Environmental Policy Water Policy & Water Trading Mike Young Executive Director, The Environment Instit

1. Environmental PolicyWater Policy & Water Trading Mike Young Executive Director, The Environment Institute

2. H20 • Water is heavy • Gravity is cheap – when we use fossil fuel to make and move water some-one has to pay. • Someone has to pay for the infrastructure too.

3. Environmental policy • Triple bottom line? • Environment first? • Transition arrangements often confused with definition of final outcome to be pursued

4. Environmental policy design • Three Important Principles • Tinbergen principle • One instrument per objective • Mundell’s assignment principle • Assign for max leverage and don’t swap use • Coase Theorem • Get transaction costs as close to zero as possible

5. Getting the balance right • Recognise the difference between • Identifying environmental objectives • The science of estimating how much water is needed to deliver each environmental objective • Institutional arrangements need to encourage efficient use and innovation in the pursuit of environmental objectives • Volumes water needed will change through time as technology and institutional arrangements improve

6. Untangling the story • Economic efficiency (Productive and allocative) • Intergenerational equity • Maintenance natural capital (Ecosystem services) • The discount rate • Precautionary principle • Lots of instruments are needed • The institutional design will be most efficient if advantage is taken of subsidiarity rather than hierarchical administrative structures • Most local decisions do not need to be supervised

7. Who should pay • Payment arrangements (Incentives) influence decisions • Investment decisions • Day-by-day use decisions • When the signals are wrong tax-payers, third parties and future people pay • Principles • Polluter-Pays below environmental duty of care • Beneficiary-pays above duty of care • Duty of care will change through time

8. Water Policy • As water is heavy, why use it to redistribute income? • Water is heavy – as heavy as sand • Delivered to your house, about 1/20th as valuable as sand (more useful)

9. Three importantobservations

10. Scarcity is compromising Biodiversity! After Vörösmarty and others (2010).

11. With 10% less rainfall Users Users Environment Environment River Flow River Flow

12. National Water Initiative • Full cost pricing • Metering every-where • Urban reform • Phase in house by house charging • Install smart meters • Phase out all concessions • Phase out all block pricing • Rural reform • Eliminate administrative barriers to trade • Allow entitlement conversion • Restore all systems to health using market • Replace planning with entitlement-based management • Water Act (2007) is inconsistent with the NWI

13. Water Trading • Urban-rural trading is a global must • 2 billion more people will need to drink and will want access to goods only produced in factories • Agriculture will have to get more efficient • Still many “clever” administrative barriers • The environment should become a key player in the market • Is the MDB Authority throwing the baby out with the bath water?

14. Annualised return to water reform After Bjornlund & Rossini 2007

15. Water accounting matters • Improvements in water use efficiency come at a big cost to rivers • Forests, farm dams, overland flow capture water • Need to assume groundwater is connected to a river • MDB Guide found that the cost of not dealing with water accounting has major (in-equitable) consequences • up to 37% reduction in water entitlements if interception excluded, only 29% if included

16. Concluding observations • The sooner systems are restored to health the better • Trading is essential for prosperity and environmental health in a rapidly changing world • Design your entitlement regime to facilitate rapid adjustment in an ever changing world • But get your accounting right • Price at full cost and let markets deliver scarcity signals – long and short-term • Make sure the environment’s future is secure as all user’s future – force risks to be shared • Design constellation of governance arrangements to drive innovation and manage rapid emergence of scarcity • Allow autonomous adjustment • Drive innovation • Expect water availability to go down as product prices and water prices go up • Enjoy the prosperity that these challenges will bring collectively • See increased water scarcity as opportunity

17. www.adelaide.edu.au/environment www.myoung.net.au