Water Economics and Financing
Water Markets in Integrated Water Management
Trading into and out of trouble
Australian water allocation & trading
experience
Prof Mike Young,
The University of Adelaide
Zaragoza, 29 July 2008
Progressive unbundling
Land Title
with
Water Licence
attached
Water
Land
Tradeable Rights
Entitlement
Shares
in Perpetuity
Bank-like
Allocations
Delivery Price
Use licences
with limits &
obligations
National
Competition
Policy
1993/94
National
Water
Initiative
2004
Markets rather than governments as the integrator
Murray-Darling Basin Water Entitlement Transfers - 1983/84 to 2003/04
1 200
1 100
Intrastate
Intrastate
Interstate
Interstate
1 000
Transfer Volume (GL)
900
Temporary (GL)
Permanent (GL)
Temporary (GL)
Permanent (GL)
800
700
Intra
Intra
Inte
Inte
600
500
400
300
2003/04
2002/03
2001/02
2000/01
1999/00
1998/99
1997/98
1996/97
1995/96
1994/95
1993/94
1992/93
1991/92
1990/91
1989/90
1988/89
1987/88
1986/87
1985/86
1983/84
0
1984/85
100
2003/04
2002/03
200
2001/02
2000/01
Scarcity and Trading
 Source: Murray Darling Basin Commission, 2007.
Trading has enabled adoption of new technology and “greenfield” development
Benefits of trading
1200
Cotton Index
1100
Sugar Index
1000
Total crops sector Index
800
Total Livestock sector
Index
Milk Index
700
Total prices received Index
900
Total Grains Index
600
Waterdex
500
400
2000
2001
2002
2003
2004
2005
2006
Year
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
2004
300
2004
2001
1998
1995
1992
1989
1986
1983
1980
14% less
2001
1998
1995
1992
1989
1986
400
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
1500
1977
1974
1971
1968
1965
1962
1959
1956
PERTH
1953
1950
1947
1944
1941
1938
1935
1932
1929
1926
1923
1920
1917
1914
1911
Rainfall (m m )
2000
1953
1950
1947
1944
1941
1938
1935
1932
1929
1926
1923
1920
1917
1914
1911
S tr e a m flo w (G L )
Insufficient planning for less water
Rainfall for Jarrahdale
20%
less
- 1%
1000
500
0
1000
900
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 )
800
700
600
500
4 8 % le s s
- 3%
66%
le s s
200
100
Volume of Water in the System
Indicative template for sharing and allocating water
Unbundling framework
Scale
Policy Objective
Distributive
Equity
System-wide
Sharing regime
Management
(Strategic
Instruments)
Individual users
(Market
Instruments)
Economic
Efficiency
Environmental
Externalities
Seasonal
Catchment Plans
allocation of
water to
River flow and
pools
quality
protocols
Trading
Protocols
Individual
Individual
entitlements
allocations
Water-use
approvals
Individual entitlements
1. Issue shares not volumetric
entitlements
2. Validate registers early
3. Ensure register compatibility
4. Don’t deepen droughts
–
–
Allow individual users to manage interseasonal 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
Murrumbidgee Irrigation: Index of costs in real terms since privatisation
1.15
1.10
1.05
Index of costs
1.00
0.95
0.90
0.85
Bulk Water Costs
Overheads and environment
0.80
Water distribution & maintenance
Total costs
0.75
0.70
1999
2000
2001
2002
2003
2004
2005
 Source:
After Young
et al.costs.
2006.
Separation of policy from
water supply
has lowed
Allow irrigators to own and run their supply systems
Year
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 registers
4. Convert area entitlements to volumetric entitlements
as basis for determining entitlement shares
5. Establish credible accounting and enforcement
systems
6. Develop protocols and trial trading
7. 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.
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Contact:
Prof Mike Young
Water Economics and Management
Email: [email protected]
Phone: +61-8-8303.5279
Mobile: +61-408-488.538
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 separation
4. Full cost pricing (Lower Bound)
5. Formal Planning
6. Reduced allocations per entitlement
16
Over last 25 years rice yields have risen from 5 to 10 tonnes per hectare1.6
14
1.4
12
1.2
10
1.0
8
0.8
6
0.6
4
0.4
Measured field water use (ML/ha)
Grain yield (t/ha)
Water productivity (g/L)
Linear (Measured field water use (ML/ha))
2
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
Source: Modified from Humphreys and Robinson (2003).
2000
0.2
0.0
2002
Water productivity (g/L)
Water use (ML/ha) or Yield (t/ha)
Trends in Rice productivity, MIA
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