Journal of Hydrology 509 (2014) 1–12

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Journal of Hydrology

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Applicability of market-based instruments for safeguarding waterquality in coastal waterways: Case study for Darwin Harbour, Australia

0022-1694/$ - see front matter � 2013 Elsevier B.V. All rights reserved.http://dx.doi.org/10.1016/j.jhydrol.2013.11.019

⇑ Address: Research Institute for the Environment and Livelihoods, CharlesDarwin University, Darwin, NT, Australia. Tel: +61 418 242 156.

E-mail address: romy.greiner@cdu.edu.au

Romy Greiner ⇑Research Institute for the Environment and Livelihoods, Charles Darwin University, Darwin, NT, AustraliaThe Cairns Institute and School for Environmental and Earth Sciences, James Cook University, Townsville, QLD, Australia

a r t i c l e i n f o s u m m a r y

Article history:Received 21 September 2013Received in revised form 12 November 2013Accepted 13 November 2013Available online 23 November 2013This manuscript was handled by GeoffSyme, Editor-in-Chief

Keywords:Water qualityPollutionRegulationEconomic instrumentsPolicy evaluation and designCoastal waters

Water pollution of coastal waterways is a complex problem due to the cocktail of pollutants and multi-plicity of polluters involved and pollution characteristics. Pollution control therefore requires a combina-tion of policy instruments. This paper examines the applicability of market-based instruments to achieveeffective and efficient water quality management in Darwin Harbour, Northern Territory, Australia.Potential applicability of instruments is examined in the context of biophysical and economic pollutioncharacteristics, and experience with instruments elsewhere. The paper concludes that there is potentialfor inclusion of market-based instruments as part of an instrument mix to safeguard water quality inDarwin Harbour. It recommends, in particular, expanding the existing licencing system to include quan-titative pollution limits for all significant point polluters; comprehensive and independent pollutionmonitoring across Darwin Harbour; public disclosure of water quality and emissions data; positive incen-tives for landholders in the Darwin Harbour catchment to improve land management practices; a storm-water offset program for greenfield urban developments; adoption of performance bonds fordevelopments and operations which pose a substantial risk to water quality, including port expansionand dredging; and detailed consideration of a bubble licensing scheme for nutrient pollution. The paperoffers an analytical framework for policy makers and resource managers tasked with water quality man-agement in coastal waterways elsewhere in Australia and globally, and helps to scan for MBIs suitable inany given environmental management situation.

� 2013 Elsevier B.V. All rights reserved.

1. Introduction

Water pollution has become a major public concern in manyparts of the world (Schwarzenbach et al., 2010), causing humanhealth issues and decline of aquatic biodiversity in many places(Vörösmarty et al., 2010). Many coastal and inshore waterways re-ceive substantial amounts of material from adjacent developedcatchments, which have been shown to affect the ecological integ-rity of inshore ecosystems and adjacent coral reefs (Schaffelkeet al., 2012).

Darwin Harbour, located in the Northern Territory (NT) ofAustralia, accommodates a major shipping port and has importantrecreational use values for the resident population of approxi-mately 120,000 people, as well as aesthetic and biodiversity values(DHAC, 2010). In tourism brochures, the Harbour is being touted asa ‘pristine’ waterway and indeed, whole-of-harbour water qualityis good. However, past urban, industrial and agricultural develop-ment in the catchment area have caused significant anthropogenic

impacts on water quality at the local scale with pollution hot-spotsemerging (McKinnon et al., 2006; Padovan, 2001; Wolanski andDucrotoy, 2014). Darwin Harbour is now experiencing a phase ofrapid port expansion, industrialisation and urban development.The situation is symptomatic of the economic development trajec-tory of many coastal waterways with port facilities in northernAustralia and driven predominantly by the rapid expansion ofthe oil, gas and mining industries (Allen et al., 2012; Cagnazziet al., 2013; Grech et al., 2013). Coastal waterways in wet tropicalregions in eastern Australia are already showing rapid increases inpollutant loads (Tsatsaros et al., 2013).

A water quality protection plan for the Darwin Harbour catch-ment is under development to ensure that ‘community values forwaterways are protected’ (Drewry et al., 2009). Safeguarding waterquality by controlling water pollution requires a carefully consid-ered planning and policy approach, which efficiently integrates bothpoint and non-point pollution (Shortle and Horan, 2013). Accordingto Perry and Vanderklein (1996), effective water quality planningand policy entails three elements namely, water quality goals, anunderstanding of the current resource condition and its potentialto deliver desired ecosystem services, and the appropriate physicaland institutional mechanisms to accomplish the goals. To find

2 R. Greiner / Journal of Hydrology 509 (2014) 1–12

effective and efficient solutions to water pollution problems, instru-ments need to consider the pollution impact and be tailored to thepollution characteristics (Sterner, 2003). A clear diagnostic under-standing of environmental problems within their social-ecologicalsystems context is therefore a necessary condition of effectivepolicy design (Cox, 2011), meaning a sound understanding of thebiophysical dimensions as well as drivers—social, economic, techni-cal and other—that directly or indirectly cause pollution.

This paper contributes to the understanding of the role thatmarket-based instruments (MBIs) can play in coastal water qualitymanagement. MBIs provide an alternative to traditional command-and-control approaches. The paper provides a synthesis of empiri-cal and theoretical evidence about different types of MBIs in thecontext of coastal water quality protection. It develops and imple-ments an analytical framework for the systematic consideration ofMBIs in a case study context, which is transferable to applicationselsewhere in Australia or globally. Section 2 conceptualises waterpollution as an economic problem and provides a summary analy-sis of the water pollution problem in Darwin Harbour to set therelevant biophysical parameters. Section 3 provides a literature re-view of MBI theory and offers pertinent examples of application.Section 4 discusses the potential of MBIs in the Darwin Harbourcontext. Section 5 offers concluding comments and reflects onthe broader relevance of the findings.

2. Water pollution: concepts and situation in Darwin Harbour

2.1. Conceptualisation of water pollution

Water pollution can be defined as damage to the ecosystem ser-vices provided by the aquatic environment caused by the disposalof waste from production and consumption activities into water-ways (William, 1982). Two types of pollution are differentiatedon the basis of identifiability of individual polluters and measur-ability of pollution: point source and diffuse-source pollution.

‘Point source pollution’ refers to pollutant discharge into a receiv-ing water body at an identifiable single-point location or identifiablemultiple-point locations (Novotny, 2003). While there aredifferences between legal and operational definitions, point sourcepollution generally includes municipal and industrial wastewatereffluent, runoff and leakage from solid waste disposal sites andconcentrated animal feeding and raising operations, runoff fromindustrial and construction sites, runoff and drainage water from ac-tive mines and from oil and gas fields, stormwater and sewer outfallsfrom urban centres, sewer overflows and bypasses, other sourcessuch as discharges from vessels, damaged storage tanks and storagepiles of chemicals, and dredging of port waterways.

