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Trading into and out of trouble Australian water allocation & trading
experience
Zaragoza, 29 July 2008
Water Economics and Financing
Prof Mike Young, The University of Adelaide
Water Markets in Integrated Water Management
Water
Tradeable Rights Delivery Price
Land Title with
Water Licence attached
Land
Entitlement Shares
in Perpetuity
Bank-like Allocations
Use licences with limits & obligations
National CompetitionPolicy 1993/94
National Water Initiative2004
Progressive unbundling
Markets rather than governments as the integrator
Scarcity and Trading
Source: Murray Darling Basin Commission, 2007.
Murray-Darling Basin Water Entitlement Transfers - 1983/84 to 2003/04
0
100
200
300
400
500
600
700
800
900
1 000
1 100
1 200
198
3/8
4
198
4/8
5
198
5/8
6
198
6/8
7
198
7/8
8
198
8/8
9
198
9/9
0
199
0/9
1
199
1/9
2
199
2/9
3
199
3/9
4
199
4/9
5
199
5/9
6
199
6/9
7
199
7/9
8
199
8/9
9
199
9/0
0
200
0/0
1
200
1/0
2
200
2/0
3
200
3/0
4
Tra
ns
fer
Vo
lum
e (
GL
)
0
100
200
300
400
500
600
700
800
900
1 000
1 100
1 200
1983/8
4
1984/8
5
1985/8
6
1986/8
7
1987/8
8
1988/8
9
1989/9
0
1990/9
1
1991/9
2
1992/9
3
1993/9
4
1994/9
5
1995/9
6
1996/9
7
1997/9
8
1998/9
9
1999/0
0
2000/0
1
2001/0
2
2002/0
3
2003/0
4
Intrastate Temporary (GL)
Intrastate Permanent (GL)
Interstate Temporary (GL)
Interstate Permanent (GL)
Trading has enabled adoption of new technology and “greenfield” development
Benefits of trading
400
500
600
700
800
900
1000
1100
1200
2000 2001 2002 2003 2004 2005 2006
Year
Cotton Index
Sugar Index
Total crops sector Index
Total Livestock sectorIndexMilk Index
Total prices received Index
Total Grains Index
Waterdex
Psi-Delta 2007
Bjornlund and Rossini 2007
Costs of not getting fundamentals right
• Australia introduced trading without getting the foundations right
• Markets reveal flaws– Trading has increased the costs of
fixing system flaws• Revealed over-allocation by increasing use• Revealed administrative reluctance to keep the
system in balance
• Trade now seen as a way to reduce the costs of structural adjustment
0
500
1000
1500
2000
19
11
19
14
19
17
19
20
19
23
19
26
19
29
19
32
19
35
19
38
19
41
19
44
19
47
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
Ra
infa
ll (
mm
)
14% less 20% less
Rainfall for Jarrahdale
0
100
200
300
400
500
600
700
800
900
1000
19
11
19
14
19
17
19
20
19
23
19
26
19
29
19
32
19
35
19
38
19
41
19
44
19
47
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
Str
ea
mfl
ow
(G
L)
N o te s : S tre a m flo w is fro m Ma y o f la b e lle d ye a r to th e fo l lo w in g Ap ri l
48% less
66% less
S tre a m in flo w fo r P e rth d a m s (P rio r to S tirlin g D a m )
PERTH
Insufficient planning for less water
- 1%
- 3%
Unbundling framework
Scale Policy Objective
Distributive Equity
Economic Efficiency
Environmental Externalities
System-wide Management(Strategic Instruments)
Sharing regime
Seasonal allocation of water to pools
Trading Protocols
Catchment Plans
River flow and quality protocols
Individual users (Market Instruments)
Individual entitlements
Individual allocations
Water-use approvals
Individual entitlements
1. Issue shares not volumetric entitlements
2. Validate registers early3. Ensure register compatibility4. Don’t deepen droughts– Allow individual users to manage inter-
seasonal risk– Allow carry-forward of allocations and
give market access to storage capacity
System wide planning & management
1. Install meters and convert from area to volumetric allocation systems (asap)
2. Give the environment a share don’t expect communities to plan for adverse climate shifts
3. Account for all forms water use – especially the unmeterable•Forests, farm dams, return flows
4. Manage groundwater inter-connectivity–When use of one increases the other must decrease
Efficient supply and delivery
1. Don’t subsidize supply and infrastructure provision
– Charge at marginal cost of delivery– Transfer ownership of the supply system to
entitlement holders.
2. Use separate instruments to manage externalities
• Reward users who reduce externalities
Administrative separation - Murrumbidgee
Source: After Young et al. 2006.
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1999 2000 2001 2002 2003 2004 2005
Year
Ind
ex
of
co
sts
Bulk Water Costs
Overheads and environment
Water distribution & maintenance
Total costs
Separation of policy from water supply has lowed costs. Allow irrigators to own and run their supply systems
Efficient market design
1. Removal of administrate impediments to trade difficult but necessary.
2. Allocate entitlements to individuals not water supply companies.
3. Announcement policies must attend to equity and fairness.
4. Make trade information available• Daily trade volume and price
5. Develop broking industry
Implementation sequence (Will take a decade)
1. Vest ownership of water in national as whole• Establish government right to manage and vary allocations
at the system level
2. Issue “unbundled” entitlements to defined parts of each system
3. Install meters and validate registers4. Convert area entitlements to volumetric
entitlements as basis for determining entitlement shares
5. Establish credible accounting and enforcement systems
6. Develop protocols and trial trading7. Let the market drive innovation
Concluding Comments
1. Develop a principled reform agenda and start the sequence
2. Get the foundations for trade right
3. See trading as a way of facilitating change in a changing world not as a panacea.
Contact:
Prof Mike YoungWater Economics and ManagementEmail: [email protected]: +61-8-8303.5279Mobile: +61-408-488.538 www.myoung.net.au
Download our reports and subscribe to Jim McColl and my droplets at
www.myoung.net.au
Water Use-Efficiency in Australia
Australian irrigators have increased water use efficiency significantly– 1991 -2001 water use per hectare down by 50% – Area under irrigation only reduced by 6%
This has been driven by – Low rates of agricultural protection– Water reform - since 1994
• Improved entitlement and risk specification• Water trading• Separation of policy from delivery
– Impact of prolonged drought since 2001
National Water Reform
1. Recognition of Scarcity – freeze on new licences
2. Separation of water title from land and trading
3. Administrative separation4. Full cost pricing (Lower Bound)5. Formal Planning6. Reduced allocations per entitlement
Trends in Rice productivity, MIA
0
2
4
6
8
10
12
14
16
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Wat
er u
se (
ML
/ha)
or
Yie
ld (
t/h
a)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Water p
rod
uctivity (g
/L)
Measured field water use (ML/ha)Grain yield (t/ha)Water productivity (g/L)Linear (Measured field water use (ML/ha))
Source: Modified from Humphreys and Robinson (2003).
Over last 25 years rice yields have risen from 5 to 10 tonnes per hectare
Annualised delivery costs, Pyramid Boort Irrigation Area
Source: Goulburn Murray Irrigation, pers. com.
Move away from postage stamp pricing or transfer pod management to local farmers
Water Sharing Plans
• Have a statutory legal basis• Assign climate change risk to irrigators• Forced community engagement in
planning process• But rarely plan for adverse climate
change– River Murray Plans reduce env. allocations
83% & users 17%
• Have not succeeded in restoring river health as fast as now seems necessary