Assessment of the potential costs and benefits of water trading across northern Australia

Summary This report is the final of three reports and part of a two year project entitled Establishing water markets in northern Australia: a study to assess feasibility and consequences of market-based mechanisms of water delivery undertaken through the Australian National University’s Crawford School of Economics and Government. The Tropical Rivers and Coastal Knowledge (TRaCK) hub funded this project under Theme 6.1 “Sustainable Enterprises”. This research is also being done in collaboration with the North Australian Indigenous Land and Sea Management Alliance (NAILSMA). This third report provides an assessment of the potential costs and benefits of water markets across northern Australia with consideration of efficiency, equity and effectiveness criteria. The region under focus is the tropical belt of northern Australia which comprises the jurisdictions of Queensland, Northern Territory and Western Australia, (with attention on the Gulf, Timor and North East drainage divisions). Water trading is at a formative stage in northern Australia, with few (if any) recorded trades at the time of writing. Markets have been effective in southern Australia in providing flexibility to irrigators and supporting productivity through reallocation during drought. Markets under the National Water Initiative (NWI) are seen as an effective tool to optimise economic, social and ecological values associated with water. There are preconditions for a water market to be effective. Important is for there to be low to medium transactions costs. A transaction cost is the costs involved in executing a trade that are above and beyond the actual price paid for the water (they can include travel time, fees, title searches and other costs). The potential for high and increased transactions costs is significant across northern Australia. A key reason for this is uncertainty over Indigenous rights and interests to water, which if not resolved could impose constraints on water markets. This suggests that there must be greater certainty around Indigenous involvement in water markets. There are environmental costs associated with water markets. Experience in the Murray Darling Basin highlights there have been environmental impacts from water trading (though it is acknowledged that it is difficult to separate these impacts from the effects of drought and increased development). These impacts include increased salinity, and effects from the physical change in the timing and location of water use. One outcome of the development of water markets in southern Australia was the activation of sleeper and dozer entitlements- this meant more water was being used. Across northern Australia most rivers are not perennial, there is a reliance on groundwater and the expansion of storages is constrained There is the potential in northern Australia for environmental impacts from trade. These impacts include: increased salinity in-stream; water logging from more on-farm use; saltwater intrusion because of reduced flows; and during the dry increased nutrient loads could threaten the health of rivers. These issues can be addressed through management efforts. For example, in the Ord, water managers have increased dry season flows to disperse nutrients from agricultural activity. Efficiency is key aim of water markets. Economic efficiency arises when all the gains from trade have been exhausted and the costs imposed on others from water use have been fully accounted for in the decision making of water users. Any assessment of efficiency of water markets, however, requires more than simply a comparison of quantified private costs and benefits. This is because, typically, water markets have been implemented only for consumptive uses of water and the effects of water use on downstream users and the environment have typically been ignored or not fully considered. Any assessment of efficiency in the north must seek to integrate customary or ecological values, but it is acknowledged that this is complex as these values are intangible and difficult to quantify. Issues of equity are important in the transition to water access rights. In the north, equity should be given increased prominence because there is a significant Indigenous population in the region who are subject to chronic socioeconomic disadvantage. In allocating property rights to water there will need to be consideration of Indigenous Australians. Including Indigenous people in water markets through a structure that is appropriate will offer challenges to policy makers. Quantifying the amounts of water to be provided for consumptive purposes and non consumptive purposes (such as spiritual values) is also complex. There will need to be considerable Indigenous community consultation to ensure principles of equity are upheld. Water planning should provide important parameters to ensure Indigenous customary aspirations are not threatened by water trading. There will need to be consideration of surface and groundwater connectivity, and the effect of extraction on groundwater dependent ecosystems, which are of high importance to Indigenous people in the region. These parameters should be reflected in trading rules. Ongoing Indigenous collaboration and engagement in water allocation is essential- such efforts should be underpinned by capacity development. The concept of water markets can be politically contentious. In our first work for this project, community opposition was identified as a key barrier to the development of water markets by research participants. However, it is important to emphasise that a slender majority of all respondents in our second study agreed that water markets would be useful in their region. Indigenous respondents were more likely to agree that water markets would be useful. But respondents imposed conditions on how markets should operate. Respondents placed a high value on environmental and cultural assets, and Indigenous involvement in water markets was important. It was suggested by participants that there is required more community awareness on water reform and on water markets. There is little awareness that markets can support the optimisation of environmental, economic and social values to water (which is an overarching objective of the NWI). Non market approaches may be more appropriate in some areas than markets. Markets are efficient in optimising the allocation of water where scarcity and competition exist. Markets may by themselves be incapable of achieving ecological or equity outcomes. A blend of approaches to allocating water may be more suitable. There is a growing trend in water management for increased collaboration and stakeholder driven governance approaches. Central to these approaches are inclusivity and capacity building. Collaborative efforts provide a structure for stakeholders to develop rules over allocation and management of water, as well rules for enforcement and compliance. Efforts will be required to include Indigenous interests in collaborative approaches. A key barrier in the experience of collaborative approaches in New Zealand is uncertainty around customary rights to water. Uncertainty over customary rights exists across northern Australia, and has the potential to reduce collaboration between stakeholders and constrain water planning and management efforts. Resolving Indigenous rights to water through creation of Indigenous property rights may address this uncertainty.