Download Water and Australia`s future economic growth

Water and Australia’s future economic
growth
Rowan Roberts, Nicole Mitchell and Justin Douglas1
Water is critical not only to life, but also to economic growth and environmental outcomes. This
article examines how water in Australia is currently allocated and used, and explores some of
the consequences of current water management arrangements. Concluding that the current
allocation of water gives rise to both technical and allocative inefficiencies, the article examines
the importance of water markets. Water markets can deliver numerous benefits to individuals,
communities and the economy more broadly, as well as providing a mechanism for governments
to address environmental concerns. Despite an ongoing water reform agenda, Australia does
not have well-functioning and complete water markets. The National Water Initiative (NWI)
provides a framework for the continued development of water markets in Australia but the
implementation of the NWI will require ongoing commitment from governments and other
participants in the water market.
1
The authors are from Industry, Environment and Defence Division, the Australian Treasury.
This article has benefited from comments and suggestions provided by Frank Di Giorgio,
David Ellis, David Gruen, Maryanne Mrakovcic and Malcolm Thompson. The views in this
article are those of the authors and not necessarily those of the Australian Treasury.
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Water and Australia’s future economic growth
Introduction
Water is a valuable resource and is essential to sustaining the wellbeing of Australians.
The availability of water has influenced the pattern of economic development in
Australia. All of Australia’s major cities and most of its towns are located where water
can be extracted for human consumption, as well as for productive uses. Water is an
important input to almost every industry. Throughout Australia’s history, the link
between water availability and agricultural production has been repeatedly
demonstrated. All stages of mining production rely on water, either for exploratory
drilling, production or site rehabilitation, as well as during downstream processing.
Many manufacturing processes and service industries also use water as an essential
input.
Water is clearly essential for Australia’s economic prosperity. However, Australia is
characterised by extreme climatic variability and has the lowest average rainfall of any
inhabited continent (Bureau of Meteorology 2006). Moreover, the sustainable
extraction level for many of Australia’s water resources is being approached or
exceeded.2 The consequences of this are already evident in reduced water quality,
salinity and threatened biodiversity. These problems are primarily environmental, but
they can also have adverse consequences for economic production.
The emergence of these problems has raised concerns that the availability of water
could place a constraint on economic growth. Some would argue that these constraints
are already emerging. There is a related concern amongst some in the community that
because of the scarcity of water, continued economic growth can only be achieved at
the expense of the environment.
However, the finite nature of our water supplies does not have to imply reduced
economic growth or ongoing environmental degradation. Rather, the fact that water
resources are scarce means that water, like other limited inputs to economic
production, needs to be used efficiently and allocated to its highest value uses in order
to improve both economic and environmental outcomes. This paper starts by
examining the current allocation of water in Australia and concludes that it is unlikely
that water is currently used or allocated efficiently. This means that there is scope to
improve the allocation of water in such a way as to achieve economic growth and
ensure water for the environment.
2
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The sustainable level of extraction may be thought of as the level of extraction that avoids
damaging the environment in ways that would constrain future economic, environmental
and amenity uses. In Australia, national water quality guidelines established by the
Australian and New Zealand Environment and Conservation Council are supplemented by
state and regional guidelines established to meet specific water quality management
objectives (NLWRA 2002).
Water and Australia’s future economic growth
In general, markets are an efficient mechanism for ensuring that scarce resources are
efficiently allocated. The next section of this paper discusses the potential benefits of
expanding the scope and role of water markets in Australia. These include improving
the allocation of water across industries, improving the efficiency with which it is used
within industries, providing incentives for investment in water infrastructure and
providing a mechanism for the provision of environmental water by governments.
The Council of Australian Governments (COAG) has agreed on a number of reforms
aimed at expanding the Australian water market, including the National Water
Initiative (NWI) agreed in 2004. The NWI aims to increase water trade by seeking to
define water property rights more clearly and remove institutional and regulatory
barriers to trade in water. The paper examines the effectiveness of the current
Australian water market and outlines the progress of these reforms.
