Resource management reform: Incentivising environmental outcomes through economic tools

Many are aware that in July the Resource Management Review Panel (Panel) suggested a suite of reforms that include repealing the Resource Management Act 1991 (RMA) and replacing it with a new Natural and Built Environments Act (NBEA), a new Strategic Planning Act (with spatial plans) and new Managed Retreat and Climate Change Adaptation Act. Our summary of the reforms is available online.

We have identified three things you may not know about this upcoming reform programme that are likely to be of interest to organisations interfacing with the resource management system in future. They are:

  1. Economic tools are more likely to be used to incentivise environmental outcomes.
  2. Proposals for greater enforcement and transparency will lead to greater public knowledge of environmental non-compliance.
  3. Māori perspectives will be more integrated into New Zealand’s resource management system.

This article is focused on the first point.

Economic tools are more likely to be used to incentivise environmental outcomes

Since the RMA was first created the Minister for the Environment has been empowered to “consider and investigate the use of economic instruments” to achieve the purpose of the RMA. Charges, levies, incentives and “other fiscal measures” are all identified as possible economic instruments. This has not been a focus in the past. With the country mounting up significant COVID-19 debt, gathering of tax has been a focus of political campaigning. While there are clear positions of the parties relating to income taxes, revenue generation for the Crown or local government through environmental taxes and charges is an area that seems wide open.

Currently under the RMA, local authorities regularly impose financial contributions, administrative charges, bonds and (to a lesser extent) collect royalties for the Crown on natural materials extracted from the coastal marine area. Imposing coastal occupation charges and geothermal royalties are also tools that local authorities have available to them under the RMA but they aren’t comfortable using them. Tendering for coastal space has only happened a few times in the context of aquaculture.

The Panel recommends increasing the use of economic instruments to achieve environmental outcomes and below we explain how they align with the Tax Working Group’s recommendations, might apply in practice, and broadly fit with the agenda of a future government.

These recommendations sit alongside proposals to address more efficient allocation of natural resources. Broadly, the Panel’s allocation recommendations involve retaining the current allocative functions for resources, adding new allocation principles to provide clarity and consistency, changing processes to rebalance the inherent bias towards existing users of resources and providing more direction on urban land use direction. This is a connected issue, but for brevity, this note is focused on economic instruments.

Greater use of economic instruments for environmental outcomes has already been foreshadowed by the Tax Working Group

The Panel’s recommendation to increase the use of economic instruments to achieve environmental outcomes is aligned with the 2019 Tax Working Group (Group) report which reached the same conclusion.

The Group made a number of suggestions about the potential to use environmental taxes to manage behaviour and made the following recommendations:

  • In the short term (1-5 years) the Group recommended the better use of environmental taxes to price negative environmental externalities, for example congestion charging, increases to the cost of emissions through the emissions trading scheme and the introduction of a waste disposal levy. It also contemplates consideration of a water pollution and water abstraction tax, areas which are a focus for the Labour and Green political parties.
  • In the medium term (5-10 years) the Group recommended using revenue from environmental taxation to support the transition to a more sustainable economy.
  • Over the long term (10-30 years), the Group considered that there was scope for environmental taxes as part of New Zealand’s current tax base which would sit alongside common forms of tax including GST and income tax. It recommended that tools such as an environmental footprint tax or natural capital enhancement tax also be considered.

The Group recommended further work to understand where the costs would lie, how taxes complement other environmental policy measures and how to work through a range of issues it identified. It can be expected that this work will be undertaken in conjunction with implementing a new resource management system.

In response, the Government indicated that in the short-term it would focus tax policy officials on providing advice on tax implications of environmental policy on specific areas. These include agricultural emissions in the emissions trading scheme, improving water quality and nutrient run-off, waste disposal levies, and congesting charging. Going forward, Inland Revenue will also consider how specific tax regimes might be used to achieve positive environmental outcomes. For example, Inland Revenue will consider whether the fringe benefit tax regime could be amended so that employers can subsidise their employees' use of public transport without incurring fringe benefit tax.

Focus will be placed on changing behaviour and ensuring that the polluter pays

Economic instruments are used to incentivise alignment with environmental outcomes. The Panel’s recommendations for a new resource management system is strongly focused on outcomes. Instead of ‘principles’ to be considered when functions are undertaken, those exercising functions must provide for specific outcomes relating to the natural environment, tikanga Māori, rural environment, historic heritage and natural hazards and climate change. These goals are supported by environmental limits or bottom lines. This focus on outcome alone will make it simpler for economic instruments to be applied in future.

