Environmental Finance

Question: Write an essay on Environmental finance. Answer: Introduction Although science has made stupendous progress, still about a third of earths population lives in areas where they have shortage of fresh water. One of the prominent cause of this is the growth of population and when combined with the climate changes in the arid and semi-arid areas of this planet, there will be increase in water demand and reduced availability of fresh water. A fitting example of this phenomenon is the murray-darling basin in australia. In this region authorities have made large scale water reforms and planning, which have helped in reducing consumptive extraction and has also made the river ecosystems more sustainable under the climate variability, as per grafton et al, (2014). The authorities made use of the actual data which was considered for assessing the climate change and variability, and for analysing the long-term ecological function of the river systems. The findings of grafton et al, (2014) indicated that a better water planning, combined with more understanding of the effects caused by irrigation on the regional climate evapotranspiration, will, in the long run, help in achieving better profits by increasing the gross value of food and fibre production, with Increased benefits from consumptive and non-consumptive use of water. Improved riparian environment under climate variability. The evaluations of murray-darling basin (mdb), carried out by this paper, are aimed at providing an insight into the management of consumptive and non-consumptive water in the mdb, say grafton et al, (2014). This review is for Assessing the ecosystem impacts of the current water reforms. Considering the costs and benefits of the reforms. Providing ways to improve water management in the basin area. Discussion Ecosystems A complete ecosystem comprises of various plant, animal and microorganism communities, including the non-living environment. In fact, humans too are an integral part of the ecosystems, as per connell grafton (ed.), (2011). Ecosystem services Ecosystem services consist of the benefits obtained by people from the ecosystems and these benefits include the life-supporting as well as life-enhancing services provided by the ecosystems. Broadly, according to acton, (2012), the following benefits are derived from a well maintained ecosystem Provisioning Fresh water Food Wood and fibre Fuel Regulating Water purification Flood regulation Climate regulation Disease regulation Cultural Aesthetic Spiritual Recreational Educational Rivers, wetlands and floodplains Seeming to be simple, functional aspects of every ecosystem are very complex and are finely balanced. Removal of any one factor from an ecosystem or making a simple change in any of the physical conditions (including flow change in seasons) of the ecosystem can bring about a major change in the performance of the ecosystem, say rogers ralph, (2011). In the mdb, there are numerous plants and animals, which combined with a diverse range of climatic environments, end-up making different types of ecosystems in the area. Rivers The mdb has a vast network of rivers, watercourses and creeks. The rivers are long and slow flowing because of the flat nature of the basin. This causes high degree of water evaporation from the various water bodies, and is helped by the semi-arid climate among the lower catchment areas, as per woodward et al, (2014). This can be gauged from the fact that darling rivers the actual course is 3 times longer than the direct distance which it travels. Another important factor is that most of the creeks and rivers carry water only during flood times, hence these creeks and rivers are known as ephemeral watercourses. It is pertinent to note that regular water flow has an important role in the mdb system, as it helps in flushing of sediments, salt and nutrients from the river. Similarly, a high rate of water flow starts the process through which floodplains and wetlands receive the sediment and nutrients, and also the groundwater system is recharged, assert palutikof et al, (2014). In this way, there are different types of vegetation and ecosystems, which are dependent on periodic or regular flooding. Rivers are also home of fish and many other aquatic species. A particular type of aquatic specie thrives in different part of the river system. Hence, strings of pools or slow moving or fast moving waters are essential for the growth of different species of fish at the particular stages of their life cycle. Mammals and birds too depend for basic water needs on the fresh water provided by the river as well as for the food sources. Thus we find that mdb fulfils all the requirements mentioned above under ecosystem services, as per palutikof et al, (2014). Floodplains The land alongside the rivers banks, which is slightly elevated, is called floodplain and gets flooded when the river has high volumes of water. This land is majorly made-up from the sediment deposited by the river during flood. The areas of the floodplain which remain wet even after receding of flood waters are known as wetlands. Hence, flooding provides the natural process which extracts excess salt from the floodplain and also the river system, assert saintilan overton, (2010). In the mdb, floodplains are an important feature, because they embody unique ecosystems, including the barmahmillewa forest situated in the central murray catchment area. These floodplains provide fertile ground to humans for agriculture. One such area is alongside the darling river from bourke to menindee. The groundwater