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DEDICATED TO MAKING A DIFFERENCE

How EconomicIncentives MotivateSustainableDevelopment:An Introduction

NEW ZEALAND BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT

NOVEMBER 2003

Full report also available to download from

www.nzbcsd.org.nz/economicincentives



NZBCSD – Business Guide to a Sustainable Supply Chain

Section 1

Dedicated to makinga 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 benefit from the

WBCSD’s global network of 43

national and regional business councils

and partner organisations, involving

some 1000 business leaders globally.

OUR MISSION

To provide business leadership as a

catalyst for change toward sustainable

development, and to promote

eco-efficiency, innovation and

responsible entrepreneurship.

OUR AIMS

Our objectives and strategic directions,

based on this mission, include:

Business leadership – to be the

leading advocate on issues connected

with sustainable development.

Policy development – to participate in

policy development in order to create

a framework that allows business to

contribute effectively to sustainable

development.

Best practice – to demonstrate

business progress in environmental

and resource management and

corporate social responsibility and to

share leading-edge practices among

our members.

Global outreach – to contribute to a

sustainable future for developing

nations and nations in transition.

Contact

Members

Dedicated to making a difference

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 LtdIAG 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 LtdPort 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

Jo Hume, Operations Manager

Tel: 64 9 488 7404

Fax: 64 9 488 7405

Email: [email protected]

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 society’s waste mountain: taking an incentive approach 8

CHAPTER 4

Dealing with climate change: raising revenues and lowering taxes 10

CHAPTER 5

Beating traffic 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 1 – Getting into Energy Management

4

Introduction

Message from the Chairman

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 identifies 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.

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. Auckland’s traffic 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 fishing rights were introduced to curb

the wasteful, unsustainable use of our fisheries resources. The result was of huge benefit, both

environmentally and economically. That farsighted move laid the foundation for our prosperous

modern fishing industry.

In another example Living Earth has just celebrated a decade of profitable business built on waste

that used to go to landfill. 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 fisheries’ 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.

Let’s 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.

Stephen Tindall, Chair, New

Zealand Business Council for

Sustainable Development and

founder of The Warehouse



5


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

Why Economic Incentives MakeSense For Both Business andCommunities

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 conflict.

To achieve sustainable development, New Zealand needs to get much better at resolving thesedifferences 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 conflict in the bud, and lower the total cost of meeting the

community’s 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.

A VALUE PROPOSITION FOR BUSINESS

For some business sectors, economic incentives are not a new idea. The introduction of tradable

fishing rights almost twenty years ago put a brake on over-fishing, restored stocks to sustainable

levels and increased fishermen’s profits.

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 mostbusinesses and individuals are better off than they were before.

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.



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

6

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



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 fishing – 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 scientific reports on how much water needs to be left in the river during low flows to restore the river to a fishable 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 difficulty 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, inefficient irrigation systems, or change to less water-hungry crops, will be water sellers.

So will a local processing plant, which finds it commercially attractive to install a water recycling

system that greatly reduces its draw-off of water from the river. It finances 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 first. 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 significant 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 fullycommitted 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.

7


Chapter 2: How do Incentive-Based Approaches Work?

How do incentive-basedapproaches work?



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 river’s flow 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 financial 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 ITSENVIRONMENTAL OBJECTIVES

No market is created in a vacuum: there is always a legal framework defining 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 flow regime needs to be set, and for this, aquatic ecosystem values, fisheries,

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 district’s 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 Australia’s huge Murray-Darling

basin found only positive social effects.

8



REDUCING SOCIETY’S 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 Government’s 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

identifies waste reduction, and not just safe waste disposal, as the waste management objective.

Incentives need to be aligned to this objective.

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 landfills 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 community’s waste management objective.

9


Chapter 3: Reducing Society’s Waste Mountain

Reducing society’s wastemountain:taking an incentive approach

This landfill, located on

Invercargill’s New River

estuary, is typical of an older

generation of landfills that

are unacceptable today.

There is a widespread

community desire in New

Zealand to find ways of

reducing waste, waste truck

movements, and the need for landfills itself.



Chapter 3: Reducing Society’s 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 artificial 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

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 landfill 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-profit council-owned

entity that operates recycling activities and has pioneered market-making activities for materials in

the city’s 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 certified,

renewable sources. Based on this model, an incentive-based approach to efficiently achieve waste

reduction in New Zealand would involve the following steps:

• Create a tradable credit for sustainable resource recovery, called a transferable resource recovery

certificate (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 certificates 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 sub-

standard landfills and subsidies for landfilling. A number of benefits would then follow:

• A transparent market price would emerge, to reflect the value society places on avoiding waste

and landfilling;

• 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 benefits to society;

• A level playing field would be created between different waste management organisations, so that

those who undertake efficient 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;

• Identified waste reduction targets would be met, rather than just talked about and striven towards.