The paper finishes by discussing some of the key risks and challenges that will need to
be overcome if the benefits from expanding water markets are to be realised.
How is water currently allocated and used?
There are two separate issues in relation to how water is allocated and used. The first is
how much water is extracted from a water system and whether this is sustainable. The
second issue is how productively the extracted water is used.
Overallocation (how much water is used)
Historically, water has been allocated on an ad hoc basis with little regard to its
scarcity (see Box 1 for an overview of the history of water allocations). As a result,
many water systems are over-allocated, in that the total volume of water that can be
extracted by entitlement holders exceeds the sustainable level of extraction for that
system. For example, it is estimated that in New South Wales, licences and water
allocations equal 120 per cent of total available water resources (Melville and
Broughton 2004).
Many water users have historically held licences providing for higher water extraction
amounts than they have actually used. For as long as the actual amount extracted was
below the sustainable level of extraction, this was not a problem. However, as
irrigators have increased production and used more of their licences, over-allocation
has led to overuse, in that the total volume of water physically extracted from the
system exceeds the sustainable level of extraction. Also contributing to the emergence
of overuse is the fact that as individual irrigators adopt practices such as drip irrigation
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Water and Australia’s future economic growth
to increase the efficiency of their water use, less excess water re-enters the water
system.3
The over-allocation and subsequent overuse of river systems has left many of
Australia's water resources under significant pressure. Of Australia's 325 surface water
basins, 84 are currently overused or close to it. These systems account for about
55 per cent of total water use in Australia. The areas under the most pressure from
overuse are predominantly located in the eastern States, with the Murray Darling
Basin showing the greatest signs of pressure (NLWRA 2002).
Overuse can have significant environmental and economic consequences. Overuse
results in unhealthy rivers and a loss of biodiversity through inadequate
environmental flows. For example, the Barmah-Millewa Forest in New South Wales
and Victoria is home to numerous threatened plant and animal species. These include
river red gums, which depend on regular flooding from the Murray River. Decreased
flooding in recent years has led to declining forest health and decreased
waterbird-breeding and fish-spawning (Living Murray Initiative 2005).
Overuse also results in poor water quality, with problems such as algal blooms and
increased water salinity. Degraded water quality can impose significant costs on
agricultural users. For example, high salinity levels reduce irrigation crop yields and
can cause loss of arable land (MDBMC 1987). The impacts of salinity illustrate that
over-allocation can have long-term consequences for the productivity of land and
water and pose a threat to potential economic growth.
Additional water to support economic growth and/or to address environmental
problems cannot be ‘created’ easily or at low cost.4 The BCA (2005) notes that
over-allocation of water and resulting surface and groundwater stress is sometimes
used to argue against higher population or higher economic growth. However, despite
significant over-allocation in some regions, it would be wrong to assume that strong
economic growth and good environmental outcomes are mutually exclusive. Poor
environmental outcomes do not indicate economic growth is not compatible with
environmentally sustainable water use. Rather, they indicate problems with the way
that water is currently allocated and used.
3
4
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Less efficient water use practices can involve significant amounts of water seeping or
running back into rivers so that it can be ‘re-used’ downstream.
Options such as recycling and desalination are feasible in some instances but are typically
costly and can have adverse environmental impacts.
Water and Australia’s future economic growth
Box 1: An overview of water rights
In the Australian colonies, water law was based on English common law. The common
law did not define the water itself as property — rights to water were attached to land
and could not be bought or sold separately to the land.
The common law had two different schemes to allow access to water. Firstly, for
surface water in a river, ‘riparian’ rights were given to those who occupied land
immediately next to rivers such that riparian owners could use the water for ordinary
and domestic purposes provided they did not substantially affect the quality of the
water in the river. If water was taken for other purposes, such as manufacturing or
irrigation, it had to be returned to the system largely unchanged in quantity and
quality.5 For all other categories of surface or ground water, the owner of the land had
an unrestricted right of access to the water.
