Australian Natural Resources Atlas

Economics - Accounting Framework

Economics - natural resource accounting framework

The material below is an extract from the Australians and Natural Resource Management 2002 report. For ease of cross reference, figure, table and section references pertain to the chapter structure of this report. The Further Information section provides links to the full graphics version of the material below and the Australians and Natural Resource Management 2002 report.

Natural resource management decisions

An integrated approach

Key messages

Managing natural resources

Awareness of Australia’s natural resource management challenges

There are many goals and stakeholders in managing natural resources. Goals of private land owners include:

Public goals include:

Driven by the precautionary principle, concerns about inter-generational equity or for ethical or other reasons, they also include protection and restoration of the environment for its own sake.

Public and private goals are not always consistent although in some areas and industries, production and conservation objectives can be delivered by the same natural resource management approach. In addition, private management decisions on site can have off-site impacts on both production and conservation in other areas. Divergence in goals and the off-site impacts present the main problems for natural resource management.

Governments, as agents of society, are increasingly concerned about perceptions of worsening resource condition. This is driven, in part, by the values that society as a whole places on the natural environment, not only due to greater recognition of the services provided by the environment, but also its intrinsic value. This is reflected in the increasing controls placed by State and Territory legislation on the use of resources on private land (e.g. restrictions on land clearing and rainfall harvesting). With society increasingly demanding the sustainable use of natural resources, private resource managers are coming under pressure to take account of the public benefits and costs and the off-site impacts of their management decisions as well as their own benefits and costs.

Deterioration in the quality of the resource base occurs for many reasons. Natural processes such as erosion are often accelerated by human disturbance, but some occur regardless of the actions of humans (e.g. soil acidity and sodicity are an inherent part of the resource base). Deterioration due to human inter­ference can also be due to a lack of knowledge, delivering short-term needs at the cost of longer-term returns, or delivering private returns at the cost of public returns. While addressing lack of knowledge can lead to a win-win outcome, an explicit consideration of the public and private benefits and costs is required for sensible resource management where private and public interests do not align.

The scale and scope of problems with the natural resource base are described in Chapters 4 and 5, which bring together biophysical information on landscape change and economic information on the value derived from using the resource base. While economic data on future costs or profits foregone provide information about potential gains by addressing natural resource management (and some inherent) problems, it does not tell us anything about optimal management of the resource as it does not address the cost of correcting the problem. In many cases damage may not be reversible or the cost of addressing the problem may greatly outweigh the benefits—both private and public.

The cost of change in resource management practices is not just the financial cost. It includes the personal cost of making decisions, increased perceived risk and having to acquire the skills and knowledge to implement change. Where these costs are high for individual resource managers, even ‘no regrets’ solutions may not be implemented. Some of the characteristics of farmers that impact on these costs are discussed in Chapter 3.

The risks associated with change in resource management practices involve a complex interaction of agricultural practices and systems, inputs, outputs, prices, uncontrollable constraints (e.g. weather) and resource and social priorities. Ultimately all these issues must be incorporated into any natural resource management framework that takes into account varying response time frames.

The costs and benefits from natural resource management are not static. The social costs and benefits do not necessarily equal the sum of private costs and benefits. The public benefits of successful natural resource management depend on the values placed on social returns—recreation opportunities, ecosystem services and existence values—that are rising with the growing urban population and the change in social norms that favour a high quality natural environment. Falling commodity prices in real terms are reducing the private returns to natural resource management that aim to preserve the resource base for agricultural use. Private land owners will have little incentive to invest in natural resource management for society’s well being if the private returns from the investment fall short of the costs.

The role of government in natural resource management

Where all costs and benefits of natural resource management are borne by the individual (no public costs or benefits), the landholder needs to make optimal decisions in regard to natural resource management. In these cases the government has little role in directing natural resource management as, even if managers are poorly informed about the true costs and benefit, their decisions impact only on themselves. However, it is rarely the case that poor decisions will not impact beyond the ‘farm gate’. Even where off-site physical impacts such as dust storms and increased turbidity in waterways might be minimal, the socioeconomic impacts of poor longer-term profitability of the enterprises provide a role for government, industry, the community and even neighbours, in providing information and decision-making support.

Government has a more active role in preventing or mitigating externalities or off-site effects of poor management as the costs are widespread and degradation is often difficult to identify. Salinity is a clear example of actions in one area affecting many resource users downstream, albeit with a considerable time lag (e.g. the costs of salinity include reduced agricultural productivity for downstream farmers, loss of fishery resources, damage to wetlands and the environment, and higher water treatment costs). A better understanding of the services provided by the natural environment, from cleaner air and water to the services of genetic diversity, has widened the concept of externalities. The potential benefits from protecting some of the services provided by the natural environment are discussed in Chapter 5.