The Panel agreed with the Group that there is a strong case (in principle) for empowering local authorities to use economic instruments for environmental management more generally. The Panel concluded that that future legislation should ensure there is a broad mandate for the use of tradeable rights and permits, incentives and environmental taxes and charges, designed and supported by the Ministry for the Environment.

The Panel propose criteria for economic instruments that could be incorporated into the development of future legislation and guidance documents. They recommend that economic instruments will need to comply with the following as a matter of good practice:

  • focus on changing behaviour to achieve environmental outcomes (not just gather revenue);
  • apply a “polluter pays” principle, which people easily understand;
  • be designed to flexibly respond to change as needs change;
  • focus on cost-effectiveness to ensure there is a balance between the cost of implementation, administration, and monitoring and compliance.

The Panel identified a range of specific economic tools that were “opportunities” for environmental taxes and charges to be examined, while noting that more work could identify a full range of tools available. Available tools include:

Resource royalties The Panel noted that, in principle, a fair charge should be placed on the private use of common resources such as coastal space and water, particularly for commercial use. The Panel was particularly focused on imposing mandatory coastal occupation charges.

Financial contributions (renamed to ‘environmental outcome charges’) are contemplated in the new resource management system. The Panel suggests a range of ways that these could be made more effective, including rebates to reward restorative development.

Environmental bonds could reduce compliance costs for local authorities, price in externalities (like potential for abandoned developments) and incentivise environmental outcomes. As such, the Panel suggests that bonds should be considered for a wider range of activities.

User charges do not need to sit solely within rating or local government charging regimes. The Panel suggests the NBEA could apply user charges to encourage the efficient use of existing infrastructure. User charges for water, wastewater and roads are contemplated.

Road pricing is a new tool that could be incorporated into the NBEA or in connected changes to the Land Transport Management Act to address congestion, air pollution, noise, water pollution from oil run-off, and loss of biodiversity. The Panel noted that current road user charges, parking charges, and the emissions trading scheme do not adequately address these matters.

Subsidies to encourage positive outcomes and to create a pool of funds to pay polluters to reduce negative outcomes is a less common tool that the Panel has suggested could be used if carefully designed.

An environmental footprint tax and natural capital fund was also identified by the Group and the Panel as an option that warrants further consideration. This involves imposing different tax levels that are proportionate to the ecological impact on land and applying those funds to use in restoration activities (like purchasing wetlands).

Targeted rates were also supported by the Panel. These would capture the uplift in land values that results from public works (such as rapid transit) and have been previously recommended by the Productivity Commission. The Panel has commented that it is a valuable extension to existing infrastructure funding mechanisms but recognised that this approach could be controversial.

The Panel recognised that institutions have not been comfortable applying economic instruments in the past. To encourage greater use of economic instruments, the Panel recommended that central government should provide institutional support for local authorities to develop and use economic instruments through the design of the new resource management system, use of national direction, guidance, and support.

The Panel’s recommendations broadly fit with the agenda of a future government, however constituted

Together these recommendations show that a large range of environmental taxes could be introduced through New Zealand’s next environmental framework. While political parties have been broadly supportive of the Panel’s recommendations, apart from the Green Party, they have not focused on these specific aspects of the recommendations.

Labour’s tax plan includes no income tax changes for 98% of Kiwis and its policy is that it is committed to no new income taxes and no further increases to income tax next term. It is clear that these restrictions are limited to income tax exclude commentary about environmental taxes or charges.

The Panel’s recommendations are most consistent with the Green’s support of the “taxing of pollution and those who profit from our shared natural resources, like water”. They have specifically pushed for nitrogen charges and fertiliser levies. Labour has indicated that it is open to such proposals.

National, NZ First and ACT have not signalled a desire to introduce environmental taxes or charges. In the past these parties have supported forms of economic incentives, like congestion charging and targeted rates.

Given that all parties support change to the RMA along the lines of the Panel’s recommendations and have supported the use of economic instruments to some degree, it is likely that the new resource management system will provide for greater use of economic instruments. That potential will cause close examination of the environmental outcomes being set through the new system and the tools proposed to achieve them.

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