Non-point source pollution—also called diffuse pollution—is, bydefinition, pollution other than point source as the entry point intothe waterway is not (easily) traceable (Novotny, 2003). Diffusesource pollution includes return flow from irrigated agricultureand horticulture, runoff from agricultural land (including horticul-tural and pastoral) and roads, urban runoff from small communi-ties with storm sewers and from unsewered settlement areas,outflows and overflows of septic tanks, wet and dry atmosphericdeposition over a water surface, and activities on land thatgenerate wastes and contaminants such as wetland drainage, landdevelopment other than construction, and military training,manoeuvres and shooting ranges; and mass outdoor recreationand gatherings.

2.2. Overview of Darwin Harbour

Darwin Harbour is an estuary located in the wet–dry tropics ofnorthern Australia (Padovan, 2001; Fig. 1), located at latitude

12�280S, longitude 130�500E, on the southern shore of the BeagleGulf in the Timor Sea. It encompasses approximately 1000 km2 ofopen water. It harbours a major port, which had 5500 vessel callsin 2009/10 and transferred 4.5 million tonnes of goods in that sameyear (DPC, 2013). As a coastal waterway in direct proximity to theNorthern Territory’s major population centres Darwin and Palmer-ston, it provides a range of ecosystem services including cultural,recreational and biodiversity services (NRETAS, 2010), which re-quire high water quality standards to sustain them (ANZECC andARMCANZ, 2000; DHAC, 2010).

Darwin Harbour is surrounded by a comparatively small catch-ment area of 2417 km2 (NRETAS, 2005; Padovan, 2001; SEWPaC,2011). The cities of Darwin and Palmerston are located withinthe catchment, and, together with adjacent rural areas, are hometo approximately 120,000 people. There has been no evidence tosuggest that anthropogenic nutrient inputs may have substantialeffects on primary production in Darwin Harbour (Burford et al.,2008). Light industrial development in the catchment means thatheavy metal concentrations in organisms are much lower com-pared to heavily industrialised harbours such as Port Philip Bay(Hanley and Couriel, 1992). The catchment is the predominantsource of water pollution (NRETAS, 2010). It is anticipated thatongoing industrialisation and urbanisation of the catchment, andport development, will place increasing pressure on Darwin Har-bour and lead to a more widespread decline in water quality. In-creased runoff and waste water discharge will cause higherturbidity and nutrient and contaminant loads (Drewry et al.,2009; McKinnon et al., 2006; SEWPaC, 2011). Typically large dailytidal movements and high inflow of sediment into the harbour dur-ing the wet season mean that the water is naturally turbid thoughdissolved nutrient concentrations vary spatially and temporally(McKinnon et al., 2006). The tides help dilute anthropogenic con-taminants (Hanley and Couriel, 1992). Port dredging leads to re-suspension of marine sediments and creates a turbid plume aroundthe dredge activity (Capello et al., 2010). Increased dredging (andassociated spoil disposal) as part of the port expansion is thereforelikely to cause increased turbidity in some parts of Darwin Harbour(URS, 2011).

Darwin Harbour is considered a water quality ‘hot spot’ in Aus-tralia. It holds significant ecological values as it supports a numberof rare and threatened species of birds, fish, cetaceans and turtles.Its mangrove fringes hold 36 mangrove species, which is half of theworld’s mangrove species, and provide habitat for 60 fish, 36 crus-tacean and 31 mollusc species (McKinnon et al., 2006). It also holdsimportant social and recreational values, in particular it supports akey recreational fishery in northern Australia (NAFF, 2013). Releaseof a comprehensive water quality protection plan for DarwinHarbour is expected in the near future.

2.3. Water pollution in Darwin Harbour

Darwin Harbour is the receiving water body of a cocktail of pol-lutants including sediments, nutrients, heavy metals, hydrocar-bons, pathogens and chemicals (Drewry et al., 2010). Detailedcausal attribution of water pollution is hindered by a lack ofmonitoring data and/or inaccessibility of data (DHAC, 2005). Ofmeasured contaminants, those showing large relative load in-creases compared to pre-urbanisation are phosphorus, zinc andlead. Phosphorus load has increased by a factor of 5.9, caused pre-dominantly by treated sewage inflow. Zinc and lead loads have in-creased 3.1-fold and 3.8-fold, respectively, and are attributed tosurface run-off (McKinnon et al., 2006). Sewage outflows havebeen linked to increased nutrient loads and harmful algal blooms(Burford et al., 2012; Smith et al., 2012). Modelling of known andassumed processes has been employed to enhance systemsunderstanding. Modelling results highlight increasing pollutant

Fig. 1. Map of Darwin Harbour. Modified from SEWPaC (2011).

R. Greiner / Journal of Hydrology 509 (2014) 1–12 3

concentration in the upper parts of estuaries, where the waterbodyis poorly flushed (Drewry et al., 2009).

There are multiple sources and pollution types for each pollu-tant, and each type of polluter releases a diversity of pollutants(Table 1). Wastewater treatment plants act as aggregators of thesewerage produced by households and other premises, and alsoaccumulate discharge from various sub-sections of diffuse pollu-tion, particularly in urban areas.

Information about pollution discharge into Darwin Harbour issparse. Data are available for wastewater treatment plants forthe year 2006/07 and for aquaculture operations for the year2011. These point source polluters are licensed and monitored.For all other polluters, estimates exist only at an aggregate land-use level: urban and rural (including undeveloped land). Basedon calculated annual pollutant load discharges for 2006/07 (Skin-ner et al., 2009), wastewater treatment plants emit a majority oftotal phosphorus load, while diffuse sources contribute the major-ity of total (and volatile) suspended sediment and nitrogen(Table 2). Nutrients are a key cause of harmful algal blooms incoastal marine systems (Chislock et al., 2013) and in the case of

Darwin Harbour can be causally linked to sewage outfall (Burfordet al., 2012). Darwin’s sewage treatment plants contribute amajority of annual total phosphorous load (71%, Skinner et al.,2009). Since 2011, all waste water is treated prior to discharge intoDarwin Harbour. Treatment processes differ between plants andinclude waste stabilisation ponds, chemically-assisted sedimenta-tion and maceration (Engineers Australia, 2010). There is, however,no tertiary treatment. There are four licenced aquaculture opera-tors, whose combined contribution to nutrient loads is below oneper cent.

Pollution is subject to spatial variability across sub-catchmentsand temporal variability. Rainfall is highly variable in the mon-soonal climate conditions of the Top End of Australia and drivestemporal variability of pollutant loads. Water quality at any givenpoint in time is critically influenced by precipitation events andassociated surface water run-off. Rainfall causes increased waterrunoff which, in turn, results in more pollutant transport (Skinneret al., 2009). This explains poorer water quality during the wet sea-son (NTG, 2012; Wolanski, 2006) as well as variability of annualpollutant loads. Pollutant discharge in ‘wet’ years (>2700 mm)

Table 1Conceptualisation of pollutants and pollution sources in Darwin Harbour.

Emitters and sources ofpollution

Pollutants

Sediments Phosphate Nitrogen Pesticides, herbicides,etc.

Heavymetals

Hydrocarbons Anti-foulants

Pathogens Antibiotics,etc.

