Environmental economics deals with the impact of the economy on the environment and the appropriate way of regulating economic activity so that balance is achieved among environmental, economic and other social goals. Environmental economics involves adapting concepts developed in other branches of economics and using the tools of economics to understand environmental problems.

There is a direct relationship between economics and environmental management. Economic activity stresses the environment (e.g. generating pollution) and uses environmental resources (e.g. fisheries, forests, minerals, water). Likewise, an understanding of the interactions between the environment and the economy is fundamental to environmental management. Environmental economics reveals the myriad forces at work in our complex and dynamic world, and searches for solutions to the ever-evolving problems we face. Climate change, energy and resource use, conservation and consumption, technological innovation, industrialization, pollution, and poverty demand economic understanding. Economics raises questions and provides a framework upon which discussions of these, and other, difficult social problems can be held.

Market-based instruments are increasingly part of the environmental policy toolbox. Tradable emissions permits, biodiversity conservation auctions, vegetation and pollution offset schemes and other market-based solutions are more and more widely embraced. Examples of programs include the Victorian BushTender and BushBroker programs, and the Hunter River Salinity Trading Scheme. These schemes have an incentive structure that was designed and experimentally tested to take advantage of a sophisticated understanding of how human strategic behaviour interacts with complex spatially heterogeneous environmental processes.

Background: Since 1750 more than 15 million hectares of native vegetation have been cleared in Victoria - the highest percentage of clearing for any state in Australia. These consequences have emerged because There is no price signal in the economy that incorporates the value of ecosystem services or native vegetation into the economic cost-benefit calculations; environmental impact is left out of the economic equation. Thus, economic development and environmental conservation have often been at odds with each other.

Victoria's Native Vegetation Management Framework established the strategic direction for the protection, enhancement and revegetation of native vegetation across Victoria by setting the goal of achieving "a reversal, across the entire landscape, of the long-term decline in the extent and quality of native vegetation, leading to a net gain."

What environmental policy tool may best achieve this goal? The Victorian government designed an offset scheme to reconcile economic and environmental interests. Individuals or firms wanting to proceed with development involving destruction of native vegetation are required to obtain a permit and a vegetation offset to replace the vegetation destroyed. Vegetation offsets are mostly supplied by private landholders who register the vegetation on their land as permanently protected on the land title and sign a management plan that describes the activities they will need to carry out to maintain the vegetation in good condition. The landholder is then able to sell the vegetation credits as an offset to a third party such as a property developer.

How does science help understanding complex environmental processes? Native vegetation in Australia is a highly varied. Victoria is divided into 28 bioregions and over 300 floristic community classes. The 'habitat hectare' metric has been developed to represent the quality and quantity of native vegetation. Specific rules also exist to govern the exchanges made in offset transactions. These 'like-for-like' requirements are effectively trading rules that require the vegetation gains from an offset to be commensurate to the vegetation loss in terms of conservation significance, quality, and habitat/vegetation type. Additionally, there are spatial restrictions on offset transactions. For example, the ecosystem and habitat value of a cool temperate rainforest in the Otway Ranges is not substitutable with a snowpatch herbland in the Victorian Alps. In certain circumstances, however, clearing healthy dry forest in the East Gippsland Lowlands may be offset by the protection of shrubby dry forest located also in the East Gippsland Lowlands.

How does economics and understanding human strategic behaviour help? Prior to setting up the native vegetation offset market, supply and demand for native vegetation did not exist and consequently native vegetation did not have a market price that would reflect its scarcity value. For BushBroker to operate efficiently, a system is needed that allows multiple interactions between numerous buyers and sellers with the option to combine the sellers' and buyers' packages to meet the specific needs of a seller or a buyer. The Victorian government enlisted the expertise of Professor Charlie Plott from California Institute of Technology (CALTECH), a pioneer in market mechanisms, to design an electronic trading platform that allows developers and landholders to find one or a combination of sell or buy offers that meet the 'like-for-like' criteria. Prices are discovered through the continuous interaction of buyers and sellers. A range of smart search and query functions have been developed for the program that allows developers and landholders to optimize their position by looking for counterparties to be included in the trade and thus bringing down compliance cost.

What is the gain from this approach? The electronic market for trading native vegetation offsets is expected to be completed and operational late this year representing a world first in environmental economic management. Market-based solutions to environmental policy on private land have the potential to dramatically improve the accountability of natural resource management and environmental programs through greatly improving their ability to deliver outcomes at low cost, while increasing the transparency and accountability of government and reducing red tape. Market-based instruments place a market price on ecosystem services and thus will help in finding the right balance between conservation and economic development.

Further Information: DSE BushBroker Website

The primary professional organization of environmental economists is the Association of Environmental and Resource Economists (AERE). There are regional professional associations, many of which are referenced on the AERE web site.

There are a number of journals in the field, including:

The Journal of Environmental Economics and Management

Resource and Energy Economics

Review of Environmental Economics and Policy

Environmental and Resource Economics

Land Economics

Energy Journal

Environment and Development Economics

Universitites:

Australian National University

Central Queensland University

Griffith University

The University of Melbourne

The University of Queensland

University of Western Australia

Research Centres:

Economics and Environment Network at the Australian National University

Environmental Economics research Hub at the Australian National University

UNSW Centre for Environmental and Energy Markets

CSIRO Sustainable Ecosystems

CSIRO Land and Water

Government Institutions:

Victorian Department of Primary Industries

Environmental Economics Unit - Victorian Department of Sustainability and Environment

Victorian Department of Treasury and Finance

Department of the Environment, Water, Heritage and the Arts

Tom Tietenberg

Robert N. Stavins

Thomas Sterner

Wallace Oates

Resources for the Future

Environmental Economics Unit at the University of Göteborg

Biodiversity Economics

Business and Biodiversity Offsets Program (BBOP)