it publishes a new plan to reduce all the permits by 30 percent in summer, there will be massive opposition from those affected. Alternatively, if it tries to allocate a reduced available volume of water by picking winners and losers, it will have difculty showing its decisions are fair and equitable. Now let us suppose that the council creates a water market. All summer water allocations are reduced by 30 percent, but the permit holders are able to trade among themselves. For the water users, the ability to trade in water makes all the difference. Some users will cut their usage heavily, where it costs them relatively little, selling their surplus entitlements to others who could not reduce their usage except at very high cost. Farmers who can replace old, inefcient irrigation systems, or change to less water-hungry crops, will be water sellers. So will a local processing plant, which nds it commercially attractive to install a water recycling system that greatly reduces its draw-off of water from the river. It nances the new system by selling the water entitlements it no longer needs. The ability to trade means that the cheapest reductions in water use can be taken up rst. The overall result is that the community as a whole may achieve its goal of restoring the river at a much lower cost than it otherwise would have done. There is another signicant result. New land users come into the district, establish themselves on small parcels of land subdivided from existing farms, and start up new added-value horticulture and vineyard enterprises. These people previously could not enter the district because its water resources were fully committed to existing permit-holders. By adding more value to the basic resources of land and water, the newcomers bring greater prosperity to the district, its towns, and the country as a whole. Restoration of the river as a recreational attraction also opens the door to new tourism businesses, completing the virtuous circle of economic and environmental improvement.
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Chapter 2: How do Incentive-Based Approaches Work?

WHAT THIS EXAMPLE ILLUSTRATES...

This example of a water market illustrates a number of features that are generally characteristic of incentive-based approaches to environmental management.

FINANCIAL REWARD FOR THOSE WHO LOOK AFTER THE ENVIRONMENT

The water market puts a price on the water in that part of the rivers ow which the community has decided is available for consumptive use. The effect is to create an incentive on everyone to practice water conservation, since by reducing wastage or recycling their water, and selling the entitlements they no longer need, they can earn money. The existing water permit system, offers little or no nancial reward for anyone to save water.

CREATING A FEEDBACK MECHANISM FOR A SUSTAINABLE ECONOMY

As water becomes increasingly scarce, its price will rise, generating a powerful economic incentive on users to reduce their demands and take pressure off the resource. Such a mechanism widely adopted can keep economic growth from impacting on ecological limits. It does so of its own accord, without the need to mobilize public opinion against development.

STIMULATING INNOVATION, AND DRIVING IT IN THE RIGHT DIRECTION

As our economy becomes more advanced, it generates wealth, not so much from consuming raw resources, as from innovations that add more value to those resources. The water pricing incentive drives forward innovation, ranging from simple process improvements and better housekeeping, through to land use changes and to advanced research and development by major industry sectors. The innovation being stimulated creates new business opportunities, while at the same time serving to protect the environment.

INCENTIVE APPROACHES STILL REQUIRE SOCIETY TO SPELL OUT ITS ENVIRONMENTAL OBJECTIVES
No market is created in a vacuum: there is always a legal framework dening entitlements and protecting things that ought not to be traded. The creation of a water market in a river will require councils to go through a public consultation process to establish this framework. A minimum ow regime needs to be set, and for this, aquatic ecosystem values, sheries, recreation and Maori relationships to the resource are among the things that need to be researched and taken into account under the Resource Management Act. But once rules have been set to address these issues, and to avoid adverse effects on other permit holders, trading can proceed on a willing-buyer, willing-seller basis.

INCENTIVE APPROACHES ARE USEFUL WHERE RESOURCES ARE GETTING SCARCE

Water markets are extensively used overseas, especially in Australia where water is a particularly scarce resource. The main report describes working examples of water markets in Australia, both for taking water from rivers and discharging contaminants into rivers. Water markets can also be used for groundwater. The rapid growth of irrigation demands on water resources throughout New Zealand points strongly to the need to establish water markets in this country.

