C21 water policy opportunities for NZ Prof. Mike Young Research Chair, Water Economics & Management School of Earth and Environmental Sciences The University of Adelaide Friday 9 th February 2007 Note these slides formed the basis of a full morning seminar/workshop with water managers and water users in Wellington on 9 th February 2007 and then again in Christchurch on 13th February For a more complete understanding of this material it is recommended that readers download the following two other documents located on our at the links below

GL/yr 6300 GL/yr River Murray Inflow Source: MDBC 2006 & Craik 2005

3 High level water reform agenda YearMajor policy 1994COAG Water Reform Framework within National Competition Policy 1995a 1995b MDB Cap introduced Water reform implementation linked to competition payments 1998MDBC commenced Pilot Interstate Water Trading Trial 2001National Action Plan for Salinity and Water Quality 2002MDBMC started Living Murray process 2003COAG agreed, in principle, to implement a NWI 2004COAG finalised NWI 2007 Howard Water $10 billion Plan for Water Security

4 Major Australian mistakes 1.Serious Water accounting errors 2.Poor consultation and engagement 3.Mis-communication of what an entitlements are 4.Failure to act early on over-allocation problems 5.Introduced trading without addressing over-allocation simultaneously 6.Forgot to plan for change 7.Forgot to build registers with attention to detail and integrity 8.Forgot to design for low transaction costs 9.Poor pricing policy and charging policies 10.Allocated water to corporations not individuals 11.Plans not statutory 12.Created a “run to Canberra” for money game

5 A Robust System Water Tradeable Rights Price Single Title to Land & Water Land Entitlement Shares in perpetuity Bank-like Allocations Use licences with limits & obligations Channel Capacity Shares Channel Capacity Allocations Salinity Shares Salinity Allocations CoAG’s 1990’s Vision Solution for C21?

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 1999)  To minimise adverse effects of entitlement mis-allocation on economic activity => Ensure very low transaction costs

Water Policy Goals Distributive Equity Economic Efficiency Manage Environmental Externalities

8 Three Part Separation Entitlements => Equity instrument Allocation => Efficiency instrument Use licence => Externalities instrument Entitlements Allocations Use Approvals

Generalised framework Catchment Plans Trading Protocols & Accounting Rules Water allocation plans Total System Use licences (approvals) AllocationsEntitlementsIndividual ExternalitiesEconomic Efficiency Distributive Equity Policy Objective Scale

10 A Water Licence

Why unbundle? Water Concession or Permit Delivery Priority Expected Reliability Registered interests Tenure Ownership Restrictions Delivery charges Salinity obligations Return flow & drainage Low cost trading Water Allocation Volume for use or trade

12 Periodic Allocations & Trading

13 Allocation Trading Pay ____________________________________________ The sum of ________________________________ ML of 2000/01 Water Water Trading Australia Signature______________________ : Date ____________ ________ML WPay BPay

14 Entitlement definition? 1.Area that may be irrigated 2.Volume that may be stored 3.Max pump size and capacity 4.Access time &/or flow height 5.Volume that may be pumped 6.Volume pumped less estimated Qty returned

ML Unconfined Aquifer 50 ML Water that returns to the aquifer Extraction 45 ML Actual amount used 5 ML Evapo- transpiration Drainage Gross entitlement = 100 ML Return = 50 ML Recharge Credits for return flows

16 Water quality policy 1.Zoning to control new uses 2.Trading rules to encourage trade out of high impact areas 3.Irrigation efficiency regulations 4.Off-set policies 5.Levies to fund investment

17 Recharge Accounts Trading Land use Recharge rate Area Recharge mm ha KL Native vegetation Plantation Timber ,500 Dryland lucerne ,000 Other Dryland 80 3, ,000 Irrigated ,000 Total Groundwater load 4, ,000 $0.10 per KL $500 Recharge 4,000 ha = 280,000 KL Farm Credit/Deficit 10,000 KL Less credits sold 5,000 KL Credits available for sale 5,000 KL

