C21 water policy opportunities for Canada

Prof. Mike Young

Research Chair, Water Economics & ManagementSchool of Earth and Environmental SciencesThe University of Adelaide

Tuesday 19th March 2007

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Less rain means much less water!

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Ra

infa

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mm

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14% less 20% less

Rainfall for Jarrahdale

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Str

ea

mfl

ow

(G

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N o te s : S tre a m flo w is fro m Ma y o f la b e lle d ye a r to th e fo l lo w in g Ap ri l

48% less

66% less

S tre a m in flo w fo r P e rth d a m s (P rio r to S tirlin g D a m )

PERTH

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Warragamba + 3 Nepean Dams (Inflows & annual rainfall)

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1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Year

Inflo

w GL

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Rain

fall

(mm

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892 GL pa

2,027 GL pa

572 GL pa

780 mm pa 907 mm pa 681 mm pa

Sydney

5

5400 GL/yr 6300

GL/yr

River Murray Inflow

Source: MDBC 2006 & Craik 2005

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High level water reform agenda

Year Major policy

1994 COAG Water Reform Framework within National Competition Policy

1995a1995b

MDB Cap introducedWater 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

2007 Howard Water $10 billion Plan for Water Security

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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

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Seasonal Variability Risk

Split Environment & Consumptive Use

Climate Change Risk

Salinity Pollution Right

Carry over rules (NSW)

Integrity of Register, mortgages

etc

Trading opportunity - Temporary

Delivery Charge

River Capacity Management Rules

Channel Capacity Shares

Administrative Dilution Risk

Return Flow & Drainage Rules

This Feburary Delivery

Register integrity

Bulk water licence & ownership

Trading Fees

Administrative Error Risk

Trading opportunity - Permanent

Impact of use - on river

Impact of use - on groundwater Impact of use -

LocalAccess to Sales

Water (Vic)

A Water Licence

Unbundling – robust separation

WaterConcession

or Permit

DeliveryPriority

Expected Reliability

Registered interests

Tenure

OwnershipRestrictions

Delivery charges

Salinity obligations

Return flow &drainage

Low costLow costtradingtrading

WaterAllocation

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

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Three Part Separation - Individual

Entitlements => Equity instrument

Allocation => Efficiency instrument

Use licence => Externalities instrument

Entitlements

Allocations Use Approvals

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Three Part Separation - System

Allocation plans => Equitable sharing

Trading protocols => Efficient adjustmentCatchment plans => Externality managementAllocation plans

Trading protocols

Catchment Plans

A Robust Solution?

Water

Tradeable Rights Price

Single Title to

Land & Water

Land

Entitlement Shares

in PerpetuityBank-like Allocations

Use licences with limits & obligations

Delivery Capacity Shares

Delivery Capacity Allocations

SalinityShares

SalinityAllocations

Generalised framework

Catchment Plans

Trading Protocols & Accounting Rules

Water allocation plans

Total System

Use licences(approvals)

AllocationsEntitlements

Individual

ExternalitiesEconomic Efficiency

Distributive Equity

Policy Objective Scale

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Periodic Allocations & Trading

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Allocation Trading

Pay ____________________________________________

The sum of ________________________________ ML of 2000/01 Water

Water Trading Australia

Signature______________________

807512 085 249:0223 7851

Date ____________

________ML

WPayBPay

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100 ML

Unconfined Aquifer

50 M

LWater that returns to the aquifer

Extraction

45 ML

Actual amount used

5 ML

Evapo-transpiration

Drainage

Gross entitlement = 100 MLReturn = 50 ML

Recharge Credits for return flows

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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

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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

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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

Rebate @ $0.10 per KL $500

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

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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

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Governance

Ministerial over-site

Independent Authoritywell-specified objectives

& power to manage

Environmental TrustSystem Infrastructure

Manager

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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

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10 suggestions for Canada1. 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 YoungWater Economics and ManagementEmail: Mike.Young@adelaide.edu.auPhone: +61-8-8303.5279Mobile: +61-408-488.538