Point-source pollutionWastewater treatment

plants� � � � �

Industrial operations andareas

� � � � �

Stormwater drains � � � � � � �Golf courses and race

courses� � �

Airports � � �Hospital and surgeries � �Development and

construction� �

Refuse and waste disposalsites

� � � � � � � �

Harbour loading facilities � � �Dredging operations � �Ships � �Feedlots � � �Aquaculture operations � �Marinas � � � �

Diffuse pollutionUrban gardens � � � �Urban households – internal

use� � �

Agriculture & horticulture � � � � � �Small-scale industry � � �Parks, sporting fields � � � �Roads and other sealed

surfaces� � �

Septic tanks � � �Recreatioinal boating � �

Table 2Relative estimated contribution to pollutant discharge into Darwin Harbour for 2006/07.

Sources Pollutants

TSS (%) VSS (%) N (%) P (%)

Wastewater treatment plants (licenced) 4.6 13.1 30.8 70.8Aquaculture (licenced)a 0.0 0.0 0.4 0.1Urban (diffuse) 47.6 36.9 20.8 16.0Rural (diffuse) 47.8 49.9 48.4 13.2

Note: Calculated from Skinner et al. (2009; p. 28); nitrogen (N), phosphorus (P),total suspended sediment (TSS), volatile suspended sediment (VSS); ‘rural’ includesrural and undeveloped land.

a Aquaculture discharge for year 2011 (email J. Fortune on 2 May 2012).

4 R. Greiner / Journal of Hydrology 509 (2014) 1–12

can be up to 500 per cent of the typical pollutant load in a ‘dry’ year(�1000 mm; Skinner et al., 2009). No ongoing emissions monitor-ing is undertaken for the port though there is a requirement fornotification of authorities in case of toxic spills, which happensporadically (EPA, 2012).

3. Market based instruments (MBIs) for water qualityprotection

3.1. Introduction to MBIs

MBIs, sometimes described as ‘‘economic instruments’’, seek tobring market opportunities and processes into areas that have beentraditionally managed by government regulation, information andeducation. MBIs are grounded in the notion that environmentalproblems, such as water pollution, biodiversity loss and climatechange, are the result of market failure and that the introductionof markets or market-like mechanisms can correct this failure in

many situations (Lockie, 2010). In comparison to traditionalregulatory or command-and-control approaches, MBIs offer thepotential to achieve environmental outcomes more efficiently byproviding decision makers—individuals, households and firms—with a rationale on which to make decisions that are in both theirown and the public interest (Lockie, 2013; Stavins, 2003). MBIs in-crease flexibility and adaptability to changes in conditions (Windleet al., 2005). However, MBIs must be supported by regulatory andmonitoring frameworks in order to be effective and realise the po-tential benefits, and they must be well communicated. There is anextensive list of MBIs and they are typically classified into threetypes of mechanisms: market friction, price based and rights-based(Lockie, 2013; OECD, 2007; Stavins, 1998).

3.2. Market friction measures

Market friction instruments improve the efficiency of existingmarkets or support the design and implementation of new marketsby reducing transaction costs and/or increasing information. Theunderlying rationale is that information can alter market and con-sumer behaviour (Godden and Peel, 2010). They work by (i) pro-viding relevant information to market participants, (ii) improvingaccountability and transparency of market function through, e.g.the introduction of liability rules and (iii) encouraging privateinvestment in activities that directly or indirectly help reduce pol-lution. Market friction instruments include the creation of newmarkets, liability rules and information programs (Stavins, 2003).Examples include standards, certification, eco-labelling and capac-ity building. Market friction instruments have a regulatory basis asdisclosure requirements and duty of care need to be legislated.

Eco-labelling of products (i) allows consumers to choose prod-ucts that have been produced in more environmentally benign

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manner and (ii) enables producers with higher environmentalstandards to thus pass on higher production costs to consumers(Godden and Peel, 2010; Jordan et al., 2003).

The explicit definition of an environmental duty of care repre-sents a liability rule in that agents who pollute may find them-selves in breach of their duty of care and may be prone toprosecution (Greiner, 2014; Lockie, 2013). The duty of care isequivalent to a safe minimum standard approach to industrialactivity and may result in industries defining voluntary codes ofpractice so minimise the risk of breaches and litigation. Duty ofcare retains the common law approach in that no negligence existswhere (i) harm was not ‘reasonably foreseeable’, regardless ofwhether the harm or the circumstances that lead to harm eventu-ated, or (ii) all ‘reasonable and practical’ steps were taken toprevent harm. The three essential elements of negligence are aduty to take care, failure to take care and harm resulting from thatfailure to take care.

3.3. Price-based mechanisms

Price based mechanisms are used for either market reform ormarket design. If used for market reform, they set or modify pricesto incorporate the cost of ecosystem services, e.g. through taxes onpollution or proxies, thus reflecting the ‘polluter pays’ principle. Ina market design situation, they use market mechanisms to allocatepayments for ecosystem services, e.g. through auctions and reflectthe ‘beneficiary pays’ principle. Price based approaches broadlyentail subsidies and charges.

Subsidies are financial incentives for actors (individuals, house-holds and firms) to create positive environmental services such asprevention, control or remediation of pollution, thereby encourag-ing adoption. Subsidies can take the form of grants, low interestloans and tax allowances. Subsidies are the preferred instrumentin the natural resources management domain by governments inAustralia, with various programs funding landholders to undertakeconservation and remediation activities on their land (Hajkowicz,2009). Payment-for-environmental-services schemes are one suchpermutation. Subsidies can also apply to households, e.g. throughsubsidies given for the installation of solar energy generation.

Charges are financial dis-incentives which increase the cost of apolluting activity in order to discourage its application. Environ-mental taxes, for example, can be applied to production inputs thatare associated with environmental harm and encourage firms toreduce their application. Taxes on e.g. nitrogen and phosphorusfertilizers in agriculture have been shown to be effective and effi-cient—due to low transaction costs—in addressing diffuse sourcepollution and there are many examples of fertilizer tax applica-tions in the USA and Europe (Huang and LeBlanc, 1994; McCannand Easter, 1999; Sheriff, 2005; Vatn, 2000; Von Blottnitz et al.,2006). Effectiveness is much less certain in urban settings as fertil-izer application is governed by social factors (Carrico et al., 2013;Martini et al., 2013).

Performance bonds represent a monetary security which poten-tial point-scale polluters are required to set aside ex ante as anoperating condition (Panayotou, 1998; Stavins, 2003). They ensureavailability of adequate funds for (i) rehabilitation of a site in theevent the activity is abandoned by the developer, (ii) clean-up ofpollution and remediation of adverse downstream effects associ-ated with the activity, and (iii) compensation of affected parties(Dowd et al., 2008; Greiner et al., 2000; Weersink, 2002; Weersinket al., 1998). Performance bonds have been widely applied in themining/processing and manufacturing sectors and have applicabil-ity for large-scale coastal development including port expansionand dredging.

