CRC for Catchment Hydrology Socio-economic Analysis of Mature Water Markets

1. CRC for Catchment HydrologySocio-economic Analysis of Mature Water Markets CSIRO Land and Water Bogotá Nov 8th-10th Social solutions for the management of social resources?? The effect of information and communication in closed water trading environments Dr. John Ward (j.ward@csiro.au) www.clw.csiro.au/research/peru Seminario Internacional CONDESAN “Experiencias y Métodos de Manejo de Cuencas y su Contribución al Desarrollo Rural en los Andes” Bogotá – Colombia, 8 a 10 de noviembre del 2004

2. NSW Queensland Western Australia South Australia NSW Murray Darling Basin Victoria Tasmania

3. Storage Water Yield Land use Ground water Base flow Water Extraction Irrigation, urban & industrial use $ Surface Drainage GW Recharge Wetlands Rainfall Comprehensive water accounts x x River x x

4. As a result of water extraction society pays a socialized environmental cost. For this simulation: mixed policy instruments Market for water trading Environmental levy – reflecting the socialized cost of water extraction. Information and Community management – River Management Committees – management through information and communication. Experimental evaluation of alternative environmental flow management options

5. Environmental Water Flows typify a Common Pool Resource • Individual rationality – act opportunistically, maximising benefits free riding and socializing the cost. • Group rationality - would reduce aggregate extraction and maximise group benefits

6. Monthly extraction levels given rainfall

7. Benefits of environmental flows are symmetric and equally shared by all the community  any reduction in benefits (costs) are imposed equally Environmental levy = • Individual benefits of extracting and using water for irrigation are asymmetric and specific for farm characteristics. • Farmers can earn income by growing a crop and trading water. • Income from the game is proportional to a player’s skill in trade and farming according to their farm characteristics

8. Experimental Design The impact of the provision of information, discussion forums and sanctions with trade Each session is comprised of 12 periods of monthly water decisions. Each period has 12 unique farms.

9. Research Questions Given heterogeneous farms, how will the level of environmental flow, farm income and group accordance be influenced by:- • The provision of aggregate information • Discussion forums • Disclosure of individual extraction information In a market environment where there is:- • No trade in water entitlements. • A closed call auction structure. • An open call auction structure.

10. Policy elements for the simulation: • Market: Temporary monthly • Allocation type: Fixed allocation of water • Auction type: Closed or Open Call – pool price with leverage • Pricing: Simple volumetric • Environmental Levy: Annual aggregate • Hydrological constraints to trade: None Within a closed catchment, comprising heterogeneous farms facing uncertain rainfall.

11. Typical Farm Characteristics • Players are provided with monthly updates on: • Their water allocation and balance • Crop type, monthly crop income and monthly water requirements • Marginal value of water • Median monthly rainfall (which can vary) • Market outcomes (market price and volume traded if successful) • Monthly aggregate extraction for all farms and the cost of the levy

12. A Typical Water Use Table

13. Typical Farm Income Table

14. Four Assessment Measures • Accordance with environmental target. • Aggregate traders’ income • Ratio of traders’ income to environmental levy. • Accordance with agreed levels of extraction

15. Environmental targets ($ levy) Notes: Information/communication treatment means with the same letter were not statistically different at =0.05.Trade treatment means with the same letter were not statistically different at =0.10

16. Summary • In these experiments the introduction of trade increased environmental damage. • Disclosure of only the impact of aggregate extraction on riverine environments was found to be counter-productive to achieving environmental extraction targets in open call market experiments. This treatment resulted in the highest level of environmental damage.

17. Environmental damage was minimised by providing aggregate environmental information with a forum for group discussion and agreement in a no trade experimental environment.

18. Aggregate Traders’ Income Notes: Treatment means with the same letter were not statistically different at =0.05.

19. Summary • In these experiments average traders’ income increased with trade in all cases. • Introducing aggregate extraction and environmental information increased average traders’ income in trade experiments compared to no trade experiments.

20. Maximum average traders’ income was achieved by providing information on aggregate extraction, environmental targets and a forum for discussion in an open call market. • Disclosure of individual information compared to aggregate information with discussion led to lower average traders’ income in all cases. • Providing aggregate information and discussion produced higher average traders income compared to no information or aggregate information alone in all cases.

21. Ratio of income and environmental levies

22. Summary • Providing aggregate information and a forum for discussion without trade maximised the return per unit of environmental damage. • Compared to aggregate information and discussion, providing individual information produced lower returns per unit of environmental damage and was therefore counter productive in all cases.

23. Aggregate information and discussion Individual information and discussion No trade 0.0165 0.0241 Closed 0.0148 0.0100 Open 0.0057 0.0133 Accordance with group agreements Accordance measure=

24. summary • The highest level of level of accordance was observed in no trade experiments with individual information and discussion. • The lowest level of level of accordance was observed in an open call environment with aggregate information and discussion.

25. Key Conclusions • The provision of aggregate extraction information without a formalised forum for communication is not effective in promoting players’ coordinating their extractions to avoid environmental damage. • Disclosure of individual information is not effective in modifying people’s extractions to be more in accordance with environmental targets. • .

26. The environmental damage was minimised by providing aggregate extraction information and a forum for discussion without a trading environment. • Average traders’ income was maximised providing information on aggregate extraction, environmental targets and a forum for discussion in an open call market. • Providing aggregate information and a forum for discussion without trade maximised the return per unit of environmental damage

27. No Provision of Environmental Information

28. Environmental and Individual extraction Information and Group Discussion

29. For further information, contact Dr John Tisdell, Griffith University, Australia: j.tisdell@griffith.edu.au Mwater is a methodological procedure and software platform for evaluating aggregate behavior of a market under controlled laboratory conditions. It yields a formal and replicable system for analyzing alternative market structures, without underlying assumptions concerning farmer behavior, before they are actually implemented. Mwater Experimental Water markets in Action