WATER ALLOWANCE TRADING

Changing flow conditions

Water allowance trading is primarily aimed at economic benefits, with environmental benefits a secondary consideration. In fact, water allowance trading can have an adverse impact on the environment.

Trading of water rights can alter timing of flows in streams at dif­ferent locations along the river. This can affect ecosystems and diverters of water lower in the river. If water is traded across wide geographical distances, trading could affect the route the water takes. It could also lead to different uses with different impacts on ecosystems and communities. (ENRC 2001: ch 7)

However temporary trades in water, which make up the vast majority of water trading, generally do not require any sort of environmental clear­ance (Fullerton 2001: 164).

The trading of water allowances also means that, in some places, additional areas of land are irrigated, which can have environmental consequences. In Australia, for example, it can lead to increased salinity of the soil because the extra water raises the level of the under­ground watertable, which is saline. Most of the water traded in a pilot interstate water market has gone to South Australia from New South Wales and Victoria, causing salinity problems in South Australia (Wahlquist 2002).

The National Water Initiative (NWC 2005) seeks to expand water markets across 'the widest possible geographic scope' in Australia and not to restrict it to particular catchment areas. This can be done by piping water from one catchment to another. However, this ignores the fact that 'some in-stream uses [such as fishing, boating and swimming] are location-specific and depend on the volume of flow in the river at that location'.

Outcomes

Despite having a cap and trade system for water allocation since 1997, Australia's Murray River is dying. More than 75 per cent of the river system's water is still diverted before the river reaches the sea, which has caused serious environmental problems, especially at the mouth of the river, where there has seldom been any river flow since 2001. As a result the river mouth has become hypersaline because of the ingress of sea­water. Over 300 000 red gums which had survived on the lower Murray for 300 years, in the face of natural droughts, have died as a result of this human-induced perennial drought. The cycles of floods so essential to river health no longer occur. Additionally, the 'internationally recognised Coorong wetlands at the Murray mouth may not survive' (Fullerton 2003; Hodge 2005c).

A parliamentary inquiry in Victoria 'was made aware of failures of water markets, as presently operating, to provide water for recreational and social purposes as well as commercial fishing'. These water uses are common purposes, which don't actually consume the water, but require it to be there rather than withdrawn by those who have licences. Water quantity also affects water quality for downstream water users. The inquiry concluded that 'Market trading, by itself, is inadequate to meet environmental needs' (ENRC 2001: ch 7).

Water allowance trading often involves the trade of water licenses that had previously not been used or only partly used, that is, sleeper (or 'dozer') licences or rights. In the first few years of trading on the Murray River most of the trades were for such rights. An audit in 1995 found that 'only 63% of allocated water was being fully used', so that trading actu­ally resulted in more use of water rather than less because those who bought sleeper rights used them.

Profit vs conservation

In any water trading system there is an ongoing conflict between the needs of irrigators and the needs of the environment. Irrigators demand certainty about the amount of water they will have so that they can plan ahead and safely invest in irrigation infrastructure. But rainfall varies, and any certainty provided to irrigators creates problems for ecosystems, particularly in times of drought when the surplus water is not available.

The economic goals of a functioning water market also seem to con­flict with the goals of a healthy ecosystem. An overallocated river system threatens the environment, but if there are not enough spare water enti­tlements there will be no trade. This occurred in Queensland's Mareeba- Dimbulah Irrigation Area where water allocations varied according to rainfall, and allocation holders were unwilling to trade because they might need their spare water allocations in times of drought, or for alter­native crops (Robinson amp; Ryan 2002: 24).

In order to protect the environment governments have to vary enti­tlements according to environmental requirements and as new informa­tion comes to hand or community attitudes to the environment change. This is called 'clawback'. Water allowances are sometimes based on a proportional share of available water so that they decrease in times of low water flow and regulators can take account of environmental needs when deciding the total amount that can be withdrawn. Farmers gener­ally oppose such systems because they cannot know how much water will be available in future. Even where entitlements are proportional, governments are wary of reducing the total water allocation too much because of irrigator opposition (Ecos 2003: 24; ENRC 2001: ch7).