Price-based mechanisms can use existing markets or they cancreate new markets, such as payments for environmental services

(Lockie, 2013). Two principal approaches exist for determining thelevel of subsidy or charge to be applied. Firstly, the level can bedetermined ex ante to be equal for all firms or subsets of firms thatmeet certain criteria, or activities that meet certain criteria. Thisfixed price approach was adopted by the Australian Governmentwhen it implemented a carbon tax in 2012 (POA, 2010). Similarly,in relation to water quality, some European countries introducedfixed fertiliser taxes to reduce the nitrogen load to the environ-ment (Rougoor et al., 2001). Secondly, the level can be determinedin a competitive fashion, e.g. through an auction or tender process,resulting in business-specific levels of tax or subsidy. Thisapproach is commonly employed for determining stewardshippayments or payments-for-environmental-services. Examples ofthis approach exist, e.g. in biodiversity conservation (e.g. Stonehamet al., 2003) and water quality control (Rolfe et al., 2011). Tender-based determination of payment levels leads to significant costefficiencies compared to fixed price approaches (Windle and Rolfe,2008).

While they are technically identical in terms of pollution con-trol effect, user charges and pollution taxes differ with respect tothe use of the revenue generated. Taxes tend to add to consolidatedgovernment revenue while user charges can be administered by anon-government entity and used for the proper disposal of pollu-tants or management of the resource (Stavins, 2003).

3.4. Rights-based mechanisms

Rights-based mechanisms set quantity targets (positive andnegative) to achieve or maintain ecosystem services and needto be developed in association with property rights, for examplecap and trade mechanisms or tradable offsets. These mecha-nisms require the creation of new property rights through reg-ulation (Godden and Peel, 2010; Murtough et al., 2002; Ostromand Schlager, 1996) and typically involve the imposition of alimit or ‘cap’ on pollution, either by specifying a total pollutionlimit or by establishing firm-based limits. The market elementis associated with the introduction of trade in the pollutant inorder to generate efficiencies and generate an ongoing incentivefor firms to reduce pollution (O’Shea, 2002; Greiner et al.,2000). Challenges with rights-based approaches occur underconditions of scientific uncertainty and low verifiability andenforceability of property rights. ‘Thin markets’ can also be aproblem, i.e. markets with few potential participants, whichcan be caused by high transaction costs and market segmenta-tion necessitated by spatial pollution characteristics (Gustafs-son, 1998; Lockie, 2013).

Rights-based approaches are extensively being used to controlair pollution, regulate commercial fisheries and also to managewater quality (Colby, 2000). For example, the USA introduced acap-and-trade system for sulphur dioxide and nitrogen oxides in1990 to combat the phenomenon of acid rain. Lessons learnt in-clude the need for stringent emissions monitoring, enforcementand stiff penalties for non-compliance, sophisticated trading rules,e.g. in relation to the need to impose geographical restrictions totrade (Colby, 2000; Schmalensee et al., 1998; Schwarze and Zapfel,2000).

Water quality trading schemes have been implemented in theUSA, Canada, Australia and New Zealand (Selman et al., 2009). Theyinvolve cap-and-trade approaches and work through the setting ofwater pollution caps and implementation of transferable dischargepermits to polluters (Cline et al., 2006; Woodward et al., 2002). Aspart of ‘offsets’ polluters are able to either sell permits they do notrequire to other licenced polluters or buy credits off them (Stavins,2003).

Thin markets have proved to be a particular problem in waterquality trading (Fisher-Vanden and Olmstead, 2013; Newburn

6 R. Greiner / Journal of Hydrology 509 (2014) 1–12

and Woodward, 2012). Experience shows that unless restrictiveregulatory conditions apply and aggressive enforcement isprovided, there remains an absence of willing buyers and sellers(King, 2005). Also, water quality schemes are often complicated ifthey require metrics to determine environmental equivalency be-tween different nutrients or pollutants. Administrative costs ofcomplicated schemes may become excessively high whereassimple markets may not lead to environmentally effective out-comes (Connell et al., 2005). In Australia, active schemes includethe Hunter River Salinity Trading Scheme and the Murray-DarlingBasin Salinity Credits Scheme, in which the states rather thanagents hold salinity credits (Selman et al., 2009).

Design and implementation challenges include, e.g. balancinguse levels with resource condition and determining the size of thecap, equity considerations associated with initial assignment ofrights, implementing trading mechanisms that facilitate transac-tions among market participants and minimise transaction costs,and ensuring adequate monitoring (including for leakage, i.e. thecreating of unintended consequence caused by participants shift-ing from a regulated activity to a non-regulated activity). Keycriteria for operating successful pollutant cap-and-trade policiesare (Van Bueren, 2001): (i) understanding the scientific dimen-sions of the problem; (ii) ensuring caps are measurable andenforceable; (iii) starting from scratch (instead of makingchanges to existing programs), (iv) understanding the potentialmarket, (v) involving stakeholders in the design, and (vi) keepingtrading rules simple.

Bubble schemes represent a version of a cap-and-trade mech-anism where the group of emitters is small. A ‘bubble’ is anaggregate pollution permit whereby all polluters contributing topollution of the waterway are jointly responsible for meeting apollution limit or water quality standard (OECD, 2001). Thismeans only the total quantity of pollutants emitted under thebubble is taken into consideration. Thus, polluters are free, withincertain limits, to offset excess emissions from one source by areduction made on another source, as long as collectively theoverall limit is not exceeded. For example, the South Creek Bub-ble Licensing System, introduced in 1996 in the South Creek areaof the Hawkesbury–Nepean River system in New South Wales,sets nutrient pollution targets for three sewage treatment plansof Sydney Water Corporation. The bubble allows the participantsewage treatment plants to adjust their individual dischargesprovided the total pollutant load limit for the scheme is not ex-ceeded, thereby allowing for flexibility in capital infrastructureinvestment by the operator compared to limiting pollution forevery plant or setting uniform concentration limits (Kraemeret al., 2004). The scheme achieved the target reduction in nutri-ent emission (Environment_and_Heritage, 2011). A similar con-cept is being pursued in the Las Vegas Wash catchment(Greenhalgh and Selman, 2012).

The idea behind offsets is to encourage actors to produceenvironmental net improvements by off-setting environmentaldamage caused, e.g. by development, with environmental restora-tion, possibly of a different nature or in a different (geographical)area. Offset activities may be carried out by the agent, another pri-vate party or a government entity (Hahn and Richards, 2010). Off-sets are often employed in the context of wetlands (Kiesecker et al.,2009). The incentive for polluters to get involved in offsets arerules that specify a ‘no net increase in emissions’, including thosefrom new developments. Development is enabled by establishingtrading ratios so that the environmental impacts of a pollutingactivity at one site can be equated to the environmental benefitsof a mitigating activity (offset) elsewhere (Windle et al., 2005).An offset program enables trading to occur between enterprisesand even between different sectors without the establishment ofa full trading market.

