2. Regulatory Policy Framework
Before looking at why the government should be involved in environmental policy development (if at all) it is important to understand what is looked for in an "ideal" policy framework.
In general terms less regulation is preferred to more. This reflects the general starting point of law in New Zealand that people should be free to engage in activities unless they are prohibited for some good reason. Also, more specifically, good regulatory design should signal the importance of innovation for economic growth, and the maintenance and enhancement of New Zealand’s standard of living. This is why, for example, New Zealand has signed up to international agreements on intellectual property laws that give patent holders uniquely powerful property rights over an extended period of time.
When it comes to the environment, it is widely accepted that the pursuit of economic growth, by itself, increases the risks for environmental damage and that some limits need to be set on the types of activities that may be undertaken, and the manner in which they are undertaken. This relates directly to sustainability, which is at the core of the Resource Management Act (1991). The policy question then becomes how to design an appropriate regulatory regime, in terms of the substantive rules, and the associated processes and institutions.
What should a regulatory framework look like? Below are set out some of the fundamental questions that need to be addressed when designing any regulatory regime, if it is to be effective and appropriate. These questions are based on simple principles in relation to regulatory policy design, which are reflected in many publications (specific to New Zealand conditions) and from the NZIER’s practical experience in developing and advising on policy in a range of fields.1
The important questions are:
- What are the policy objectives?
The first and most important task in designing any regulatory regime is to identify very clearly the rationale for regulating the area in question. It is important to have a clear statement of the objectives of the regulation. This allows any proposed regime to be tested against those objectives, to ensure that it does what is desired, and does not have other outweighing, undesired or unintended consequences.2
In the context of environmental policy initiatives, any description of regulation needs to take into account:
- The effectiveness of the infrastructure developed and the methods employed to encourage farmers to up-take environmentally sustainable activities (see Section 3 and 4);
- How the unique features of farming in New Zealand and the associated economics of the farming industry interact with environmentally sustainable activities (see Section 4); and
- How costs and benefits are measured (see Section 4, 5, and Appendix A);
All three factors are interrelated and are prominent in the case of sustainable environmental activities. They have important implications for both the substantive rules, and the implementation process and institutions – any regime needs to incorporate mechanisms for taking account of, and reflecting, relevant changes and developments.
- Will the proposed regime advance those objectives? In principle? In practice?
This requires an examination of both the substantive rules and the procedures and institutions. It involves asking whether:
- The substantive rules accurately capture the policy objectives (see Section 5); and
- The institutions and processes involved will need to, in practice, apply those substantive rules, in an appropriate and timely way, so that the objectives will be actually achieved (see Section 3 and Part II of this report).
The regime will need to deal with various types of, possibly overlapping, issues and strike balances between them. The list, which is discussed in detail in Section 4 and 5, includes:
- Technical/scientific issues;
- Environmental issues;
- Cultural and ethical issues;
- Other social issues; and
- Economic issues.
Different institutions and processes are likely to be more appropriate for identifying and weighing different types of issues. For example, if environmental damage is specific to a particular region then it is appropriate for that region to take a role (both organisationally and in terms of funding) in correcting the problem3. However, if the environmental issue "spills over" into other regions a more co-ordinated national approach will more likely to be effective. What sort of regional and national assistance local and national government should provide is discussed in Section 5.
Technical issues present a huge challenge to economists in approaching environmental questions. Of particular note are the data intensive techniques required in an area where data is usually scarce and sometimes questionable. Technical issues are more likely to be case specific, and require different, more specialised inputs and evaluation, with the results typically being of limited application to other regions (see Section 4 and 5).
- What are the associated costs?
These include direct costs for government, and for participants, and indirect costs. The main form of indirect cost is what economists call opportunity cost. That is, if the regime results in some valuable activity not being pursued, the loss of the potential contribution is a cost of the regime. This may occur where a prohibition catches not only the target "evils" but also innocent "bystanders". It can also arise where the regime would, in theory, allow the activity, but in practice, the cost and delay involved in obtaining the necessary permissions:
- Is seen as prohibitive by the promoter; or
- Is greater than the cost of doing something else, which is actually less socially valuable, but which is done instead; or
- Is greater than the cost of doing the proposed regulated activity in another country, under a different regime.
- Do the benefits from the regime (measured in terms of advancing its aims) justify the full costs associated with the regime? Can the costs be reduced without appreciably compromising the benefits?
Once the ability of the proposed regime to deliver the desired outcome, and the associated costs have been identified, it is essential to step back and ask whether the benefits that will be achieved in practice (not the maximum theoretical benefit) justify the costs that will be incurred. This is not a crude arithmetical process – many of the benefits and costs are unlikely to be able to be quantified in any useful or meaningful way. But a weighing of the gains against the price that New Zealand will pay for those gains is essential, since it is rare that a particular goal is worth pursing at any price, however great. The ability to identify costs and benefits in the context of environmental policy is discussed in Section 5.
A closely related issue is whether it is possible to achieve essentially the same gains at lower cost. Once the costs associated with a regime have been clearly identified, it is often possible to see ways in which those costs can be reduced (perhaps through an alternative regulatory structure) without compromising the policy goals. In order to maximise the benefit of regulation for New Zealanders it is important to find the least costly way of achieving the regime’s objectives, rather than simply fastening on one option, even if that option would work and would deliver benefits that justify its costs.
1 See for instance: Gruensprecht and Lave (1989), and Rose Ackerman (1996), which contain good background material. For New Zealand policy, see Hawke (1993) for a sound overview. 2 This step is just as important when reviewing an existing regime as it is when developing a new regulatory regime from scratch. The most powerful tool for such a review is to ask what the objectives of regulation are in the field in question. The practical effectiveness of the existing regime can then be measured against those objectives, identifying where it fails to advance them, and where it has other consequences. 3 What that role is will depend on: the size of the environmental problem; the co-ordination process between local and central government, and between local and central government and farmers; the willingness of farmers to adjust their land management practices etc.
Contact for Enquiries
Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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