beneath floodplains is of high quality and is influenced by the groundwater which flows from the upper catchment areas. Floodplain vegetation also plays an important role by using the groundwater below the soil profile, and also prevents the underneath salt rising to the ground surface and being carried to the river, say grafton et al, (2014). Wetlands Wetlands, as explained above are areas either with shallow or slow moving water. In the mdb, these areas are among the most productive and biologically diverse ecosystems. They provide the essential breeding and feeding grounds for various types of organisms, plants, fish and water-birds. Wetlands also help in first absorbing, then recycling and finally releasing various nutrients and sediment, thus acting as natures filtering agents. Wetlands also help in increasing productivity of other associated aquatic and terrestrial ecosystems, as per grafton et al, (2014). Mdb area has over 30,000 wetlands. Some of these are listed as world heritage sites for the role they play as home to migratory birds. Scientifically, these wetlands need to be alternately dry and wet so as to remain healthy and promote aquatic life. Wetlands also add to the diversity of the surrounding landscape and have remained the focus of a number of recreational activities. During the wet periods, these spread and store floodwaters, and release them gradually, thus reducing the effects of floods. Whereas, during drought, these provide refuge to wildlife and grazing grounds for livestock, as per rogers ralph, (2011). As described above, the ecosystems are delicately balanced and to perform effectively, they require the correct proportion of all the ingredients, such as water-flow, non-living organism such as soil, stones and living organism such as plants, fish and other mammals. Human population creates the biggest amount of disturbance in the ecosystem, thereby disrupting the smooth and controlled performance of the nature, say rogers ralph, (2011). This not only disturbs the life-cycle of the non-living and living organism, it also effects, in a huge way, the economic efficiency of the area as the maintenance costs of restoring the semblance of the natures performance is very high and time-consuming. Economic efficiency Scarcity of resources is the first warning which leads to the decisions for maintaining economic efficiency. The cost of restoration or of taking relevant action is sometimes higher than the cost of the alternative which has to be given up. The cost-benefit principle of economics by which benefits and costs are compared is the basis of the concept of economic efficiency. Environmental and resource policies The authorities, as per woodward et al, (2014), need to formulate suitable and effective policies concerning environment and resource management as detailed below A command-and-control policy An environmental policy which will rely on regulations such as permission, standard setting, prohibition and enforcement as opposed to giving financial incentives, such as, location control, emission standards and technology restrictions. Promotion and distribution of market based instruments (mbis) for inviting more stakeholders. Purpose of mbis is to address environmental problems by including the external costs of the economic activities through a system involving a mechanism based on price or quantity and may include such measures as subsidies, emission permits and emission taxes. Markets and incentives The benefits of mbis are A market economic system shall give business opportunities to more people and shall also increase the per capita incomes when they provide goods and services which are needed by others. Such opportunities form the basis of the incentives which are instrumental in driving the activities in market economies. A well working economic system is shall lead to a better outcome when looked from a social perspective, assert palutikof et al, (2014). Market economies Market based instruments (mbis) Mbis have the following advantages Mbis create direct approach. Market prices generate faster incentives for achieving improved environmental outcomes as compared to direct regulations. Mbis can be designed for overcoming market failures. Mbis can also be used for creating markets for those ecosystem services which do not command explicit market prices, as per mills, (2008). Different types of mbis Price-based Quantity-based Market friction Subsidies Emission charges Performance bonds Deposit-refund systems User/product charges Non-compliance fees Removal of perverse subsidies / taxes Offset schemes Tradable permits Rights or quotas Research programs Designed to facilitate market exchanges Reducing market barriers Extension/education program Information disclosure Labelling The passing of the water act 2007 (cwlth) and making it a law put to rest several decades of ambiguity about a water policy which was aiming at improving the ecological health of the mdb. The murraydarling basin agreement was adopted in 1987 with an aim of planning and management of natural resources of mdb area. Then, the council of australian governments (coag) water reform framework was formulated in 1994, committing the governments in allocating water for the environment and thus establishing a market for water through the national water initiative of 2004. These reforms enabled management of surface water as well as groundwater resources for an improved social, economic and environmental outcome in mdb area, as per labatt white, (2003). The basis of the measures noted above were the following three factors Financial