However, in the 1870s and 1880s, it was recognised that common law principles would
not provide secure water supplies and the colonies began passing legislation to give
the right to use and control the water in all rivers and lakes to the Crown.
At Federation, with the exception of section 100, the Constitution did not address the
issue of water resources and the power to control water resources thus remained with
the States. The Commonwealth’s only powers over water resources came from its
power to legislate for defence, trade and commerce, and external matters.
Water allocation arrangements throughout the 20th century were complicated,
involving statutory riparian rights for certain users, water rights in irrigation schemes,
and licences and permits. The exact details and tenure of these arrangements differed
across States, but in general terms these allocations provided a right to take and use
water, rather than a property right to the water itself. While water agencies had the
power to change or cancel licences, this did not occur and in most circumstances water
licences came to be viewed by holders as rights in perpetuity.
By the 1970s it became evident that some water systems were over-allocated, in that
the total volume of water that could be extracted by entitlement holders exceeded the
environmentally sustainable level of extraction for that system. A number of reforms
followed in most States, including moving to volumetric allocations which varied with
available water each year, the powers to suspend allocations during water shortages,
embargoes, new water legislation and the beginning of water trading.
5
However the riparian doctrine relied on downstream users challenging upstream use and if
the upstream use was not challenged within a certain period of time, it acquired the status of
a ‘prescriptive’ right. As a result, many people took large amounts of river water, because
their use was not disputed in time.
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Water and Australia’s future economic growth
Box 1: An overview of water rights (continued)
However these initial reforms did not meet the demands for the security of water for
consumption or the growing need for water to be allocated to the environment to
restore water quality and repair ecosystem damage. As a result, further reforms were
instigated through the Premiers’ Conference in 1994, focusing, among other things, on
institutional reform including the creation of secure and clearly defined water
entitlements, the separation of water entitlements from land title and the trading of
water allocations. By 2002, COAG recognised that some impediments remained to
achieving the 1994 reform objectives and it was in this context that the National Water
Initiative was initiated and agreed by States and Territories and the Australian
Government in 2004.
(Sources: Tan, PL 2004; Melville and Broughton 2004)
How water is used
The vast majority of water in Australia is used in agricultural production. As can be
seen from Chart 1, two-thirds of the water consumed in the Australian economy is
used in the agricultural sector. The recent drought illustrated the dependence of this
sector on water availability — in 2002-03, farm output fell by $3 billion from 2001-2002
levels, leading to a reduction in GDP of around 1 per cent and causing difficulties for
farm families and communities (Lu and Hedley 2004).
Chart 1: Water consumption
Mining
2%
Households
9%
Water supply,
sewage and
drainage services
7%
Agriculture
67%
Manufacturing
4%
Electricity and
gas supply
7%
Remaining
industries
4%
Urban water use accounts for less than one-third of all water use in Australia. Despite
declining per capita urban water use, as of early 2005, water utilities in almost every
urban area had imposed domestic water restrictions in response to increasing pressure
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Water and Australia’s future economic growth
on urban water resources.6 These urban water restrictions place significant economic
costs on households and urban industry.7 For example, the Water Services Association
of Australia (WSAA) estimates that since 2002, water restrictions have cost the ACT
$71 million (WSAA 2005).8 In other cities, with much larger populations and a higher
proportion of water-dependent industries, the economic cost of water restrictions is
likely to be much higher.
Clearly water availability impacts on the economy. However, it is not only total water
availability that matters to economic growth, but also how the available water is
distributed and the efficiency with which it is used.
Water productivity
Water productivity relates to how much water is used to produce a given output,
which can be measured as production (measured in terms of economic value added)
per megalitre of water used.9 Water productivity is influenced by the way in which
water is used to produce an output (technical efficiency), and how water is allocated
between and within industries (allocative efficiency).
