Rural water use and the environment: The role of market mechanisms
report
Rural water use and the environment: The role of market mechanisms
Research report
This research report was released on 25 August 2006.
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Markets are already making a significant contribution to increasing rural water-use efficiency. But further reform is needed to ensure that water continually moves to its highest value uses (including environmental uses).
Market mechanisms to address environmental externalities need to be targeted to location and scale — no ‘one size’ fits all. Poorly designed programs can impose high costs that may outweigh potential gains.
- 'Saving' water via major infrastructure works is often costly compared with other options and may reduce water available for other uses.
- Subsidies that seek to improve the uptake of particular technologies or practices solely to increase the productivity of water use are likely to be inefficient.
The Living Murray Initiative could be implemented more effectively if current efforts to source water 'permanently' are supplemented with additional water products (such as seasonal allocations, leases and options contracts). Appropriate institutional arrangements should be put in place to establish an agency specifically charged with purchasing a portfolio of water products to suit the needs of environmental management in the River Murray.
Using administrative arrangements to allocate water for environmental purposes conceals the opportunity cost of meeting environmental targets. Market mechanisms are usually a more efficient means of re-allocating resources.
Climate change, farm dams, vegetation and land-use changes, groundwater extraction, and changes to irrigation water management, have the potential to reduce stream flows substantially. In the Murray–Darling Basin, such reductions undermine efforts to achieve environmental goals and can affect the reliability of existing entitlements. Priority should be given to refining and clarifying existing property rights, undertaking further research on water systems and improving water accounting.
There are opportunities to improve entitlement regimes through unbundling of water entitlements and water-use approvals, and facilitating efficient intertemporal water use decisions. Separating delivery entitlements from water entitlements may also be beneficial where there is congestion in water delivery.
A number of impediments to water trade reduce economic efficiency and should be removed. In particular, governments should:
- enable other participants to trade in water markets
- open up interdistrict water entitlement trade, and remove exit fees.
