The City and State Where it located
Introduction
The Murray Darling Basin as an ecosystem is the third largest river basin in the world and is divided into two sections that is the Darling system which is the northern basin and the Murray system which is the southern basin . The Murray Darling river basin has been a subject of concern over the deteriorating quality of its water and impact on the ecosystem services offered by the basin. This paper studies the various ecosystem services offered by the Murray-Darling basin and the respective value each of the services offers to the various components of the ecosystem. The paper also discusses the role of tools called market based instruments in improving the provisioning of the ecosystem services and explains how different market based instruments can help market failures through incentives to improve environment.The paper tries to analyse the effects of climate change and various other environmental factors that necessitate conservation efforts and have been driven by stakeholder interests in the conservation of the basin. The paper also investigates the role of various financial instruments in negating and mitigating the adverse impacts of the economic activities on the river basin.
Discussion
Ecosystem Services in Murray Darling Basin
The Murray Darling basin provides a range of ecosystem services to the region. The of the key categories of services provided by the basin are as mentioned below
Provisioning Services
Provisioning services refer to the products or services that can be derived from the ecosystem such as crops, minerals, and animal food and other animal products. Around 98% of the area in the MDB is dedicated to agriculture that is rain-based. Alongside this the MDB is also a main source of a wide variety of fish . The government as people’s institution is responsible for the overall welfare of the people of a given region. This makes it imperative for the governments to take care of all the public resources and preserve them such that the values and benefits derived out of them are not only maximized but preserved over a maximized period of time.
(2) Supporting Services
The ecosystem supports life and life forms along the basin and the ecosystem services include soil formation, photosynthetic activity, etc. that help maintain the food chain. The basin is home to numerous species of birds and other animals . The Murray Darling river basin with the services it offers is a set of resources by virtue of the above ecosystem services offered by it, which support and sustain the life and welfare of human beings as well as other life forms. Thus Murray Darling Basin offers natural capital with the four main components of the capital being the water, Biota, Atmosphere and Land.
Cultural services
The Murray Darling river basin has an ancient aboriginal culture that dates back to pre historic times. There are almost 50 aboriginal nations and are spread out across the basin that still maintain a connection with their traditional culture. The aboriginal people and their culture are at the forefront of sustaining the river basin and thus their own life and identity which seems tied to it. The government is obligated to preservation of cultural heritage and practices as a resource that needs to be protected in order for the welfare as well as sustainable survival of the life in a given region.
Efficiency of the Ecosystem Services and Regulation
The ecosystem provides various services to the region such as fish products which can be considered as a common pool of resources that are basically the resources whose characteristics or features make them costly, but do not hinder beneficiaries to utilize it. As per the economic theory of supply and demand, the price of a resource is determined by the intersection of the demand level and the supply determined by the marginal cost of acquiring the resources. Also, for the markets to work properly, perfect market conditions characterized by existence of markets for the goods and services which are private and not public, are perfectly competitive, access to relevant market information to all participants, well defined property rights and absence of any externalities are a must. These perfect market conditions are a prerequisite for an accurate determination of price, which can seldom exist without an enforcer. In absence of regulation, the common pool of resources shall either be over used or the resources might be under developed.
Failure of market system to provide the right price signal
Market prices are the signals that reflect the real economic value of a good or a product. Due to non economic nature of environmental services, the perfect market conditions do not apply or are difficult to apply since the nature of the services is that of public goods. Public goods can be defined as those goods (or services) which have the characteristics of (1) non-rivalry- which means that the use of the goods/services by one user or consumer does not diminish the amount available for use by and (2) non-excludability-which means that once the public good (or service) is provided, even those who fail to pay for the benefits of the goods can not be excluded from enjoying the benefits. Thus services provided by the ecosystems can be termed as public goods. In order to preserve the resources and maintain a proper supply and demand balance, and gain a proper and reflective price signal, actual cost of acquiring the services or resources must be supplemented by a social cost, by an enforcer, which in case of public goods and services can only be through regulations.