The challenges to achieving sustainable natural resource management stem mainly from:

What are the challenges to greater investment in natural resource management?

This Audit theme has focused on the capacity of individuals and rural communities to change—that is to invest more and/or more wisely in resource management. Capacity to change presupposes an awareness of current or future problems and a desire for change based on assessments of benefits and costs. Yet the four challenges discussed above as being at the heart of resource management problems explain why some desire change and why others do not.

Figure 2.1 explains how an investment decision process might work with many feedback points.

Figure 2.1 A conceptual framework for decisions on natural resource management investment

Awareness

The first challenge is understanding that there is a problem. A problem is not just perceived or defined in biophysical terms. It imposes costs (e.g. loss of agricultural productivity, loss of ecosystem services and threats to ecosystem existence). These costs depend respectively on the market prices of farm production, the costs of services to replace those of the environment, and the values placed on the existence of natural ecosystems. But even recognising costs, and hence potential benefits, is not sufficient—there must also be recognised solutions. Lack of information on not only which management practices to undertake, but also on the consequences of any management practice is perhaps the biggest challenge to investment in natural resource management.

Motivation

Challenges arise from conflicts between natural resource management for private and public returns and from competing uses of investment resources. The motivation to address a resource management problem comes from expected benefits exceeding expected costs. These benefits and costs include time and effort as well as financial returns, social impacts and changes in risk exposures. The discount rate that individuals and organisations apply impacts on their assessment of lifetime costs and benefits (e.g. farmers who are nearing the end of their working life and do not wish to leave the farm to the next generation may place a lower value on the longer-term benefit flow from such investments).

Overcoming barriers

The challenge to investment is to overcome barriers caused by lack of capacity rather than lack of understanding or motivation. Capacity is defined here to mean physical and financial resources, skills, and institutions to implement a desired policy, program or action (e.g. investments that require large up-front cash injections, face financial constraints and/or are complex may be beyond the capacity of many landowners). Chapter 3 looks at the characteristics of individual farmers to see how they interact with the characteristics of practices and the impact on adoption.

Investment can be a reorganisation of production systems, change in land use, as well as change in land management practices. The challenge for policy makers is:

Natural resource management is all about investment in protecting and remediating the natural resource base and about encouraging people and communities to acquire the necessary resources to do this. And like all investments, hard decisions have to be made about how much to invest relative to other investments, and what types and levels of investment yield satisfactory returns. This chapter develops a framework to address these issues. The overwhelming conclusion of the research for this work is that there are no easy answers—but the work presented here should help guide decision-making processes as well as providing critical information to inform choices.

The institutional framework for natural resource management policy

The 1992 Intergovernmental Agreement on the Environment between the Commonwealth, States and Territories and the National Strategy for Ecologically Sustainable Development provided a framework for a cooperative approach to environmental decision making, policy development and program implementation. The Council of Australian Governments and its Ministerial Councils and the working groups reporting to these bodies have the task of coordinating natural resource management policy.

The Intergovernmental Agreement on the Environment also provided for the establishment of the National Environmental Protection Council. This statutory body is able to make law and is made up of Ministers from State, Territory and Commonwealth governments. It has responsibility for making environmental protection measures.

Constitutionally the States and Territories are responsible for land and water management. Consequently in a federal system of government, collaborative and consultative arrangements have been developed, regionally and locally, to deliver focused, action-oriented programs such as the National Landcare Program and Natural Heritage Trust.

The National Strategy for Ecologically Sustainable Development commits Australian governments to ensure that land use decision- making processes and land use allocations meet the overall goal of ecologically sustainable development and are based on a consideration of all land values, uses and flow-on effects. Under the National Strategy for Ecologically Sustainable Development, governments are working to:

Initiatives also include the revised National Overview for the Decade of Landcare Plan (the main strategic plan for the National Landcare Program), the National Water Quality Management Strategy and the Council of Australian Governments Water Reform Framework.

Additional strategies and plans are being developed between the three levels of Australian governments and regional and community interest groups. These include the National Action Plan for Salinity and Water Quality, a Salinity Management Strategy for the Murray–Darling Basin and a rehabilitation strategy for the Great Artesian Basin groundwater resource. The Audit has provided benchmark information for these and other initiatives.

The complex nature of the causes of lack of sustainability within Australia and the range of participants require a mix of instruments to provide effective solutions. Therefore Australian governments are undertaking a range of measures to address sustainability issues. These measures include:

Australia-wide legislation also provides tools for facilitating and implementing a sustainable approach to natural resource management. The Environmental Protection and Biodiversity Conservation Act1999 (Cwlth) has six objectives.

This Act also includes mandatory reporting requirements on environmentally sustainable development for Australian government agencies, including the extent to which environmentally sustainable development principles are applied in decision making.

