- Abstract
- 1 - Introduction
- 2 - Need for water
- Table 1: Estimated change in irrigation area due to market demand forces
- 3 - Review of theory
- 4 - Issues in developing markets
- 5 - Anxieties
- 6 - New Zealand characteristics to consider
- 7 - Approach
- 8 - Conclusion
- References
Water Markets
Murray Doak
Senior Policy Analyst
MAF Policy
Christchurch
doakm@maf.govt.nz
Abstract
Projected land use change over the medium term, the likelihood of a more variable climate, more discerning markets, requirements for environmentally sustainable development and the need for a more diversified economic base in regional New Zealand, all combine to suggest that a water management system able to efficiently handle increasing water scarcity is required. Theory suggests water markets can deliver the desired outcomes, but there are many practical issues to address before it can be shown that water markets are the best option. This paper explores some of the identified issues from various research projects and observations, and suggests a number of areas to address in a co-ordinated and strategic way to move forward. An overarching approach seems desirable, in which water markets are viewed as a means to an end rather than an end in themselves.
1 - Introduction
Water markets of various types and arrangements have been operating in various parts of the world for a long time now. Structured water markets were first introduced in Australia in 1983 (Bjornlund, 2002). In New Zealand there are examples of water markets in place, albeit somewhat informal and unstructured (Robb 2001). As water demand grows relative to the resource size, allocation decisions become more and more critical to those businesses using water and to new ones wanting to use the resource. Can the current allocation system cope with this approach? If not, is there a better way? If there is, what are the particular issues that need to be addressed to result in better outcomes in the national interest?
2 - Need for water
Currently, there is about 500,000ha of irrigated land in New Zealand. A further 1.5m ha of potentially irrigable land (land use capability class 1-3) has been identified (Nimmo-Bell 2001). In fact, several large tracts of class 4 land are also irrigable. This represents a tremendous opportunity for a primary industry based economy such as ours to build on, providing quality food and in future most likely other products, for example nutraceuticals, to discerning markets around the world. The projected irrigated land use change over the next 10 years, based on market demand factors, is shown in table 1 (Nimmo-Bell 2001). There are a number of feasibility investigations underway at present throughout New Zealand, totalling over 300,000ha.
To provide this much irrigation water will require both more efficient use of the existing water resource and the harnessing of other available water resources. Is there enough water and are the incentives in place to maximise the efficiency of its use?
Table 1: Estimated change in irrigation area due to market demand forces
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Table 1: Estimated change in irrigation area due to market demand forces |
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Results by Region |
Agricultural Area |
Est of Ag. Area |
Increased Ag. Area |
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|
Northland |
4,000 |
8,700 |
4,600 |
|||
|
Auckland |
6,500 |
8,500 |
2,000 |
|||
|
Waikato/King Country |
4,500 |
13,600 |
9,100 |
|||
|
Bay of Plenty |
9,300 |
14,500 |
5,200 |
|||
|
Gisborne |
5,000 |
7,800 |
2,800 |
|||
|
Hawke's Bay |
23,200 |
31,200 |
7,900 |
|||
|
Taranaki |
2,000 |
1,900 |
-100 |
|||
|
Manawatu/Wanganui |
8,000 |
12,900 |
4,900 |
|||
|
Wellington/Wairarapa |
9,300 |
14,600 |
5,300 |
|||
|
Tasman |
7,900 |
9,700 |
1,800 |
|||
|
Marlborough |
12,100 |
18,300 |
6,200 |
|||
|
Westland |
- |
- |
- |
|||
|
Canterbury |
347,000 |
404,000 |
567,000 |
|||
|
Otago |
65,100 |
101,400 |
36,300 |
|||
|
Southland |
1,500 |
2,400 |
900 |
|||
|
Totals |
505,500 |
649,500 |
144,000 |
|||
|
% increase in irrigation area |
28% |
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Source: Nimmo-Bell 2001
3 - Review of theory
There is a huge body of literature supporting the theory and principles behind the need for and application of water markets (Meister and Sharp 1993, Ford and Butcher 2001). There is not time to go into all of them here, but suffice to say the issues arise where water is scarce for periods of time which are significant enough for there to be a value created for the water. Users can manage short-term scarcity, but a point in allocation systems is reached where the scarcity creates a cost large enough to justify a better approach. At this point of real scarcity, the principle of improving efficiency of use would suggest that resources have to shift to their highest value use to return the greatest value to the nation. This requires information for the decision-makers on the resource, its use and the return from the various uses, and it requires that the less efficient are bought off by the most efficient.
