Water Trading & Prices
The major area that is at thr forefront of water trading is the Murray-Darling Basin.
The irrigation industry is the major user of freshwater in Australia, consuming between
70 and 80 per cent of all water used. It provides many benefits to the nation, but there
are also a number of challenges facing the industry. These include:
# infrastructure decline (with insufficient public funds to pay for refurbishment)
# low profitability in the industry generally; and
# natural resource and environmental degradation such as declining water quality,
rising watertables and increased river and groundwater salinity.
It was also seen as a means to encourage a shift to more efficient water uses and to
activate water entitelments that were not being used.
Water trading in Australia was introduced in the early 1980s to address these concerns.
The devlopment of a water trading system was one of the major requirements for the set of
COAG ( ) Water Reforms established in .
The majority of the water trading has been temporary, within States, and along individual
river valleys.
Environmental Concerns
Whilst bringing many benefits, the development of the Basin's water resources has not
been without its costs. The region is now experiencing significant degradation problems,
including increased toxic algal blooms, salinisation of irrigated and dryland areas and
water logging.
The growing demands for water from the Basin's rivers have resulted in low flows and
changes to the seasonal flow patterns. These have degraded many riverine environments.
In order to help prevent further degradation of the Basin's waterways, a Cap has been
placed on any increase in water diversions.
The environment also needs water and, with most rivers dammed or regulated, this issue
is receiving increasing attention from governments, communities and interest groups.
Since the 1950's the quantity of water diverted from the rivers of the Murray-Darling Basin
increased substantially. While the development of the Basin's water resources has brought
many social and economic benefits, eg through activities such as irrigation, it has also
adversely affected the health of the river systems.
In 1995 an audit was commenced of water use in the Basin. The audit showed that if the
volume of water diversions continued to increase, this would exacerbate river health
problems, reduce the security of water supply for existing irrigators in the Basin,
and reduce the reliability of water supply during long droughts.
A limit was therefore imposed on the volume of water which could be diverted from
the rivers for consumptive uses - this limit is called the 'Cap'.
While the Cap restrains further increase in water diversions, it does not constrain
new developments provided the water for them is obtained by using water more efficiently
or by purchasing water from existing developments
For New South Wales and Victoria, the Cap iwas defined as the volume of water that would
have been diverted under 1993/94 levels of development subject to two small allowances
that will be made for Pindari Dam (NSW) and Mokoan Storage (Victoria); diversions
were capped at 1993/94 levels for New South Wales, Victoria and South Australia.
The CAP for Queensland has yet to be set.
As a result of the Cap there will be no more increases in the water available for
off-stream use in the Basin beyond that provided for under the Cap.
Thus, in order to meet the continuing increase in the demand for water and to achieve
the environmental and economic sustainability of the Basin, there has to be much greater
efficiency in the allocation and use of the limited water resources.
Water trading within strict environmental constraints is seen as one of the main
mechanisms available to achieve these desired improvements in efficiency.
The importance of water trading has been recognised by the Council of Australian Governments.
(COAG) Water Reform agenda. This agenda has a key objective to encourage water use which
will achieve its highest value among both consumptive and non-consumptive uses,
while ensuring that the use is ecologically sustainable.
Provided it is socially, physically and ecologically sustainable, water trading is one
way to reallocate the use of water to maximise its contribution to national income and
welfare.
A significant part of the Council of Australian Governments' Water Reform agenda has been
the establishment of clear water property rights in all States and territories.
For water trading to take place, there must be a clear separation of water property
rights from land title.
Until relatively recently, this was not the case. The only way that a water trade could
take place was by selling land with a linked water entitlement to an existing irrigator
and the subsequent amalgamation of the two water entitlements.
This direct link between water and land is in the process of being broken in each State
and increasingly water entitlements can be traded independently of land.
Benefits of Water Trading
Put simply, water trading is the buying and selling of water entitlements or allocations.
The Australian Bureau of Agricultural and Resource Economics has estimated that the more
widespread use of water trading in the Murray-Darling Basin would increase output by
around $48 million annually.
Water trading is an equitable way of achieving structural adjustment in irrigation regions.
Trading brings to the fore the opportunity cost of water, which is its value in alternative
uses to all farmers, whether or not they trade.
It enables marginal producers who hold significant water entitlements to realise an asset
that was previously valueless unless used or sold with the land.
