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Water Markets in Australia: a Short History, December 2011 Water markets in Australia A SHORT HISTORY Water markets in Australia A SHORT HISTORY © Commonwealth of Australia 2011 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission. Requests and enquiries concerning reproduction and rights should be addressed to the Communications Director, National Water Commission, 95 Northbourne Avenue, Canberra ACT 2600 or email [email protected] ISBN 978-1-921853-44-9 Water markets in Australia: a short history, December 2011 Published by the National Water Commission 95 Northbourne Avenue Canberra ACT 2600 Tel: 02 6102 6000 Email: [email protected] Date of publication: December 2011 Design by 2B Advertising & Design Printed by Bluestar Print Group An appropriate citation for this publication is: National Water Commission 2011, Water markets in Australia: a short history, NWC, Canberra. ii Foreword The National Water Commission is pleased to release Water markets in Australia: a short history. This report traces the development of water markets in Australia. Making the best use of Australia’s limited fresh water resources has been an enduring challenge since European settlement. Our rainfall and river flows are highly variable by international standards. In response to this challenge, governments encouraged and financed an extensive expansion in water infrastructure and use in the early and mid 20th century, with a view to promoting economic development and prosperity. Governments played an active role in determining how, where, and by whom, water should be used. Then, as options for harvesting more water dwindled, we recognised the need to make the best use of existing resources. Water markets and trading were the primary means to achieve this. Creating a working market in Australia required policy makers to put faith in the collective wisdom of water users, rather than governments, in deciding how to make the best use of the resource. The flexibility and autonomy offered by water trading has increased agricultural production, helped farmers and communities to survive severe drought, and provided the mechanism for recovering water for the environment. Governments still have a vital role to play in improving the efficient functioning of the market, and managing unintended consequences of trade. Today, our water markets are internationally recognised as Australia’s water reform success story. A market now boasting an average turnover of $2.4 billion is allowing water to be put to its most productive uses, for a price determined by water users. Trading generates economic benefits valued in hundreds of millions of dollars annually. The fundamental reforms that enabled water markets to develop in Australia have, necessarily, taken time. When the first tentative steps toward trading were taken in the 1980s, few would have foreseen the growth in trading that followed. In publishing this history, the Commission hopes to promote a better understanding of the benefits of water reforms, together with the sustained commitment and leadership required to achieve long-term gains. Australia’s water markets story demonstrates how perseverance, collaboration and pragmatism can lead to good policy outcomes and tangible benefits. The great challenge still ahead is to resolve the historic overallocation of water rights and so realise the full benefits of sustainable water management. This too will require strong leadership to build and sustain the case for change. iii The Commission acknowledges the assistance of Frontier Economics, which developed this report based on consideration of the available literature and consultation with individuals from government agencies, water authorities and research institutions involved in the development of water markets. We welcome feedback and look forward to working with governments and other stakeholders to further advance water reform in Australia. Laurie Arthur Commissioner 8 December 2011 iv Key lessons Water markets in Australia: a short history Contents Foreword iii Executive summary ix About this report 2 1.1 Background 2 1.2 Purpose and scope 3 1.3 Approach 3 2 An introduction to water markets 6 2.1 The basic idea and objectives of water markets 6 2.2 Elements of water market design 9 2.3 A snapshot of water markets in Australia today 11 3 Early approaches to water management in Australia 19 3.1 Common law riparian rights and early water statutes 19 3.2 Sharing water between the states 20 3.3 Development of water resources and irrigated agriculture 22 3.4 Licensing systems and controls on water ownership 28 3.5 Water markets at the end of this phase 31 4 The emergence of water markets 33 4.1 Pressures for change: the beginning of scarcity 33 4.2 Precursors to water trading 36 4.3 Proposals and debates about water trading 39 4.4 Initial steps in water trading 41 