INCENTIVE APPROACHES SUPPORT SOCIAL SUSTAINABILITY AS WELL

Initiatives to establish water markets in New Zealand have been stopped in several cases because of a perception that there would be adverse social consequences for rural communities. It is often believed, for example, that economically powerful organisations would buy and hoard water permits even though such organisations do not take over and hoard land. A fear is sometimes expressed that a districts established pattern of land and water use would change yet the long term viability of most rural communities depends very much on their ability to be open and adaptive to change. A recent study of water trading in Australias huge Murray-Darling basin found only positive social effects.
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Chapter 3: Reducing Societys Waste Mountain NZBCSD Business Guide to a Sustainable Supply Chain

Reducing societys waste mountain: taking an incentive approach

REDUCING SOCIETYS WASTE MOUNTAIN: TAKING AN INCENTIVE APPROACH
Various forms of unwanted waste household waste, industrial and trade wastes, construction and demolition waste, sewage and agricultural discharges, contaminated storm-water, airborne emissions and greenhouse gases are traditionally regarded as inevitable by-products of economic growth. But that approach to growth is no longer acceptable, as society realises it cannot go on fouling its nest. One of the biggest challenges of adopting a sustainable pattern of development is to de-couple waste production from economic growth. In the long run, humans must follow nature's model, in which organisms do not poison their environment but instead re-use or compost and recycle their wastes as food and nourishment for the next generation. The Governments New Zealand Waste Strategy focuses on solid waste from households and industry. It commits to zero waste as a long term vision, and sets out a range of steps that need to be taken to reduce waste. There is widespread community, professional and private sector support for a public policy which identies waste reduction, and not just safe waste disposal, as the waste management objective. Incentives need to be aligned to this objective.
This landll, located on Invercargills New River estuary, is typical of an older generation of landlls that are unacceptable today. There is a widespread community desire in New Zealand to nd ways of reducing waste, waste truck movements, and the need for landlls itself.

BARRIERS TO BETTER PERFORMANCE

Actual practice around the country remains quite variable. There are many barriers to waste reduction and resource recovery besides lack of awareness, and these barriers remain to be tackled. They include: In many parts of New Zealand, the cost of waste disposal is so low that waste reduction and recycling is discouraged. This occurs where local authorities still rely on cheap rubbish dumps, which have neither impervious lining, nor gas and leachate collection systems to protect the environment from contamination. The environment is effectively subsidizing rubbish disposal. Also, subsidizing landlls from council rates is still a common practice. In either case, the incentives to reduce waste or recover resources from the waste stream are limited or absent. Elsewhere, local authorities have been pro-active in establishing both user-pays waste disposal policies and kerbside recycling facilities. But in some cases, their efforts are being undercut by waste companies offering a cheap, bulk wheelie bin service, which effectively removes the incentive on households to segregate their wastes for recycling. Again, this is possible because these operators are not being charged the full costs of meeting the communitys waste management objective.

Chapter 3: Reducing Societys Waste Mountain

Organic matter makes up a large part of the waste stream, and it could be converted to compost. But present agricultural cropping practices make little use of compost. Instead, soil organic matter is often run down to low levels, at which the soil has limited capacity to retain nutrients and moisture. Growers then rely on frequent applications of articial fertilizers and irrigation water. In intensive cropping areas, these practices are unsustainable because they are leading to a serious build-up of groundwater contamination. Such practices must change, and compost must be marketed more competitively, if its use is to be greatly expanded. Overall, there are many ambitious targets for waste reduction and resource recovery, but progress
Studies show that much of the benet of recovering and reusing waste is upstream of the landll. The environmental impact of this mine, for example, and of all the energy and emissions needed to process the ore from the mine into metal, could be greatly reduced if everything taken from the mine and manufactured into products was recycled at the end of its useful life.

toward these targets cannot be sustained unless there is substantially increased investment in reprocessing facilities, collection systems and market development for compost and recyclables. There is a gap between the incentives facing stakeholders, and the actions that are desired of them. The concept in The New Zealand Waste Strategy of a levy on waste going to landll could help to close this gap. Christchurch City Council has pioneered this concept. It imposes a small levy on household waste and uses it to fund the Recovered Materials Foundation, a non-prot council-owned entity that operates recycling activities and has pioneered market-making activities for materials in the citys waste stream.

