Trading water to improve environmental flow outcomes

As consumptive extractions and water scarcity pressures brought about by climate change increase in many world river basins, so do the risks to water-dependent ecological assets. In response, public or not for profit environmental water holders (EWHs) have been established in many areas and bestowed with endowments of water and mandates to manage water for ecological outcomes. Water scarcity has also increasingly spawned water trade arrangements in many river basins, and in many instances, EWHs are now operating in water markets. A number of EWHs, especially in Australia, begin with an endowment of permanent water entitlements purchased from irrigators. Such water entitlements typically have relatively constant interannual supply profiles that often do not match ecological water demand involving flood pulses and periods of drying. This article develops a hydrologic-economic simulation model of the Murrumbidgee catchment within the Murray-Darling Basin to assess the scope of possibilities to improve environmental outcomes through EWH trading on an annual water lease market. We find that there are some modest opportunities for EWHs to improve environmental outcomes through water trade. The best opportunities occur in periods of drought and for ecological outcomes that benefit from moderately large floods. We also assess the extent to which EWH trading in annual water leases may create pecuniary externalities via bidding up or down the water lease prices faced by irrigators. Environmental water trading is found to have relatively small impacts on water market price outcomes. Overall our results suggest that the benefits of developing EWH trading may well justify the costs. © 2013. American Geophysical Union. All Rights Reserved.Jeffery D. Connor, Brad Franklin, Adam Loch, Mac Kirby, Sarah Ann Wheele

Between Forced Resumption and Voluntary Sale: A Mechanism For The Collective Sale Or Transfer Of Irrigation Water

Currently, the legitimate transfer of ownership of an asset occurs either through voluntary means--gift, bequest, sale--or through the use of state power--compulsory acquisition, resumption, eminent domain, court order. In Australia and elsewhere, compulsory acquisition of private property is followed by the payment of compensation, which may be too little or too great. This paper outlines an auction mechanism that is intermediate between the forced resumption of water entitlements and their voluntary sale. To be effective, the mechanism requires there to be competitive bidders in the auction; so the mechanism would work best if there were an end to collusion between public agencies in the water market. The seller would be an irrigation district, which would be compelled by government to engage in the auction. The proceeds of any auction sale would be distributed to the individual irrigators, according to fixed and known fractional shares. However, in contrast with the use of forced resumption, under the Shapiro--Pincus mechanism no sale would be made unless each individual irrigator receives at least what he or she has nominated as a minimum required payment. This guarantee would be secured through the use of a secret reserve for the auction of the district's water entitlements. The combination of a secret reserve, competitive bidding, and the share mechanism should give individual irrigators a financial incentive to nominate truthfully what each requires as a minimum payment. The mechanism may have other applications, including helping to achieve unanimous agreement within an irrigation district to offer to sell all of the district's entitlements.Jonathan Pincus and Perry Shapir

Economic assessment of acquiring water for environmental flows in the Murray Basin *

This article is an economic analysis of reallocating River Murray Basin water from agriculture to the environment with and without the possibility of interregional water trade. Acquiring environmental flows as an equal percentage of water allocations from all irrigation regions in the Basin is estimated to reduce returns to irrigation. When the same volume of water is taken from selected low-value regions only, the net revenue reduction is less. In all scenarios considered, net revenue gains from freeing trade are estimated to outweigh the negative revenue effects of reallocating water for environmental flows. The model accounts for how stochastic weather affects market water demand, supply and requirements for environmental flows. Net irrigation revenue is estimated to be 75 million less than the baseline level for a scenario involving reallocating a constant volume of water for the environment in both wet and dry years. For a more realistic scenario involving more water for the environment in wet and less in dry years, estimated net revenue loss is reduced by 48 per cent to 39 million. Finally, the external salinity-related costs of water trading are estimated at around 1 million per annum, a quite modest amount compared to the direct irrigation benefits of trade. Copyright 2007 The Authors Journal compilation 2007 Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishing Ltd .