incentives, market prices and ecosystem services Financial incentives are often provided by prices. Market prices are signals that reflect the economic value of a good, service or asset. Prices are usually determined by the market. Given the non -market nature of environmental market goods and services, pricing ecosystem services is difficult. Allocations in a market system Can a system of markets produce efficient and equitable allocation of environmental goods and services? Different institutional arrangements might be able to allocate scarce resources, e.g., dictatorship, central planning A great advantage of markets is they serve as a decentralised information-processing system. Conditions for markets to work Markets exist for goods and services produced and consumed All markets are perfectly competitive All transactors have relevant information Property rights are well defined No externalities exist All goods and services are private Among the several precursors to mdbs plan for recovery of water for environmental purposes, the most prominent has been the living murray program (tlmp), through which nearly 500 gl has been recovered for the environment since 2004, when the program began, assert ali yano, (2004). Under this program, the government has used about au$700 million for purchasing water entitlements, 99-year leases and making farm investments in irrigation water infrastructure. The aim of tlmp is to ensure that the environmental water requirements are met for the six icon sites for keeping them in a healthy ecological condition, as defined in the environmental management plans. The six icon sites are Barmahmillewa forest Gunbowerkoondrookperricoota forest Hattah lakes Chowilla floodplain and lindsaywallpolla islands Lower lakes, coorong and murray mouth River murray channel. The government has also made allocation of another au$250 million for building allied infrastructure works at the above noted six icon sites for improving efficient delivery of the recovered environmental water, as per ali yano, (2004). Financial tools used Some of the most common category of economic instruments which are often used in the markets are those with risk sharing / alleviating tools, says lobo-guerrero, (2010). They are available in the form of (a) insurance, (b) catastrophe bonds and (c) weather derivatives. Insurance This is the typical risk sharing/alleviating type of instrument. The insured party pays a premium to the insuring company which covers the risks with respect to one or more of climate variables. Compensation is paid after an assessment of losses caused by nature are carried out, says lobo-guerrero, (2010). Catastrophe bonds These are securitised risks which are associated with natural hazards. Reinsurance companies, including large corporations, issue these bonds to reinsure the low frequency-high severity risks, as per lobo-guerrero, (2010). Weather derivatives Weather derivatives are those derivative securities in which an investor will hedge against the future state of the weather. These are based on certain 'weather trigger rather than insuring a loss and are simple to administer than other financial options. This may include, for instance, variation in temperature over a specified period, as per klein, (2014). They have a great potential in the agricultural sector. An investor may pay another if the weather indicator, which includes temperature, rainfall and soil humidity, of a given place, over a given period of time, goes above a certain limit. On the other hand, the other investor will pay if the indicator goes below the agreed-upon limit. Hence, weather derivatives can be used as financial mechanisms by individuals and businesses as part of their overall risk management strategy. As they are based on a certain 'weather trigger, rather than relying on the proof of a loss, therefore they are cheaper to manage as compared to other alte rnative options, asserts klein, (2014). Although these are finding application in most businesses which get affected by weather, their greatest potential may lie in their use in the agricultural sector. Whole life-cycle costing (wlcc) is used for a fair assessment of flood risk and its response effectiveness in the construction industry. Although it is a relatively new concept, the primary purpose of wlcc is to use it as aid for making capital investment decision by providing forecasts involving the long-term costs of construction and ownership of a building or structure. It also provides a dynamic approach and hence can give up-to-date forecasts in regard to costs and performance of the building or structure throughout its life. On the same grounds, a similar methodology is finding use in the agriculture sector for making assessments related to direct and indirect, as well as private and societal costs of adaptation options, weather uncertainties and other natural causes as a consequence and can be applied to many working options or investment, as per klein, (2014). List of references Acton, q.a. 2012, issues in ecological research and application. Scholarlyeditions, atlanta. Ali, p.a.u. And yano, k. 2004, eco-finance: the legal design and regulation of market-based environmental instruments. Kluwer law international, the hague. Connell, d. And grafton, r.q. (ed.) 2011, basin futures: water reform in the murray-darling basin. Anu e press, canberra, act. Grafton, r. Q., pittock, j., williams, j., jiang, q., possingham, h., quiggin, j. 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Woodward, g., hajibabaei, m., dumbrell, a. And baird, d. 2014, big data in ecology. Academic press, london.