Instruments for Adaptive Water Management

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Instruments for Adaptive Water Management R.
Quentin Grafton Crawford School of Economics and
Government Australian National University quentin
.grafton_at_anu.edu.au ANU NeWater Workshop on
Adaptive Water Management 28 August 2007
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Outline

• Targets and Instruments
• Implementing Adaptive Instruments
• Case Studies
• - Water trading in Australia in MDB
• - Sydney water pricing

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Targets and Instruments

• Adaptive management requires target and limit
  reference points to measure performance, e.g.
  Minimum 2,000 GL annual flow at Murray Mouth,
  Maximum EC 800, etc
• Instruments are the control levers that map
  human behaviour and actions into uncertain
  biophysical and socio-economic outcomes
• Adaptive management requires that instruments
  match targets (horses for courses)

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Adaptive Instruments

• Adaptive instruments
• Change behaviour in ways that are readily
  understood by managers
• Can be implemented in a time frame needed to
  avoid limit reference points and move towards
  target reference points
• Flexible to allow for uncertainties and shocks

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Implementing Adaptive Instruments (1)

• Targets must match instruments, e.g., water
  restrictions are useful to correct for short and
  unexpected declines in water supply, but probably
  not suitable if permanent and long-term demand
  reductions required
• Instruments that provide incentives for people to
  change their behaviour likely to be more
  effective that measures designed to control
  behaviour.

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Implementing Adaptive Instruments (2)

• Level of the instrument, the type of instrument
  and the target interact to determine if targets
  are achieved e.g. increasing water prices will
  reduce urban water consumption, but price must be
  set appropriately
• Instruments must suit the institutions,
  environment and capacity where they are applied,
  e.g. applicability of tradable water rights in
  Australia versus Pakistan

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Implementing Adaptive Instruments (3)

• Instruments that are flexible to bio-physical
  uncertainties may not be flexible to other
  uncertainties e.g. price of water rights change
  with water supply/yield but reassigning rights to
  others and/or uses is highly inflexible
• Mapping/modelling from instrument to human
  behaviour to outcomes and relationship to targets
  is required to adaptively manage water

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Rural Water Trading in MDB

• Trade largely restricted to irrigators
• Well established, active markets in seasonal
  allocations
• Smaller, but growing volume of trade in
  entitlements
• Markets for derivative products, such as leases
  and forward contracts, emerging
• A number of significant constraints to trade
  remain

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Seasonal allocation trade in the southern
MurrayDarling Basin
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Water entitlement trade in the southern
MurrayDarling Basin
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Instrument Effectiveness

• Costs of trading reduce trade by reducing net
  gains from selling and buying water (such as exit
  fees on export of water entitlements)
• Water trading has been effective at transferring
  water from low to high values uses and reducing
  impacts of reduced flows
• Market-based water recovery is proposed as the
  means of achieving environmental outcomes, but
  does not directly address water quality (and
  other) issues

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Sydney Water Pricing (1)

• Since 2001 the total water stored by the Sydney
  Catchment Authority in its dams has declined from
  about 90 to about 40, and recently increased
  to 57.
• Concern is that if the low rainfall period that
  occurred 2002-2004 (and previously in 1994,
  1979-84, 1934-42, 1904-10) were to reoccur then
  Sydney would run out of water.

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Sydney Water Pricing (2)

• Residential usage prices have increased at least
  70 in past decade and set a two tiers
• Water price fixed years in advance by independent
  authority (IPART) whose stated objective is to
  set Tier I price equal to long-run marginal cost
  of supply

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Modelling Sydney Water Prices (1)
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Modelling Sydney Water Prices (2)
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Instrument Effectiveness

• Even with expected increases in supply
  (groundwater recycling) scheduled price
  increases 2005-2009 are NOT sufficient without
  extra supplies to balance supply and demand IF
  2001-2005 rainfall period is repeated 2006-2010
• Different and more flexible water pricing
  arrangement are required to balance supply and
  demand in low rainfall periods, and also to
  encourage additional sources of supply