C21 water policy opportunities for NZ

1
C21 water policy opportunities for NZ
Note these slides formed the basis of a full
morning seminar/workshop with water managers and
water users in Wellington on 9th February 2007
and then again in Christchurch on 13th February
2007. For a more complete understanding of this
material it is recommended that readers download
the following two other documents located on our
at the links below http//www.myoung.net.au/water/
publications/cwrj300165.pdf http//www.myoung.net.
au/water/publications/Sharing_water_060221p.pdf

• Prof. Mike Young
• Research Chair, Water Economics
  ManagementSchool of Earth and Environmental
  SciencesThe University of Adelaide
• Friday 9th February 2007

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River Murray Inflow
5400 GL/yr
6300 GL/yr
Source MDBC 2006 Craik 2005
3
High level water reform agenda
2007
Howard Water 10 billion Plan for Water
Security
4
Major Australian mistakes

• Serious Water accounting errors
• Poor consultation and engagement
• Mis-communication of what an entitlements are
• Failure to act early on over-allocation problems
• Introduced trading without addressing
  over-allocation simultaneously
• Forgot to plan for change
• Forgot to build registers with attention to
  detail and integrity
• Forgot to design for low transaction costs
• Poor pricing policy and charging policies
• Allocated water to corporations not individuals
• Plans not statutory
• Created a run to Canberra for money game

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A Robust System
Solution for C21?
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Theoretical Design Foundations

• Tinbergen Principle (NP in 1969)
• For dynamic efficiency
• gt One instrument per objective
• Mundells Assignment Principle (NP in 1999)
• For dynamic stability
• gt Pair instruments and
  objectives for greatest leverage
• Coase Theorem (NP in 1999)
• To minimise adverse effects of entitlement
  mis-allocation on economic activity
• gt Ensure very low transaction
  costs

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Water Policy Goals

• Distributive Equity
• Economic Efficiency
• Manage Environmental Externalities

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Three Part Separation

• Entitlements gt Equity instrument
• Allocation gt Efficiency instrument
• Use licence gt Externalities instrument

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Generalised framework
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A Water Licence
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Why unbundle?
Low costtrading
WaterConcession or Permit
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Periodic Allocations Trading
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Allocation Trading
WPay
BPay
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Entitlement definition?

• Area that may be irrigated
• Volume that may be stored
• Max pump size and capacity
• Access time /or flow height
• Volume that may be pumped
• Volume pumped less estimated Qty returned

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Recharge Credits for return flows
100 ML
Extraction
Gross entitlement 100 MLReturn 50 ML
Unconfined Aquifer
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Water quality policy

1. Zoning to control new uses
2. Trading rules to encourage trade out of high
   impact areas
3. Irrigation efficiency regulations
4. Off-set policies
5. Levies to fund investment

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Recharge Accounts Trading
Land use Recharge rate Area
Recharge mm
ha
KL Native vegetation 5
100 500 Plantation Timber
5 300
1,500 Dryland lucerne 10
400 4,000 Other Dryland
80 3,000
240,000 Irrigated 120
200 24,000 Total
Groundwater load 4,000
270,000
Recharge Entitlement _at_ 70mm/ha/yr _at_ 4,000 ha
280,000 KL Farm Credit/Deficit
10,000 KL Less
credits sold
5,000 KL Credits
available for sale
5,000 KL
Rebate _at_ 0.10 per KL
500
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Groundwater South East of SA

1. Standardised Crop Area Equivalent
2. Install meters
3. Volumetric conversion
4. Carry over rules
5. Define maximum volume and return flow rules
6. Define entitlements as shares
7. Set announcement rules
8. Set trading rules

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A Robust Solution?
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Unbundle, share and design for change
Contact Prof Mike Young Water Economics and
Management Email Mike.Young_at_adelaide.edu.au P
hone 61-8-8303.5279Mobile [phone]
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National Water Initiative

• Broadly, water planning by States and Territories
  will provide for
• ii) resource security outcomes by determining
  the shares in the consumptive pool and the rules
  to allocate water during the life of the plan.
• .
• 28. The consumptive use of water will require a
  water access entitlement, separate from land, to
  be described as a perpetual or open-ended share
  of the consumptive pool of a specified water
  resource, as determined by the relevant water
  plan.

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Evaluation criteria

1. Sustainable Yield
2. Salinity
3. Efficient Investment
4. Transaction Costs For water users
5. Administrative Costs For Board Govt
6. Distributive Equity
7. Policy Consistency with NWI, NRM Act 2004,
   Catchment Plan Water Allocation Plans

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South East - Eight major issues

1. Gross or Nett shares
2. Non-metered water affecting activities
3. How many entitlement pools
4. Should shares be unbundled from use approvals
5. Type of shares
6. Allocating under-allocation
7. Managing over-allocation
8. Announcement period

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Gross or Nett Entitlements?
100 ML
Extraction
Gross entitlement 100 MLNett entitlement 50
ML
Unconfined Aquifer
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Collective Implications
Sustainable Extraction Frontier(as efficiency
increases gross extractions need to reduce)
Assumed aquifer return
Gross
Extracted volume
Drainage to other aquifers, management areas or
the sea
Evaporation and Transpiration
100
50
5
of extracted volume not returned to aquifer
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Gross, nett or mixed system?

