1 Instruments for Adaptive Water Management R. Quentin Grafton Crawford School of Economics and Government Australian National University ANU – NeWater Workshop on Adaptive Water Management 28 August 2007

2 Outline Targets and Instruments Implementing Adaptive Instruments Case Studies: - Water trading in Australia in MDB - Sydney water pricing

3 Targets and Instruments Adaptive management requires target and limit reference points to measure performance, e.g. Minimum 2,000 GL annual flow at Murray Mouth, Maximum EC 800, etc Instruments are the ‘control levers’ that map human behaviour and actions into uncertain biophysical and socio-economic outcomes Adaptive management requires that instruments match targets (‘horses for courses’)

4 Adaptive Instruments ‘ Adaptive’ instruments: 1. Change behaviour in ways that are readily understood by managers 2. Can be implemented in a time frame needed to avoid limit reference points and move towards target reference points 3. Flexible to allow for uncertainties and shocks

5 Implementing Adaptive Instruments (1) Targets must match instruments, e.g., water restrictions are useful to correct for short and unexpected declines in water supply, but probably not suitable if permanent and long- term demand reductions required Instruments that provide incentives for people to change their behaviour likely to be more effective that measures designed to control behaviour.

6 Implementing Adaptive Instruments (2) Level of the instrument, the type of instrument and the target interact to determine if targets are achieved e.g. increasing water prices will reduce urban water consumption, but price must be set appropriately Instruments must suit the institutions, environment and capacity where they are applied, e.g. applicability of tradable water rights in Australia versus Pakistan

7 Implementing Adaptive Instruments (3) Instruments that are flexible to bio-physical uncertainties may not be flexible to other uncertainties e.g. price of water rights change with water supply/yield but reassigning rights to others and/or uses is highly inflexible Mapping/modelling from instrument to human behaviour to outcomes and relationship to targets is required to adaptively manage water

8 Rural Water Trading in MDB Trade largely restricted to irrigators Well established, active markets in seasonal allocations Smaller, but growing volume of trade in entitlements Markets for derivative products, such as leases and forward contracts, emerging A number of significant constraints to trade remain

9 Seasonal allocation trade in the southern Murray–Darling Basin

10 Water entitlement trade in the southern Murray–Darling Basin

11 Instrument Effectiveness Costs of trading reduce trade by reducing net gains from selling and buying water (such as exit fees on export of water entitlements) Water trading has been effective at transferring water from low to high values uses and reducing impacts of reduced flows Market-based water recovery is proposed as the means of achieving environmental outcomes, but does not directly address water quality (and other) issues

12 Sydney Water Pricing (1) Since 2001 the total water stored by the Sydney Catchment Authority in its dams has declined from about 90% to about 40%, and recently increased to 57%. Concern is that if the low rainfall period that occurred (and previously in 1994, , , ) were to reoccur then Sydney would ‘run out of water’.

13 Sydney Water Pricing (2) Residential usage prices have increased at least 70% in past decade and set a two tiers Water price fixed years in advance by independent authority (IPART) whose stated objective is to set Tier I price equal to long-run marginal cost of supply

14 Modelling Sydney Water Prices (1)

15 Modelling Sydney Water Prices (2)

16 Instrument Effectiveness Even with expected increases in supply (groundwater & recycling) scheduled price increases are NOT sufficient without extra supplies to balance supply and demand IF rainfall period is repeated Different and more flexible water pricing arrangement are required to balance supply and demand in low rainfall periods, and also to encourage additional sources of supply