3.5. Overarching considerations

According to Stavins (2003), MBIs work best in situations wherepollution abatement costs differ widely between polluters andthere is a high degree of mixing of pollutants in the receivingwaterway. The efficacy of individual MBIs also needs to be consid-ered in the broader context of environmental policy objectives andsettings. According to Young and McColl (2005), instrument designneeds to be consistent with three notions. (i) The Tinbergen princi-ple asserts that sustainable solutions require as many instrumentsas there are goals, objectives or targets (Tinbergen, 1952). (ii) Gen-eralising from the Mundell assignment rule, an appropriate policymix consists of different instruments, with each instrument target-ing the goal over which it has the most influence (Rose, 2000). (iii)The Coase Theorem stipulates that if trade in an externality is pos-sible, bargaining will lead to an efficient outcome regardless of theinitial allocation of property rights only when there are no transac-tion costs, including free-rider and coordination costs (Coase,1960; Medema, 2013; Shirley, 2013). In situations where transac-tion costs are high, initial entitlement allocation will strongly influ-ence the outcome and regulatory government solutions maybecome optimal (Banzhaf et al., 2013).

4. Applicability of MBIs for water quality control in DarwinHarbour

4.1. Water management objectives and synopsis of pollutioncharacteristics

On the basis of the existing generic water quality objectives,available data and understanding of issues, three broad goalsemerge for water quality management in Darwin Harbour, namely(i) reduction of diffuse pollutants, in particular sediments andnutrients, (ii) control of land-based point polluters with focus onlarge dischargers, and (iii) control of water pollution caused byport-related development and activities. The questions to be an-swered now are whether and how MBIs would be appropriate tohelp achieve these goals. As with other types of policy instruments,choice and design of MBIs must be ‘fit for purpose’ (Lockie, 2013)and therefore tailored to the characteristics and context specificityof the pollution problem.

On the basis of this research, the defining features of water pol-lution in Darwin Harbour can be summarised as follows. (i) Theharbour itself is a large waterbody. Water quality is generally good,though significant localised and temporally confined pollutionsproblems exist. (ii) Tide-driven water movement results in limitedmixing of water within the harbour and in high natural turbidity ofthe water. (iii) The catchment area is comparatively small and sup-ports a small urban population without major heavy industries.There is a small agricultural sector. (iv) Diffuse source pollutionfrom both rural and urban areas contributes the vast majority oftotal sediment and nitrogen load. (v) Diffuse pollution is substan-tially driven by high rainfall events during the rainy season. (vi)Wastewater treatment plants aggregate much of the urban andindustrial waste and contribute the majority of total phosphorusload. Waste water is minimally treated and discharged at poorlycirculated locations in the coastal water body, causing localisedpollution problems at times. (vii) There are occasional spills oftoxic materials (heavy metals), caused by port operations. (viii) Ur-ban and industrial development and dredging associated with portexpansion contribute to localised turbidity. (iv) There are existingsignificant commercial operations (airport, harbour, army base,and gas processing/loading facilities), which are not currently in-cluded in the licencing and monitoring system. There is a smalland licenced aquaculture industry operating in the catchment.

1 Provisions in this Act to enact environmental duty of care provisions byprosecuting alleged offenders were strengthened in 2012 following a series of spillof toxic substances at the Port of Darwin during 2010 and 2011.

2 It is a form of Pigouvian tax and, according to Stavin (2003), a ‘special case ofperformance bond’.

R. Greiner / Journal of Hydrology 509 (2014) 1–12 7

Fitness for purpose of MBIs rests on several criteria, includingeffectiveness, cost effectiveness, equity, social and political accept-ability and ongoing incentive (Greiner et al., 2000; Lockie, 2013). Itis therefore helpful to develop an analytical framework for screen-ing MBIs for potentially useful instruments. Hatton MacDonaldet al. (2004) propose a screening process of MBIs on the basis offeasibility in the existing institutional setting and likely effective-ness and efficiency in addressing a specific environmental goal.Greiner et al. (2000) include further criteria, including whetherinstruments are precautionary and offer continuing incentive andintrinsic motivation, whether they are equitable and what their le-vel of likely political and community acceptability might be. Gunn-ingham and Sinclair (2005) further stress the need for processconsiderations in the selection and staging of instruments. The dis-cussion framework adopted here organises the consideration ofMBIs for water quality control in Darwin Harbour into (1) feasibil-ity in the existing institutional setting, (2) likely effectiveness andefficiency of different types of MBIs, and performance against othercriteria including precaution, equity and political/communityacceptability, and (3) additional considerations.

4.2. Feasibility in the existing institutional setting

Many MBIs require a legislative basis and some the definition of(new) property rights (Lockie, 2013). In the NT, relevant legislativefoundations already exist and with little additional legislativeeffort, a policy mix could contain a suite of MBIs to support regu-lation in safeguarding water quality in Darwin Harbour.

The power to legislate on environmental issues in Australia gen-erally lies with the states and territories, but state/territory legis-late needs to be consistent with federal legislation, most recentlythe National Water Initiate NT Government. The matter of waterquality control is principally governed by the Water Act (NT,2011c). The Water Act assumes an inclusive definition of water pol-lution, meaning any direct or indirect change to the ‘‘physical, ther-mal, chemical, biological or radioactive properties of the water so as torender it less fit for a prescribed beneficial use for which it is or mayreasonably be used, or to cause a condition which is hazardous orpotentially hazardous to (a) public health, safety or welfare; (b) ani-mals, birds, fish or aquatic life or other organisms; or (c) plants’’(NT, 2011c; Water Act Part 4). The definition of ‘beneficial uses’is similarly inclusive, including commercial uses, human consump-tion, environmental and cultural uses. s16 of the Water Act prohib-its the pollution of water. However, s74 enables the Controller ofWater Resources to authorise waste discharge by granting pollut-ers a time-limited waste discharge licence. Principally, two typesof polluters are regulated in this manner, namely wastewatertreatment plants and aquaculture operations. Other pollutersmay also require a discharge licence. In November 2011, a dis-charge licence was granted to the Wickham Point ImmigrationAccommodation Facility and in August 2013 to Ichthys LNG, whichoperates a liquefied nitrogen gas plant on Blaydin Point in DarwinHarbour. A licence is typically given for a period of 2 years. It legit-imises the exact discharge location and imposes qualitativerequirements in relation to avoidance of visible impact, odour, al-gal blooms, fish kills and adverse impacts on plants (NTG, 2012).Quantitative discharge limits apply in that surface water monitor-ing for specified sampling locations must meet the water qualityobjectives, based on beneficial uses declarations, as per water qual-ity objectives for the Darwin Harbour Region (NRETAS, 2010) and/or national standards for marine and fresh water (ANZECC andARMCANZ, 2000). Specific quantitative limits apply for wastewatertreatment plans in relation to dry and wet weather flow, pH, bio-chemical oxygen demand, and concentration of suspended solids,Escherichia coli, total nitrogen, free ammonia and total phospho-rus. As part of the licencing agreements, water quality monitoring

must be undertaken by the polluters for specified pollutants and atspecified frequency.

The licenced aquaculture enterprises contribute a small propor-tion of total known point pollutant load while the vast majority isdischarged through waste water treatment plants (Table 2). Allwastewater treatment plants are operated by Power and Water, aNT Government owned corporation. In this capacity, the utility actsas aggregator of sewage discharge of households, firms and othersewered premises. The price of water and sewerage services inthe NT is determined by the NT Government (UC, 2013). Water tar-iffs are volumetric while sewerage tariffs are fixed for householdswhile for other premises they are based on the number of sanitaryfittings.

