The Role of the Government and Markets in Water Reform: Learning from Australia

1. The Role of the Government and Markets in Water Reform: Learning from Australia Prof Mike Young, The University of Adelaide Alberta, November 2008

2. 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

3. Trends in Rice productivity, MIA Over last 25 years rice yields have risen from 5 to 10 tonnes per hectare Source: Modified from Humphreys and Robinson (2003).

4. Which future is best? • One that gets the fundamentals right, now? • A system that can be confidently explained as able to cope -- whatever future arrives • One that facilitates autonomous adjustment and change • One that creates opportunity • One that commits all to more decades of reform and uncertainty? • Incremental progress with lots of impediments to change • No guarantee of resolution of current problems

5. Definitions • System • Catchments, rivers, groundwater, etc • Regime • Rules, rights, obligations, administration • Entitlements • Long-term interest (property right) • Allocations • Water available for extraction • Use approval • Consent to apply water to land

6. Year Major Australian policy initiative 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 2007-8 Water for the Future (Formerly National Plan for Water Security)

7. - 1% - 3% Insufficient planning for less water

8. With half as much water Users Users Environment Environment River Flow River Flow

9. Indicative template for sharing and allocating water Volume of Water in the System

10. Single Title to Land with a Water Licence National CompetitionPolicy 1993/94Plus Cap Water Land Tradable Licence Price Entitlement Sharesin Perpetuity Use licences with limits & obligations Bank-like Allocations Delivery Capacity Allocations SalinityShares SalinityAllocations Delivery Capacity Shares Water Reform National Water Initiative2004 Now trying to fix the problems created by the naive introduction of markets bolted onto an entitlement regimes that lacked hydrological, environmental & economic integrity

11. Scarcity and Trading • Source: Murray Darling Basin Commission, 2007. Trading has enabled adoption of new technology and “greenfield” development

12. What have been the outcomes • Many more irrigators survived the drought • Considerable innovation and wealth creation • Movement of water out of areas with local environmental problems • Facilitate considerable greenfields development • Facilitated considerable change without government intervention

13. Psi-Delta 2007 Bjornlund and Rossini 2007 Benefits of trading

14. Entitlements • Shares of a pool of water • Unit shares not percentage shares • How many pools? • One if trading costs extremely low • Two enables individual risk profile management • Three if already exists in old system • Define pool size to shift with longtime water availability • High security = 30% of 10 year moving average of total annual allocation to system

15. Entitlement registers • Issue shares of a pool not volumetric entitlements • Units based on current volume • Validate registers early • Ensure register compatibility • Register (not paper) defines ownership

16. Periodic Allocations & Trading

17. What we got right • Installing meters • Enforcing compliance with licensed volume • Defining entitlements as shares • Pools of differing reliability • Unbundling to get control and transaction costs down • Allocation announcement discipline

18. Mistakes we made - • Regime arrangements • System connectivity – manage GW and SW as one • Capped the wrong thing – cap entitlement potential not use • Return flows – account for them • Unmetered uses – include them • Climate change – plan for an adverse shift • The environment’s share – define it and allocate to it • Storage Management – include in trading regime • Individual licence arrangements • Registers – validate them early • Entitlements - define entitlements as shares • Trading – forgot to get the costs and time to settle down • Not enough instruments – needed to unbundle • Inter-seasonal risk management – allow markets to optimize carry forward • Exit fees – Need to allocate to individuals or allow trade out of districts • Trading risk – develop tagged trading

19. A reform sequence - Alberta • Cap Groundwater Systems and all uncapped surface systems • Complete metering and establish allocation accounts • Establish river trusts and allocate a licence to environment • Mandatory reporting coupled with enforced compliance with licensed volume - charges for volume used • Unbundle license system, validate licence registers & improve water accounting systems • Establish allocation announcement and trading protocols for system • Establish trial trading program & incentive driven conversion • Within irrigation districts • Among districts and to new areas • Trial voluntary conversion from seniority to 3 pool system • Pre-1950 • 1950 to 1980 • Post 1980 • Issue new entitlements • Individually mortgagable and tradable unit shares • Guaranteed to remain more valuable than equivalent seniority licence • Include return flow obligations, at least, in all urban licences

20. Download our reports and subscribe to Jim McColl and my droplets at www.myoung.net.au Contact: Prof Mike Young Water Economics and Management Email: Mike.Young@adelaide.edu.au Phone: +61-8-8303.5279Mobile: +61-408-488.538 www.myoung.net.au