Economic Rights and Regulatory Regimes Is there still

Economic Rights and Regulatory Regimes: Is there still a ‘right’ to water? Could trade in water resources promote water stewardship? Alice Piure Strategy and Policy Analyst, Anglian Water

Water stewardship “Stewardship is about taking care of something that we do not own. Stewardship approaches that focus on the management of public goods like forests, fisheries or, in our case, freshwater resources, are based on the premise that we are all accountable for the sustainable management of those resources and are, therefore, based on collective responses. Water Stewardship is the use of freshwater that is socially and economically beneficial as well as environmentally sustainable. Environmentally sustainable water use maintains or improves biodiversity and ecological processes at the catchment level. Socially beneficial water use recognizes basic human needs and ensures longterm benefits (including economic benefits) for local people and society at large. ” Source: Alliance for Water Stewardship

What does water stewardship mean to Anglian Water? demand for water will rise but 28% of the region is below sea level available water won’t sustainability reductions will reduce the water available for abstraction as a low-lying region there is a high use of energy to pump water around the region population is expected to rise – around 1 m homes to be built in the next 25 years Climate change and uncertainty it is the driest region in the UK impacts

Abstraction in the Anglian Region Source: Environment Agency, 2012

A right to water? A sustainable water allocation regime should: • Protect the environment & other in-stream uses • Ensure affordable and reliable water supplies • Encourage efficient allocation and use of water • Encourage dynamic efficiency or improvements in the efficiency of water use over time

Water allocation project • Co-funded by Defra & Anglian Water • Managed by Anglian Water • Steering group Final report available at: www. cpsl. cam. ac. uk

The Upper Ouse & Bedford Ouse catchment characteristics • • Predominantly rural • Urban centres: Milton Keynes, Hitchin, Letchworth, Bedford, Huntingdon. • Farming; horticulture; aquaculture; quarrying; power generation; golf courses; race courses. • Source: Environment Agency, 2005. c 3, 000 km 2 Grafham Water

Project Overview Phase 1 Initial engagement with stakeholders: including abstractors in catchment, Environment Agency, Ofwat and innovative local land managers May – June 2012 ---------------------Phase 2 Development of 2 demonstration trading platforms/models Hands on trading demo Improved Pairwise Hydro-economic model 100 50 0 ec /D 16 ov /N 11 ct O 7/ p Se 2/ ul /J 29 un /J 24 ay /M 20 pr /A 15 ar /M 11 b Fe 5/ n Ja July – October 2012 150 1/ Interactive workshops to share with stakeholders Volume, Ml Common Pool New Licensing with Trading - Buyers 200

Phase 1 Findings Evidence of social capital & collaborative approaches during 2011 -12 drought: • EA took a flexible approach & worked closely with farmers • Voluntary 20% reductions • Internal Drainage Board kept water levels higher than usual • Agricultural abstractor groups trading HOFs • Investment in shared storage facilities But: • Current trading system not well understood • Agreement current system not flexible enough to deal with future challenges Source, HR Wallingford et al, 2012.

Phase 2 Trialled two alternative market models: 1. Improved pair-wise trading 2. Common pool model

Current system: Pair wise trading Ben Don Zara Frank • High transaction costs Bill Roz • Very thin market

Modelling an improved pairwise trading system Improvements to the current system: • pre-approved trades Ben Don e s tim ost ng n c Zara di tio tra ac Frank er ans ow tr L d Bill n a • online bulletin boards Roz 3 scenarios: • Current licensing system (volumetric licenses with Hands Off Flows) • Current system with improved pairwise trading • ‘Shares’ licensing system Models weekly abstractions, consumptive use, return flows, reservoir storage and trades. Estimated demand curves Real flow data Transaction costs reflect measures to ease trading and approvals needed Model suggests who might trade with whom, how much, and when

Improved Pair-wise trading You Right: Hypothetical Screenshot of an online trading bulletin board 0. 1£ /m 3 • Abstraction points (green, yellow, orange) indicate extent of yellow pre-approval • Red circles show interest in trading • Online transactions, link to Environment Agency records

Total volumes abstracted across sectors Drastic water cuts to abstractors with unfavourable conditions (stringent HOF limits) Current Licensing with Trading 100 50 0 New Licensing with Trading 150 Volume, Ml ec /D 16 ov /N 11 t Oc 7/ p l n /Ju Se 2/ 29 /Ju 24 ay /M 20 pr /A 15 ar /M 11 b Fe 5/ n Ja 1/ Short-term trading under either licensing system allows more favourable abstraction patterns Volume, Ml 150 100 50 0 ec /D 16 ov /N t l p Oc 11 7/ Se 2/ /Ju 29 n /Ju 24 ay /M 20 pr /A 15 b ar /M 11 Fe 5/ n Ja 1/

Flow exiting catchment 7000 Current Licensing without Trading 6000 Current Licensing with Trading Flow, Ml per week 5000 New Licensing with Trading Current licensing system is not able to maintain environmental flows under very dry conditions 4000 3000 2000 1000 0 ov ec /D 16 /N 11 t Oc 7/ p Se 2/ l Ju / 29 n /Ju 24 ay M / 20 r Ap / 15 ar /M 11 b n Fe 5/ Ja 1/

Improved pair-wise trading Reactions • Improved pair-wise trading builds on the existing system and was generally more readily understood • Pre-approved short-term bi-lateral trades were generally considered positively by the abstractors • Mapping of parties willing to trade, water availability and the use of bulletin boards were seen as positive

Common Pool Bill • Weekly auction • Users trade “quotas” with auction manager • Quotas scaled to match forecast water availability Roz • Low transaction costs • Trading platform underpinned by hydrological model Zara • Auction clears market subject to environmental flow constraints • Needs suitable (unbundled) licences

Common pool model Environmental Flow Monitoring Points Abstraction points

Common Pool Model Reactions • Change of mindset needed: abstractors, regulators • Concerns: – Would require training and time to manage – Being short of water due to inappropriate bidding strategy (but: “isn’t this just like trading wheat futures? ”) – Perceived dominance of large abstractors (i. e. the reservoir) & consequent calls for “ring fencing” – Discomfort/risk associated with scaling of quotas. Unused to non-firm licence rights. Governance of catchments? – Potential for adverse unintended consequences e. g. loss of sector

Ring fencing supplies for agricultural abstractors? • Ring fencing could restrict water for agricultural use only and so protect farmers’ abstraction rights BUT • It might skew the market as it would keep nonagricultural users out of part of the market • It could remove resilience from the trading system • It may inhibit farmers from investing in water storage in partnership with other users • It could restrict farmers’ ability to buy, store and sell water on the open market when conditions allowed A wider debate on the pros and cons of ring-fencing is needed.

Could trade in water resources promote water stewardship? Water Stewardship is the use of freshwater that is socially and economically beneficial as well as environmentally sustainable. • Can protect the environment and other in-stream users (when rights are defined as a share of available water) • Can encourage efficient allocation • Can encourage investment • Flexible BUT • Concerns about unintended consequences that would be socially undesirable • Concerns about transition

Possible next steps? • Improve demo tools / models • Use common pool demo as a trading “laboratory” – Effects of ring fencing – PWS dominance • To what extent could trading encourage multi-sectoral investment in shared infrastructure? • Extend to other catchments • Funding partners sought!! Final report available at: www. cpsl. cam. ac. uk