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

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

Quantities of

Quantities of entitlement purchased could be significantly reduced if environmental demands in the few years with high requirements were not met. Alternatively, greater efficiencies could be achieved if the water could be utilised at other environmental sites when not required at this site. However the strategy of meeting environmental demands at the case study site only through entitlement purchase is simply ineffective due to the huge variability in the quantity of water required each year. It should be noted that the opportunity cost of such an approach would be significantly less than the budget cost indicated. Despite not allowing the trading of allocations under the environmental entitlements, the unused allocations would serve to increase storage levels between years and hence serve to increase future allocations under all entitlements, including irrigation entitlements. 5.4.2 Purchase of seasonal allocations Given the large variation in water required each year at this site, and the fact that in many years no water is required at all, a more efficient instrument may be to purchase water on the allocations market when it is needed. To assess the opportunity cost of sourcing water through markets for seasonal allocations, a model of the price of water allocations throughout irrigation seasons was estimated through regression techniques based on observed price, allocation and rainfall data for Murray Irrigation Limited (see Appendix 1 for a description of the regression equation). A similar relationship estimated by Brennan (2004) was used to identify prices for allocation purchases from the Victorian Murray irrigation region (see Section 3). Given the broad scoping analysis sought here, we have in the first instance assumed that water could be purchased in required volumes from these irrigation regions when needed at prevailing ‘market’ prices. The impact on market prices of introducing a new buyer of large quantities of allocations, often early in irrigation seasons, has been incorporated into the analysis to ensure that the full opportunity cost of water is identified. The analysis summarised in Figure 12 demonstrates that there is no cost in many years because water is simply not required, while the highest cost in any one year was estimated to be $22 million. Over the 85 year simulation period the average cost in nominal terms is estimated to be $1.5 million. Due to the large volumes required in some years, price impacts of up to 17% in NSW Murray and 11% in the Victorian Murray (see Figure 13) were estimated, although price impacts in most years where purchases were made were less than 10 per cent. Figure 12: Purchase of allocations when needed – cost per year inclusive of price effects $25 $20 Cost $m $15 $10 $5 $0 Year Natural resource ‘buybacks’ and their use to secure environmental flows BDA Group 40

The average volume of water that would need to be sourced to meet the environmental demand at this site represents about 3.5 per cent of entitlements in the two buyback regions. This compares to the trading of some 10 to 20% of allocations in these regions in recent years. However in peak years, the volumes needed to meet the environmental demand would be up to 9% of allocations in those years, and typically needed in August when announced allocations are generally lower than final allocations. Figure 13: Purchase allocations when needed – price impacts on water markets 20% 15% 10% 5% 0% NSW Murray Vic Murray Year Accordingly, it may be difficult to source necessary volumes in some years, particularly given the short time available between when an environmental watering trigger may be activated and the time when releases would need to be made. This problem would be compounded if environmental managers were also seeking to source water for other environmental sites at the same time. For these reasons, this scenario is not likely to be a feasible option for obtaining the large and irregular volumes of water required at this site. 5.4.3 Entitlement purchase with trading A more workable alternative may be the purchase of some entitlements whose allocations are sold in years when not required. Depending on the quantity purchased and profile of seasonal allocations, additional water could be purchased on the seasonal allocations market when needed to meet environmental demands. In most cases at this site, the environmental manager will know early in the irrigation season if water is not required, and hence can sell surplus allocations throughout the season in order to maximise returns. However, for illustrative purposes in this study, the December irrigation allocation is used to determine a selling price and hence opportunity cost. December was considered as a midway point in the season, when final allocations are often known, so the analysis will give an ‘average’ estimate of costs and revenues. The costs and revenues from alternative entitlement purchasing / allocation trading strategies to meet the environmental watering needs are illustrated in Figure 14. Natural resource ‘buybacks’ and their use to secure environmental flows BDA Group 41

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