4.5 The status of water markets at the end of this phase 42 5 Broadening and expanding water markets 45 5.1 Drivers and objectives 45 5.2 The nationally coordinated approach to water reform 47 v 5.3 The elements of water market reform—what was done? 51 5.4 The status of water markets at the end of this phase 69 6 The transition to sustainable water markets 71 6.1 Drivers and objectives 72 6.2 Overview of key measures 75 6.3 The current status of water markets 95 6.4 Where to next? 95 7 The results of water market reforms 98 7.1 An overview of water trading activity 98 7.2 Economic impacts 101 7.3 Impacts on regional economies and communities 114 7.4 Impacts on the environment 115 8 Key lessons 118 8.1 Working water markets in complex hydrological systems are feasible 119 8.2 Markets can deliver benefits in any system where water is scarce 120 8.3 Universal physical and economic characteristics suggest where trading will be most beneficial 120 8.4 Market design should be informed by the history and characteristics of local water resource management 121 8.5 There are universal prerequisites for effective water markets 122 8.6 An incremental approach is appropriate, but benefits will be forgone if suboptimal arrangements are left in place too long 124 8.7 Measures to address environmental and social objectives should not interfere with the market 125 8.8 Market participants learn quickly and make decisions based on the rules 125 8.9 Roles and responsibilities should be assigned carefully to avoid conflicts of interest 126 References 127 Glossary 137 Acronyms and abbreviations 139 vi Key lessons Water markets in Australia: a short history Tables Table 2.1: Elements of water market design 10 Table 6.2: Key water market policy changes since 2006 76 Figures Figure 1.1: The evolution of Australian water markets 4 Figure 2.1: The ‘cap and trade’ approach to establishing water markets 6 Figure 2.2: Connected regions in the southern MDB 14 Figure 2.3: Water entitlement and allocation trading in Australia, 2009–10 15 Figure 3.1: Tensions over Australian interstate water sharing 21 Figure 6.1: Unbundling of water rights 83 Figure 7.1: Volumes of allocation and entitlement trades in the southern MDB, 1983–84 to 2009–10 99 Figure 7.2: Water allocation sales as a percentage of water allocated in the southern MDB, 1998–99 to 2009–10 99 Figure 7.3: Average water allocations and average allocation prices in the southern MDB, 2007–08 and 2009–10 100 Figure 7.4: Interregional water allocation trading in the southern MDB, 2008–09 103 Figure 7.5: Riverina rice production and end-of-season allocations to general security water entitlements, NSW Murray and Murrumbidgee, 1998–99 to 2010–11 104 Figure 7.6: Net intervalley allocation trade and prices, 1998–99 to 2010–11 106 Figure 7.7: Northern Victorian dairy production and water use in the Victorian Goulburn irrigation district, 1998–99 to 2009–10 108 Figure 7.8: Allocations available to high-reliability water entitlements and net allocation purchases in the Victorian Murray system, 1998–99 to 2010–11 111 Figure 7.9: Water allocation prices in Murray Zone 7, 2007–08 and 2008–09 112 vii Boxes Box 2.1: What are ‘sustainable levels of extraction’? 7 Box 2.2: Water resources and irrigation in the Murray–Darling Basin 16 Box 3.1: Patterns of development of irrigated agriculture in Australia 26 Box 5.1: Water market reforms under the National Water Initiative 51 Box 5.2: Water resource planning during the 1990s and 2000s 54 Box 6.1: Drivers of recent changes in the use of water markets 74 Box 6.2: Water trading, water market and water charge rules 87 viii Key lessons Water markets in Australia: a short history Executive summary Background Global demand for water is increasing due to rapid increases in population and food demand. Meanwhile, supplies of surface water and groundwater are finite, variable, and increasingly at risk from climate change and environmental degradation. The development of efficient, flexible and sustainable approaches to allocating scarce and variable water resources between competing uses is therefore vital for continued economic and social development. Yet, in most countries, flexible market-oriented mechanisms play little or no role in allocating water. Water is often allocated based on political mandate or outdated administrative arrangements. To address these issues, a number of countries have sought to introduce water markets, and Australia is prominent among them. The development of water markets in Australia, particularly in the Murray– Darling Basin (MDB), has resulted from a concerted and ongoing effort across multiple levels of government, and from collaboration with users and water service providers. Yet it would be misleading to portray the development of water markets as the seamless rollout of a grand vision or master plan.
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