Gross Nett Mixed
Irrigation industry Allocation cuts as others improve technology More efficient use
Community Arguments about inequity may emerge
Board and DWLBC Reduce allocations periodically Less monitoring No reductions Need to track use and define assumed aquifer return Need to manage the politics of justifying and defending an inconsistent system.(Inconsistencies are emerging.)
Criteria supporting option Policy Consistency (with the rest of the State) Administrative Costs Efficient Investment Sustainable Yield Distributive Equity Transaction costs
Other Criteria Salinity Control Salinity can be controlled under either system Salinity Control Salinity can be controlled under either system Salinity Control Salinity can be controlled under either system
Indicative option Nett allocation system coupled with a modification to the volumetric conversion process to include evaporation in the base allocation. (Remainder called an Assumed Aquifer Return.) Nett allocation system coupled with a modification to the volumetric conversion process to include evaporation in the base allocation. (Remainder called an Assumed Aquifer Return.) Nett allocation system coupled with a modification to the volumetric conversion process to include evaporation in the base allocation. (Remainder called an Assumed Aquifer Return.)
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Gross or Nett Entitlements?
100 ML
Extraction
Gross entitlement 100 MLNett entitlement 50
ML
Unconfined Aquifer
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Water Affecting Activities

Surrender Quarantine above a threshold Quarantine all forestry
Irrigation industry Simplicity with re-issue guarantee Existing get allocation
Community Inconsistent between new old plantations
Board and Govt Small numbers only Need to manage ongoing use
Criteria supporting option Transaction Costs Administrative Costs Distributive Equity Policy Consistency Distributive Equity
Other Criteria Efficient Investment, Sustainable Yield, Salinity Control Efficient Investment, Sustainable Yield, Salinity Control Efficient Investment, Sustainable Yield, Salinity Control
Indicative option Surrender coupled with a re-issue guarantee Surrender would apply to all significant non-metered water affecting activities. Require any new significant water affecting activity to offset the likely impact of that effect by surrendering entitlements equivalent to the annual estimated mean impact of that effect. Authorisation would take the form of a permit authorising the significant effect and containing clause guaranteeing permit surrender will result in share re-issue. Consider a small risk premium. Surrender coupled with a re-issue guarantee Surrender would apply to all significant non-metered water affecting activities. Require any new significant water affecting activity to offset the likely impact of that effect by surrendering entitlements equivalent to the annual estimated mean impact of that effect. Authorisation would take the form of a permit authorising the significant effect and containing clause guaranteeing permit surrender will result in share re-issue. Consider a small risk premium. Surrender coupled with a re-issue guarantee Surrender would apply to all significant non-metered water affecting activities. Require any new significant water affecting activity to offset the likely impact of that effect by surrendering entitlements equivalent to the annual estimated mean impact of that effect. Authorisation would take the form of a permit authorising the significant effect and containing clause guaranteeing permit surrender will result in share re-issue. Consider a small risk premium.
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How many entitlement pools?

One share pool Surrendering for trees Two share pools water affecting Three or more share pools
Irrigation industry Simple systemReviews focus on sustainability issues. Change often favours one group over another
Community Changes cant favour one over another. Arguments about fairness Even more arguments
Board and Govt Focus on sustainability. Need to manage non-metered offsets Difficulty in maintaining a consistent approach Complexity cost
Criteria supporting option Sustainable Yield Transaction Costs Administrative Costs Distributive Equity Efficient Investment Policy Consistency
Other Criteria Salinity Control Salinity Control Salinity Control
Indicative option A single pool for all metered use coupled with surrender arrangements to account for water affecting activities A single pool for all metered use coupled with surrender arrangements to account for water affecting activities A single pool for all metered use coupled with surrender arrangements to account for water affecting activities
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How should shares be recorded?