Sources of market failure
The ecosystem services as discussed above may fail considering that the Murray-Darling River provides common pool resources for instance fish products. Provision of fish by the river as a common pool resource may fail as fish is diminishable in quantity by virtue of consumption; this may lead to over-use or over-fishing. In the absence of regulation, there is no control on use of resources thus affecting provisioning services. The three ecosystem services are not provided at an efficient level when there is imbalance between demand and the resources/services such as soil formation, photosynthetic activity, and production of primary life forms an imbalance might result. Depletion of forests for instance leads to degradation of photosynthetic activity the quality of air available in the ecosystem. Thus there is a higher demand of services and products from the ecosystem compared to the amount that the ecosystem can produce. In absence of regulation/laws there could be over-exploitation of the water and other resources from the river which jeopardizes provisioning service efficiency. The cultural services in the form of belief systems and values might also be affected when there is an imbalance between the supply of such value systems and there is a much greater demand in terms of the drain on values and beliefs for preservation of ecology owing to overt economic activity often at the expense of the traditional values.
Externalities occur as sources of market failure when the actions of a person, community or an individual create a direct, uncompensated, unintentional impact on the well-being of other people or the benefits of other communities. For instance industry located along the Murray-Darling River extracts large volumes of water from the river leading to a reduction of the amount of water volume for domestic uses.
Further, public goods and free riders wherein the use of the environmental services as well as the cost of maintenance of such services or resources is borne by a few and others just get to use it for free are another source of market failures. For example, if the fishing services are left without any restriction on the use and bearing of costs, the resources would deplete fast and the distribution of the fishes shall be very uneven and the prices inconsistent, leading to fall in demand and in turn to market failure.
Market Based Instruments
Market based instruments help control the market conditions governing the acquiring of the services based on market price signals rather than any other pre decided provisions for the same. The MBIs can be seen as tools that generate incentives to achieve better environmental outcomes through the market signals than direct regulations. MBIs are designed so as to overcome market failures and can be used to create a market for the ecosystem services such as those in the Murray Darling basin, for example, the fishing services or availability of clean and pollution free air. There are two types of MBIs that can help prevent failure of the markets as mentioned below.
Price based
MBIs can be price based wherein a component is added to the pre existing prices which reflects the level of exchanges taking place by virtue of the usage of the environmental services or resources such as emission charges for helping control the pollution by virtue of the use of the fresh air provided by the ecosystem. Price-Based Instruments can be applied to enhance provisioning services provided by the Murray-Darling River.Some of the provisioning services offered by the Murray-Darling River include; provision of different fish species to the local communities and provision of water for domestic uses. Price-Based Instruments such as user charges and product charges may be imposed upon any individual using water or fish resources from the river, hence facilitating a change in the consumption patterns of water and fish products. Non-compliance fees may also be imposed on those who do not adhere to rules and regulations that control exploitation of resources from the river.
Quantity based
MBIs can also be quantity based, wherein the value of the ecosystem service in the Murray Darling basin such as supporting services in the form of the nutrient cycle can be preserved by regulating the depletion of the nutrients by virtue of the trade able permits for the usage of soil. The aim of using Quantity-Based Instruments is to encourage a market to achieve a desired environmental outcome through the control of extractable resources from the environment. In the case of Murray-Darling River, Tradeable permits; quotas or rights may be provided by local authorities or stakeholders to users intending to exploit resources from the river such as provision of permits to local fishermen indicating the maximum amount of fish products that can be extracted from the river within a specific period of time.
Price based MBIs help to regulate the prices of the ecosystem services through levying of taxes or offering of subsidies on the production of the environmental services. The MBIs can help create a regulating environment for the provision services such as fishing in the Murray Darling Basin. The economic activity such as industrial production emits gases that increase environmental temperature and hence can be taxed more to regulate the emission levels and improve fresh air in the ecosystem as a support service. The quantity based MBIs such as trade able permits can be used to limit the quantity of the fish catch and predict the price and real value of the fishing activity. This can help prevent the fast decline in fish, it also helps sustain the cultural values that stand for preservation of the natural environment and hence improve the efficiency of the cultural services provided by the Murray Darling River Basin.