10

Studies show that much of

the benefit of recovering and

reusing waste is ‘upstream’

of the landfill. 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.



11

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 1990are 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-efficient 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 kilowatt-

hour, 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 benefit from the emission charge.

Some of New Zealand’s trading partners have not ratified the Kyoto Protocol. Accordingly, those

firms 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 specific 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 Zealand’s total emissions.

Dealing with climate change:raising revenues andlowering taxes

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 energy-

efficient businesses and

households improve their

after-tax financial position.

Chapter 4: Dealing with climate change



12

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 reflect 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 taxreduction, many businesses and households that are efficient users of electricity and transport

would expect to see net increases in their after-tax profit 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 confidence.

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.

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 benefit all

taxpayers.

Alternatively, all personal

income tax rates and the company tax rate could

each be cut by about

1.5%.

Chapter 4: Dealing with climate change



13

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 city’s 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

reflect 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 modification for New Zealand conditions.

One solution would be a comprehensive road pricing system for the Auckland region’s 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.

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

fleet 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 first, 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 Auckland’s motorways.

Since being introduced in

central London this year,

congestion pricing has led

to a 20% traffic reduction

within the target zone,

and a doubling of average

speeds. In the words of

London’s Mayor, KenLivingstone, “These results

confirm that traffic

congestion and journey

times for motorists, bus

passengers, and business

journeys are significantly

reduced both inside and

outside the congestion

charging zone.”

NZBCSD – Economic Incentives

Beating traffic congestion:new approaches to road pricing

Chapter 5: Beating traffic 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.

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 fleet.

Congestion pricing contributes directly to a city’s 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 benefits 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 benefit 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 Zealand’s 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 benefits.

Overall, vehicle use is growing faster than population. It is only a matter of time before several of

New Zealand’s growing cities experience similar problems to Auckland. The need for an effective

new approach to road pricing is therefore a national issue.14

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.

Traffic congestion and delays in Auckland are costing a

billion dollars a year. This

affects all of New Zealand,

because 75% of the

country’s imports and 42%

of its exports, by value, pass

through Auckland’s ports

and airport.

Chapter 5: Beating traffic congestion



15

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 fine particles

known as PM10. Household wood-burners and open fires, 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 significant 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 fires and the replacement of

older, inefficient 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 manytowns 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 fireplaces and wood-burners, and could

reduce pollution through financial assistance to households that convert their appliances.

This approach would have the following benefits:

• 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 find emission

reduction options too costly.

Chapter 6: Unhealthy urban air

Trading of emissions

allowances would enable

the cheapest pollution

reduction options to be

taken first. That would

speed up the process of

ensuring Christchurch is

really ‘fresh each day.’

Unhealthy urban air:creating the incentives to clear it



16

• 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.

Chapter 6: Unhealthy Urban Air



17

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 conflict with

each other – conflicts which, in a regulatory system, can all too easily lead to delay, cost and

uncertainty. The risk to sustainable development is that unresolved conflict may make it difficult 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-specific 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 conflicting

objectives, by making it easier to achieve all of them. This is because, while incentive-based policies

are firm about the desired outcomes, they are flexible 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 conflict, stimulate innovation and creativity, and lower the

total cost of meeting the community’s 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 efficient 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.

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

Chapter 7: Summing Up the Case

Summing up:the case for using incentives

The challenge New

Zealand faces today is

to find a sensible way

forward in its pursuit of

sustainable development.

Incentive-based policies

are central to achieving

that goal. It is time for

New Zealand’s business

and community leaders

to dare to be different,

and to speak up for this

enlightened approach.



Chapter 7: Summing up

18

trade in air discharge allowances, and it does not have efficient mechanisms for initial allocation of

any kind of permits. At present, there is no statutory basis to operate a system of tradable resource

recovery certificates.

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 conflict which

can become a national habit, fortified by those who are passionate about only one of the threecomponents of sustainable development – economic, environmental or social.

Moving beyond the status quo requires a willingness to do three things:

• to acknowledge New Zealand’s 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 first 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 find a sensible way forward in its pursuit of

sustainable development. Incentive-based policies are central to achieving that goal. It is time for

New Zealand’s business and community leaders to dare to be different, and to speak up for this

enlightened approach.



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 SustainableDevelopment. 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 Ecologic Foundation

PO Box 1665 Auckland PO Box 756 Nelson

www.nzbcsd.org.nz/economic incentives www.ecologic.org.nz



PO B 1665 T l 64 9 488 7404 E il ffi @ b d

Documents

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