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Instruments for Adaptive Water Management

R. Quentin Grafton

Crawford School of Economics and GovernmentAustralian National University

quentin.grafton@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:

1. Change behaviour in ways that are readily understood by managers

2. Can be implemented in a time frame needed to avoid limit reference points and move towards target reference points

3. 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 Murray–Darling Basin

0

250

500

750

1 000

1 250

1983-84 1986-87 1989-90 1992-93 1995-96 1998-99 2001-02 2004-05

Tran

sfer

Vol

ume

(GL)

Intrastate

Interstate

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Water entitlement trade in the southern Murray–Darling Basin

0

20

40

60

80

100

1983-84 1986-87 1989-90 1992-93 1995-96 1998-99 2001-02 2004-05

Tran

sfer

Vol

ume

(GL)

Intrastate

Interstate

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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)

Actual and hypothetical water storage level (% ) given 48.48% increase in price

35.00

45.00

55.00

65.00

75.00

85.00

95.00

27

/10

/20

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%

Actual Hypothetical

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Modelling Sydney Water Prices (2)

Hypothetical w ater s torage level (%) given 48.48% increase in price plus additional 375ML/day supply

24.00

26.00

28.00

30.00

32.00

34.00

36.00

38.00

40.00

42.00

0 1 2 3

%

Hypothetical Hypothetical plus additional 375ML/day supply

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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