A regulatory or policy agency could make this decision, but in doing so will put itself in the invidious position of having to make tradeoffs among different uses and users with imperfect information. Inevitably there are political interferences and judgement calls are made on behalf of others. A more efficient way is likely to be to allow trading of the limited resource among users, either via a permanent change in ownership of the right to use, or via long or short-term leases.
Thus the need for a market is created. Without one, there is unlikely to be sufficient information or incentives to maximise the return from the resource to the national good where the resource is scarce.
4 - Issues in developing markets
To have a market operating efficiently there needs to be transparent, timely and sufficiently accurate information so that quantity of water and therefore the price it will attract can be determined by buyers and sellers. Real-time information of appropriate accuracy is needed on the resource size and when it's available, the amount that is left in the resource for in-stream use and the crop or plant needs.
A regulatory framework must be established so that the property right is secure and everyone knows what is being traded, and how the right is adjusted should aspects such as quantity of water change. Some legislative changes would be required to establish "pure" rights for water (Ford and Butcher 2001). However, the Resource Management Act 1991 does allow for the transfer of water permits.
Risks must be addressed before anyone will trade. For example, there must be a certainty that the rules won't change some time down the track, or at least that if an agency overrides the rules there is an established and robust regime to address the issues created.
More often than not there needs to be a "clearing house" whereby buyers and sellers can contact each other and carry out the transaction. This infers that an intermediary function/structure is required. There is also the requirement for some oversight/monitoring role to ensure that regulations/rules are being adhered to and followed. This creates a catch-22 situation as both the "market" and the infrastructure need to develop simultaneously. At this point, there is no agency taking the initiative to proactively develop such structures or oversee functions, although councils are not unwilling to consider this role in principle (Robb 2001).
5 - Anxieties
There are two New Zealand studies available that provide an insight into irrigators' attitudes to water markets (MAF 1997, Robb 2001). The main anxieties identified in these studies are:
5.1 Transfer of water to urban/industrial uses at the expense of irrigation
This fear arises most likely from overseas experience in water short areas, where urban and industrial uses out-compete irrigators for the resource. Three points should be considered about this issue. Firstly, in a tradable system the choice would be with the irrigator to accept the price offered as compensation for the loss, or not accept it and continue to use the water for irrigation. Secondly, under the current system this can and does happen also, but it is done by political and/or regional council determination and without necessarily a compensatory payment. Thirdly, the regulatory system set up to allocate the water to environmental and abstractive uses can introduce a system based on separating urban and irrigation use if it wished, which would not allow trades outside of the groups of users. While somewhat limiting the intent of the regime, such an arrangement would be possible and could be sensible to gain acceptance of the regime in the early stages with a review at some point in the future.
5.2 The in-stream flow retained
It is important to set the level of flow remaining in the resource in a robust and transparent way, along with an equitable regime for adjustment either up or down, should that be required. This requirement is no different to the current situation, although the information required for a tradable system will be more complex and therefore, will most likely assist the transparency of the minimum flow regime.
5.3 Existing holders on consents
How to treat existing consent holders when instigating a tradable regime will be a complex issue to resolve. On the one hand, considerable capital has been invested by many water users in farming systems based on the current allocation system. Should they be effectively penalised for simply working within the rules established by others? On the other hand, many water use consents are known to be in excess of users needs, so should these users be granted potentially significant windfall gains? Where councils are reviewing and adjusting consent conditions based on consistently applied principles, then the potential for unreasonable windfall gains will be reduced anyway. There are ways of addressing these issues. When fisheries quota was allocated, those wishing to receive initial quota were required to produce a record of their previous three years catch (pers com F Scrimgeour). A tendering system with the proceeds returning to the existing holders could also be examined.
