The Role of the Government and Markets in

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

The Role of the Government and Markets in Water Reform: Learning from Australia Prof Mike Young, The University of Adelaide Alberta, November 2008

Natural resource management policy 101 The Key Question • How, at every location, do

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 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

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

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 =>

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

High level water reform agenda Year Major Australian policy initiative 1994 COAG Water Reform Framework within National Competition Policy 1995 a 1995 b MDB Cap introduced 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)

Long drys Total River Murray System Inflows (including Darling River) WET DRY 8 yrs

Long drys Total River Murray System Inflows (including Darling River) WET DRY 8 yrs 12 yrs 52 yrs

Insufficient planning for less water - 1% - 3%

Insufficient planning for less water - 1% - 3%

With half as much water Users Environment River Flow

With half as much water Users Environment River Flow

Volume of Water in the System Indicative template for sharing and allocating water

Volume of Water in the System Indicative template for sharing and allocating water

Water Reform National Competition Policy 1993/94 Plus Cap Single Title to Land with a

Water Reform National Competition Policy 1993/94 Plus Cap Single Title to Land with a Water Licence Water Land Tradable Licence Entitlement Shares in Perpetuity Delivery Capacity Shares Bank-like Allocations Delivery Capacity Allocations Price Use licences with limits & obligations Salinity Shares National Water Initiative 2004 Salinity 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 § Source: Murray Darling Basin Commission, 2007. Trading has enabled adoption

Scarcity and Trading § Source: Murray Darling Basin Commission, 2007. Trading has enabled adoption of new technology and “greenfield” development

What have been the outcomes • Many more irrigators survived the drought • Considerable

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 Psi-Delta 2007 Bjornlund and Rossini 2007

Benefits of trading Psi-Delta 2007 Bjornlund and Rossini 2007

Entitlements • Shares of a pool of water – Unit shares not percentage shares

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

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

Periodic Allocations & Trading

What we got right 1. Installing meters 2. Enforcing compliance with licensed volume 3.

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. 2. Regime arrangements 1. 2. 3. 4. 5. 6. 7.

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

General guidelines Hydrological Integrity (Debit & credit) – Return flows – Connectivity – Unmetered

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 - Alberta 1. 2. 3. 4. Cap Groundwater Systems and all

A reform sequence - Alberta 1. 2. 3. 4. Cap Groundwater Systems and all uncapped surface systems Complete metering and establish allocation accounts Establish river trusts and allocate a licence to environment 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 to 1980 Post 1980 – – – 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 9. Issue new entitlements

Download our reports and subscribe to Jim Mc. Coll and my droplets at www.

Download our reports and subscribe to Jim Mc. Coll and my droplets at www. myoung. net. au Contact: Prof Mike Young Water Economics and Management Email: Mike. [email protected] edu. au Phone: +61 -8 -8303. 5279 Mobile: +61 -408 -488. 538 www. myoung. net. au