Designing Tradable Credit Policy for Diffuse Source Salinity Ex Ante

Market-based instruments are policies that rely on price signals as incentives to encourage private actions with public environmental benefits. They are becoming increasingly popular worldwide as instruments of natural resource management. Experience suggests that success of such policies can critically depend on design detail and that these design challenges are especially significant for diffuse source environmental issues. This article describes a process for the ex ante design of market-based approaches for diffuse source environmental issues that involves: (1) identifying potential impediments to efficient functioning of the market mechanisms, (2) qualitatively evaluating the potential significance of identified impediments given case-study-specific context, and (3) consideration of policy design features to overcome high-priority impediments. An Australian case study is described where the developed methodology was applied to the design of a credit trade policy to reduce the salinity consequences of drainage, a result of prevailing agricultural practice.