The Evolution of Markets for Water


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This book is described in the preface as a response to 'the standard of debate on water in Australia and the attempts by some radical green lobby organisations to distort the picture in ways that might lead to some far-reaching adverse economic consequences' (p. xiii). It is the result of a workshop sponsored by the Australian Institute of Public Affairs, a free market-oriented policy think tank, and its authors include economists and lawyers, in the public and the private sectors.

As would be expected from such an agenda, the approach is strongly supportive of the moves to develop water markets in Australia as a response to scarcity of the resource, a policy agreed by the Council of Australian Governments (COAG) in 1994 and further developed since. The thrust behind the policy is to create secure property rights in water which can then be freely traded, within and between states. This entails both legal reform and behavioural adjustment on the part of users, particularly agricultural irrigators. One of the goals of such a policy is to transfer resources from low-value to high-value uses, and for this to be effective it is necessary to seek to reduce transaction costs. This in turn requires secure rights which can be relied upon, not just by buyers but by third parties, especially security holders. It also requires good information flows, especially about prices, of the sort that can emerge from public registers of water rights and their transfers. One of the themes throughout the book is the relative inefficiency of government, and its susceptibility to lobbying interests. It is strongly suggested that evidence emerging from the operation of markets will be more reliable than that which is obtained by government itself through traditional policy-making mechanisms.

This is not to suggest that the authors look to a deregulated world where water rights are left entirely to the market. Such a concept may be attractive to some (we think of the work of Terry Andersen in the US) but is rarely found in practice. Often Chile is held up as a model for this, but the authors in the present work cite studies suggesting that the Chilean experiment was not wholly successful, mainly due to its failure to provide effectively for river basin planning, ecological quality and the other exter-nalities that make the market alone a problematic solution for the management of non-exclusive natural resources with a high public interest, of which water may be the quint essential example. Rather the book sees water rights and water trading as operating within a planned system for catchment management and ecological protection, whereby trade can only take place in water made available for that purpose through a regulatory and licensing process. This would be in accordance with developing global practice, which assumes that governments should provide both for river basin planning and environmental protection; the Australian states are all operating within that consensus. That in turn leaves the difficulty that if water rights are secure and tradeable, but yet confined by a wider planning process, then future allocations under a plan may be less than the volumes previously entitled for trade. At this point the most recent formulation of COAG policy is of great interest to those who, like the current writer, look to Australia as one of the jurisdictions advancing practice in this area. The 2004 COAG National Water Initiative provides inter alia a formula by which the risk of claw-backs and reduced entitlements are to be shared in the future,between states, the Commonwealth and users.

Given the breadth of expertise amongst the authors, a review cannot do justice to the detail of this work. It moves from an illuminating historical analysis of the nature of property rights in water versus land, through a technical discussion of hydrology and how certain water flows are left unaccounted-for, to a sophisticated debate on how market products might develop in the medium term. Many of the contributions are versed in economic theory and at a high level of analysis, yet the arguments are rarely difficult to follow. On the part of the lawyers. Professor Tan, in a perceptive account of the nature ol stale rights in water, suggests that legislators should 'bite the bullet' and provide expressly for public ownership of the water resource. She suggests that this would accord well with a stronger emphasis on private rights in water, and also that it might focus the minds of regulators and public sector water managers on the nature of their resource management task, which is much more than mere administration of a licensing system. Other important legal issues are the unbundling of the various different property rights that may be held in water, the management of 'stranded assets' particularly in rural areas, and the importance of a proper system of registering rights.

Some of the suggestions may raise eyebrows, such as the idea that beyond an initial allocation of water to the environment, all future environmental flows should be left to the market to purchase, relying at least in part on 'private sector conservation enterprises' (charities, trusts and conservation groups) to raise money for such purposes. A related view is that regulators should be empowered to trade to provide these entitlements, rather than a base line allocation as such. Overall though, this collection of essays illustrates the sophistication of the developing markets in the Australian states. It is highly recommended to anyone with an interest in Australia, in water, and in the use of markets as one tool to manage environmental resources.

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