Technical efficiency
For individual businesses, water productivity can be influenced by factors such as
wastage, evaporation, leakage and the production technologies used. For example, a
farm business that grows a crop using drip irrigation is likely to have greater water
productivity than one that grows the same crop using flood irrigation. This type of
productivity is sometimes referred to as technical efficiency since it concerns the
amount of the desired output (economic value added) that can be produced using a
given quantity of input (in this case water).
Due to technical inefficiency, a significant amount of irrigation water is lost through
seepage or evaporation before it is ever put to use. On average, only 77 per cent of
water extracted reaches the final user. In some circumstances, this proportion can be as
low as 41 per cent. The variation in the percentage delivered reflects delivery
6
7
8
9
Per capita urban water consumption has fallen over the past 20 years. For example, Sydney
has been able to accommodate an additional 700,000 inhabitants without increasing total
water use (WSAA 2005). Urban industrial water use is not large and is falling as industries
become more water efficient. (NLWRA 2002).
This economic cost includes the welfare cost of reduced access to water.
It is unclear whether this estimate has been made on the same basis as the definition of
economic cost outlined previously, however it is indicative of the scale of the costs imposed
by water restrictions.
Water productivity can be measured either for an individual user, for a group of users, or for
the economy as a whole. When dealing with multiple users, water productivity is also
referred to as the average product of water. The related concept of the marginal product of
water is discussed later in this paper.
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Water and Australia’s future economic growth
techniques ranging from open channels to fully piped reticulation systems
(NLWRA 2002). Once delivered, storage evaporation from dams and other storages
can result in further significant losses (BCA 2005).
This wastage could be reduced through piping, channel lining and coverage, or the
introduction of drip irrigation (Pratt Water 2004). However, there is currently little
incentive to invest in water-saving infrastructure because the opportunity cost of
wastage is not recognised due to the restricted and limited nature of the water market.
Put another way, the ability to sell ‘unused’ water or excess water from increased
technical efficiency cannot be realised.
Allocative efficiency
For the economy as a whole, it is also possible to identify a second type of water
efficiency, which relates to how well water is allocated across different industries and
uses. Allocative efficiency is achieved when it is not possible to increase the value
added for the economy as a whole by transferring water from one activity to another.
Conversely, if water is not being used in a manner that is allocatively efficient, then it
is possible to improve economic outcomes by transferring water to uses where it can
make a relatively larger contribution to GDP.
At an aggregate level, water productivity is also referred to as the average product of
water. This average product of water can vary significantly across industries, as well as
within industries. As can be seen in Charts 2 and 3 below, the differences in average
product between industries and even between commodities in the irrigated agriculture
sector are dramatic. These differences reflect a broad range of factors, including
significantly different inputs of capital and labour, which can be substantial. The rice
and cotton industries, which use over half of all agricultural water, have a much lower
average product than horticulture. In fact 12 per cent of irrigation water produces
50 per cent of the value of total agricultural production (ABS 2004).
For allocative efficiency to exist, the marginal product of water should, subject to
transport, treatment and transactions costs, be equal across all of its different uses.10
Data on the marginal product of water are not readily available and the averages
shown in Charts 2 and 3 do not show the marginal product of water in each industry.11
10 The marginal product of water is how much additional economic production an industry
would generate (measured in terms of its value added) were it to receive an additional unit
of water, but holding all other inputs constant. In comparing the marginal product,
transport, treatment and transactions costs should be taken into account. These costs can be
significant and sometimes prohibitive, as in practice water used in one area may not be able
to be transported or purified to meet the needs of another area or industry.
11 Douglas, Dwyer and Peterson (2004) provide a more detailed discussion of this distinction
between the marginal and the average product of water.
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Water and Australia’s future economic growth
Nevertheless, the extent of the differences between the average product of water across
industries is so large as to suggest that the marginal product of water is unlikely to be
equal across its various uses. It seems reasonable to conclude that a reallocation of
water between industries could improve the allocative efficiency of water use across
Australia and thereby yield substantial benefits to the economy.
