Transaction Costs in Development Offsets: Who Bears What and Why?

Abstract: Environmental policy instruments generate transaction costs for all parties that engage in the instrument. There is a growing body of literature reporting on the extent of transaction costs for environmental policy instruments. However, these studies tend to concentrate primarily on: 1) the extent of transaction costs borne by the public agency; and 2) price-based policy instruments such as government purchase of environmental goods. This paper contributes to the transaction cost literature through an analysis of the influences of transaction cost to all parties in a quantity-based environmental policy instrument. Based on Williamson (1985, 1999) and Coggan et al. (2010), the key influences to transaction costs to all parties are taken to be: 1) the characteristics of the transaction; 2) the characteristics of the transactors; and 3) the current institutional environment and arrangements. In this paper the extent to which these factors cause transaction costs to all parties involved in a quantity-based policy is explored. The policy application is a development offset applied to manage development impact on the endangered Australian Southern Cassowary. It is found that these factors do influence the transaction costs to all parties. Further, it is found that the extent to which each factor influences transaction costs varies across parties and due to actions of other parties in the policy environment.