Statement in Management Plan Amend existing holding and taking licences Unbundle and create a separate share register use approvals
Irrigation industry Registration of mortgages difficult Environmental issues still managed with allocation issues Lower trading costs Increased investment options
Community Alignment with policy change in Victoria and elsewhere
Board and Govt Significant change to current policy
Criteria supporting option Policy Consistency Efficient InvestmentTransaction CostsAdministrative CostsSalinity Control
Other Criteria Sustainable Yield, Distributive Equity Sustainable Yield, Distributive Equity Sustainable Yield, Distributive Equity
Indicative option Unbundle and establish a separate share register coupled with the introduction of a water accounting system to allow people to identify how much water they have and have not used Unbundle and establish a separate share register coupled with the introduction of a water accounting system to allow people to identify how much water they have and have not used Unbundle and establish a separate share register coupled with the introduction of a water accounting system to allow people to identify how much water they have and have not used
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Unit or Proportional Shares

Unit shares Proportional shares
Irrigation industry Less opportunity to change boundaries and land use when all agree that the change should be made
Community
Board and DWLBC Very difficult and expensive to make minor modifications to boundaries and to manage changes in non-metered use
Criteria supporting option Transaction CostsAdministrative Costs Policy Consistency
Other Criteria Sustainable YieldEfficient InvestmentDistributive EquitySalinity Control Sustainable YieldEfficient InvestmentDistributive EquitySalinity Control
Indicative option Issue unit shares Issue unit shares
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Under-allocation

Pro-rata among existing shareholders Ministerial Reserve
Irrigation industry
Community Profit and opportunity remains in the region but distributed among existing licensees If water is auctioned the money received returns to consolidated revenue
Board and DWLBC
Criteria supporting option Policy Consistency
Other Criteria Efficient Investment, Sustainable Yield, Transaction CostsDistributive Equity, Administrative Costs, Salinity Control Efficient Investment, Sustainable Yield, Transaction CostsDistributive Equity, Administrative Costs, Salinity Control Efficient Investment, Sustainable Yield, Transaction CostsDistributive Equity, Administrative Costs, Salinity Control
Indicative option Ministerial Reserve. The Board may, however, hold the view that a pure market model should be used. If this is the case, then any unused water should be distributed amongst all shareholders including the Minister on a pro-rata basis Ministerial Reserve. The Board may, however, hold the view that a pure market model should be used. If this is the case, then any unused water should be distributed amongst all shareholders including the Minister on a pro-rata basis Ministerial Reserve. The Board may, however, hold the view that a pure market model should be used. If this is the case, then any unused water should be distributed amongst all shareholders including the Minister on a pro-rata basis
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Over-allocation

Immediate pro-rata cut Bridging allocation Increase borrowing and carry-forward provisions
Irrigation industry Have to buy allocations Necessary for efficient allocation
Community Some see as more equitable
Board and DWLBC Carry forward borrowing to manage. Borrowing penalties
Criteria supporting option Sustainable Yield Efficient Investment
Other Criteria Transaction Costs, Administrative Costs, Distributive EquitySalinity Control, Policy Consistency Transaction Costs, Administrative Costs, Distributive EquitySalinity Control, Policy Consistency Transaction Costs, Administrative Costs, Distributive EquitySalinity Control, Policy Consistency
Indicative option Immediate pro-rata cut in PAV to align with sustainable yield coupled with the introduction of appropriate carry-forward and borrowing rules. Immediate pro-rata cut in PAV to align with sustainable yield coupled with the introduction of appropriate carry-forward and borrowing rules. Immediate pro-rata cut in PAV to align with sustainable yield coupled with the introduction of appropriate carry-forward and borrowing rules.
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Announcement frequency

Every 5 years 5 years but an option to make an earlier variation 5 year moving average of annual announcements with thorough review
Irrigation industry Sudden dramatic changes should be expected Dramatic changes would be phased in Continuous signalling of the direction of change
Community
Board and DWLBC Obligation to watch for early signals of a climate change Rolling process that encourages all to accept that both climate and weather change continuously
Criteria supporting option Administrative Costs Efficient InvestmentSustainable YieldTransaction Costs
Other Criteria Distributive Equity, Salinity Control, Policy Consistency Distributive Equity, Salinity Control, Policy Consistency Distributive Equity, Salinity Control, Policy Consistency
Indicative option Announce sustainable yield annually, convert these announcements into a 5 year moving average. Coupled with a 5 year review of aquifer hydrology. Announce sustainable yield annually, convert these announcements into a 5 year moving average. Coupled with a 5 year review of aquifer hydrology. Announce sustainable yield annually, convert these announcements into a 5 year moving average. Coupled with a 5 year review of aquifer hydrology.
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Preferred model

1. Define each entitlement in nett terms
2. Use surrender approach for significant
   non-metered water affecting activities with
   re-issue guarantee. (Risk premium?)
3. Allow trade in surrendered forest permits, issue
   new permit to existing forest activity if
   requested.
4. Define each share holding on a separate share
   register with separate use approval system
5. Separate set of volumetric water accounts for
   each user
6. Unit shares to define proportion of each
   consumptive pool held
7. 1 share per kilolitre of entitlement
8. Place any unallocated water in a Ministerial
   Reserve
9. Use carry-forward and borrowing to allow rapid
   alignment with the sustainable yield in
   over-allocated areas
10. Estimate sustainable yield annually but allocate
    5-yr rolling ave