Chart 2: Gross value added per megalitre
of water used in selected industries
100,000
$GVA/ML
$GVA/ML
100,000
80,000
80,000
60,000
60,000
40,000
40,000
20,000
20,000
Agriculture
Water supply
Electricity and
gas supply
Forestry and
Fishing
Manufacturing
0
Mining
0
Source: ABS, 2004.
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Water and Australia’s future economic growth
Chart 3: Gross value added per megalitre
of water used in irrigated agricultural production12
3,500
GVA/ML
GVA/ML
3,500
3,000
3,000
2,500
2,500
2,000
2,000
1,500
1,500
1,000
1,000
500
500
Rice
Sugar
Other
Livestock
Cotton
Dairy
Grapes
Fruit
0
Vegetables
0
Source: ABS, 2004.
Notably, the efficient allocation of water is constantly changing. Movements in world
commodity prices, exchange rates, fuel and transport costs, labour costs and weather
can all influence the economic value added in a particular industry and hence the
marginal product of water in that industry. Thus it is important that mechanisms exist
to ensure that water can move to its highest value uses.
In this context, a prerequisite for improving wellbeing is ensuring that water resources
can move easily to their most productive uses. Efficiently functioning water markets
are the key to this objective.
The benefits of water markets
There is evidence to suggest that water in Australia is not currently used in a way that
is either technically or allocatively efficient and that the current allocation of
Australia’s water resources poses both economic and environmental threats. Markets
can provide incentives that address these inefficiencies and a mechanism which
enables both sustained economic growth and improved environmental outcomes.
By making the value of water explicit, water markets provide an incentive to increase
the technical efficiency with which water is used, even if very little water ends up
being traded. This is because water users gain the opportunity to sell any water that
12 In some cases, these data may underestimate the GVA per megalitre of water used due to
such factors as the planting of a second crop on flood-irrigated land.
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Water and Australia’s future economic growth
they do not use, either by selling a share of their entitlement permanently or by leasing
out their unused annual allocations.
This price signal provides incentives for improvements in water infrastructure that
reduce wastage, leakage and evaporation and encourage water to be stored more
cost-effectively, potentially increasing the amount of water that reaches end-users. The
Bureau of Transport and Regional Economics found that water trade is one of the key
factors influencing investment in irrigated agriculture infrastructure in the lower
Murray-Darling Basin (BTRE 2003).
Incentives to invest in improved water infrastructure will exist wherever the value of
the water that can be saved is greater than the cost of the investment. In the past,
investment in on-farm water infrastructure has been financed by individual water
users and off-farm infrastructure has often relied on government involvement.
However, water markets will provide new opportunities for private sector investment
in water infrastructure. Saved water could be sold or leased to finance private
investment, or investors could share in water savings in return for their investment. It
is likely that these incentives for private sector investment in water infrastructure will
become increasingly important in future as factors such as demographic change put
increasing pressure on government budgets (Treasury 2004).
Water markets will improve the allocative efficiency of water use. Both buyers and
sellers stand to benefit from water trade. Where water is being used to generate only
low levels of economic return, water markets will provide users with the option of
selling their water. For sellers, the revenue from the sale of water can supplement farm
income and provide capital for other on- or off-farm activities, injecting additional
income into regional communities. At the same time, farms and businesses that can use
water to generate high rates of economic return, but are currently limited by their
inability to obtain more water, will benefit by being able to buy water to increase
production. Well-designed water markets will allow buyers and sellers to trade either
permanent entitlements or annual allocations depending upon their individual
preferences and needs.
