Daniel Mulino (Fraser, Australian Labor Party) Share this | Hansard source

I'm pleased to rise to speak in support of the Nature Repair Market Bill 2023. Sometimes people might recoil at the notion of markets being deployed in policy areas such as the environment or the promotion of biodiversity. In those contexts, we are perhaps more used to using other regulatory mechanisms such as setting standards or limiting damage. But markets can have a very important role. In my contribution I want to talk about the ways in which this bill sets up extremely important architecture that will benefit our environmental protection policies more broadly.

I think it's worth remembering why markets can be so beneficial not just in the broader economy but in the achievement of policy goals as well. Firstly, markets, at their heart, are about connecting people—not just buyers and sellers, which is the context in which we usually think of markets, but in all sorts of other contexts. In this context, the parties being connected are landholders and those seeking an environmental outcome. It might be a developer seeking to offset damage that is being incurred as a result of a development, or it might be a company seeking to achieve an ESG outcome. But ultimately at the heart of markets is connecting people. I want to start with that, because that's why it's so critical that the right regulatory framework is established.

Secondly, markets are about achieving effective, efficient outcomes once people are connected. One thing I think that's often forgotten with markets is that, particularly where markets involve voluntary transactions, those transactions will involve a benefit for both parties. That's something that I think is extremely important and sometimes forgotten when we think about markets. They're win-win transactions. But markets need to be well designed in many contexts in order to achieve the maximal win-win aggregate across those transacting. There are many contexts in which markets are used—obviously throughout the economy but also in many areas of public policy, in our employment services and in the NDIS. There are many areas of public policy where markets do both of these things: they connect people and they achieve mutually beneficial transfers. But there are also many contexts where markets need to have regulatory architecture.

We talk about free markets, but even the markets that we often think of as free have a great deal of regulatory architecture. They often have disclosure arrangements. They often have consumer protection arrangements. There are often clearing houses, for example, in equities markets. Stock exchanges can only open at certain times. There are often standards applied to goods or services. So regulation is key even for markets that we think of as 'free', but regulation is doubly important where we are seeking to achieve complex and important public policy goals.

Markets for biodiversity and environmental outcomes are becoming more common around the world. The Wetland Mitigation Banking Program in the US was the first, or one of the first, biodiversity environmental protection markets, but other schemes have since been trialled or implemented in the UK, France, Germany and, indeed, some state jurisdictions in Australia. These schemes take a number of forms, but at the heart of them is connecting different parties, through appropriate and well-designed regulation, to achieve the maximum mutually beneficial gain and policy outcomes.

I want to talk about the importance of well-designed regulatory arrangements for markets in the context of what we're trying to achieve here, because this is a setting where well-designed regulation is absolutely fundamental. Let's think for a moment about a simple possible transaction between a developer and a farmer or landholder. We could leave that to a bilateral arrangement, as we might do in other situations. For example, in the situation of a consumer looking for a seller of food we tend to leave those people to find each other. We set some regulatory standards—for example, by having minimum standards for the food—but we generally let people find each other. But in this context, if we didn't have a well-designed market—if we instead left developers or other companies seeking ESG outcomes to find those who hold land—extremely complicated searches to find matches between those parties would be required, and that wouldn't occur in practice. That's why well-designed markets in this context are extremely important. We would also find there was insufficient integrity in these markets in many cases. In some contexts in the case of offset markets a party might have an obligation. Not in this context at the moment but in examples of similar markets overseas, integrity is absolutely critical in seeing those obligations satisfied, in order for the ultimate objective to be achieved. It's also critical, when there is complexity in the transactions, that markets are designed in order for there to be transparency.

We have here a situation where we are trying to achieve biodiversity or environmental outcomes but there are a number of complexities. I want to run through a couple of the complexities that make absolutely clear why we can't simply leave it to people to find each other, which is what happens in some other parts of the economy. There can be what you might describe as transactional complexities. Let's say, for example, that somebody is trying to achieve a particular outcome by planting five of tree type A and three of tree type B. They might be able to find a landholder who can achieve part of that but not all of it. In trying to achieve environmental outcomes there will be many instances where the person who is trying to achieve the outcome has to find multiple landholders. That adds a great deal of complexity to the achievement of the goal. The other side of the transaction in these contexts can also be complex. You might have a landholder who has a great deal of environmental benefit to gain from repairing their land, but that potential may not be realisable through an engagement with just one particular developer or corporation.