In the case of the Murray River, for example, the logical thing to do is to reduce entitlements to a level that is compatible with a healthy river ecosystem. However, this is politically undesirable because of the strong opposition of irrigators. In fact, Australian governments go out of their way to please irrigators. In 2003 the federal government moved, as part of its National Water Initiative, to increase the security of irrigators' water entitlements (Krijnen 2004: 6). In 2005 the NSW government was accused of 'plundering water set aside to preserve one of the Murray River's most important wetland forests to top up irrigators' allowances' (Hodge 2005a).

Economists argue that any reduction of entitlements 'undermines the market process and prevents permanent water entitlements moving to their highest-value use' (Crase et al. 2000: 314). Government clawback is not only unpopular with commercial water users but can lead to lawsuits opposing the measures and to claims for compensation from those whose water allocations are thereby reduced. Such compensation or buyback could easily make water markets the most expensive way of meeting environmental objectives, particularly to the taxpayer, rather than the most cost effective.

Nevertheless, many people think that governments should buy water to ensure that ecosystems are protected. Irrigators, in particular, would prefer those caring for the environment to have to buy water on the market when it was needed, presumably so they would have a chance to outbid them or otherwise reap enough from sales of their own water entitlements to com­pensate for not growing crops (Crase et al. 2000; NSW Farmers 2004) - but most people object to paying for a resource that the public already owns.

In Victoria, the environment is not given a priority right to water under the Water Act, 1989, which means that the government must nego­tiate reductions with stakeholders, invest in water-saving measures, pur­chase water on the market or charge water taxes on trades, in order to obtain more water for the environment.

Perpetuating bad practices

While water trading seeks to ensure that the highest value crops are grown, there is no guarantee that those crops will be the most environ­mentally beneficial. They may require more chemicals to grow than lower-value crops, and therefore be worse for the environment in the long run. Nor does water trading ensure that less water-dependent crops are grown. There has been a shift in Australia from wheat growing to cotton growing because cotton is a more profitable crop. This has serious ramifications for the environment, since cotton is much more dependent on water and agricultural chemicals than wheat. Moreover, the concen­tration of water usage in particular areas where cotton is grown com­pletely disrupts the natural river flows (Fullerton 2001: 160).

As water prices have increased, farmers have built dams on their property to capture and store the rain: 'In Victoria alone, there are said to be about 90,000 dams, and for every meg [ML] held in the dam, between one and three are lost to the system in evaporation'. This means that less water is available to rivers despite caps on total water diversions. In New South Wales the government attempted to deal with this problem by allowing farmers to keep only 10 per cent of the rain that fell on their land for free, leading to claims that the government was privatising the rain (Fullerton 2001: 155).

The other problem is that when farmers have to pay more for their water they do not necessarily use less. Rather, they work out ways to get their water to cover greater areas of crops, that is, expanding the area of irrigation for the same amount of water. What is more, about half the water used with inefficient methods like flood irrigation returns to the river through groundwater and surface run-off.

Monitoring and enforcement

Lack of monitoring is also a problem with water allowance markets. In Australia, a national water market is going ahead 'without accurate meters or accounting systems', so that it is impossible for authorities to ensure that water users are complying with their licences (not cheating). The authorities spent many months working out water property rights but left the issue of measuring and accounting to the last minute (Hodge 2005b).

Another problem is water poaching, which has become more of a temptation as the price of water has increased. Given the choice between taking more water than is allowed, or risking the failure of a crop and the possibility of losing the farm, many are going to take more water (Fullerton 2001: 172). 'Calls are now being made for the creation of a water police force to monitor water extractions', but this is being opposed by farmers (Krijnen 2004: 4; NSW Farmers 2004).