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					The Role of the Government and Markets in
              Water Reform:
         Learning from Australia



                       Prof Mike Young,
                              The University of Adelaide

                                 Alberta, November 2008
  Water Use-Efficiency in Australia
 Australian irrigators have increased water
  use efficiency significantly
  – 1991 -2001 water use per hectare down by 50%
  – Area under irrigation only reduced by 6%
 This has been driven by
  – Low rates of agricultural protection
  – Water reform - since 1994
     • Improved entitlement and risk specification
     • Water trading
     • Separation of policy from delivery
  – Impact of prolonged drought since 2001
                                             Trends in Rice productivity, MIA
                                    16   Over last 25 years rice yields have risen from 5 to 10 tonnes per hectare1.6

                                    14                                                                                   1.4
Water use (ML/ha) or Yield (t/ha)




                                    12                                                                                   1.2




                                                                                                                               Water productivity (g/L)
                                    10                                                                                   1.0



                                    8                                                                                    0.8



                                    6                                                                                    0.6



                                    4                                                                                    0.4
                                                                       Measured field water use (ML/ha)
                                    2
                                                                       Grain yield (t/ha)                                0.2
                                                                       Water productivity (g/L)
                                                                       Linear (Measured field water use (ML/ha))
                                    0                                                                                    0.0
                                    1980       1982   1984   1986    1988   1990   1992   1994   1996   1998   2000   2002



                                                                    Source: Modified from Humphreys and Robinson (2003).
           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
                   Definitions
• System
  – Catchments, rivers, groundwater, etc
• Regime
  – Rules, rights, obligations, administration
• Entitlements
  – Long-term interest (property right)
• Allocations
  – Water available for extraction
• Use approval
  – Consent to apply water to land
        High level water reform agenda
 Year                     Major Australian policy initiative

 1994     COAG Water Reform Framework within National Competition Policy

 1995a    MDB Cap introduced
 1995b    Water 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)
                          S tr e a m flo w (G L )
                                                                                                                                                                           Rainfall (m m )




   0
                                                                                                                                                   1000




       100
             200
                    300
                            400
                                            500
                                                  600
                                                        700
                                                              800
                                                                    900
                                                                                                                                                                     500
                                                                                                                                                                             1000
                                                                                                                                                                                             1500
                                                                                                                                                                                                          2000




                                                                                                                                                                 0
1911                                                                                                                                                      1911
1914                                                                                                                                                      1914                                          PERTH
1917                                                                                                                                                      1917
1920                                                                                                                                                      1920
1923                                                                                                                                                      1923
1926                                                                                                                                                      1926
1929                                                                                                                                                      1929
1932                                                                                                                                                      1932
1935                                                                                                                                                      1935

1938                                                                                                                                                      1938
1941                                                                                                                                                      1941

1944                                                                                                                                                      1944

1947                                                                                                                                                      1947

1950                                                                                                                                                      1950

1953                                                                                                                                                      1953

1956                                                                                                                                                      1956

1959                                                                                                                                                      1959

1962                                                                                                                                                      1962

1965
                                                                                                                                                          1965

1968                                                                                                                                                      1968
                                                                                                                                                          1971
1971
                                                                                                                                                          1974
                                                                                                                                                                                                        Rainfall for Jarrahdale




1974

1977
                                                                                                                                                          1977
                                                                                                                                                          1980
                                                                          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 )




1980
                                                                                                                                                          1983
1983
                                                                                                                                                          1986
1986
                                                                                                                                                                                             14% less




                                                                                                                                                          1989
1989
                             4 8 % le s s




                                                                                                                                                          1992
1992
                                                                                                                                                          1995
1995
                                                                                                                                                          1998
1998
                                                                                                                                                          2001
2001
                                                                                                                                                                                     less
                                                                                                                                                                                     20%




                                                                                                                                                          2004
                   le s s
                   66%




2004
                                                                                                                                                                                                                                  Insufficient planning for less water




                              - 3%
                                                                                                                                                                                             - 1%
 With half as much water



  Users




                      Users

Environment
                    Environment

River Flow          River Flow
                                Indicative template for sharing and allocating water
Volume of Water in the System
                      Water Reform
                      Single Title                                   National
                           to                                        Competition
                      Land with a
                     Water Licence                                   Policy
                                          Water                      1993/94
       Land
                                                                     Plus Cap
                      Tradable Licence            Price


                                                                        National
    Entitlement                                      Use licences       Water
       Shares                 Bank-like
    in Perpetuity             Allocations
                                                     with limits &
                                                      obligations
                                                                        Initiative
                                                                        2004
 Delivery Capacity           Delivery Capacity            Salinity           Salinity
      Shares                    Allocations               Shares           Allocations