18 Groundwater South East of SA 1.Standardised Crop Area Equivalent 2.Install meters 3.Volumetric conversion 4.Carry over rules 5.Define maximum volume and return flow rules 6.Define entitlements as shares 7.Set announcement rules 8.Set trading rules

A Robust Solution? Water Tradeable Rights Price Single Title to Land & Water Land Entitlement Shares in Perpetuity Bank-like Allocations Use licences with limits & obligations Delivery Capacity Shares Delivery Capacity Allocations Salinity Shares Salinity Allocations

Unbundle, share and design for change Contact: Prof Mike Young Water Economics and Management Phone: Mobile:

21 National Water Initiative Broadly, water planning by States and Territories will provide for: ii) resource security outcomes by determining the shares in the consumptive pool and the rules to allocate water during the life of the plan.” …. “28. The consumptive use of water will require a water access entitlement, separate from land, to be described as a perpetual or open-ended share of the consumptive pool of a specified water resource, as determined by the relevant water plan.”

22 Evaluation criteria 1.Sustainable Yield 2.Salinity 3.Efficient Investment 4.Transaction Costs – For water users 5.Administrative Costs – For Board & Govt 6.Distributive Equity 7.Policy Consistency – with NWI, NRM Act 2004, Catchment Plan & Water Allocation Plans

23 South East - Eight major issues 1.“Gross” or “Nett” shares 2.Non-metered water affecting activities 3.How many entitlement pools 4.Should shares be unbundled from use approvals 5.Type of shares 6.Allocating under-allocation 7.Managing over-allocation 8.Announcement period

ML Unconfined Aquifer 50 ML Water that returns to the aquifer Extraction 45 ML Actual amount used 5 ML Evapo- transpiration Drainage Gross entitlement = 100 ML Nett entitlement = 50 ML Gross or Nett Entitlements?

25 Evaporation and Transpiration Drainage to other aquifers, management areas or the sea Assumed aquifer return % of extracted volume not returned to aquifer Extracted volume 100% 50%5% Sustainable Extraction Frontier (as efficiency increases gross extractions need to reduce) Nett Gross Collective Implications

26 “Gross”, “nett” or “mixed” system? GrossNett Mixed Irrigation industryAllocation cuts as others improve technology More efficient use Community Arguments about inequity may emerge Board and DWLBCReduce allocations periodically Less monitoring No reductions Need to track use and define “assumed aquifer return” Need to manage the politics of justifying and defending an inconsistent system. (Inconsistencies are emerging.) Criteria supporting option Policy Consistency (with the rest of the State) Administrative Costs Efficient Investment Sustainable Yield Distributive Equity Transaction costs Other CriteriaSalinity Control – Salinity can be controlled under either system Indicative optionNett allocation system coupled with a modification to the volumetric conversion process to include evaporation in the base allocation. (Remainder called an “Assumed Aquifer Return”.)

ML Unconfined Aquifer 50 ML Water that returns to the aquifer Extraction 45 ML Actual amount used 5 ML Evapo- transpiration Drainage Gross entitlement = 100 ML Nett entitlement = 50 ML Gross or Nett Entitlements?

28 Water Affecting Activities SurrenderQuarantine above a threshold Quarantine all forestry Irrigation industrySimplicity with re-issue guarantee Existing get allocation CommunityInconsistent between new & old plantations Board and GovtSmall numbers onlyNeed to manage ongoing use Criteria supporting option Transaction Costs Administrative Costs Distributive Equity Policy ConsistencyDistributive Equity Other Criteria Efficient Investment, Sustainable Yield, Salinity Control Indicative option Surrender coupled with a re-issue guarantee Surrender would apply to all significant non-metered water affecting activities. Require any new significant water affecting activity to offset the likely impact of that effect by surrendering entitlements equivalent to the annual estimated mean impact of that effect. Authorisation would take the form of a permit authorising the significant effect and containing clause guaranteeing permit surrender will result in share re-issue. Consider a small risk premium.