MBIs Versus policy instruments
The Market Based Instruments (MBIs) work better than the command and control regulations and enable organizations to make adjustments based on variations in the individual need or demand for the environmental goods or services. The incentives or MBIs provide cheaper ways to attain the desired outcomes and help make decisions which provide a vast range of opportunities to reduce incremental costs associated with achievement of future business targets. This is because they let the organization managements make suitable operational decisions that are environment friendly. In contrast the policy instruments such as penal regulations necessitate instant decisions and instant costs hindering the production process itself irrespective of cost structures of the services while trying to attain the desired environmental outcomes.
Climate Change and Murray Darling River Ecosystem Services
The climate change effects such as rise in the average temperature for instance can adversely affect the support services by making survival for a number of aquatic life forms difficult. The change in climate creates uneven and unpredictable patterns of weather like temperature rise which affect the yield of the ecosystem support services such as a reduction in the Murray Darling River water levels . The climate change threatens to disrupt the ecosystem provision services such as the grazing areas for the cattle and thus availability of sufficient milk and milk products in the Murray Darling Basin. The climate change also puts pressure on the cultural services of the ecosystem by virtue of forcing the inhabitants to look for alternative or artificial ways to fight climate change such as air conditioning instead of relying on cool and fresh air of the environment as a supply service and give up the traditional views.
Financial Instruments and Environmental Risks
Catastrophe bonds
Catastrophe bonds are one of the important and efficient instruments used to manage environmental risks that might be incurred by the government agencies and/or the sponsored private organizations and firms as they are responsible for acquiring the ecosystem services on the behalf of the public. This is an Insurance Linked Security. Catastrophe Bonds help to hedge institutions against financial losses that they incur in event of major natural disasters. The Catastrophe bonds or Cat bonds work through the sponsor i.e. the insurer or reinsurer who is looking for protection and enters into a risk transfer agreement with a company called special purpose vehicle (SPV) established with the sole objective of fulfilling the transaction. The SPV capitalizes itself by issuing the “Cat Bonds” equivalent to the contract risk. The accruals from the securities are transferred to a collateral account and are invested in markets to provide a secure return. .
Catastrophe bonds have an advantage over forms of bonds as they provide a cover to the organizations and firms against any natural disasters and help the various government bodies to hedge themselves against possible financial losses they might incur in case of such catastrophic events such as a Tsunami, or earthquakes .
In case of the Murray Darling basin ecosystem services there are no imminent threats of such major disasters though there are risks associated with drought and loss of biodiversity. Thus Catastrophe bonds cannot be applied and this is a disadvantage of with respect to the MDB ecosystem services.
Weather derivatives
Weather derivatives are risk management products that allow the companies to protect against adverse weather conditions wherein the payout is based on the weather index and is parametric in nature. The Weather derivatives are mostly used to address the ‘volume risk’ of transactions of or doing business a company faces by virtue of possible adverse weather conditions. Usually, the weather derivatives are especially designed or customized to suit the exposure or risk of a particular business.
The chief advantage of the weather derivatives is that it helps people from low risk but high probability conditions of weather fluctuations.
However the main disadvantage of the weather derivatives is that it difficult to evaluate as the indicators of underlying weather conditions are measured at specific locations and may differ from the realization values of the same variables at different locations. The weather phenomena are mostly localized and even a small distance between the measuring station and the actual crop field at risk may yield discrepant results between the realized losses and weather derivative accruals.
Conclusion
The Murray-Darling River through its range of ecosystem services supports a great bio-diversity which includes numerous species of birds, plants animals and fish. The basin it provides provisioning services such as water for domestic use as well as milk and cattle food products and fish products. The Murray-Darling River is offers cultural services and cultural basis for preservation of the identity and values for the local population. The basin is historically associated with the Aboriginal people and their culture. As a global ecosystem, Murray-Darling River is faced by challenges such as exploitation of natural resources through economic activity and resultant climate change. The government and other stakeholders can use certain Market-Based Instruments both Price-Based and, Quantity based Instruments to retain and improve the efficiency of the ecosystem services. Weather Derivative as a risk management tool can be used by the government to protect against possible losses as a result of climate change and global warming.
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