SCALING UP THE INCENTIVE-BASED APPROACH

If this approach is to be scaled up nationwide and made really effective, a way needs to be found for the business of resource recovery to be driven forward by the private sector. In this way, the power of the marketplace could be harnessed to get the results that society desires, while the risks of increasingly large investments in new business activities are removed from ratepayers. Australia has developed a useful model for getting large-scale sustainability results through a scheme that requires electricity companies to generate a certain amount of electricity from certied, renewable sources. Based on this model, an incentive-based approach to efciently achieve waste reduction in New Zealand would involve the following steps: Create a tradable credit for sustainable resource recovery, called a transferable resource recovery certicate (TRRC), to be used as an offset against waste generation. This would involve a process for independently certifying that sustainable resource recovery had occurred; Create a regulatory obligation on waste generators to either create or purchase a certain number of these recovery certicates for every hundred tonnes of waste they dispose of; Gradually increase the obligation on waste generators as experience is gained with the resulting business opportunities and their cost, and as society determines how much it wishes to pay to achieve waste reduction results. The TRRC approach, would need to be complemented by continued progress in phasing out substandard landlls and subsidies for landlling. A number of benets would then follow: A transparent market price would emerge, to reect the value society places on avoiding waste and landlling; This would stimulate the development, commercialisation and large scale application of new technologies for resource recovery; There would be an incentive to purchase products which lend themselves to re-use, recycling or resource recovery, rather than those that do not [see www.nzbcsd.org.nz/supplychain]; this incentive would feed back into the design of products, with long term benets to society; A level playing eld would be created between different waste management organisations, so that those who undertake efcient recycling activities could no longer be undermined by those who do not; The price of compost would fall, strengthening the business case for using compost in market gardens, intensive cropping for export, and the growing of maize as stock feed for the dairy industry; and improving the overall sustainability of these activities; Identied waste reduction targets would be met, rather than just talked about and striven towards.

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Chapter 4: Dealing with climate change

Dealing with climate change: raising revenues and lowering taxes

DEALING WITH CLIMATE CHANGE: RAISING REVENUES AND LOWERING TAXES By ratifying the Kyoto Protocol, New Zealand has undertaken to shoulder a small share of the global responsibility for reducing emissions of greenhouse gases that are destabilizing the global climate. When the Protocol enters into force, there will be an international market in emissions allowances. Additional net emissions by New Zealand above 1990 levels will incur a cost, while net savings below 1990 levels will mean payments to New Zealand. Tree plantations established since 1990 are absorbing emissions, and if retained as a sustainably harvested forest, will earn New Zealand credits.

THE NEW ZEALAND RESPONSE

As part of its response to its Kyoto obligations, the Government has announced that it will use incentive measures to manage greenhouse gas emissions by individuals and businesses. Measures include a carbon emissions charge starting in 2007 or 2008, and a projects mechanism to reward emission-reducing projects by business. Most of the revenue from the emissions charge will be recycled to the economy via reductions in taxes. The emissions charge will ensure that energy users face the cost of their emissions, and have an economic incentive to identify and adopt more energy-efcient alternatives. The emissions charge will also provide an incentive for the use of renewable energy, such as electricity from windfarms, and the use of wood residues in place of coal for industrial heat requirements. The emissions charge will mean that electricity users pay an additional cent or two per kilowatthour, while vehicle users will pay an extra few cents per litre of fuel. While this charge on fuel will be too low to change the behaviour of most road users, it will at least ensure they pay for the cost of their emissions, rather than this cost being passed on to the general taxpayer. Indeed, due to reductions in other taxes, many taxpayers will see a net benet from the emission charge. Some of New Zealands trading partners have not ratied the Kyoto Protocol. Accordingly, those rms whose international competitiveness would be jeopardised by the emissions charge are eligible for exemption if they have a Negotiated Greenhouse Agreement (NGA). An NGA is a binding contract with the Government to take specic measures to manage greenhouse gas emissions, including adoption of world best practice. In addition, farmers are being exempted for their methane and nitrous oxide emissions, which make up 54% of New Zealands total emissions.
Managing climate risks is important to New Zealand. By using an incentive approach to meet its Kyoto Protocol obligations, and recycling revenues into lower taxes, the Government can help to ensure that energyefcient businesses and households improve their after-tax nancial position.