29 How many entitlement pools? One share pool + Surrendering for trees Two share pools + water affecting Three or more share pools Irrigation industrySimple system Reviews focus on sustainability issues. Change often favours one group over another CommunityChanges can’t favour one over another. Arguments about fairness Even more arguments Board and GovtFocus on sustainability. Need to manage non- metered offsets Difficulty in maintaining a consistent approach Complexity = cost Criteria supporting option Sustainable Yield Transaction Costs Administrative Costs Distributive Equity Efficient Investment Policy Consistency Other CriteriaSalinity Control Indicative optionA single pool for all metered use coupled with surrender arrangements to account for water affecting activities

30 How should shares be recorded? Statement in Management Plan Amend existing holding and taking licences Unbundle and create a separate share register + use approvals Irrigation industryRegistration of mortgages difficult Environmental issues still managed with allocation issues Lower trading costs Increased investment options CommunityAlignment with policy change in Victoria and elsewhere Board and GovtSignificant change to current policy Criteria supporting option Policy Consistency Efficient Investment Transaction Costs Administrative Costs Salinity Control Other CriteriaSustainable Yield, Distributive Equity Indicative optionUnbundle and establish a separate share register coupled with the introduction of a water accounting system to allow people to identify how much water they have and have not used

31 Unit or Proportional Shares Unit sharesProportional shares Irrigation industryLess opportunity to change boundaries and land use when all agree that the change should be made Community Board and DWLBCVery difficult and expensive to make minor modifications to boundaries and to manage changes in non-metered use Criteria supporting optionTransaction Costs Administrative Costs Policy Consistency Other CriteriaSustainable Yield Efficient Investment Distributive Equity Salinity Control Indicative optionIssue unit shares

32 Under-allocation Pro-rata among existing shareholders Ministerial Reserve Irrigation industry CommunityProfit and opportunity remains in the region but distributed among existing licensees If water is auctioned the money received returns to consolidated revenue Board and DWLBC Criteria supporting option Policy Consistency Other CriteriaEfficient Investment, Sustainable Yield, Transaction Costs Distributive Equity, Administrative Costs, Salinity Control Indicative optionMinisterial Reserve. The Board may, however, hold the view that a pure market model should be used. If this is the case, then any unused water should be distributed amongst all shareholders – including the Minister – on a pro-rata basis

33 Over-allocation Immediate pro-rata cut Bridging allocationIncrease borrowing and carry-forward provisions Irrigation industryHave to buy allocations Necessary for efficient allocation CommunitySome see as more equitable Board and DWLBCCarry forward & borrowing to manage. Borrowing penalties Criteria supporting option Sustainable YieldEfficient Investment Other CriteriaTransaction Costs, Administrative Costs, Distributive Equity Salinity Control, Policy Consistency Indicative optionImmediate pro-rata cut in PAV to align with sustainable yield coupled with the introduction of appropriate carry-forward and borrowing rules.

34 Announcement frequency Every 5 years5 years but an option to make an earlier variation 5 year moving average of annual announcements with thorough review Irrigation industrySudden dramatic changes should be expected Dramatic changes would be phased in Continuous signalling of the direction of change Community Board and DWLBCObligation to watch for early signals of a climate change Rolling process that encourages all to accept that both climate and weather change continuously Criteria supporting option Administrative Costs Efficient Investment Sustainable Yield Transaction Costs Other CriteriaDistributive Equity, Salinity Control, Policy Consistency Indicative option Announce sustainable yield annually, convert these announcements into a 5 year moving average. Coupled with a 5 year review of aquifer hydrology.

35 Preferred model 1.Define each entitlement in nett terms 2.Use surrender approach for significant non-metered water affecting activities with re-issue guarantee. (Risk premium?) 3.Allow trade in surrendered forest permits, issue new permit to existing forest activity if requested. 4.Define each share holding on a separate share register with separate use approval system 5.Separate set of volumetric water accounts for each user 6.Unit shares to define proportion of each consumptive pool held 7.1 share per kilolitre of entitlement 8.Place any unallocated water in a Ministerial Reserve 9.Use carry-forward and borrowing to allow rapid alignment with the sustainable yield in over-allocated areas 10.Estimate sustainable yield annually but allocate 5-yr rolling ave