Water Trading and the Murray Darling Basin

Water Allocations in the Murray Darling have two components. There is a maximum component and there is a yearly allocation. Each year the amount of water that can be taken from the river by Allocation holders is determined by the state of water storages and the long term estimates of water inflows. The actual allocation for each Allocation holder is less than the maximum permitted. These Allocation rights can be traded in some parts of the country and they have a particular value.

The new Commonwealth plan envisages a two prong approach to the problem of over allocation of water. The first prong is to reduce the total maximum component by buying out some of the existing water allocations.

The second prong is to work with farmers to reduce wastage of water. Here funds will be given to improve pipes, fix leaky drainage, presumably install drips instead of flooding and other ways of making better use of water. In effect this increases the supply of usable water. The Commonwealth will fund these savings and will get half the savings while the farmer will get the other half to use for other purposes.

Both these approaches are unlikely to be the most efficient use of the funds.

  1. Funds given to farmers to buy water allocations will not be used to create “new” water through investing in water technologies because the money will get a better return elsewhere.
  2. Allocation holders will try for as much grant money as possible to be spent on their property because that is their best strategy. They will not seek the best return on the money because their best return is to get as much money as possible allocated to their land as there is no incentive to use the money on other properties or on multi property savings.

The underlying problem with the system is that the price of “new” water is a lot less than the price of “old” water.

There is another approach which is likely to give a better return in terms of water saved and may allow the price of “old” water to rise to be closer to “new” water.

Let water allocations become tradeable throughout the whole country with the proviso that the money obtained from the sale of water allocations has to be spent on ways to increase the supply of water. Let us call this money WaterFunds. WaterFunds can be sold but their value is the value to the person who can use them to save water and hence is the value of the “new” water available through using WaterFunds.

Governments are heavily involved in the system because they must control and set the total allocations available in any one year, they must police the use of water, and they must determine how many Water Allocations they will purchase for environmental flows.

This approach requires agreements by the states on defining current Water Allocations and agreeing to WaterFunds being able to cross state boundaries. Agreements need to be reached on Ground Water Allocations and methods of policing Ground Water and on farm use of water. Each year the total water allocations available has to be set by governments. Governments are also required to police the expenditure of WaterFunds on appropriate projects. (The specification and definition of appropriate projects are required no matter what system is used).

WaterFunds are tradeable and the value of WaterFunds will be less than the value of New Water obtained through the use of WaterFunds. The price of all water will tend to rise towards the cost of providing “new” water. Increased revenue from the sale of water can be used to fund the governance of water and any excess can be put into WaterFunds for the creation of “new” water or for the purchase of Water Allocations to be used for environmental flows.

The value of Water Allocations becomes the value of WaterFunds. As the value of “old” water increases it will encourage Allocation holders to sell their Water Allocations.

The approach will encourage the efficient use of WaterFunds because people who hold them will look for the best return no matter where the project exists. The approach will get a return on all funds spent by the government and may gradually bring the cost of all water to the cost of “new” water. Unspent WaterFunds will not attract interest and so there will be an incentive to spend the money.

The most efficient use of WaterFunds is to allow them to be used in any catchment and with as few restrictions as possible – as long as the money is spent on creating New Water. This means that Water Allocations will tend to be sold from water catchments where there is a lower return on funds. Water Funds will tend to be spent in catchments where there is a higher return on funds. An irrigator with a water inefficient distribution system will be able to fund a more efficient system by selling some of their Water Allocation to a city catchment.

The effect of the system will be to make the price of Water Allocations approach the value of water in the catchment with the highest cost water and will encourage the more efficient use of water in catchments where Water costs are low and will increase the supply in Water Catchments where the cost of water is high.

Where WaterFunds are spent can be controlled through the approval of projects. Thus a State might decide that WaterFunds obtained from selling allocations must be spent in the same state. States could also decide they would not allow WaterFunds to come from the sale of Water Allocations in other states although this is most unlikely.

The likely outcome of the scheme is that City Water will fund environmental flows in marginal water catchment areas.

The system can be corrupted if Water Allocations are created arbitrarily but this can be controlled through the limiting the sale of WaterFunds derived from inappropriate Water Allocations.

The system can be corrupted through the approval of inappropriate Water projects. That is, the money is spent not on Water Projects but on projects that do not increase the supply of water. This can be policed by requiring that income derived from the project comes from the sale of “new water” or for projects with multiple income sources the amount of WaterFunds that used is proportional to the income derived from “new water”.

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