5.4 Attitudes to trading
This is probably the most difficult anxiety to overcome, and is somewhat problematic. Experience in the fisheries market development suggests that restricting the scope of the market until players became accustomed and comfortable with the processes and principles was a useful approach (pers com F Scrimgeour). Similar views have been expressed in irrigation schemes where limited trading is taking place (Robb 2001). Getting political support to get even this far can be challenging, as was the case in Tasman district (MAF 1997). There are some very deep-rooted attitudes among water users that will pose barriers to the acceptance and functioning of water markets (Robb, 2001). The concept that water users are compensated for reducing production and that adopting such a regime may speed up land and water use change, especially to non-farming uses, go against the deeply held value sets of irrigators.
There are some issues that recent research concluded can be discounted as barriers to water transfer (Robb, 2001). Both water users and regional councils understand the role water transfer could play in promoting the economic efficiency of water use. Water users understand the generic value of water to production enterprises, and the more detailed information on marginal value that would be required in a trading situation must be tailored to the individual anyway. Regional councils interviewed during the project expressed a willingness to use transfers, showing that if the very real barriers can be addressed then water markets will be considered as a viable option.
6 - New Zealand characteristics to consider
The key aspects of New Zealand's irrigation activities and resource base that will determine how to proceed include:
6.1 Individual catchments
Unlike many overseas examples, most noticeably Australia, New Zealand's water resources are generally numerous and distinct, that is, they are not connected to each other. Often there are a very small number of users extracting water from the same resource and the design of some schemes also limits the ability to transfer water easily between users. The ability to transfer water between catchments is limited and the connectivity of resources, especially groundwater resources, is not yet well enough understood for a tradable system, with some possible exceptions. Run of river scheme flows are generally variable and uncertain in both amount and timing. There is an opportunity for management of the set of resources, as the earlier paper on the Canterbury Strategic Water Study suggests. At one end of the spectrum is a centrally administered system, and at the other end are the individual irrigators who intimately know the particular system they are a part of. Each approach has its own benefits and costs, so both the decentralised and centralised knowledge in some combination is essential and the sum of the costs is minimised. The optimal combination is likely to be different for each catchment.
6.2 Smallness
Many of our small schemes have few players and so issues are probably best resolved by non-regulatory regimes e.g., catchment management groups.
6.3 Scarcity
Knowledge of water supply and demand by catchment is necessary to determine if water is actually scarce enough to warrant a trading system. In some cases, for example some catchments in Canterbury, there is evidence that there is sufficient water but in the wrong place at the wrong time (Morgan et al 2002). In this case, the costs and benefits of introducing markets could be considered against those of increasing storage.
6.4 Multiple use
In catchments where water uses are similar, trading at the margins is likely to be infrequent because the patterns of use are very similar among similar farms. In much of New Zealand, catchments contain a variety of land uses and soil types, so there is potential to move water between uses both between and within seasons to a greater degree than if catchments contain similar land uses. However, users themselves appear not to consider this as desirable from a philosophical point of view (Robb 2001).
6.5 Aversion to change
There needs to be a clear reason or motivation to change, or recognition that the current system will some day be inadequate, so that a tradable regime will become the preferred solution. It will be difficult to introduce market systems until all parties, or at least the majority, recognise the need and ask for them. A possible scenario which would cause this to happen would be if users, both abstractive and in-stream, find that the costs and uncertainty of negotiation and consenting through the current regime become too high. This is quite possible, and is believed to be part of the reason why the fishing industry adopted a tradable quota system (pers com F. Scrimgeour).
7 - Approach
Water uses and managers alike need to recognise that the current approach to water allocation is unlikely to produce the necessary "economic efficiency" that will optimise outcomes. This needs more work to explain in laypersons terms, for example that the costs, uncertainty and frustration of working out entitlements against land use needs to be recognised.
Progress depends on there being a real scarcity, so that water has an obvious and explicit value. This may be created naturally through demand exceeding supply, or artificially by access to water for abstraction being closed e.g., by legislation that closes off storage options.
