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An Assessment of the Efficiency of Water-Trading Markets in the Murray-Darling Basin

An Assessment of the Efficiency of Water-Trading Markets in the Murray-Darling Basin . James Smits Supervised by Professor Snow Barlow University of Melbourne, Summer 2010. Adam Smith.

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An Assessment of the Efficiency of Water-Trading Markets in the Murray-Darling Basin

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  1. An Assessment of the Efficiency of Water-Trading Markets in the Murray-Darling Basin James Smits Supervised by Professor Snow Barlow University of Melbourne, Summer 2010

  2. Adam Smith • “Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.” Source: Smith, Adam. An Inquiry into the Nature and Causes Of the Wealth of Nations Image Source: http://www.greekshares.com

  3. How does one place a value on water?

  4. The Murray-Darling Basin Source: Wikipedia Source: Murray Darling Association, http://www.mda.asn.au/

  5. The Murray-Darling Basin • Crosses five (of the six) states of Australia • 23 river valleys • 14% of total area of Australia • Annual average rainfall 530,618 gigalitres • 39 % of the national income from agricultural production • 53% of the Australian cereals grown for grain • 28% of the nation’s cattle, 45% of sheep, 62% of pigs Source: http://www. mdba.gov.au

  6. Present state of the MDB • Natural assets of the MDB are currently in poor or very poor health due to climactic, social, and economic factors • The nature of the MDB is also a problem – sufficient flows of water and periodic flooding required to maintain the ecological functions of the Basin • Drought has persisted since 1997, exacerbating these problems Source: Wentworth Group of Concerned Scientists, Sustainable Diversions in the Murray-Darling Basin: An analysis of the options for achieving a sustainable diversion limit in the Murray-Darling Basin

  7. How is efficient use and distribution of water possible?

  8. Water Trading Water trading: • a transfer of an entitlement from one legal entity to another, with or without a change in location, • a trade of water allocation from one authorized water user or another, or between water accounts held by the same water user, with or without a change in location Source: National Water Commission, Australian Water Markets Report 2008-2009

  9. Water Trading (cont.) • Water access entitlements – a perpetual entitlement to exclusive access to a share of water from a specified consumptive pool • Water allocation – the specific volume of water allocated to water access entitlements in a given season • Technically, entitlements can be transferred, while water allocations can be traded Source: National Water Commission, Australian Water Markets Report 2008-2009

  10. Why is this all possible? • Unbundling – the separation of “bundled” entitlements into their individual elements • Separates a water entitlement from a land property title, allowing the trade of the water entitlement independently of water • Most water entitlements in Australia have been unbundled from the land Source: National Water Commission, Australian Water Markets Report 2008-2009

  11. Water Trading in Australia • National level, 1800 GL of entitlements were traded in 2008-09 • 7% of total entitlements on issue were traded in 2008-09 • Total value of turnover of entitlements was estimated to be $2.2 billion for the 2008-09 water year – a 162% increase on 2007-08 • Total sales of water allocations were $606 million – a 28% decline in estimated value (volume of trade increased 35%, but the average price decreased 40%) Source: National Water Commission, Australian Water Markets Report 2008-2009

  12. Water Trading in the MDB • 1980s - Water trading began • 1990s - Basin-wide cap on water diversions • June 2004 - National Water Initiative -introduction of “interim threshold limit” (cap) • 2009 - Phasing out of cap on entitlement trading • 2014 – Caps to be removed entirely Source: National Water Commission, The impacts of water trading in the southern Murray-Darling Basin: An Economic, social, and environmental assessment

  13. MDB By the Numbers… • MDB water trading accounts for 60% of the national entitlement trade and 81% of the national water allocation trade (by volume) • Negligible interstate entitlement trade between connected systems in the MDB • Interstate trade accounted for 28% of the allocations traded (by volume) • Entitlement trade increased 75% (for SMDB) • Allocation trade increased 41% (for (SMDB) Source: National Water Commission, Australian Water Markets Report 2008-2009

  14. Strengths of Water Trading • Risk and debt management tool • Entry/exit from the industry • Uncertain rainfall • Changes in management practices and efficiencies including new irrigation systems • Economic benefits to both buyer and seller • Helps irrigators manage variation in seasonal water availability • Flexibility – unbundling Source: National Water Commission, The impacts of water trading in the southern Murray-Darling Basin: An Economic, social, and environmental assessment

  15. Weaknesses of Water Trading • Transaction time • Restrictions on trading • Exchange rates between states • Lack of available data • Environmental impact • Changes in flow, quality, timing, or storage of water • Social and political impact? Source: National Water Commission, The impacts of water trading in the southern Murray-Darling Basin: An Economic, social, and environmental assessment;

  16. Recommendations • More detailed databases • Decrease barriers to trading • Transaction time • Government interaction with system • e.g., Electricity market in Australia • Public understanding

  17. Works Cited • Greek Shares, http://www.greekshares.com • Murray Darling Association, http://www.mda.asn.au/ • National Water Commission, Australian Water Markets Report 2008-2009 • National Water Commission, The impacts of water trading in the southern Murray-Darling Basin: An Economic, social, and environmental assessment • Smith, Adam. An Inquiry into the Nature and Causes Of the Wealth of Nations • Wentworth Group of Concerned Scientists, Sustainable Diversions in the Murray-Darling Basin: An analysis of the options for achieving a sustainable diversion limit in the Murray-Darling Basin

  18. Special Thanks • Professor Snow Barlow, Professor Ignacio Rodriguez-Iturbe, Professor Steven Pacala, Sunday McKay, Professor Michael Robinson, Professor IvenMareels, the staff in the Primary Industries and Climate Change Centre • Princeton Environmental Institute • Grand Challenges Program

  19. Questions?

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