C21 water policy opportunities for Canada

1. C21 water policy opportunities for Canada Prof. Mike Young Research Chair, Water Economics & ManagementSchool of Earth and Environmental SciencesThe University of Adelaide Tuesday 19th March 2007

2. Less rain means much less water!

4. Sydney

5. River Murray Inflow 5400 GL/yr 6300 GL/yr Source: MDBC 2006 & Craik 2005

6. Year Major policy 1994 COAG Water Reform Framework within National Competition Policy 1995a1995b MDB Cap introduced Water reform implementation linked to competition payments 1998 MDBC commenced Pilot Interstate Water Trading Trial 2001 National Action Plan for Salinity and Water Quality 2002 MDBMC started Living Murray process 2003 COAG agreed, in principle, to implement a NWI 2004 COAG finalised NWI High level water reform agenda 2007 Howard Water $10 billion Plan for Water Security

7. National Water Initiative • Broadly, water planning by States and Territories will provide for: ii) resource security outcomes by determining the shares in the consumptive pool and the rules to allocate water during the life of the plan.” …. “28. The consumptive use of water will require a water access entitlement, separate from land, to be described as a perpetual or open-ended share of the consumptive pool of a specified water resource, as determined by the relevant water plan.”

8. Australian water policy mistakes • Serious Water accounting errors • Poor consultation and engagement • Mis-communication of what an entitlements are • Failure to act early on over-allocation problems • Introduced trading without addressing over-allocation simultaneously • Forgot to plan for change • Forgot to build registers with attention to detail and integrity • Forgot to design for low transaction costs • Used non-cost reflective and non-competitive pricing and charging policies • Allocated water to corporations not individuals • Plans were more like funding applications than statutory instruments • Program design created a “run to Canberra” for money game

9. A Water Licence

10. OwnershipRestrictions Delivery charges Tenure Salinity obligations Registered interests Expected Reliability Return flow &drainage DeliveryPriority WaterAllocation Volume for use or trade Unbundling – robust separation Low costtrading WaterConcession or Permit

11. Theoretical Design Foundations • Tinbergen Principle (NP in 1969) • For dynamic efficiency => One instrument per objective • Mundell’s Assignment Principle (NP in 1999) • For dynamic stability => Pair instruments and objectives for greatest leverage • Coase Theorem (NP in 1991) • To minimise adverse effects of entitlement mis-allocation on economic activity => Ensure very low transaction costs

12. Water Policy Goals • Distributive Equity • Economic Efficiency • Manage Environmental Externalities

13. Entitlements Use Approvals Allocations Three Part Separation - Individual • Entitlements => Equity instrument • Allocation => Efficiency instrument • Use licence => Externalities instrument

14. Allocation plans Catchment Plans Trading protocols Three Part Separation - System • Allocation plans => Equitable sharing • Trading protocols => Efficient adjustmentCatchment plans => Externality management

15. Single Title to Land & Water Water Land Tradeable Rights Price Entitlement Sharesin Perpetuity Use licences with limits & obligations Bank-like Allocations Delivery Capacity Allocations SalinityShares SalinityAllocations Delivery Capacity Shares A Robust Solution?

16. Scale Policy Objective Distributive Equity Economic Efficiency Externalities Individual Entitlements Allocations Use licences(approvals) Total System Water allocation plans Trading Protocols & Accounting Rules Catchment Plans Generalised framework

17. Periodic Allocations & Trading

18. Water Date ____________ Pay ____________________________________________ ________ML The sum of ________________________________ ML of 2000/01 Water Water Trading Australia Signature______________________ 807512 085 249:0223 7851 Allocation Trading WPay BPay

19. Evapo-transpiration 45 ML Actual amount used 5 ML Drainage 50 ML Water that returns to the aquifer Recharge Credits for return flows 100 ML Extraction Gross entitlement = 100 MLReturn = 50 ML Unconfined Aquifer

20. How many entitlement types • High security – reliable supply that varies only with long term trends • General security – varies according to supply • With these two any degree of reliability can be achieved • Important to allow individual carry forward

21. Water quality policies • Zoning to control new development • Trading rules to encourage trade out of high impact areas • Irrigation efficiency regulations • Off-set policies • Cap and trade • Levies to fund system-wide investment

22. Recharge Accounts Trading • Land use Recharge rate Area Recharge mm ha KL • Native vegetation 5 100 500 • Plantation Timber 5 300 1,500 • Dryland lucerne 10 400 4,000 • Other Dryland 80 3,000 240,000 • Irrigated 120 200 24,000 • Total Groundwater load 4,000 270,000 • Recharge Entitlement @ 70mm/ha/yr @ 4,000 ha = 280,000 KL • Farm Credit/Deficit 10,000 KL • Less credits sold 5,000 KL • Credits available for sale 5,000 KL Rebate @ $0.10 per KL $500

23. Proposed governance arrangements • Manage river and groundwater systems as one • Independent skill-based management separated from politics • Arms length management of environmental entitlements • Separation of infrastructure management from policy formation • Separation of system management from delivery to increase competition • Use of companies to manage local infrastructure

24. Governance Ministerial over-site Independent Authoritywell-specified objectives & power to manage Environmental Trust System Infrastructure Manager

25. Preferred Groundwater model – South East, South Australia • Define each entitlement in nett terms • Use surrender approach for significant non-metered water affecting activities with re-issue guarantee. • Allow trade in surrendered forest permits, issue new permit to existing forest activity if requested. • Define each share holding on a separate share register with separate use approval system • Separate set of volumetric water accounts for each user • Unit shares to define proportion of each consumptive pool held • 1 share per kilolitre of entitlement • Place any unallocated water in a Ministerial Reserve • Use carry-forward and borrowing to allow rapid alignment with the sustainable yield in over-allocated areas • Estimate sustainable yield annually but allocate on 5-yr rolling average

26. 10 suggestions for Canada • Unbundling of licences into unit shares and use approvals. • Replace first in time, with 2 or 3 entitlement types. • Independent Water Allocation & Management Boards responsible for all connected surface and groundwater in a region and making final non-appealable decisions on environmental flow, abstraction limits, allocations & trading rules. • No more allocations once any part of a water body gets to 70% of WAM estimate of abstraction potential. Remaining 30% shares to be tendered. Classify water bodies as heritage, conservation or working systems. • Credit for returns to ground and surface water systems. • Mandatory off-set of impacts of forests, farm dams, and increases in water use efficiency. • Mandatory pollution off-set trading in all nutrient hotspots. • Shares issued to individuals (not supply cooperatives). • Carry forward of unused groundwater and storage allocations. • Tradeable forest habitat maintenance credits by zone to maintain biodiversity.

27. Unbundle, share and design for change Contact: Prof Mike Young Water Economics and Management Email: Mike.Young@adelaide.edu.au Phone: +61-8-8303.5279Mobile: +61-408-488.538