Water trading began officially in South Australia in 1988, in Victoria in 1989 and in
New South Wales in 1990, but Australian water markets are still in its infancy.
Only two kinds of trading exist – temporary or permanent – and neither meets all the
requirements of producers. For example, there is no arrangement for trading in water
options, which would allow users to plan with more certainty about water availability.
In addition, the property right to be transferred is still not well defined in many cases,
and definitions differ across States. Historically, some farmers have been allocated
‘high security’ supplies while others are at the mercy of factors such as the weather
and State government decisions on environmental allocations.
Water markets have so far been dominated by temporary transfers. One reason for the
relatively low volumes of permanent transfers is the lack of secure water entitlements.
This is accentuated by uncertainty about whether governments will determine environmental
flows or have an environmental agency as a player in the water market.
This in turn will influence the allocations available to irrigators.
Trading should be between all sectors of the economy. This is particularly important in
water-scarce regions which are experiencing rapid development of population and industry
and have a significant history of rural water use.
Examples include the south-west of Western Australia (irrigation to urban transfers)
and parts of the semi-arid zone (transfer from pastoral to mining use).
In the longer term, beyond the time horizon of this study, water trading may also address
the increased water needs of Melbourne and Adelaide. The institutional system for such
transfers, however, must be established well before the need for transfer arises.
There is also a need for a property right to be defined which is uniform across the market
and is applicable to all its components.
The property right needs to apply to both commercial water use and environmental flows.
Interstate trading will become increasingly important in the Murray-Darling Basin.
Each State could supply almost all the needs of growth sectors by internal transfers
out of low-value-adding uses, but the study projections suggest marked imbalances in
the interstate distribution of potentially transferable water.
Interstate trading will benefit buyers and sellers and simplify adjustment processes.
A properly functioning market for water entitlements allows each farmer to decide whether
to use, sell or buy water at the market price.
The price of water fluctuates according to supply and demand conditions, just like that
of other commodities, driven sometimes by demand and sometimes by the supply price.
Of particular importance is the fact that water trading allows water to move to sites
where it can be used for higher value uses.
This, and the fact that irrigators will be able to financially benefit from the sale of
water they do not need, should lead to greater water use efficiency.
The resulting economic benefits to water users will have a positive effect on the
sustainability of irrigation production.
Environmental benefits will also arise where water moves from degraded areas to areas
more suited to irrigation.
Given that irrigation is the major user of water in Australia, and especially in the
Murray-Darling Basin, water trading has the potential to make a major contribution
to the sustainability of the irrigation industry.
Equally important, permanent water trading gives irrigators, as well as other water users,
the opportunity to increase the flexibility of their operations.
With permanent trade, an irrigator will be able to buy water to expand his or her activities.
Alternatively, an irrigator who may wish to sell water that is not needed or retire land
from irrigation, can sell all, or part of, his or her water entitlement and gain a
financial return from the sale of that asset.
The benefits to individuals who participate in water trading can be considerable.
Permanent water transfers currently operate in all States in the Murray-Darling Basin.
The Future
The buying and selling of water entitlements within one river valley located within
one State is well established.
However, the MDBC recognised that going beyond such a situation would be complex and
that permanent interstate trade would need to be progressively introduced.
The Commission is thus conducting a Pilot Interstate Water Trading Project.
The Murray-Darling Basin Ministerial Council is committed to water trading as an
important component of the future economic and environmental sustainability of the Basin.
The Council has adopted a vision statement for water trading (as at March 2001) of:
"water trading as a foundation in maximising the profitable and sustainable use of
water, while protecting the environment and catering for social needs".
Other challenges relate to the complex relationship between water trading and salinity
and rising groundwater problems. The shift in the location whewre water used may affect
the drainage and salinity in particular areas. These issues particularly apply when the
trade involve shifting water use from upstream to downstream users.
South Australians, who have for years blamed everyone but themselves for the problems
afflicting the Murray, have been accused by Victorians of increasing salinity in the
river through inadequate controls on traded water.
Nearly all the water traded in a pilot interstate water trade operating since 1997 has
gone from Victoria and NSW to South Australia – and with it has come salinity.
A Victorian Government publication, 'The Value of Water', says South Australia does not
properly account for the salinity effects of water that trades into South Australia.
At issue is how and when the states account for the increase in salinity that is
caused by irrigation.
Adapted from MDBC site