The Role of the Government and Markets in Water Reform:

Learning from Australia

Alberta, November 2008

Prof Mike Young, The University of Adelaide

Natural resource management policy 101

The Key Question• How, at every location, do we get

– the right set of interventions– at the least cost

• so as to facilitate the emergence of – Socially optimal land use change– Socially optimal land and water use

• in an ever changing world of – Varying prices, climates and technology

• full of people who behave differently from one another

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

Robustness

• Robust (adj.)     Said of a system that has demonstrated an ability to recover gracefully from the whole range of exceptional inputs and situations in a given environment.

• One step below bulletproof. • Carries the additional connotation of elegance in addition

to just careful attention to detail. • Compare smart, oppose brittle.

• Robust systems • Endure without the need to change their foundations.• They last for centuries.• Inspire confidence.• Produce efficient and politically acceptable outcomes in

an ever changing world.

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

High level water reform agenda

Year Major Australian policy initiative

1994 COAG Water Reform Framework within National Competition Policy

1995a1995b

MDB Cap introducedWater 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

2007-8 Water for the Future (Formerly National Plan for Water Security)

Long drys

DRY WET

Total River Murray System Inflows (including Darling River)

8 yrs 12 yrs 52 yrs

0

500

1000

1500

2000

19

11

19

14

19

17

19

20

19

23

19

26

19

29

19

32

19

35

19

38

19

41

19

44

19

47

19

50

19

53

19

56

19

59

19

62

19

65

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

Ra

infa

ll (

mm

)

14% less 20% less

Rainfall for Jarrahdale

0

100

200

300

400

500

600

700

800

900

1000

19

11

19

14

19

17

19

20

19

23

19

26

19

29

19

32

19

35

19

38

19

41

19

44

19

47

19

50

19

53

19

56

19

59

19

62

19

65

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

Str

ea

mfl

ow

(G

L)

N o te s : S tre a m flo w is fro m Ma y o f la b e lle d ye a r to th e fo l lo w in g Ap ri l

48% less

66% less

S tre a m in flo w fo r P e rth d a m s (P rio r to S tirlin g D a m )

PERTH

Insufficient planning for less water

- 1%

- 3%

With half as much water

Users

Environment

River Flow

Environment

River Flow

Users

Volu

me o

f W

ate

r in

th

e

Syste

m

Indicative template for sharing and allocating water

Water Reform

Water

Tradable Licence Price

Land

Single Title to

Land with aWater Licence

Entitlement Shares

in PerpetuityBank-like Allocations

Use licences with limits & obligations

Delivery Capacity Shares

Delivery Capacity Allocations

SalinityShares

SalinityAllocations

National CompetitionPolicy 1993/94Plus Cap

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

Scarcity and Trading

Source: Murray Darling Basin Commission, 2007.

Murray-Darling Basin Water Entitlement Transfers - 1983/84 to 2003/04

0

100

200

300

400

500

600

700

800

900

1 000

1 100

1 200

198

3/8

4

198

4/8

5

198

5/8

6

198

6/8

7

198

7/8

8

198

8/8

9

198

9/9

0

199

0/9

1

199

1/9

2

199

2/9

3

199

3/9

4

199

4/9

5

199

5/9

6

199

6/9

7

199

7/9

8

199

8/9

9

199

9/0

0

200

0/0

1

200

1/0

2

200

2/0

3

200

3/0

4

Tra

ns

fer

Vo

lum

e (

GL

)

0

100

200

300

400

500

600

700

800

900

1 000

1 100

1 200

1983/8

4

1984/8

5

1985/8

6

1986/8

7

1987/8

8

1988/8

9

1989/9

0

1990/9

1

1991/9

2

1992/9

3

1993/9

4

1994/9

5

1995/9

6

1996/9

7

1997/9

8

1998/9

9

1999/0

0

2000/0

1

2001/0

2

2002/0

3

2003/0

4

Intrastate Temporary (GL)

Intrastate Permanent (GL)

Interstate Temporary (GL)

Interstate Permanent (GL)

Trading has enabled adoption of new technology and “greenfield” development

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

Benefits of trading

400

500

600

700

800

900

1000

1100

1200

2000 2001 2002 2003 2004 2005 2006

Year

Cotton Index

Sugar Index

Total crops sector Index

Total Livestock sectorIndexMilk Index

Total prices received Index

Total Grains Index

Waterdex

Psi-Delta 2007

Bjornlund and Rossini 2007

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

Entitlement registers

1. Issue shares of a pool not volumetric entitlements

2. Units based on current volume3. Validate registers early4. Ensure register compatibility5. Register (not paper) defines

ownership

Periodic Allocations & Trading

What we got right

1. Installing meters2. Enforcing compliance with licensed

volume3. Defining entitlements as shares4. Pools of differing reliability5. Unbundling to get control and

transaction costs down6. Allocation announcement discipline

Mistakes we made -

1. Regime arrangements1. System connectivity – manage GW and SW as one2. Capped the wrong thing – cap entitlement potential not

use3. Return flows – account for them4. Unmetered uses – include them5. Climate change – plan for an adverse shift6. The environment’s share – define it and allocate to it7. Storage Management – include in trading regime

2. Individual licence arrangements1. Registers – validate them early2. Entitlements - define entitlements as shares3. Trading – forgot to get the costs and time to settle down4. Not enough instruments – needed to unbundle5. Inter-seasonal risk management – allow markets to

optimize carry forward6. Exit fees – Need to allocate to individuals or allow trade

out of districts7. Trading risk – develop tagged trading

General guidelines

Hydrological Integrity (Debit & credit)– Return flows– Connectivity– Unmetered water use

• Economic Integrity– Trading at low cost– Individual risk management

• Equity– Full specification of right– Allocate licence to the environment

A reform sequence - Alberta1. Cap Groundwater Systems and all uncapped surface systems2. Complete metering and establish allocation accounts3. Establish river trusts and allocate a licence to environment4. Mandatory reporting coupled with enforced compliance with

licensed volume - charges for volume used5. Unbundle license system, validate licence registers & improve

water accounting systems6. Establish allocation announcement and trading protocols for

system7. Establish trial trading program & incentive driven conversion

• Within irrigation districts• Among districts and to new areas

8. Trial voluntary conversion from seniority to 3 pool system– Pre-1950– 1950 to 1980– Post 1980

9. 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

Contact:

Prof Mike YoungWater Economics and ManagementEmail: Mike.Young@adelaide.edu.auPhone: +61-8-8303.5279Mobile: +61-408-488.538 www.myoung.net.au

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