Diapositiva 1

1
The Role of the Government and Markets in Water
Reform Learning from Australia
Prof Mike Young, Executive Director
Research Chair, Water Economics and Management
The Environment Institute
The University of Adelaide
University of Arizona, January 2009
2
River Murray Inflows (GL)
In 2006/07, we broke the month by month inflow
record for 11 months Inflows have been well
below evaporative losses Managed by running down
stocks and reducing evaporation by closing off
wetlands and not replenishing lakes
3
Symptoms - The River Murray

• Over-allocation
• Dredges in its mouth since Oct 2002
• Level below the sea
• Rising salinity
• Serious acid-sulphate soil problems
• Bottom in strife!
• High security allocations in SA on 18

4
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

5
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

6
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.

7
Theoretical Design Foundations

• Tinbergen Principle (NP in 1969)
• For dynamic efficiency
• gt One instrument per objective
• Mundells Assignment Principle (NP in 1999)
• For dynamic stability
• gt Pair instruments and
  objectives for greatest
  leverage
• Coase Theorem (NP in 1991)
• To minimise adverse effects of entitlement
  mis-allocation on economic activity
• gt Ensure very low transaction
  costs

8
High level water reform agenda
2007-8
Water for the Future (Formerly National Plan
for Water Security)
9
National Water Initiative

• Full implementation of this Agreement will result
  in a nationally-compatible, market, regulatory
  and planning based system of managing surface and
  groundwater resources for rural and urban use
  that optimises economic, social and environmental
  outcomes by achieving the following
• clear and nationally-compatible characteristics
  for secure water access entitlements
• transparent, statutory-based water planning
• statutory provision for environmental and other
  public benefit outcomes, and improved
  environmental management practices
• complete the return of all currently
  over-allocated or overused systems to
  environmentally-sustainable levels of extraction
  
• progressive removal of barriers to trade in water
  and meeting other requirements to facilitate the
  broadening and deepening of the water market,
  with an open trading market to be in place
• clarity around the assignment of risk arising
  from future changes in the availability of water
  for the consumptive pool
• water accounting which is able to meet the
  information needs of different water systems in
  respect to planning, monitoring, trading,
  environmental management and on-farm management
• policy settings which facilitate water use
  efficiency and innovation in urban and rural
  areas
• addressing future adjustment issues that may
  impact on water users and communities and
• recognition of the connectivity between surface
  and groundwater resources and connected systems
  managed as a single resource.

10
Long drys
Total River Murray System Inflows (including
Darling River)
WET
DRY
11
Insufficient planning for less water
12
With half as much water
Users
Users
Environment
Environment

River Flow
River Flow
13
With half as much water
Users
Users
Environment
Environment
River Flow
River Flow
14
Indicative template for sharing and allocating
water
Volume of Water in the System
15
Water Reform - Entitlements
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
16
Scarcity and Trading

• Source Murray Darling Basin Commission, 2007.

Trading has enabled adoption of new technology
and greenfield development
17
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

18
Benefits of trading
19
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

20
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

21
Periodic Allocations Trading
22
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

23
Mistakes we made

1. Regime arrangements
2. System connectivity manage GW and SW as one
3. Capped the wrong thing cap entitlement
   potential not use
4. Return flows account for them
5. Unmetered uses include them
6. Climate change plan for an adverse shift
7. The environments share define it and allocate
   to it
8. Storage Management include in trading regime
9. Individual licence arrangements
10. Registers validate them early
11. Entitlements - define entitlements as shares
12. Trading forgot to get the costs and time to
    settle down
13. Not enough instruments needed to unbundle
14. Inter-seasonal risk management allow markets to
    optimize carry forward
15. Exit fees Need to allocate to individuals or
    allow trade out of districts
16. Trading risk develop tagged trading

24
Governance

• Power of veto for each state restricted progress
• Too many people at the table
• States have now referred planning powers to
  Independent Murray Darling Basin Authority
• 6 people expertise-based
• Ministerial Council has power to accept plan or
  refer back
• If referred back goes to Federal Minister

25
Recent water reform initiatives

• Driven by political realization about the
  importance of getting water right
• New Authority
• Buying water entitlements for the Environment
• Investing in water efficiency
• Trying to remove remaining barriers to trade
• Taking climate change risk seriously

26
CSIRO Sustainable Yield Project, 2008
27
CSIRO Sustainable Yield Project, 2008
28
CSIRO Sustainable Yield Project, 2008
29
Emerging guidelines

• Hydrological Integrity (Debit credit)
• Return flows
• Connectivity
• Unmetered water use
• Economic Integrity
• Trading at low cost
• Facilitate individual risk management
• Equity
• Full specification of right
• Allocate licence to the environment

30
An Australian style reform sequence

• Cap Groundwater Systems and issue rights to a
  share of recharge
• Meter all use and establish a robust and
  transparent accounting system
• Unbundle rights and establish centralised share
  registers and individual accounts
• Trial voluntary conversion from current seniority
  to 3 pool share allocation system
• Pre-1950 ???
• 1950 to 1980 ????
• Post 1980 ????
• Issue environmental trusts with shares and
  responsibility for deciding how best to use the
  available water
• Change legislation so that courts are no longer
  involved in allocation decisions
• Establish allocation announcement and trading
  protocols that allow inter-system trading.
• Set rules for district exit fee payments.
• Guarantee to compensate if value of new shares is
  less than value of old system and consider
  abandoning trial. If more valuable, confirm new
  system

31
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