So what we have here is a double-sided complexity where, on one side, landholders have to transact with multiple parties—multiple developers or corporations—with ESG obligations or goals and, on the other side, each of those parties needs to seek multiple landholders. In reality, that often won't be possible through letting people find each other. That's where markets, if they're well-designed, can step in, because they can match those different parties in such a way that their obligations and goals can be simultaneously achieved.

There are other transaction complexities that arise in the particular context of environmental goals. It's often critical that certain environmental goals be achieved by coordination across multiple landholders—for example, if you're trying to achieve a wildlife corridor. That will require a degree of coordination that may not be possible if you let everybody engage with each other in bilateral transactions in, what you might call, a free-for-all.

There might be benefits from achieving environmental outcomes of a particular type—for example, the planting of particular trees or the development of particular ecosystems at a certain scale. That might require contiguous developments. Again, that kind of coordination may not be possible if you allow everybody to engage in a free-for-all. So achieving the environmental obligations will often not be possible unless you set up arrangements that are well designed and a market that connects people in a way that maximises the achievement of policy goals.

There can often be policy complexities in this setting. There might be dozens or hundreds of different tree types, dozens of different types of ecosystems that are being repaired. It can be very difficult, in practice, for those who are seeking to achieve these policy objectives to do it through bilateral transactions between themselves and landholders. There can often be strategic difficulties. Well-designed markets can help because integrity is achievable, and that won't be achieved if the market doesn't have some standards set for each transaction.

There can be thin markets. If there are many different types of ecosystems or trees, for example, it might be that there aren't that many people transacting on either side. This is a problem that we see in many contexts. That's why many markets establish what are called clearing houses or central trading areas, where all the different buyers and sellers come together to thicken markets, to make markets more effective. While that is a beneficial regulatory move, in and of itself, the critical thing in this context is that it often won't be enough to achieve the objectives. Where you have thin markets, where you have not many buyers or sellers in a particular type of transaction—for example, for a particular type of tree—you also need to deal with all of the complexities that I talked about earlier.

All of these are examples of why, if you don't design markets well, if you don't bring people together, the kinds of outcomes that you're seeking—the kinds of environmental outcomes, the kinds of offsets from particular types of development or the satisfaction of ESG goals, ultimately repairing the environment as the goal—won't be achievable. They won't be achievable unless you set up markets that can coordinate people's activities and bring them together. A well-designed market can match people, bring them together and coordinate their activities.

As other speakers have talked about, the potential here for gain is massive. It has been estimated that biodiversity markets could generate more than $137 billion in financial flows. That represents a huge amount of repair of the environment. So the potential gain here is massive. But that potential gain relies upon well-designed markets, which take us from a position of relying upon very limited bilateral swaps to one of helping bring people together, to achieve win-win transactions in a much more socially optimal way.

I've talked a lot about market design, which can become a very technical subject but it's a very important one. Just about everybody in this chamber agrees that nature repair is important, but the mechanism we use to achieve that is also extremely important. It's not enough for us to have aspirations to achieve public policy goals. In some contexts, we also need to define, design and implement mechanisms that, in practice, overcome a lot of the transaction and policy difficulties that can thwart those attempts. As I mentioned earlier, and also in other speeches in this place, there are many other contexts where I believe that these kinds of markets could produce significant social gains. Whether it's services in areas like assisting people to get a job—our employment services market—or whether it's the NDIS or a range of other areas, well-designed markets have the potential to bring people together in ways that significantly increase the surplus and the mutual gains that arise from trade.

At their heart, markets are about connecting people or organisations. We usually think about that in the context of very simple transactions—somebody down at the market looking for fruit and deciding whether or not to buy the fruit based upon whether they value that particular object more than the price it's being offered for. Or it's somebody wandering around a supermarket, or hopping online to buy services. I think it's absolutely critical to remember that, at their heart, markets are about connecting people and doing so in a way that brings together mutually beneficial transactions. That's what drives so many of the benefits that all of us enjoy in our broader economy. But in the context of many public policy applications of markets, we need to be very careful in how we use markets. That's why I think this bill is so important. If we don't have a well-designed market in the context of the environment, we're not going to achieve the ultimate goals—the biodiversity goals and the nature repair goals which we're seeking. That's why this bill is such an important step forward.

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