C21 water policy opportunities for NZ

1. Note these slides formed the basis of a full morning seminar/workshop with water managers and water users in Wellington on 9th February 2007 and then again in Christchurch on 13th February 2007. 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 http://www.myoung.net.au/water/publications/cwrj300165.pdf http://www.myoung.net.au/water/publications/Sharing_water_060221p.pdf C21 water policy opportunities for NZ Prof. Mike Young Research Chair, Water Economics & ManagementSchool of Earth and Environmental SciencesThe University of Adelaide Friday 9th February 2007

2. River Murray Inflow 5400 GL/yr 6300 GL/yr Source: MDBC 2006 & Craik 2005

3. Year Major policy 1994 COAG Water Reform Framework within National Competition Policy 1995a1995b MDB Cap introduced Water reform implementation linked to competition payments 1998 MDBC commenced Pilot Interstate Water Trading Trial 2001 National Action Plan for Salinity and Water Quality 2002 MDBMC started Living Murray process 2003 COAG agreed, in principle, to implement a NWI 2004 COAG finalised NWI High level water reform agenda 2007 Howard Water $10 billion Plan for Water Security

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

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

6. 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

7. Water Policy Goals • Distributive Equity • Economic Efficiency • Manage Environmental Externalities

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

9. Scale Policy Objective Distributive Equity Economic Efficiency Externalities Individual Entitlements Allocations Use licences(approvals) Total System Water allocation plans Trading Protocols & Accounting Rules Catchment Plans Generalised framework

10. A Water Licence

11. OwnershipRestrictions Delivery charges Tenure Salinity obligations Registered interests Expected Reliability Return flow &drainage DeliveryPriority WaterAllocation Volume for use or trade Why unbundle? Low costtrading WaterConcession or Permit

12. Periodic Allocations & Trading

13. Water Date ____________ Pay ____________________________________________ ________ML The sum of ________________________________ ML of 2000/01 Water Water Trading Australia Signature______________________ 807512 085 249:0223 7851 Allocation Trading WPay BPay

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

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

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

17. Recharge Accounts Trading • Land use Recharge rate Area Recharge mm ha KL • Native vegetation 5 100 500 • Plantation Timber 5 300 1,500 • Dryland lucerne 10 400 4,000 • Other Dryland 80 3,000 240,000 • Irrigated 120 200 24,000 • Total Groundwater load 4,000 270,000 • Recharge Entitlement @ 70mm/ha/yr @ 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 Rebate @ $0.10 per KL $500

18. Groundwater South East of SA • Standardised Crop Area Equivalent • Install meters • Volumetric conversion • Carry over rules • Define maximum volume and return flow rules • Define entitlements as shares • Set announcement rules • Set trading rules

19. Single Title to Land & Water Water Land Tradeable Rights Price Entitlement Sharesin Perpetuity Use licences with limits & obligations Bank-like Allocations Delivery Capacity Allocations SalinityShares SalinityAllocations Delivery Capacity Shares A Robust Solution?

20. Unbundle, share and design for change Contact: Prof Mike Young Water Economics and Management Email: Mike.Young@adelaide.edu.au Phone: +61-8-8303.5279Mobile: +61-408-488.538

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 • Sustainable Yield • Salinity • Efficient Investment • Transaction Costs – For water users • Administrative Costs – For Board & Govt • Distributive Equity • Policy Consistency – with NWI, NRM Act 2004, Catchment Plan & Water Allocation Plans

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

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

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

26. “Gross”, “nett” or “mixed” system?

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

28. Water Affecting Activities

29. How many entitlement pools?

30. How should shares be recorded?

31. Unit or Proportional Shares

32. Under-allocation

33. Over-allocation

34. Announcement frequency

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