Returns to natural resource management and how they might be assessed

The natural resource base:

By its very existence it infers benefits. These benefits are enhanced by management to protect and restore the natural resource. Some of these benefits are discussed below to provide a perspective on how they might be assessed.

The benefits referred to in Figure 2.2 are gross benefits. Against these must be set the costs of maintaining or enhancing our natural resources—implementing resource management—which include direct costs of putting the practice in place and indirect costs in terms of foregone benefits if use of resources is restricted as a result of the practice. Benefits derived also depend on the success of resource management in achieving restoration and protection outcomes. There is still much to learn about effective management options.

Examples of benefits from natural capital

A decision framework for policy makers

Who has responsibility for resource management?

Resource managers fall into a hierarchy:

Figure 2.3 Decision making and doing

Constitutionally, the States and Territories are responsible for land and water management. Consequently in a federal system of government, collaborative and consultative arrangements have been developed through programs such as the National Landcare Program, Natural Heritage Trust and National Action Plan for Salinity and Water Quality.

Figure 2.2 illustrates some of the sources of benefits which accrue from our natural resources.

What are the problems facing policy makers?

Policy makers need to know—what to do, how to do it and how to fund it. Given limited resources policy makers must establish priorities. They need to determine:

These three issues seek to establish a baseline showing what will happen under an operating environment of ‘business as usual’. However, where baseline trends suggest priority the most important piece of information for the policy maker is whether there is a feasible alternative outcome. In particular the:

Figure 2.4 sets out the four phases in natural resource management decision making and some of the key issues facing the policy maker.

Business as usual

Business as usual is a continuation of current policies, on-farm and off-farm management practices, similar levels of adoption and adaptation, access to knowledge and information; current trends in markets or environmental variability assumed consistent with current agricultural productivity trends.

A rapid assessment framework

A rapid assessment framework, that combines environmental, social and economic aspects of natural resource assessment into the natural resource management decision-making process (Figure 2.4), was established. The five step rapid assessment framework described in this section primarily supports the Priorities Phase (Phase I) in the decision making process.

Figure 2.4 Phases in natural resource management decision making

Steps to assessment

The five basic steps to assessing priorities for action (Phase I in Figure 2.4) are applicable at the level of the policy maker, catchment committee, community group and individual land manager. They aim to set out a process for estimating the total net benefit of undertaking any policy or practice. Those with the highest net benefits should take priority. Measurement of costs and benefits in dollar terms is a convenience as it allows for easy comparison across space and time. While environmental and social impacts are difficult to quantify, failure to do so may lead to their being left out of the assessment. Hence even if dollar assessments are not made, comparable quantification of the physical outcomes is advised. These can then be included in decision rules (e.g. establishing minimum acceptable change levels as one criterion).

Discount rates

In this report, an appropriate discount rate for public long-term investments is assumed to be 2–5%. This is an acceptable rate of time preference for evaluating potentially large benefits and costs that accrue across multiple generations. Where private investments are referred to, the dis­count rate chosen is 10% reflecting a more realistic opportunity cost for private investor funds over a shorter time period.

Figure 2.5 Framework for options assessment by policy makers in a catchment

A rapid assessment process

Undertaking a full benefit–cost analysis of options to address resource management problems is expensive. The Audit’s four salinity case studies (Chapter 6) took several years to do, with much of the time taken up in characterising the biophysical outcomes of the various options. Clearly such a detailed level of analysis should only be undertaken in areas identified as priority areas. Yet the broad scale data available will only provide the first layer of information needed for priority setting. We need an assessment of the costs and likely benefits of options on a case by case basis.

While the Audit work does not claim to do this beyond a few case studies, the projects undertaken provide some guidance on how to proceed. A rapid assessment process is one approach.

The options canvassed in the four salinity case studies were planting trees, switching from annual to perennial pasture, planting deep-rooted perennials such as lucerne and ‘living with the salt’. These case studies showed that local information was critical for assessment—and this is as true with a rapid assessment as with a detailed assessment process. This is because a critical piece of information in at least one of the case studies was only available at the local level—lucerne did not grow in the local soil type in the area, eliminating the option that looked viable on a salinity impact and economic return basis. Rapid assessment must be done at the relevant scale for the problem and the proposed solution.

An example of a set of guidelines for a rapid assessment process is given in Table 2.1. As a general guide a large number of answers in the first column would imply that there is more benefit to addressing these potential problems than if most answers were in the last column. There is considerable interaction between the answers and a simple evaluation of them can provide a guide on the most fruitful way to proceed.

Such guidelines require further development and must be tailored for different situations. Development of guides and ground-truthing using existing detailed case studies is suggested as a follow-up activity to support regional planning such as that under way as part of the National Action Plan for Salinity and Water Quality.