Beyond these initial benefits to buyers and sellers, trade generates dynamic benefits for
the broader economy because water can be put to different value uses by different
users. Economic benefits accrue because the price signals created by markets provide
incentives for water to flow to its highest value uses, increasing wealth and generating
economic activity. The ability to sell water can facilitate exit from industries that are
declining or undergoing consolidation, which may otherwise be difficult. Water
purchases can facilitate the growth of viable industries, augmenting regional economic
activity and generating increased employment. Further dynamic benefits could be
realised as price signals provide water users an incentive to invest in the development
of new water-saving technologies.
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Water and Australia’s future economic growth
Water markets can also lessen the effect of reductions in water availability, reducing
the individual and aggregate economic impacts of climate variability. For example,
there is evidence to suggest that inter-regional trade would significantly mitigate the
economic impact of reduced water supply in the southern Murray-Darling Basin
(Peterson et al 2004). This will be important if, as is predicted by some, climate change
leads to a reduction in rainfall over the south-east of Australia (Pittock 2003). Similar
analysis indicates that trade between urban centres and major irrigation districts
reduces economic losses from reduced water supply (Dwyer et al 2005).
Another means by which water markets can improve the management of climate
variability is through encouraging the development of innovative financial products.
The SFE State Water Indexes that are currently being developed in a partnership
between the New South Wales State Water Corporation and the Sydney Futures
Exchange are an example of such innovation.13 As water markets develop, it is likely
that other products such as forward contracts or futures and other derivatives will also
develop. Such products should allow agricultural and other businesses to manage their
drought risk better and thereby enhance their long-term economic viability.
There may be some concern that communities dependent on water-intensive industries
may suffer where water trading leads to structural changes in the local economy.
However, a high rate of structural change does not necessarily result in a low rate of
income or employment growth, particularly if relatively inefficient businesses or
practices are replaced by more efficient ones (CSIRO 2005). The CSIRO has found that
on a community level, the effects of adjustment are smaller than might be expected, as
opportunities often emerge to replace agricultural income with income derived from
providing other services. On an individual farm level, those who adapt quickly to the
opportunities provided by water markets can benefit significantly.
As noted above, as well as ensuring that water-dependent industries can continue to
grow, there is also a need to restore some water to the environment. Water markets can
facilitate this by allowing governments or environmental organisations to purchase
water for environmental purposes. This mechanism allows governments to respond to
changing community demands in relation to environmental protection, and places an
explicit value on the cost of its provision. Notably, as indicated earlier, these improved
environmental outcomes do not need to come at the cost of economic growth. Indeed,
with allocative and technical efficiency improvements occurring within well-designed
water markets, it should be possible to raise economic growth and improve
environmental outcomes.
13 See http://www.statewater.com.au/indexes/index.asp for more information.
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Water and Australia’s future economic growth
To illustrate the potential for water markets to make both the environment and the
economy better off, consider 10 ML of water that is currently being used to produce
$100 of economic value added per ML (or $1,000 of economic value added in total). If
8 ML of this water were to be sold to an alternative user who could produce $200 of
value added per ML, the water would now be generating $1,600 of value added
(8 ML × $200 = $1600). The remaining 2 ML could then be purchased for or given to
the environment so that the economy would be $600 better off and the environment
would receive an additional 2 ML.
The Australian water market
The Productivity Commission (2005) found that water reforms since the 1994 Premiers’
Conference agreement have ‘encouraged more efficient use of this scarce resource and
generally improved environmental outcomes’. However, they also note that ‘there is
still much more to do to achieve efficient and sustainable water use across Australia’.
The National Water Commission has also noted the importance of ongoing water
reform, in particular as it relates to water trading (NWC 2005). Despite the many
benefits of water trade, the creation of effective water markets has not proved an easy
task.
Currently, there is not an effective national water market. In some instances, there are
not even fully functioning state water markets. Instead, the majority of permanent
trade in water occurs within catchments and even where this can occur, it is often not
substantial. For example, trade in permanent entitlements in the southern Murray
Darling Basin is, on average, only 1-2 per cent of total allocations (Peterson et al 2004)
and water still cannot be traded interstate beyond a limited pilot area. Moreover, water
is rarely traded between competing uses, but is more likely to be traded between
producers of similar commodities.
