The Environment Institute Where ideas grow Environmental Policy Water Policy & Water Trading Mike Young Executive Director, The Environment Institute

The Environment Institute Life Impact The University of Adelaide H20H20 1.Water is heavy 2.Gravity is cheap – when we use fossil fuel to make and move water some-one has to pay. 3.Someone has to pay for the infrastructure too.

The Environment Institute Life Impact The University of Adelaide Environmental policy Triple bottom line? Environment first? – Transition arrangements often confused with definition of final outcome to be pursued

The Environment Institute Life Impact The University of Adelaide Environmental policy design Three Important Principles – Tinbergen principle One instrument per objective – Mundell’s assignment principle Assign for max leverage and don’t swap use – Coase Theorem Get transaction costs as close to zero as possible

The Environment Institute Life Impact The University of Adelaide Getting the balance right Recognise the difference between – Identifying environmental objectives – The science of estimating how much water is needed to deliver each environmental objective Institutional arrangements need to encourage efficient use and innovation in the pursuit of environmental objectives – Volumes water needed will change through time as technology and institutional arrangements improve

The Environment Institute Life Impact The University of Adelaide Untangling the story 1.Economic efficiency (Productive and allocative) 2.Intergenerational equity 3.Maintenance natural capital (Ecosystem services) 4.The discount rate 5.Precautionary principle Lots of instruments are needed The institutional design will be most efficient if advantage is taken of subsidiarity rather than hierarchical administrative structures Most local decisions do not need to be supervised

The Environment Institute Life Impact The University of Adelaide Who should pay Payment arrangements (Incentives) influence decisions – Investment decisions – Day-by-day use decisions When the signals are wrong tax-payers, third parties and future people pay Principles – Polluter-Pays below environmental duty of care – Beneficiary-pays above duty of care Duty of care will change through time

The Environment Institute Life Impact The University of Adelaide Water Policy As water is heavy, why use it to redistribute income? Water is heavy – as heavy as sand Delivered to your house, about 1/20 th as valuable as sand (more useful)

The Environment Institute Life Impact The University of Adelaide Three important observations

The Environment Institute Life Impact The University of Adelaide Scarcity is compromising Biodiversity! After Vörösmarty and others (2010).

The Environment Institute Life Impact The University of Adelaide Users Environment River Flow Environment River Flow Users With 10% less rainfall

The Environment Institute Life Impact The University of Adelaide National Water Initiative Full cost pricing Metering every-where Urban reform – Phase in house by house charging – Install smart meters – Phase out all concessions – Phase out all block pricing Rural reform – Eliminate administrative barriers to trade – Allow entitlement conversion – Restore all systems to health using market – Replace planning with entitlement-based management Water Act (2007) is inconsistent with the NWI

The Environment Institute Life Impact The University of Adelaide Water Trading Urban-rural trading is a global must – 2 billion more people will need to drink and will want access to goods only produced in factories – Agriculture will have to get more efficient Still many “clever” administrative barriers The environment should become a key player in the market – Is the MDB Authority throwing the baby out with the bath water?

The Environment Institute Life Impact The University of Adelaide Annualised return to water reform After Bjornlund & Rossini 2007

The Environment Institute Life Impact The University of Adelaide Water accounting matters Improvements in water use efficiency come at a big cost to rivers Forests, farm dams, overland flow capture water Need to assume groundwater is connected to a river MDB Guide found that the cost of not dealing with water accounting has major (in-equitable) consequences – up to 37% reduction in water entitlements if interception excluded, only 29% if included

The Environment Institute Life Impact The University of Adelaide Concluding observations The sooner systems are restored to health the better Trading is essential for prosperity and environmental health in a rapidly changing world Design your entitlement regime to facilitate rapid adjustment in an ever changing world But get your accounting right Price at full cost and let markets deliver scarcity signals – long and short-term Make sure the environment’s future is secure as all user’s future – force risks to be shared Design constellation of governance arrangements to drive innovation and manage rapid emergence of scarcity – Allow autonomous adjustment – Drive innovation – Expect water availability to go down as product prices and water prices go up – Enjoy the prosperity that these challenges will bring collectively See increased water scarcity as opportunity

The Environment Institute Where ideas grow