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Chapter 4: Dealing with climate change

At a carbon charge of $25/tonne, options for tax reduction include: a 2% reduction in GST, a 6% reduction in company tax, or a 3% cut in the bottom tax rate of 19.5% on income up to $38,000, which would benet all taxpayers. Alternatively, all personal income tax rates and the company tax rate could each be cut by about 1.5%.

USING REVENUES TO CUT TAXES

The revenue to be derived from the emissions charge is not yet known, because the government is still negotiating some exemptions with industry. Furthermore, the charge itself will probably not be set until 2007, and then might be adjusted occasionally to reect the international price of emissions. However, an estimate of likely revenue can be made based on emissions data and trends. In 2002, New Zealand emitted 31 million tonnes of CO2 from energy sources. The emissions trend suggests continued growth at 2.1% annually. If 25% of these emissions were covered by NGAs and therefore exempt from the charge, annual revenue would be approximately $272 million at $10/tonne of emissions, or $681 million at $25/tonne. In addition to these revenues, New Zealand will have surplus credits for carbon dioxide absorbed by forests. The number of credits available to be sold will depend on various factors, including notably: the effectiveness of the emissions charge, NGAs and other policies at reducing New Zealand's emissions; the extent to which methane emissions from agriculture continue to increase above 1990 levels; the international price for emission credits. A reasonably conservative estimate is that the government could recycle the revenue from approximately 10.5 million tonnes per year, ie. roughly half of the forestry credits it expects to receive for the period 2008-2012. At $10/tonne, this would generate $105 million, while at $25/tonne these credits would be worth $262 million per year. Thus, combining revenue from the emissions charge and from sale of forestry credits, there would be an estimated $377 million or $943 million, at $10/tonne or $25/tonne respectively, available annually for revenue recycling. This revenue could be used to cut taxes in various ways [see box]. As a result of such a tax reduction, many businesses and households that are efcient users of electricity and transport would expect to see net increases in their after-tax prot and disposable household income. At the margin, tax reform of this nature would encourage a shift towards more labour-intensive business strategies while, at the same time, lower personal income taxes would increase take-home pay and hence could attract more people into the work force. The overall result should be an increase in employment and possibly an increase in GDP, although the effect on economic output is hard to predict with any condence. Through the use of incentive-based policies, with the recycling of revenues into reduced taxes, New Zealand can reasonably expect to reconcile its Kyoto obligations with its desire for employment growth and improved living standards.

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Chapter 5: Beating trafc congestion

NZBCSD Economic Incentives

Beating trafc congestion: new approaches to road pricing

BEATING TRAFFIC CONGESTION: NEW APPROACHES TO ROAD PRICING
The best estimate of the costs of congestion to Auckland now exceeds $1 billion. Road congestion is a huge burden on the citys manufacturing, distribution and service businesses. More roads and more public transport are needed. But overseas experience suggests that increasing transport capacity alone will not solve Auckland's congestion problem. There is also a need for an improved pricing system for transport networks. New Zealand currently charges road users through a tax on petrol. But the price of petrol does not reect the cost that an additional driver joining a motorway imposes on all other peak time users of the motorway, through congestion delays. Under such a pricing system, the demand for costly new roading investments has shown itself in many countries to be almost insatiable. Those cities that have built new commuter rail systems have also not experienced much if any reduction in peak-hour automotive congestion. Only where there is some additional pricing of the scarce resource (ie. peak time capacity on transport networks) has it been possible to beat congestion. This approach, used in Singapore, and several European cities including London, is called congestion pricing. But the road pricing approaches used in overseas cities need modication for New Zealand conditions. One solution would be a comprehensive road pricing system for the Auckland regions whole transport network, or at least its motorways and arterial routes, with the prices for using different sections depending on the level of congestion on that section at the time. There are two barriers to achieving such a system: one technical, the other political. Since being introduced in central London this year, congestion pricing has led to a 20% trafc reduction within the target zone, and a doubling of average speeds. In the words of Londons Mayor, Ken Livingstone, These results conrm that trafc congestion and journey times for motorists, bus passengers, and business journeys are signicantly reduced both inside and outside the congestion charging zone.

