An Assessment of the Efficiency of Water-Trading Markets in the Murray-Darling Basin James Smits Supervised by Professor Snow Barlow University of Melbourne, Summer 2010

Adam Smith “Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.” Source: Smith, Adam. An Inquiry into the Nature and Causes Of the Wealth of Nations Image Source:

How does one place a value on water?

The Murray-Darling Basin Source: Murray Darling Association, Source: Wikipedia

The Murray-Darling Basin Crosses five (of the six) states of Australia 23 river valleys 14% of total area of Australia Annual average rainfall 530,618 gigalitres 39 % of the national income from agricultural production 53% of the Australian cereals grown for grain 28% of the nation’s cattle, 45% of sheep, 62% of pigs Source: mdba.gov.au

Present state of the MDB Natural assets of the MDB are currently in poor or very poor health due to climactic, social, and economic factors The nature of the MDB is also a problem – sufficient flows of water and periodic flooding required to maintain the ecological functions of the Basin Drought has persisted since 1997, exacerbating these problems Source: Wentworth Group of Concerned Scientists, Sustainable Diversions in the Murray-Darling Basin: An analysis of the options for achieving a sustainable diversion limit in the Murray-Darling Basin

How is efficient use and distribution of water possible?

Water Trading Water trading: a transfer of an entitlement from one legal entity to another, with or without a change in location, a trade of water allocation from one authorized water user or another, or between water accounts held by the same water user, with or without a change in location Source: National Water Commission, Australian Water Markets Report

Water Trading (cont.) Water access entitlements – a perpetual entitlement to exclusive access to a share of water from a specified consumptive pool Water allocation – the specific volume of water allocated to water access entitlements in a given season Technically, entitlements can be transferred, while water allocations can be traded Source: National Water Commission, Australian Water Markets Report

Why is this all possible? Unbundling – the separation of “bundled” entitlements into their individual elements – Separates a water entitlement from a land property title, allowing the trade of the water entitlement independently of water – Most water entitlements in Australia have been unbundled from the land Source: National Water Commission, Australian Water Markets Report

Water Trading in Australia National level, 1800 GL of entitlements were traded in % of total entitlements on issue were traded in Total value of turnover of entitlements was estimated to be $2.2 billion for the water year – a 162% increase on Total sales of water allocations were $606 million – a 28% decline in estimated value (volume of trade increased 35%, but the average price decreased 40%) Source: National Water Commission, Australian Water Markets Report

Water Trading in the MDB 1980s - Water trading began 1990s - Basin-wide cap on water diversions June National Water Initiative - introduction of “interim threshold limit” (cap) Phasing out of cap on entitlement trading 2014 – Caps to be removed entirely Source: National Water Commission, The impacts of water trading in the southern Murray-Darling Basin: An Economic, social, and environmental assessment

MDB By the Numbers… MDB water trading accounts for 60% of the national entitlement trade and 81% of the national water allocation trade (by volume) Negligible interstate entitlement trade between connected systems in the MDB Interstate trade accounted for 28% of the allocations traded (by volume) Entitlement trade increased 75% (for SMDB) Allocation trade increased 41% (for (SMDB) Source: National Water Commission, Australian Water Markets Report

Strengths of Water Trading Risk and debt management tool – Entry/exit from the industry – Uncertain rainfall Changes in management practices and efficiencies including new irrigation systems Economic benefits to both buyer and seller Helps irrigators manage variation in seasonal water availability Flexibility – unbundling Source: National Water Commission, The impacts of water trading in the southern Murray-Darling Basin: An Economic, social, and environmental assessment

Weaknesses of Water Trading Transaction time Restrictions on trading Exchange rates between states Lack of available data Environmental impact – Changes in flow, quality, timing, or storage of water Social and political impact? Source: National Water Commission, The impacts of water trading in the southern Murray-Darling Basin: An Economic, social, and environmental assessment;

Recommendations More detailed databases Decrease barriers to trading Transaction time Government interaction with system – e.g., Electricity market in Australia Public understanding

Works Cited Greek Shares, Murray Darling Association, National Water Commission, Australian Water Markets Report National Water Commission, The impacts of water trading in the southern Murray-Darling Basin: An Economic, social, and environmental assessment Smith, Adam. An Inquiry into the Nature and Causes Of the Wealth of Nations Wentworth Group of Concerned Scientists, Sustainable Diversions in the Murray-Darling Basin: An analysis of the options for achieving a sustainable diversion limit in the Murray-Darling Basin

Special Thanks Professor Snow Barlow, Professor Ignacio Rodriguez-Iturbe, Professor Steven Pacala, Sunday McKay, Professor Michael Robinson, Professor Iven Mareels, the staff in the Primary Industries and Climate Change Centre Princeton Environmental Institute Grand Challenges Program

Questions?