C21 water policy opportunities for Canada Prof. Mike Young Research Chair, Water Economics & Management School of Earth and Environmental Sciences The University of Adelaide Tuesday 19 th March 2007

2 Less rain means much less water!

3

4 Sydney

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

6 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

7 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.”

8 Australian water policy 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.Used non-cost reflective and non-competitive pricing and charging policies 10.Allocated water to corporations not individuals 11.Plans were more like funding applications than statutory instruments 12.Program design created a “run to Canberra” for money game

9 A Water Licence

Unbundling – robust separation 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

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

Water Policy Goals Distributive Equity Economic Efficiency Manage Environmental Externalities

13 Three Part Separation - Individual Entitlements => Equity instrument Allocation => Efficiency instrument Use licence => Externalities instrument Entitlements Allocations Use Approvals

14 Three Part Separation - System Allocation plans => Equitable sharing Trading protocols => Efficient adjustment Catchment plans => Externality management Allocation plans Trading protocols Catchment Plans

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

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

17 Periodic Allocations & Trading

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

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

20 How many entitlement types 1.High security – reliable supply that varies only with long term trends 2.General security – varies according to supply  With these two any degree of reliability can be achieved Important to allow individual carry forward

21 Water quality policies 1.Zoning to control new development 2.Trading rules to encourage trade out of high impact areas 3.Irrigation efficiency regulations 4.Off-set policies 5.Cap and trade 6.Levies to fund system-wide investment

22 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

23 Proposed governance arrangements 1.Manage river and groundwater systems as one 2.Independent skill-based management separated from politics 3.Arms length management of environmental entitlements 4.Separation of infrastructure management from policy formation 5.Separation of system management from delivery to increase competition 6.Use of companies to manage local infrastructure

24 Governance Ministerial over-site Independent Authority well-specified objectives & power to manage Environmental Trust System Infrastructure Manager

25 Preferred Groundwater model – South East, South Australia 1.Define each entitlement in nett terms 2.Use surrender approach for significant non-metered water affecting activities with re-issue guarantee. 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 on 5-yr rolling average

26 10 suggestions for Canada 1.Unbundling of licences into unit shares and use approvals. 2.Replace first in time, with 2 or 3 entitlement types. 3.Independent Water Allocation & Management Boards responsible for all connected surface and groundwater in a region and making final non-appealable decisions on environmental flow, abstraction limits, allocations & trading rules. 4.No more allocations once any part of a water body gets to 70% of WAM estimate of abstraction potential. Remaining 30% shares to be tendered. Classify water bodies as heritage, conservation or working systems. 5.Credit for returns to ground and surface water systems. 6.Mandatory off-set of impacts of forests, farm dams, and increases in water use efficiency. 7.Mandatory pollution off-set trading in all nutrient hotspots. 8.Shares issued to individuals (not supply cooperatives). 9.Carry forward of unused groundwater and storage allocations. 10.Tradeable forest habitat maintenance credits by zone to maintain biodiversity.

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