ADDRESSING THE BARRIERS

The technical problem is on the verge of being solved. Electronic road user charging (ERUC), using GPS units in each vehicle, is currently under investigation by the Ministry of Transport as a better way of charging trucks for their road use nationwide. Such a system is being introduced next year in Germany, where the charges will vary depending on the route being taken and the time of day. Peak times on heavily used routes will cost more. The cost of ERUC is coming down rapidly. Investing in an ERUC system for the New Zealand truck eet makes even more sense if it is later extended to cover all vehicles. The political problem is more challenging. However, public acceptance of a new road pricing system on existing roads might be facilitated if people were given the opportunity to try it out on a small scale rst, in situations where they had a choice. An opportunity for doing this could be provided by establishing HOT lanes on a trial basis on some of Aucklands motorways.
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Chapter 5: Beating trafc congestion

A HOT lane is a motorway lane that is reserved for two classes of vehicle: high occupancy vehicles that can use the lane for free (ie. buses and private vehicles with a driver and at least two passengers); and other vehicles that pay a toll to use the lane. HOT lanes are a form of congestion pricing that is becoming popular in California and Texas. They can be established on a relatively low cost, trial basis. They provide people with the choice of avoiding congestion delays, either by taking a bus, car-pooling, or paying a toll, but nobody is forced to use them. People can decide for themselves what represents value for money at the time they want to travel. If they wish, they can continue to use free-of-charge lanes on the same motorway. Experience with HOT lanes would give people a better idea of whether they wanted to take the next step, moving to a new, comprehensive ERUC system of charging for actual use of particular roads at particular times.
Trafc congestion and delays in Auckland are costing a billion dollars a year. This affects all of New Zealand, because 75% of the countrys imports and 42% of its exports, by value, pass through Aucklands ports and airport.

CONGESTION PRICING: THE TRIPLE BOTTOM LINE

The advantages of congestion pricing for sustainable development can be summed up under three headings: economic, environmental and social. Congestion pricing improves the economic sustainability of a city because it allows those road users who value their time most highly to avoid congestion delays. For example, a courier delivery van may be able to accomplish several more deliveries during business hours than it could without road pricing, enabling the use of a smaller courier vehicle eet. Congestion pricing contributes directly to a citys environmental sustainability. On the one hand, it improves the quality of life for city residents, who experience improved access to urban facilities and amenities, and reduced hassle and stress. On the other hand, it reduces harmful air emissions by eliminating the wasteful fuel burn from congested vehicles that are stationary with their engines running, or are crawling forward in low gear. Congestion pricing of roads is likely to stimulate the use and growth of public transport, bringing additional benets for the environment. The effect of congestion pricing on social sustainability also needs to be considered. The only data we have is from the United States, and it suggests four points: Low income people are much less likely than other groups to be on the road at the peak commuting times, when the introduction of a congestion charge would affect them; Those low and middle income drivers who are on the road at peak times, and who pay congestion charges and keep driving, end up better off than they would have been without the charge, once the value of their time is taken into account (unless they are commuting for long distances); Low income commuters who use buses or carpool also benet from the introduction of congestion charges or HOT lanes, as these enable improved service and reduced travel time; If congestion charging is compared with using petrol taxes for building more roads, lower income people are better off under congestion charging. This is because petrol taxes are regressive, and when used to pay for increasing motorway capacity, they represent a subsidy from motorists in general, to those motorists who use big city roads at peak times (which tend to be higher income people). There is a need to undertake similar social sustainability studies of road pricing in New Zealand cities, to see whether the same conclusions apply here. While Auckland has New Zealands most acute congestion problems, other cities are starting to face the same problem. The road connecting Wellington and the Kapiti coast, which parallels an under-used railway line, is another place where congestion pricing could provide real benets. Overall, vehicle use is growing faster than population. It is only a matter of time before several of New Zealands growing cities experience similar problems to Auckland. The need for an effective new approach to road pricing is therefore a national issue.

