Development of Water Trading in Australia

23 March 2016 | United Nations Environment Programme News Release

In Australia’s Murray Darling Basin, water trading is used as one of the prime ways to facilitate adjustment in the face of extreme changes in water availability and to drive innovation. The development of the water entitlement and allocation systems necessary to facilitate the development of water trading has been a long journey and involved a sequence of reforms.In the early stages of the development of the irrigation industry, irrigators where granted a license to irrigate an area of land. As the industry matured and the need to recover some of the costs of water supply from irrigators emerged, meters were installed and irrigators charged only for the volume of water they diverted.

To enable further development, in Southern New South Wales, two consumptive pools were established – a “high security” pool and a “general security” pool. Under this system, the holders of high security licenses would normally receive their full entitlement, while the amount of water allocated to the general security pool would depend upon seasonal conditions. In wet years, all irrigators would receive their full entitlement. In dry years, however, general security irrigators would receive a percentage of their maximum entitlement.

In Victoria, a sales water system was used to achieve a similar effect. With these systems in place, it soon became clear that the Murray Darling Basin could not sustain any further expansion of irrigation and a limit, known as a “cap” was placed on water use in the Basin. Rather than stopping all further development, governments began experimenting with the idea that irrigators could agree to transfer water entitlements and water allocations from one person to another.

Two markets soon emerged – a within season market for allocations that had been made to an irrigator and could be used more profitably elsewhere and a permanent water market involving an agreement to permanently shift a license from one irrigator to another.

The simple rule underpinning this new regime was the concept that a person would only be allowed access to more water if they could find someone who would agree to take less water. The prior installation of meters and a strong institutional system made this possible.

Standardized contracting systems were put in place and when all parties agreed money changed hands and the license system was adjusted. The result was a rapid, market-driven increase in water use efficiency and, as a result, a rapid increase in the value of water licenses.

To facilitate the further development of these markets, formal water entitlement registers and bank-like allocation systems were established. Today, it is possible to register a mortgage over an entitlement and trade allocations over the internet. Irrigators can log onto the internet and see how much water is left in their account.

The last steps in this reform process, involved the redefinition of entitlements as shares and the unbundling of licenses into their component parts so that shares, allocations, use approvals, delivery rights, salinity impacts etc. can all be managed at different scales.

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