DEPARTMENT OF PRIMARY INDUSTRIES IMPACTS OF WATER TRADE ON AGRICULTURAL ECOSYSTEMS Trading rules controlling irrigation water movement July 2007 IMPACTS OF WATER TRADE ON AGRICULTURAL ECOSYSTEMS Trading rules controlling irrigation water movement For further information contact: Mike Morris Primary Industries Research Victoria Department of Primary Industries Private Bag 1 Ferguson Road Tatura Victoria 3616 Phone: (03) 5833 5283 Fax: (03) 5833 5299 Email: [email protected] Published by Primary Industries Research Victoria Department of Primary Industries, Tatura Private Bag 1 Ferguson Road Tatura Victoria 3616 July 2007 Find more information about DPI on the Internet at: www.dpi.vic.gov.au ISBN 978-1-74199-219-9 (print) ISBN 978-1-74199-220-5 (online) Disclaimer The information contained in this report is offered by the State of Victoria, through its Department of Primary Industries, solely to provide information. While the information contained in this report has been formulated with due care by the Department of Primary Industries, the State of Victoria, its servants and agents accept no responsibility for any error, omission, loss or other consequence which may arise from any person relying on anything contained in this paper. © State of Victoria, Department of Primary Industries, 2007 Executive summary This report presents an overview of water trading rules controlling irrigation water movement and information on the historical background preceding and underpinning current rules and regulations. Irrigation water trade ocurs under a Cap on consumptive entitlements implemented in 1995 and administered by the MDBC. Since imposition of the Cap, consumptive allocations have been progressively reduced to improve the condition of riverine ecosystems, and further reductions are likely. In the last few years significant water reforms have been implemented under the Victorian Government White Paper Our Water Our Future: Securing Our Water Future Together in order to meet the objectives of the National Water Initiative. Reforms have included introduction of a water allocation framework, creation of an Environmental Water Reserve and the unbundling of private water entitlements. Interstate water trade between Victoria, NSW and SA has been piloted since 1998, with 22,904 ML traded between 1998 and 2003. This represented 22 % of permanent trades and 2 % of all trades in the pilot project area. Full implementation of tagged trading between Victoria, NSW and SA began on 1 July 2007. In Victoria, temporary trade of allocations started in the 1987/88 irrigation season, with permanent trade of entitlements commencing in 1991. In 2004/05 the total volume of permanent trades was 57 GL and of temporary trades was 444 GL. Water trade provides significant benefits, allowing water to move to higher value uses, enabling greater flexibility for irrigators and facilitating structural adjustment. Modeling by Peterson et al (2004) has shown that water trade reduced by 50 % the impact on regional economies of reductions in water availability. Water trade can cause adverse impacts such as altered river flow regimes, changes in river water quality and secondary salinisation of land. While these impacts remain as externalities of the water market, there is potential for resource misallocation and unintended consequences. Salinity impacts in the Murray Darling Basin are managed through the Basin Salinity Management Strategy, which currently confines treatment of the salinity impacts of water trade to the impact of new irrigation developments in the Mallee. Significant features of the Riverine Plains that require attention when considering the impacts of water trade include: • the Plains are extensive and heterogeneous • other factors also influence water and salt mobilisation such as climate, the implementation of Land and Water Management Plans, improvements in farm irrigation efficiencies, and greater water distribution system efficiencies through system reconfiguration and modernisation • temporary trade has consistently been an order of magnitude greater each season than permanent trade in entitlements, and may or may not create salinity impacts; and • the small average volume of water trades in the Riverine Plains means that salinity impacts will be related more to district or regional net volume traded rather than to the effects of individual trades. Despite these issues, the Impact Zone differential charging policy implemented as part of water-use licences in the Mallee provides a promising approach to cost-effectively accounting for adverse impacts of water trade. Contents INTRODUCTION 1 1. GEOGRAPHICAL AND HISTORICAL PERSPECTIVES 2 2. LIMITS ON WATER AVAILABILITY 3 2.1. THE CAP 3 2.2. THE LIVING MURRAY INITIATIVE 4 2.3. OUR WATER