Drivers in Singapore are charged for entering the central city and using various motorways, with higher charges at peak times. Electronic gantries mounted over the road warn drivers when the charging system is operating, and automatically deduct the charge from stored value CashCards which are inserted in small transponder units in each vehicle.

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Chapter 6: Unhealthy urban air

Unhealthy urban air: creating the incentives to clear it

UNHEALTHY URBAN AIR: CREATING THE INCENTIVES TO CLEAR IT
Air pollution in New Zealand is not just a big-city problem in Auckland and Christchurch. Nelson, Timaru, Taumarunui and many other towns all have serious winter air pollution problems. As more councils monitor air quality, other towns and cities will discover that they, too, have a problem typically the result of cold winter nights and still days, local topography, and a high reliance on solid fuel burners for residential heating. Monitoring in recent years has shown that, in many areas, the main air pollutant is ne particles known as PM10. Household wood-burners and open res, and motor vehicles, are major sources of this pollution. There is no known safe level of PM10. Research suggests that, in Nelson alone, up to 40 premature deaths could be occurring every year due to the effects of PM10, along with days of restricted activity for thousands of residents. In Nelson, approval for a new road has been held up in part because it would add signicant emissions to an already polluted airshed. Environment Canterbury and Nelson City Council (NCC) have both produced air quality plans that attempt to reduce air pollution by requiring the phase-out of open res and the replacement of older, inefcient burners. Both offer incentives for low-income households to install alternative heating and NCC is trying to offset emissions from the proposed new road. An alternative approach, enabling trading of emissions allowances, may have advantages for many towns with air pollution problems. Each emitting sector (industrial, commercial, households and transport) would be assigned a share of total emissions and required to reduce these allowances over time to achieve the target standard of air quality. Each would have to reduce its own emissions accordingly, or acquire allowances from another sector that has achieved more than its required reduction. Industrial and large commercial emitters could manage their own emissions, while the local council and Transit NZ would manage emission allowances for households and vehicles. The council would pass on costs to households through emissions charges on replaces and wood-burners, and could reduce pollution through nancial assistance to households that convert their appliances. This approach would have the following benets: Emission charges would provide revenue to help low-income households convert to clean appliances. Businesses could fund cleaner alternatives by selling allowances to others who nd emission reduction options too costly.
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Trading of emissions allowances would enable the cheapest pollution reduction options to be taken rst. That would speed up the process of ensuring Christchurch is really fresh each day.

Chapter 6: Unhealthy Urban Air

Air quality targets could be met with less cost and by earlier dates than would be possible without trading of allowances. Many low income households rely on solid fuel for home heating and might be unable to afford conversion to other heating methods, or the on-going cost of electricity or gas. To avoid putting excessive burdens on households least able to afford it, some funding from general rates might still be required. Emission charges and tradable allowances seem to be possible under the Resource Management Act, but some councils have rejected these approaches because they are not explicitly provided for. There is a need for an amendment to the law to clarify this, and to require road authorities to take on-going responsibility for transport emissions once roads are built. With emerging technology for electronic road user charges, suitable emission charges for vehicles could be passed on to vehicle owners who use roads in polluted areas.

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Chapter 7: Summing Up the Case

Summing up: the case for using incentives

SUMMING UP: THE CASE FOR USING INCENTIVES
Sustainable development is about economic growth that takes proper account of environmental effects and is socially responsible. Sustainable development requires successfully reconciling objectives that can be in conict with each other conicts which, in a regulatory system, can all too easily lead to delay, cost and uncertainty. The risk to sustainable development is that unresolved conict may make it difcult to move forward on any of the objectives. Incentive-based approaches are not a panacea. They have set-up and operating costs that limit their use to certain major issues. They cannot usually replace regulatory systems in situations where there are unique site-specic factors to consider. Nonetheless, they have potential for resolving the particular problems discussed in this publication. The great promise of incentive-based approaches is that they can help to reconcile conicting objectives, by making it easier to achieve all of them. This is because, while incentive-based policies are rm about the desired outcomes, they are exible about how to get there. They give affected businesses and individuals real choices about how to respond to community goals. By doing so, they can pre-empt conict, stimulate innovation and creativity, and lower the total cost of meeting the communitys goals. Properly implemented and applied, economic incentives achieve environmental objectives effectively and at lower cost than other approaches. Sometimes, they can make solutions possible at reasonable cost when no other realistic solution is available. While economic incentives have mostly been targeted at achieving environmental objectives in an economically efcient manner, they can also be designed to enhance social objectives. Because they facilitate least cost solutions, economic incentives are a key component of any business-friendly route to sustainable development. They present a great opportunity for a country that needs both to improve its rate of economic growth, and achieve broader community goals at the same time. The challenge New Zealand faces today is to nd a sensible way forward in its pursuit of sustainable development. Incentive-based policies are central to achieving that goal. It is time for New Zealands business and community leaders to dare to be different, and to speak up for this enlightened approach.