Widening the scope of benefit–cost assessment to include environmental and social costs and benefits

Many texts outline how to undertake a benefit–cost assessment (e.g. CIE 1997). The methods for applying discount rates, estimating net present values and calculating internal rates of return are straightforward. So too, are methods for estimating the sensitivity of the return estimates to variations in key parameters. What is difficult is the clear identification of option costs (including unintended costs), changes resulting from them and an estimation of the often complex impact of these changes. Here, the changes from an option are relative to what would have happened without the option and excluding the impact of any other sources of change. Much progress has been achieved in ensuring that the feedback effects of changes in demand and supply on prices, and quantities of goods and services produced and consumed, are taken into account in estimating benefits and costs.

The focus of most assessments has largely been on the economic impacts. Social impacts are usually included only to the extent that the change in consumer and producer welfare is separately identified. Non-market environmental impacts are rarely included. The framework for estimating benefits and costs allows for incorporation of environmental and social benefits and costs wherever a sensible value can be estimated. This is a significant challenge for social assessment—in terms of method and available data.

Table 2.1 Guidelines for a rapid assessment.

Question Low Medium High
Biophysical change anticipated
What is the area impacted or likely to be impacted by
deterioration in the resource base?		 < 1000 ha 1 m < > 1000 ha > 1 million ha
What is the time profile of the biophysical change anticipated? >25 years 10 < > 25 years < 10 years
Current resource use values
What is the land use(s)? And their gross margin per hectare? < $500 $5000 < > $500 > $5000
How much water is used per hectare? < 0.5 ML 0.5 ML < > 3 ML > 3 ML
What is the gross value of production per ML of water? < $50 $500 < > $50 > $500
Anticipated impact on land use
What proportion of current land use will be able to continue? > 90% 90% < > 50% < 50%
What is the anticipated reduction in gross margin due to
declining yields/increased inputs on continued current use?		 < 2% 20% < > 2% > 20%
What is the gross margin of the next best alternative
land use given the problem?		 > $5000 $500 < > $5000 < $500
Off-site effects
What is the estimated cost of repairs/additional depreciation
on public infrastructure affected in the local area?		 < $50 000 $1m < > $50 000 > $1m
What is the change in salt and sediment loads in major
downstream river flows?		 < 1% 5% < > 1% > 5% increase
Are there wetlands or other sensitive areas impacted? No Yes—minor Yes—extensive
Costs and effectiveness of options
Are the current problems reversible? < 10% 50% < > 10% > 50%
What is the cost of achieving this per hectare? < $10 $100 < > $10 > $100
What is the time profile for these outcomes?years > 25 years 10 < > 25 years < 10
Is further deterioration preventable? < 40% 90% < > 40% > 90%
What is the cost of achieving this per hectare? > $100 $100 < > $10 < $10
What is the time profile for these outcomes? years > 25 years 10 < > 25 years < 10

How does the work in the Audit’s assessment support this process?

The Audit work has the greatest applicability to Phase I of the natural resource management decision making process (Figure 2.4) It provides input to establishing priorities for public expenditure on natural resource management.

Chapter 7 draws on regional case studies to inform Step 5 in Phase I. Figure 2.6 summarises the five-step approach of Phase I.

Figure 2.6 Summary of the five-step process for assessing priorities in natural resource management

How can the Audit information be used to develop priorities?

The Audit has provided considerable information on the biophysical status and trends of the natural resource base. This information cannot be turned into policy priorities per se, but forms a starting point. Policy priority areas are those where economic, environmental and social net benefits of changing landscapes are high and there is insufficient motivation for and/or capacity among private land managers to address the problem. These are usually problems with substantial public spillovers.

This report is of considerable value in creating a baseline—where we are now and where we are heading under a ‘business as usual’ scenario (Phase I in Figure 2.4). The benefits of addressing problems in agriculture accrue largely to farmers and will largely be undertaken by farmers. A baseline can also be developed that provides a ceiling on the potential public benefits from farmers’ and other land managers’ actions.

Some information presented in the report is relevant to the other three phases in Figure 2.4 but detailed benefit–cost assessments are mostly applicable to particular regions, catchments or even smaller areas. This requires detailed information at those levels.

Further information

Australians and Natural Resource Management 2002 (theme) report

View other Audit assessments by clicking the links below:

View "Natural Resource Economics" project and technical reports:

A project report has been prepared by CSIRO Land and Water Policy and Economic Research Unit in the development of this work:

The technical appendices of "Values of returns to land and water and costs of degradation" report contain detailed descriptions of the methods used in this work:

The technical appendices of "Values of returns to land and water and costs of degradation" report also includes a number of component project reports. These report may be viewed separately:

Case study: View or download a technical report and appendices on dryland salinity:
View "People" project and technical reports:

This report does not contain maps and needs to be read in conjunction with:

Link to the Map Maker to view economic data.

Link to the Australian Natural Resources Data Library - to download economic and social data

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