Water quality protection is further supported by the WasteManagement and Pollution Control (WMPC) Act, with s12 legislatinga general environmental duty of care whereby ‘‘a person who con-ducts an activity that causes or is likely to cause pollution resulting inenvironmental harm [. . .] must take all measures that are reasonableand practicable to prevent or minimise pollution or environmentalharm and reduce the amount of the waste’’ (NT, 2013b).1 This, inprinciple, provides the foundation for the criminal prosecution ofpoint polluters that are in breach of their environmental duty. How-ever, as has been demonstrated following several spills of toxic sub-stances during port operations during 2010, in practice successfulprosecutions are difficult to achieve for a variety of reasons (EPA,2011, 2012) though legislated maximum fines for breaches appearsufficiently high to act as financial deterrent (NT, 2011a). Entitiesare required to immediately self-report any breaches of their duty,however reporting tended to occur after discovery or suspicion ofincidences by the public and reporting in the media.

Potential detrimental impacts on water quality can be consid-ered during the approval process of new developments. As legis-lated in s51 of The Planning Act consideration in determining adevelopment application must be given to ‘‘the public interest,including (if relevant) [..] water safety [..]’’ (s51(p)), ‘‘any potential im-pact on natural [. . .] values [. . .]’’ (s51(s)), and ‘‘any beneficial uses,quality standards, criteria, or objectives, that are declared under sec-tion 73 of the Water Act’’ (s51(s)) (NT, 2013a). The NT’s EnvironmentProtection Authority determines (i) which proposed private andpublic developments are required to conduct an environmentalimpact assessment under the Environmental Assessment Act (NT)as part of the approval process, and (ii) what level the assessmenttakes. Proposals which may require some level of formal environ-mental assessment include those which could inter alia (i) affectareas of high conservation values including wetlands, marine areasand estuaries; (ii) involve significant land disturbance includingdredging and surface paving; (iii) involve modification of naturalregimes, e.g. alteration of groundwater hydrology and drainagepatterns; (iv) involve water treatment and disposal, or (v) havethe potential to pollute, e.g. ocean dumpings, landfill, disposal oftailings, spoil and overburden, cooling water discharge, spray irri-gation and liquid effluent discharge (EPA, 2013).

In summary, the application of various MBIs is feasible in the NTwith little change to existing legislation. There is a precedent forthe legislation of a MBI in other environmental domain. In 2011the NT Government introduced a ‘cash for containers’ scheme toencourage recycling of glass and plastic containers (NT, 2011b). Itis a deposit-refund scheme2 whereby a 10-cent deposit for contain-ers is charged at the time of purchase, with an equivalent refundpayable when containers are provided for recycling. The scheme

3 The maximum fine for pollution causing environmental harm is $2.5 million forcorporations and $500,000 for individuals.

4 For the Container Deposit Scheme to be valid, the Northern Territory needed to begranted a permanent exemption from the Commonwealth Mutual Recognition Act1992 and Trans-Tasman Mutual Recognition Act 1997.

8 R. Greiner / Journal of Hydrology 509 (2014) 1–12

has survived various legal challenges to date. Its success is unclear asdesign was not informed by clear recycling targets and not under-pinned by an understanding of the marginal cost of recycling andlandfill alternatives. It is valuable however, because it serves as animportant lesson for legislators and illustration of a MBI for the gen-eral public. As regards water quality, various acts deal with differentaspects of water pollution. Beneficial uses have been defined, whichindirectly define water quality requirements. However, actual waterquality objectives are opaque and the legislation lacks provisions forcomprehensive, systematic and independent monitoring of pollutionand water quality. For existing point dischargers, the single instru-ment available to the regulator at this point in time is a system ofwaste discharge licences, which apply to selected major pollutersonly and apply qualitative—and in some cases—concentration condi-tions on the discharge of pollutants. Total discharge is not capped.Water quality monitoring and reporting requirement of licencedpolluters generate valuable but sparse data, which is not publiclyavailable. Households, businesses and organisations pay a non-volu-metric sewerage charge, which provides no incentive to reduce gen-eration of waste water. This legislative system will need to beexpanded on if MBIs are to be part of the policy mix and if theyare to operate effectively and efficiently. In particular, traceabilityand identifiability of pollution is of direct relevance to the types ofpolicy approaches that might be appropriate and their cost effective-ness (Kampas and White, 2004; O’Shea, 2002). Lack of scientificunderstanding of the pollution problem in Darwin Harbour is evi-dent from the scarcity of data this research has been able to uncover.Current lack of information undermines the effectiveness of existingregulation and impedes the design of new instruments. Absence ofrelevant data, including spatial and temporal information of concen-trations and loads of nutrients, sediments and heavy metals, makesit difficult to (i) establish specific water quality targets, (ii) setbenchmarks and design suitable policy approaches, including MBIs,and (iii) conduct successful prosecutions of pollution offences. Legis-lative change aimed at closing the knowledge gap would also have toallocate appropriate resourcing of the regulator to undertake thetask (EPA, 2012, p. 13).

4.3. Likely effectiveness and efficiency, and other criteria

The lack of regulation and management of water pollution inDarwin Harbour in the past can be regarded as socially efficientwith very little social costs caused by water pollution (Shortleand Dunn, 1986; William, 1982). Water pollution is an emergingproblem though, which is likely to become more prominent giventhe speed and type of industrial and urban development foreshad-owed throughout the catchment area (Skinner et al., 2009), andincreasing social costs are expected to emerge from damage tothe environment due to limited assimilative capacity, specificallyin areas with relatively little water interchange within Darwin Har-bour. The recent development of legislation, water quality plan-ning and increasing pollution discharge licencing efforts by theNT government are a response to emerging issues and also forman important basis for the consideration of MBIs as part of a policymix.

4.3.1. Applicability of market friction instrumentsWith regards to market friction instruments, the NT Govern-

ment has already moved to implement a duty of care to the envi-ronment under s12 of the Waste Management and Pollution Control(WMPC) Act. Greiner (2014) argues that compared to regulation, anenvironmental duty of care is more efficient, both in the sense ofproductive efficiency of industry (Greiner et al., 2000) as it givespolluters flexibility in how they go about meeting their duty andcollective economic efficiency of resource use as is reverses theonus of proof onto polluters. It also incorporates a precautionary

element and ongoing incentive as it requires the application of bestavailable information. This approach can be particularly efficient inthe presence of information asymmetries between polluters andthe regulator (Xepapadeas and Bergh, 2002), as exists in the caseof Darwin Harbour. However, it is left to the regulator and ulti-mately the courts to decide what is ‘reasonable and practical’ interms of pollution control based on water management plans, vol-untary codes of practice, performance standards and recognisedenvironmental management systems (Young et al., 2003). Theeffectiveness of environmental duty of care provisions dependson the level of compliance by polluters with the duty. Complianceis affected by moral hazard and depends on financial benefits pol-luters would expect to derive from non-compliance, perceivedlikelihood of detection of non-compliance, perceived likelihood ofsuccessful prosecution of a breach and relative severity of the pen-alty in case of a conviction (Gunningham et al., 2005; May, 2004,2005; Peterson and Diss-Torrance, 2012).