LEGISLATIVE BASIS FOR ECONOMIC INCENTIVES

There are important gaps in the legislative framework that should be addressed. The Resource Management Act enables trade in water permits, but there is some doubt as to whether it allows
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Chapter 7: Summing up

trade in air discharge allowances, and it does not have efcient mechanisms for initial allocation of any kind of permits. At present, there is no statutory basis to operate a system of tradable resource recovery certicates. The Local Government Act does not allow charging for use of the environment. It limits charging to those costs that are actually incurred in the provision of goods and services supplied by local authorities, and to development contributions. The Land Transport Management Act establishes a framework for road tolling but provides only limited scope for congestion pricing. Also, it does not allow local authorities to charge roading authorities for the adverse effects caused by road users.

WHERE TO FROM HERE

The status quo has huge inertia. The established way of doing things often leads to conict which can become a national habit, fortied by those who are passionate about only one of the three components of sustainable development economic, environmental or social. Moving beyond the status quo requires a willingness to do three things: to acknowledge New Zealands larger interests; to be creative and innovative; and to adopt a can-do attitude. Central and local government need to design and facilitate incentive-based approaches. As noted above, in most cases this will require improving legislation. But rst and foremost, adopting incentive-based policies will require champions from leading members of the community. There will always be plenty of reasons not to innovate, to avoid controversy, to stick with what has been done before. The status quo has no shortage of defenders. In the history of New Zealand, there are some who had a different attitude to change. Kate Sheppard, Richard Pearse, Clarence Beeby, Sir William Hamilton, and Sir James Fletcher, among others, all challenged conventional thinking. These New Zealanders dared to be different, and they persisted in their pursuit of a better way of doing things. The challenge New Zealand faces today is to nd a sensible way forward in its pursuit of sustainable development. Incentive-based policies are central to achieving that goal. It is time for New Zealands business and community leaders to dare to be different, and to speak up for this enlightened approach.

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ACKNOWLEDGEMENTS

This report was written by Guy Salmon of the Ecologic Foundation. It is based on a longer report commissioned from Ecologic by the New Zealand Business Council for Sustainable Development. The longer report, authored by Jim Sinner and Guy Salmon, is entitled Creating Economic Incentives for Sustainable Development. Special thanks to project participants including: Infrastructure Auckland, Metrowater, Mighty River Power, MWH New Zealand, NIWA, Ports of Auckland, PricewaterhouseCoopers, Sanford Limited, Transpower, Tranz Rail, URS, Waste Management, Watercare Services. Photo credits for this report are: Dominion Post (page 5); Southland Times (page 9); Marlborough Express (page 11); New Zealand Herald (page 14 &18); The Press, Christchurch (page 15); Nelson Mail (page 7) all others Guy Salmon, Ecologic Foundation. Design: Paradigm Printed on 50% recycled/50% chlorine-free paper with vegetable oil-based inks.

The full version of the report is available by mail or can be downloaded from:NZ Business Council for Sustainable Development PO Box 1665 Auckland www.nzbcsd.org.nz/economic incentives Ecologic Foundation PO Box 756 Nelson www.ecologic.org.nz

PO Box 1665 Shortland Street Auckland

Tel: 64 9 488 7404 Fax: 64 9 488 7405

Email: ofce@nzbcsd.org.nz Web: www.nzbcsd.org.nz