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%

Volu

me o

f W

ate

r in

th

e

Syste

m

Indicative template for sharing and allocating water

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: Mike.Young@adelaide.edu.auPhone: +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