Following recent pollution incidences, deficiencies in the cur-rent legislative and procedural clarity have been identified that af-fect the likelihood of successful prosecution of polluters (EPA,2011, 2012). While potential financial penalties of a breach of theduty appear appropriately high,3 risk of detection in the absenceof a systematic and independent water quality monitoring systemis low. Judging from the recent legislative changes and reporting inthe media, community and political acceptability of the approachare high. Market friction instruments may also find application inthe diffuse source pollution area. For example, land managementsystems and industry codes of practice development in the GreatBarrier Reef catchment have led to improved farming practices andreduced nutrient pollution from agricultural land. (GBRMPA, 2009).Water quality targets can be deduced effectively from adoption ratesof practices with known improvements in water quality and resul-tant nutrient loads (McDonald and Roberts, 2006).

Other market friction instruments including eco-labelling areunlikely to be applicable in a Darwin Harbour context due to thesmall geographical scale, population and economy of the DarwinHarbour catchment area.

4.3.2. Applicability of price-based mechanismsPrice-based approaches offer several opportunities to address

pollution problems in Darwin Harbour. They are most appropriatewhen the quantity of environmental improvement is not criticalbecause the precise outcome in terms of quantity is determinedby market forces, and it is desirable to maintain the existingsystem of property rights (Windle et al., 2005). Arguably, theseconditions hold in the context of Darwin Harbour as pollutionproblems are recent, detailed scientific understanding of the pollu-tion problem is only emerging as is the notion and implementationof pollution rights. In relation to diffuse pollution, almost half of to-tal nitrogen and sediment loads come from rural diffuse sources.Fertilizer taxes have been successfully applied in many countriesto reduce diffuse nitrogen pollution. However, in the context ofDarwin Harbour such a tax would be ineffective and inefficient.For operational reasons, the tax would have to apply across the en-tire jurisdiction, thus causing collective economic inefficiencies inareas without nitrogen pollution problems. It would be administra-tive challenging and associated with high transaction costs, and itslegitimacy would likely be challenged in court.4 It is also unlikelythat there would be community and political support to legislatefor such an approach because of the resulting fertilizer price in-

R. Greiner / Journal of Hydrology 509 (2014) 1–12 9

creases and because it has not been established that current diffusenutrient discharge does in fact constitute a problem and is drivenmore by land management than rainfall. Positive approaches, e.g.subsidy mechanisms such as those applied to achieve diffuse pollu-tion reduction in the Great Barrier Reef catchment, do not face thesesame issues and are more likely to induce a decline in nutrient load(Armour et al., 2009; Hunter and Walton, 2008). In fact, subsidy-based approaches and the beneficiary pays paradigm haveunderpinned endeavours to improve natural resource managementin Australia in recent times (Hajkowicz, 2009). Financial and opera-tional support and education are being provided to farmers tosupport implementation of less polluting land managementpractices, often in association with the market friction approachesillustrated above. Subsidy-based approaches do not require legisla-tion and can be administered by the regional natural resource man-agement group. It has been shown that farmers respond positively tofinancial incentives for voluntary adoption of conservation practices(Greiner et al., 2009). Efficiency gains of programs can be achievedby using tenders to determine payment levels of participants asdemonstrated by the Burdekin Water Quality Tender (Rolfe et al.,2011; Rolfe and Windle, 2011). In this case, farmers were offeredincentives to e.g. implement on-farm water retention and re-useinfrastructure or purchase machinery that improved tailoring of fer-tilizer and chemical application—and thereby reduce total amountapplied and therefore diffuse emissions.

Urban diffuse pollution is a major contributor to the total sedi-ment load in Darwin Harbour (Table 2) and urban expansion willcause an increase in sediment load generated. Stormwater qualityoffset programs can help minimise the additional loads deliveredfrom urban development into waterways, encourage adoption ofwater sensitive urban design, and generate funding for stormwatertreatment infrastructure. Melbourne has implemented a storm-water quality offset program to reduce diffuse urban pollution ofPort Phillip Bay. The program is linked to the planning and devel-opment approval of greenfield urban development and offset ratespayable by the developers depend on the locality of the develop-ment and the extent of water sensitive design implemented. Offsetpayments fund regional water quality works that ‘offset’ the waterquality impact of development (Melbourne Water, 2013).

Price based approaches are conceivable to help reduce pointpollution from wastewater treatment plants—not by taxing thetreatment plants but by imposing higher utility costs on house-holds, businesses and other entities. The current flat seweragecharge structure does not encourage minimisation of sewage gen-eration, and there is no acknowledgement of relative toxicity ofdifferent substances thus delivered to the treatment plants, costof treatment or cost to the receiving environment. Also, increasingthe volumetric price of water would induce water saving and thusindirectly contribute to lower sewage volumes. While transactioncosts would be low, such cost-based mechanisms are likely to beunpopular with the electorate and inefficient as a stand-alonemeasure to reduce pollution emitted from wastewater treatmentplants. Experience in Queensland has shown that the pollutantload from sewage treatment plants to the Great Barrier Reef wasonly effectively reduced after tertiary treatment standards werelegislated (Brodie et al., 2012). For the community to accept of thistype of regulation and inevitably higher user charges, a causal linkbetween wastewater discharge and environmental impact needs tobe shown to exist in Darwin Harbour (Haughton, 2001).

Environmental performance bonds are a tested price-based toolin the Great Barrier Reef World Heritage Area, where it has beenpredominantly used to safeguard against impact from tourism(Lal and Brown, 1996). In Darwin Harbour, it may be of particularmerit in the context of urban and industrial development context,which is expected to lead to substantial increases in pollutantloads (Skinner et al., 2009), particularly in sediments and heavy

metals. Heavy metal pollution is also associated with dredging(Birch, 2000; Mulligan et al., 2001). Performance bonds act ascollateral to remedy environmental performance failure even fol-lowing bankruptcy of the polluter, which is of particular relevancewhen dealing with developers. They therefore act to enhance theeffectiveness of standards and liability provisions, provided theyset sufficiently high and designed to minimise moral hazard andlegal loopholes (Gerard, 2000; Shogren et al., 1993).