Education of water users, other stakeholders and society in general, will develop more comfort with the concepts of water trading. The anxieties about what might happen under a tradable system must be addressed in conjunction with users. Examining these in relation to the current situation may assist, as would separating in users minds the issues that arise from having a high level of scarcity of the resource, rather than the trading regime itself. This may involve a participatory process type approach, which may be resource demanding without any real gains in water allocation efficiency in the short term.
Lessons, particularly from Australia and from the fishing industry in New Zealand, will be important here so mistakes are avoided. Case studies and perhaps first hand experiences of the issues, may be appropriate to develop a degree of comfort that the system can work. While water markets are immature, defined as limited in scope with unexplained variability and dispersion in prices, inefficient outcomes and often politically undesired impacts will often be the result of market forces (Bjornlund 2002). It seems a message here is to think long and hard about the issues above and put the necessary framework in place before unleashing market powers, but don't take too long!
Corrective action to minimise inequity during the transition phase appears to be an important strategy. In South Australia, early voluntary steps were taken to reduce abstraction down to actual or committed use (Bjornlund, 2002), which assisted the market to mature more quickly than in another sub-region studied.
New Zealand would benefit from a lot more information on the resources and the uses of the resource than there is at present. This is a prerequisite for any management regime regardless of tradability, and needs to be improved now. Who needs to know these things will depend on how the tradability regime is configured. The more unencumbered the market the more the users will need to know themselves, for example, how much water they use and the value of the water to their production system. The more centrally managed the regime, the more the agency will need to know. Information is costly and is unlikely to ever be perfect enough for an agency to make these decisions better than individuals, so this needs to be weighed up in deciding on the scope of a trading regime.
Development of a set of rules as an example would provide a platform for further work to determine whether a trading regime can work more efficiently than the next best alternative approach.
Finally, a case could be made to establish a separate agency to manage and develop the water resource in a proactive, strategic and complete way. The Canterbury Strategic Water Study presented at this conference raises a number of issues with implications for the current approach to water management that need to be addressed as a system, taking into account environmental, social and economic aspects. There could be value in establishing an adequately resourced agency or forum with the mandate to approach issues in this way.
8 - Conclusion
The three themes of regional development, national benefit and transparent environmental management together suggest that there is a strong case for improving New Zealand's water management system.
The theoretical case for tradable water markets is compelling but the reality is there are a number of cost and attitudinal impediments to overcome before a regime could be accepted and operate. Furthermore, the small size of many catchments and the variable degree of scarcity from catchment to catchment means that they would not always be the most appropriate approach in the New Zealand context.
In the first instance, no matter what system is in place, there needs to be greater emphasis on information systems and tools to manage the resource, by both users and agencies. This should be the priority, from which it is likely that at some point, users and managers alike will conclude that a tradable regime is the answer to dealing with the increasingly intractable problems that are likely to arise.
In the meantime, policy makers may be best to spend time on identifying and addressing what the specific barriers are to these things happening, and providing good tools and information. A dedicated agency or forum working to a medium-long term stakeholder strategy with defined steps may be useful to keep the approach co-ordinated and progressing towards a common goal.
Water markets appear to be a means to an end that the users and other stakeholders must want for them to be successful, and not an end in itself.
References
Bjornlund, Dr H. (2002) - "Signs of Maturity in Australian Water Markets"
New Zealand Property Journal, July 2002
Ford S.J. and Butcher G.B. (2001) - "Economic Efficiency of Water Allocation"
MAF Policy Technical Paper 2001/17
MAF Policy (1997) - "Transferable Water Permits: Two Case Studies of the Issues"
MAF Policy Technical Paper 97/12, December 1997
Meister A. and Sharp B. (1993) - "Current and Potential Uses of Economic Approaches to Environmental Management"
Massey University Discussion Paper in Natural Resource Economics No. 17
Morgan M, Bidwell V, Bright J and McIndoe I (2002) - "Canterbury Strategic Water Study" (in preparation)
Nimmo-Bell Ltd (2001) - "Future Water Allocation Issues"
MAF Policy Technical Paper (in print)
Robb, C., Morgan, M. and Harris S. (2001) - "Attitudes and Barriers to Water Transfer" Ministry for the Environment Report 4464/1, December 2001
The author wishes to acknowledge the assistance of Frank Scrimgeour of Waikato University.
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