Water trading in Australia has developed progressively over the past three decades. Today, there are well-established, sophisticated open markets, where water is freely bought and sold. This structure is a key mechanism for simultaneously managing water scarcity, supporting economic efficiency, and ensuring sufficient water resources to sustain wetlands, rivers, and other parts of the environment. The markets function as a cap-and-trade system, where the volume of water that can be extracted or sold by an owner is capped on an annual basis and further reassessed on a monthly basis, depending on rainfall. Assigning value to water in this way allows it to move freely to more economically productive short- and long-term uses. It also provides an incentive for irrigators to be more efficient with their water use.
As the driest inhabited continent on Earth, Australia suffers from frequent and extreme periods of drought. The impact of the Millennium Drought (1996-2010) led to two water reform initiatives that helped establish the current water markets: the National Water Initiative in 2004, which formalized the unbundling of water rights from land title, and confirmed interstate agreements to implement water reform; and the Water Act 2007, which provided the legislative framework to ensure Australia’s largest water resource—the Murray-Darling Basin (MDB)—was managed in the national interest. It also established rules around water trading.
The Australian water markets do not exist as one national market, but as catchment-specific markets—the largest being the MDB. The markets operate with the buying and selling of two different types of water rights: water entitlements and water allocations. A water entitlement, similar to property ownership, is a permanent right to an ongoing share in the total amount of water available in a defined water resource (river, dam, storage facility). A water allocation is the temporary right to access a defined volume of water available under an entitlement in an irrigation season (July 1 – June 30). Allocation determinations are made on the 1st and 15th of each month during the season, and are tracked in a water holding account, similar to a bank account. Typically, any allocation not used or transferred by June 30 is surrendered by the purchaser and redistributed the following year.
Today, the MDB is a $2 billion AUD market (just under $1.5 billion USD). Internationally, it is regarded as a water reform success story. Water trading has undoubtedly been beneficial to many irrigators across the MDB, allowing them to supplement their water supply, earn income from selling water rights, expand production, develop new business models, and free-up capital to invest elsewhere in their business. Proponents also say that markets have promoted more sustainable water use and spurred innovation in farming by directing water toward uses with the highest economic returns.
However, despite this evident success, the markets have resulted in a number of unintended adverse consequences. A major complaint from irrigators is the lack of restriction on who can participate in the markets, which has resulted in a growing segment of non-farming investors holding water entitlements purely as financial assets, including foreign investors. This drives up water prices for some irrigators, who—in dry years when water costs more than the sale value of their crops—can be temporarily priced out of the market. This can negatively impact entire rural communities that depend on the local agricultural industry to survive.
There is also inadequate regulatory oversight of market participants. Water brokers and water trading platforms are able to set their own prices, hold water in their own accounts, act on behalf of both parties to a trade, or even be a party to a trade themselves without disclosing this information. Additionally, there is a lack of transparency around where in the MDB foreign investors own entitlements, which fuels concerns over state-owned foreign enterprises, particularly from China, buying Australian water entitlements. These concerns have greatly eroded confidence and participation in the market for many irrigators.
Increasing criticism of the markets culminated in an investigation by the Australian Competition and Consumer Commission (ACCC) in 2019. The ACCC’s interim report, released in July 2020, acknowledges that the benefits from the water markets have not been universal, and some participants, industries, and regions have experienced adverse consequences. It states that fair and efficient water markets depend on: a governance framework that incorporates Basin-wide perspectives in its decision-making; consistent trading rules across the MDB; and robust regulation of market participants. The ACCC considers the current governance and regulatory frameworks for water trading insufficient to meet these standards. A final report with recommendations is expected in November 2020.
The ultimate success or failure of Australia’s water markets may help determine their scalability to other parts of the world looking for innovative water reform solutions. While they are certainly a useful guide for other countries looking to better manage water scarcity, including the U.S., differences in the legal frameworks around water rights and ownership will determine the markets’ replicability elsewhere. It will be interesting to observe how future refinements to the Australian water markets influence their viability in other parts of the world.
Image: The Darling River near Louth NSW during drought.