4.3.3. Applicability of quantity-based mechanismsA quantity-based approach to water management which adopts

a cap-and-trade mechanism requires a scientific basis for the set-ting of the pollution cap and initial allocation of pollution permitsthrough legislation. The paucity of water quality data and limitedunderstanding of dynamics in Darwin Harbour mean that no scien-tific basis exists for a complex load-based system (O’Shea andWade, 2009). Any cap-and-trade system would further behampered by a thin market due to the (currently) small numberof polluters who could conceivably participate in such a scheme.The only trading scheme able to effectively work under these con-ditions is a bubble licencing system. In the Darwin Harbour con-text, a bubble licencing system for nutrients is conceivable,following the example of the South Creek Bubble Licensing pro-gram. Theoretically, a bubble scheme could include all wastewatertreatment plants and possibly other large nutrient emitters includ-ing developers, port facilities and dredging operators. However, thegeographical setting of the wastewater treatment sites combinedwith limited mixing of water throughout the harbour as a whole(Drewry et al., 2009) provides a challenging setting. It means thatputting a total emissions cap on Darwin Harbour could conceivablelead to significant water quality improvements in some areas ofthe harbour while generating or exacerbating pollution hotspotwhere the emitter with the highest marginal cost of pollutionabatement is located or at times when abatement costs are higher.This risk could be remedied by imposing additional geographicallyand temporally specified standards, which would however stand todiminish both the productive and collective economic efficiency ofthe scheme.

4.4. Other considerations

Water quality control in Darwin Harbour is in its infancy. Ben-eficial uses have been defined and adopted in the legislation andbroad water quality objectives have been articulated for differentecosystems in Darwin Harbour. Few major polluters are licencedand licence conditions are basic and hardly restrictive. An inaugu-ral water quality protection plan is still being developed. There islimited experience with MBIs in other environmental domainswith a recently introduced deposit-refund scheme for containersoffering a valuable local precedent. To support MBI design forwater quality management, it is important to learn from the expe-riences with MBIs elsewhere. Key empirical lessons for MBI designinclude the following (Stavins, 2003). MBIs require absolute (notrelative) baselines in order to generate real environmentalimprovement. They need to engender a broad realm of possiblecompliance responses by firms to generate efficiencies. The designneeds to be simple and transparent so the instrument is difficult tocontest or manipulate. Charges fail to change firm behaviour if theyare set below marginal abatement costs. Similarly, pollution limitsfail if set too high. Public scrutiny can encourage firms to alterbehaviour. Consequently, imposing public reporting requirementson regular emission of pollutants as well as accidental releasesnot only serves compliance and enforcement purposes but alsoraises public awareness of firms’ actions. Firms need to be givenunequivocal signals that MBIs are here to stay in order to transitiontheir culture from minimising cost of compliance with regulation

10 R. Greiner / Journal of Hydrology 509 (2014) 1–12

to one of operating within the realms of MBIs. Finally, the two sin-gle most important dimensions of functioning MBIs are monitoringand enforcement. Says Stavins (2003, p.397): ‘‘In the many pro-grams reviewed [. . .] where monitoring and/or enforcement havebeen deficient, the results have been ineffective policies’’.

5. Conclusions

Water pollution is an emerging problem in Darwin Harbour,caused by ongoing urban and industrial development and exacer-bated by port expansion and dredging. The situation in DarwinHarbour mirrors that of many other coastal waterways in northernAustralia, in particularly in the Great Barrier Reef coastal zone inQueensland, where several harbours have been ear-marked forport expansion and associated economic development and whereadjoining catchments deliver a stream of pollutants from urban,agricultural and industrial development. Market-friction,price-based and quantity-based MBIs are examined in the contextof biophysical and economic pollution characteristics in DarwinHarbour, the existing institutional framework, and experientialevidence with MBIs globally and in Australia. It is argued that anumber of MBIs could usefully contribute to controlling pollutionin Darwin Harbour so as to safeguard the recreational, culturaland environmental values which people hold for this iconic estu-ary. The paper recommends that the NT government give consider-ation to the following suggestions.

� Close the data and knowledge gap: The analysis has demon-strated the need for comprehensive, systematic and independentmonitoring of water quality and pollution as a fundamental con-dition for design and evaluation of policy instruments, regulatoryor market-based. Publication of data is important as a marketfriction measure. An improved knowledge base will also improvethe likelihood of successful prosecutions of operators that havebreached their statutory environmental duty, defined by currentlegislation. More modelling research is required to deliver a bet-ter systems understanding of the spatial and temporal dimen-sions of the pollution problem and can be used for scenariotesting of alternative policy approaches.� Review of the ‘cash for containers’ scheme to draw lessons from

a NT specific MBI, to build local capacity in instrument evalua-tion and inform the design of other MBIs.� Expansion of the existing polluter licencing framework under s74

of the Water Act, namely (i) inclusion of more polluters and pollu-tants in the licensing framework, in particular large-scale urbanand industrial development areas, industrial and port facilitiesand dredging activities; (ii) inclusion of a full suite of toxic anddetrimental substances such as heavy metals and hydrocarbons;and (iii) introduction of absolute and relative quantitative pollu-tion limits at least until a cap-and-trade mechanism or bubblescheme poses a viable alternative arrangement.� Implementation of a system of performance bonds for large

industrial and port operators, dredging operators, businessesdealing with toxic substances, and possibly greenfield develop-ments (during construction): Appropriately high bonds willincentivize businesses to comply with their statutory environ-mental duty and act as collateral to remedy environmental per-formance failure even following bankruptcy of the polluter, thuspreventing polluters from shifting remediation costs onto theNT community.� Providing positive incentives for rural landholders to reduce dif-

fuse rural pollution: This involves working with the regionalnatural resource management group to deliver financial incen-tives to support the widespread adoption of improved landmanagement practices.

� Consideration of a stormwater quality offset scheme for newurban developments to reduce diffuse urban pollution: Offsetsapply at the planning stage and encourage water-sensitivedesign of new subdivisions and contribute to funding for waterquality works.� Detailed consideration of bubble licensing system(s) over

part(s) of Darwin Harbour: Bubble licences have been shownto be suitable in situation with few polluters and sparse data,which typically result in thin markets under cap-and-trade con-ditions. Design needs to ensure comparability of the pollutantprofiles of emitters to be included in a bubble and considerthe spatial and temporal dimensions of hydrodynamics in Dar-win Harbour: Effectiveness of bubbles is dependent upon mix-ing of emissions from the participating emitters as high risk oflocal and temporal pollution hotspots developing would indi-cate that conventional standards may be more effective andefficient.

The relevance of the considerations presented in this paper ex-tends beyond Darwin Harbour. The paper provides a valuable syn-thesis of empirical and theoretical evidence about different typesof MBIs in the context of a coastal water quality protection. Itdevelops and implements an analytical framework for the system-atic consideration of MBIs in a particular context. This offers a heu-ristic for policy makers and resource managers tasked with waterquality management in coastal waterways elsewhere in Australiaand globally and helps to scan for MBIs suitable in any givensituation.

Contributions

� A theoretical and empirical overview of MBIs is given in the areaof water pollution control.� Water pollution in a coastal waterway, Darwin Harbour, Austra-

lia, is described.� A framework for examining the applicability of MBIs is

developed.� Potential for use of several MBIs is identified to assist with

water quality management.

Acknowledgements

This paper is loosely based on an unpublished research reportprovided to the NT Government’s Department of Natural Re-sources, Environment, Heritage and the Arts, which initiated a re-view of MBIs as part of the development of a water qualityprotection plan for Darwin Harbour. I sincerely thank two anony-mous referees and Owen Stanley for helpful comments on earlierversions of the paper.

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