OUR FUTURE INITIATIVE 4 3. WATER TRADE REFORMS 5 3.1. INTERNATIONAL 5 3.2. NATIONAL 5 3.3. VICTORIA 6 4. RULES FOR WATER TRADE 8 4.1. RULES FOR INTERSTATE TRADE 8 4.2. VICTORIAN WATER TRADE 12 5. THE BENEFITS OF WATER TRADE 14 6. THE ADVERSE IMPACTS OF TRADE 16 6.1. CURRENT METHODS FOR MANAGING IMPACTS OF WATER TRADE 16 6.2. IMPLICATIONS FOR THE RIVERINE PLAINS 19 7. CONCLUSIONS 21 REFERENCES 23 APPENDICES 24 IMPACTS OF WATER TRADE ON AGRICULTURAL ECOSYSTEMS Trading rules controlling irrigation water movement Introduction This report presents an overview of water trading rules controlling irrigation water movement and information on the historical background preceding and underpinning current rules and regulations. Water trade enables water to be taken at a different location after the transaction. A properly functioning market for water allows each farmer to decide at any time whether to use, sell or buy water at the prevailing market price. The price of water fluctuates, driven by demand for water and availability of the resource. Victoria’s water market allows trade of either seasonal water allocation or water entitlement. Prior to unbundling of water entitlements on 1 July 2007, trade in seasonal allocation has been termed temporary transfer, while trade in entitlements has been referred to as permanent trade. Temporary transfer changes the buyers’ and sellers’ water allocation volumes for the current season, but not their ongoing water entitlements. Permanent transfer changes ownership of the water entitlement and the buyer receives all subsequent seasonal water allocations associated with the entitlement. After unbundling, temporary transfer of seasonal allocations will continue as allocation assignments, while trade in entitlements will be expanded to include the option of limited term transfer , or leasing of water entitlement, as well as permanent water share transfer (G-MW, 2007). 1 IMPACTS OF WATER TRADE ON AGRICULTURAL ECOSYSTEMS Trading rules controlling irrigation water movement 1. Geographical and historical perspectives The irrigation industry is the major user of fresh water in Australia, consuming between 70 and 80 per cent of all water used. Although it provides many benefits to the nation, there are also a number of challenges facing the industry. These include: • infrastructure decline (with insufficient public funds to pay for refurbishment) • low profitability in the industry generally • natural resource and environmental degradation such as declining water quality (nitrification, altered flow and temperature regimes, turbidity), rising watertables and groundwater and river salinity; and • limited water availability due to such factors as climate variation and change, bushfires in supply catchments and competing demands for water. By the 1980s, irrigation in the Murray Darling Basin (MDB) had outgrown the prevailing water entitlement system, where water allocations were tied to land parcels. New irrigation technologies, farming systems and industries were driving change. Growth in the irrigation sector had reached the limit of sustainable consumptive use and/or delivery capacity in many areas, and further irrigation development required mechanisms that facilitated transfers of water entitlements between irrigators. Temporary water trading began officially in South Australia in 1988, in Victoria in 1989 and in NSW in 1990. Temporary trade remains far the most common form of trade, making up 81% of all trades by volume in Australia and 89% of traded volume in Victoria in 2004-05 (ABS, 2006). Over 90% of the volume traded was within States, and mostly within irrigation supply districts. The development of a water trading system was one of the major requirements of the Council of Australian Governments (COAG) Water Reform Framework of 1994. A key objective of these reforms was to encourage water allocation to achieve the greatest value in both consumptive and non-consumptive uses, while ensuring ecological sustainability. The reforms were (and still are) seen as a means to encourage a shift to more efficient uses of water. A consequence has been the activation of water entitlements that were not previously being used. 2 IMPACTS OF WATER TRADE ON AGRICULTURAL ECOSYSTEMS Trading rules controlling irrigation water movement 2. Limits on water availability Since the 1950s the quantity of water diverted from the rivers of the Murray- Darling Basin has increased substantially. While the development of the Basin's water resources has brought many social and economic benefits, it has also adversely affected the health of the river systems. The Basin has experienced significant degradation, including salinisation of irrigated and dryland areas, high watertables and salt mobilisation, high concentrations