Underlying the limited and fragmented nature of the water market is the complexity of
current water property rights. As outlined in Box 1, the legacy of historical water
allocation policy is a complex system of licences, permits and irrigation rights that vary
between States and even between regions within States. These mechanisms imply a
right to access water, which although generally technically of limited duration, is made
more ambiguous as a result of custom and past practice. These factors contribute to
confusion and misunderstanding about water property rights.
The expansion of the Australian water market requires property rights to be clearly
defined in order for transparent and effective water trading-systems to be
implemented. Providing clarity over the definition of property rights is one of the
primary objectives of the National Water Initiative (NWI), which was agreed in
June 2004 by the Australian Government and most States, with the aim of developing
65
Water and Australia’s future economic growth
‘a nationally-compatible market, regulatory and planning based system of managing
surface and ground water resources for rural and urban use that optimises economic,
social and environmental outcomes’ (COAG 2004; NWI clause 23).
In addition to establishing a clearly defined property rights framework for water,
under the NWI, States have agreed to the expansion of water markets to allow greater
permanent trade in water; more transparent and comprehensive water planning; and
the allocation of water to meet specific environmental outcomes.
However, despite the benchmarks set by the NWI, it is likely that expanding the water
market in Australia will not be straightforward. While States have agreed under the
NWI to the expansion of water markets for greater permanent trade in water, progress
has been constrained by a number of practical challenges.
As water management occurs on a state level, and States have different water
entitlement regimes, institutional differences between States inhibit water trade. For
example, water entitlements in different States have different risk attributes, which
determine the average quantity that the entitlement holder receives and the variability
around that average.14 This difference between products has to be accounted for before
interstate trade can take place. The need to convert one product to another across state
boundaries could act to impede the development of a national water market.
Australia’s experience with trying to establish and implement a uniform rail gauge,
which took more than a century after Federation, highlights the difficulties that can be
involved in achieving national consistency. It will be critical for the Australian
economy and the environment that the differences of approach inherent to each of the
States’ existing water management regimes are resolved expeditiously.
Conclusion
Australia’s current system of water allocation results in environmental damage and
lower economic growth than would otherwise be the case. The environmental damage
caused by the current allocation of water threatens not only habitat and biodiversity
14 For example, the majority of water entitlements in New South Wales are ‘general security’,
while Victorian entitlements are largely ‘high security’. Water availability to general security
licence holders is announced as a proportion of entitlement, commonly referred to as an
‘allocation’. The announced allocation depends upon the resources currently available in
storage and those resources expected to be available during the season. An initial allocation
made at the start of the season is updated continuously to reflect rainfall in the catchment
(Crean, Jayasuriya and Jones, 2001). High-security water entitlements generally have all of
their allocated water delivered each year and are not subject to announced allocations.
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Water and Australia’s future economic growth
but also rural output through degraded land and water quality. Even where systems
are not over-allocated, problems arise as a result of the misallocation of water between
industries and regions. This results in excessive water wastage and disincentives to
invest in water-saving infrastructure, and limits potentially economically beneficial
changes to industry composition.
Water markets could improve economic outcomes through providing price signals that
allow water to flow to its highest value use and encourage investment in water-saving
infrastructure. A more efficient allocation of water could potentially increase the
amount of water available and the operation of the market would enable the purchase
of the desired amount of environmental water. Water trade can also lessen the
aggregate and individual impacts of climate variability.
The NWI sets benchmarks for the expansion of nationally compatible water markets
and an increase in the permanent trade in water, which have the potential to deliver
significant economic and environmental benefits. However, challenges remain in
implementing these objectives and a significant commitment is required from all
governments and stakeholders. This commitment will be critical to achieving an
efficient allocation of water in Australia and obtaining the subsequent economic and
environmental benefits.
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Water and Australia’s future economic growth
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