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'buybacks' and their use to secure environmental flows - National ...

'buybacks' and their use to secure environmental flows - National ...

Water allocation

Water allocation policies vary between NSW, Victoria and South Australia. Although New South Wales and Victoria share River Murray water equally, their water policies are quite different. NSW adopts a less conservative allocation policy than Victoria. NSW broadly maximizes its water use in each year and carries a minimum amount of water reserves each year 4 . Victoria, on the other hand, keeps significant volumes of water in storage each year. The differences partly reflect the higher proportion of perennial crops grown in Victoria which are dependent on the Murray in periods of drought. South Australia receives an agreed amount of water from the River Murray each year as a legal entitlement under the Murray Darling Basin Agreement. Its water allocation policy is also very conservative, reflecting high levels of perennial crops and the need to meet urban water demands. Demand for irrigation during the summer months means that the main river systems of the Murray and Murrumbidgee, which are used to deliver irrigation water, are running at full capacity during this time. In fact, deliveries to some irrigation regions are limited by physical delivery constraints. In particular, the Barmah-Millewa Choke is a significant bottleneck in terms of water delivery to downstream irrigation areas along the Murray. It is well recognised that the south east of Australia is characterised by a mature water sector. Randall, writing over two decades ago (Randall 1981), considered the Australian water sector as mature, based on the following criteria: • the long run supply of impounded water is inelastic (that is, there are very few alternative sources of water available that are not already captured); • the demand for water is high and growing; • infrastructure to store and transfer water is ageing; • competition between users is intense; • there are a growing number of externalities associated with use; and • the social cost of increased water use is high. The water sector in the south-east of Australia meets all these criteria. Urban sector demand is increasing and greater priority is being given to allocating water for in-stream uses resulting in greater demands than the existing supply. In fact, in many cases existing water resources have been over-allocated to consumptive users, particularly irrigators. Externalities associated with the use of water are increasing, with concerns about irrigation salinity and return flows. In response to the increasing demand for water, markets that allow trade in water entitlements and the seasonal allocations have been established in Australia for some time 5 . These markets provide a mechanism to allow transfer of water from low to high valued users and hence maximise the economic value of water use. Markets that trade entitlements allow new irrigation developments to occur, while markets for seasonal allocations allow for greater flexibility in meeting demands throughout an irrigation season. For example, an irrigator may purchase additional water to finish a crop or may sell water that is surplus to requirements due to higher than expected rainfall. Markets to trade both entitlements and seasonal allocations have existed for over a decade in the Southern Murray Darling Basin. The market for seasonal allocations is quite active, representing about 10-20% per cent of total allocations over recent years (PC 2004). Trade in entitlements is much lower, averaging about 1-2 per cent of total allocations (Table 1). 4 However within this policy carryover provisions apply at the individual level for some entitlements 5 Sale of the seasonal allocation has often been called ‘temporary trade’ while sale of water entitlement has often been called ‘permanent trade.’ Natural resource ‘buybacks’ and their use to secure environmental flows BDA Group 22

Significant variability exists around these averages for both markets in seasonal allocations and entitlements. For example, the volume of trade in seasonal allocations in Murray Irrigation Area reached nearly 30% in a dry year (2002/03) and trade in entitlements was more than three times higher than in other years. Table 1: Ratios of gross trade in seasonal allocations to total allocations, and trade in entitlements to total allocations Irrigation Region 2000–01 % Murrumbidgee Irrigation Area • Ratio of trade in seasonal allocations to total allocations • Ratio of trade in entitlements to total allocations 2001–02 % 2002–03 % 18.9 14.2 17.3 0.3 0.6 0.6 Murray Irrigation Area • Ratio of trade in seasonal allocations to total allocations • Ratio of trade in entitlements to total allocations Goulburn-Murray Irrigation District • Ratio of trade in seasonal allocations to total allocations • Ratio of trade in entitlements to total allocations Total of these regions • Ratio of trade in seasonal allocations to total allocations • Ratio of trade in entitlements to total allocations 14.2 6.9 28.6 0.3 0.3 1.4 9.7 12.2 18.4 1.7 1.7 2.5 10.9 11.1 19.5 0.9 0.9 1.8 Source: Productivity Commission 2004, Table A4. Prices for entitlements reflect the stream of income that can be obtained from the use of the entitlement over its life. In this respect, prices are relatively stable. However, since markets are segregated within the Basin, and the nature of entitlements (especially their reliability) differs between the States, prices do vary. The range of recent prices for common entitlements in the NSW Murray and Victorian irrigation districts are shown in Table 2. No consistent data was able to be sourced for NSW high security entitlement trades, although anecdotal information indicates prices around $1,050 / ML Long Term Cap Equivalent (LTCE) 6 . The high price for these entitlements compared to general security entitlements is likely to reflect a risk premium and the relative scarcity of these entitlements, representing only around 11% of all NSW entitlements. Similarly, data on SA water licenses was not readily available, but anecdotal information indicates prices around $1,300 / ML or $1,190 LTCE 7 . Again these entitlements would attract a significant risk premium reflecting their high reliability. 6 Based on the revised ultimate development Cap Factors (MDBC, personal communication, February 2006 7 Based on the revised ultimate development Cap Factors Natural resource ‘buybacks’ and their use to secure environmental flows BDA Group 23

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