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

                                            1 200

                                            1 100
                                                                                          Intrastate                 Temporary (GL)
                                            1 000                                         Intrastate                 Permanent (GL)
                                                 900
                                                                                          Interstate                 Temporary (GL)
                                                                                          Interstate                 Permanent (GL)
                                                 800
                    Transfer Volume (GL)




                                                 700
                                                                                                                                                                                                                                                                                      Intra
                                                                                                                                                                                                                                                                                      Intra
                                                 600
                                                                                                                                                                                                                                                                                      Inte
                                                 500                                                                                                                                                                                                                                  Inte


                                                 400

                                                 300

                                                 200
2000/01

          2001/02

                                           2002/03

                                                         2003/04




                                                 100

                                                     0
                                                                   1983/84

                                                                             1984/85

                                                                                       1985/86

                                                                                                 1986/87

                                                                                                           1987/88

                                                                                                                      1988/89

                                                                                                                                1989/90

                                                                                                                                          1990/91

                                                                                                                                                    1991/92

                                                                                                                                                              1992/93

                                                                                                                                                                        1993/94

                                                                                                                                                                                  1994/95

                                                                                                                                                                                            1995/96

                                                                                                                                                                                                      1996/97

                                                                                                                                                                                                                1997/98

                                                                                                                                                                                                                          1998/99

                                                                                                                                                                                                                                    1999/00

                                                                                                                                                                                                                                              2000/01

                                                                                                                                                                                                                                                        2001/02

                                                                                                                                                                                                                                                                  2002/03

                                                                                                                                                                                                                                                                            2003/04
             Trading has enabled adoption of new technology and “greenfield” development
                                                                                                             Source: Murray Darling Basin Commission, 2007.
    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
1200
                                                          Cotton Index
1100
                                                          Sugar Index
1000                                                      Total crops sector Index

 900                                                      Total Livestock sector
                                                          Index
 800                                                      Milk Index

 700                                                      Total prices received Index

                                                          Total Grains Index
 600

                                                          Waterdex
 500


 400
       2000   2001    2002   2003   2004   2005    2006
                             Year

                                                           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 volume
3. Validate registers early
4. Ensure register compatibility
5. Register (not paper) defines ownership
                   Periodic Allocations & Trading

Account Name: Alberta Irrigation
Statement No: 24
Date                                               Debit         Credit Balance
1/07/2001   Balance bought forward                                          400
1/09/2001   Periodic allocation                                    2000    2400
            1000 shares translates to 2000 ML of
            water that may be consumed
12/10/2001 Transfer from XYZ Pty Ltd                                 500   2900
            Cheque No. 1234 5678
3/11/2001   Use from 1/9/01 to 1/11/01                     500             2400
            (Pumped 1000 ML and deemed to have
            used 50%)
3/11/2001  Transfer from AB&CD Smith                                 300   2700
           Electronic RN 9876543
30/04/2002 Use from 2/11/01 to 30/4/02                     660             2040
            (Pumped 1320 ML and deemed to have
            used 50%)

30/05/2002 Unused water not available for carry            420             1620
           forward to 2002/03 season
          What we got right
1. Installing meters
2. Enforcing compliance with licensed
   volume
3. Defining entitlements as shares
4. Pools of differing reliability
5. Unbundling to get control and
   transaction costs down
6. Allocation announcement discipline
                 Mistakes we made -
1.    Regime arrangements
     1.   System connectivity – manage GW and SW as one
     2.   Capped the wrong thing – cap entitlement potential not use
     3.   Return flows – account for them
     4.   Unmetered uses – include them
     5.   Climate change – plan for an adverse shift
     6.   The environment’s share – define it and allocate to it
     7.   Storage Management – include in trading regime
2.    Individual licence arrangements
     1.   Registers – validate them early
     2.   Entitlements - define entitlements as shares
     3.   Trading – forgot to get the costs and time to settle down
     4.   Not enough instruments – needed to unbundle
     5.   Inter-seasonal risk management – allow markets to
          optimize carry forward
     6.   Exit fees – Need to allocate to individuals or allow trade
          out of districts
     7.   Trading risk – develop tagged trading
          A reform sequence - Alberta
1. Cap Groundwater Systems and all uncapped surface systems
2. Complete metering and establish allocation accounts
3. Establish river trusts and allocate a licence to environment
4. Mandatory reporting coupled with enforced compliance with licensed
   volume - charges for volume used
5. Unbundle license system, validate licence registers & improve water
   accounting systems
6. Establish allocation announcement and trading protocols for system
7. 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
        Download our reports and
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           www.myoung.net.au




 Contact:

 Prof Mike Young
 Water Economics and Management
 Email: Mike.Young@adelaide.edu.au
 Phone: +61-8-8303.5279
 Mobile: +61-408-488.538             www.myoung.net.au

				
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