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‘Capping’ creates a ‘global’ limit on the right to use a natural resource or a limit on the total allowable emissions to the environment (e.g. water body or air). This can be set at a sustainable limit, and then divided into parts, so that each resource user has a defined allocation. Resource users must then meet their allocation, or trade with other users. In this way, a ‘market’ for the resource is created. Capping can also be placed on pollution to contain it within sustainable limits.
Cap-and-trade mechanisms are quantity-based market-based instruments (MBIs), designed to work in conjunction with other regulatory mechanisms. In a capped system, no new rights can be authorised unless old rights are surrendered or cancelled simultaneously. The holders of the ‘rights’ can trade them in a formal market. In these systems, new market entrants must purchase permits from existing permit holders at the market price.
The cap-and-trade approach to managing environmental pollution and sustainable natural resource use has been widely applied to industrial air pollution, such as sulphur dioxide, and to natural resources such as fisheries, water and forests. In some instances, cap-and-trade mechanisms have been applied to agricultural issues and landscapes. Examples include:
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managing irrigation water in fully-allocated systems
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managing point-source water-pollution emissions
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managing dryland salinity and irrigation salinity.
A cap-and-trade mechanism is most likely to be effective when the cap is achievable, the issues are well known and documented, the cap is accepted by stakeholders, and monitoring and enforcement can be undertaken at low cost.
Despite the benefits of cap-and-trade mechanisms, they can be costly to establish and operate. The scale, costs and institutional arrangements required to create and run cap-and-trade mechanisms generally preclude regional bodies using them directly as a natural resource management (NRM) policy tool. However, there are a number of, as yet, largely under-utilised strategic opportunities for regional groups to be involved in cap-and-trade mechanisms.
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