Presentation to AARES Conference on Australasia s Resource-Based Industries

Presentation to AARES Conference on “Australasia’s Resource-Based Industries in a Future World” Looking back on Australasian water policy from 2027 Prof. Mike Young# and Jim Mc. Coll* Research Chair, Water Economics & Management The University of Adelaide # * Research Fellow, CSIRO Land Water, Queenstown, Thursday 15 th February 2007

A caveat Predicting the future is risky. We do it to discover what might go wrong. And how we can improve the future we actually experience. What follows is fictional, It is offered in good faith. We try to bring together what the profession is recommending. 2

3 Case study histories Southern Connected River Murray System § Large surface water system with very large storage indirectly connected to a series of slow moving groundwater systems of varying quality South East of South Australia § Pure unconfined groundwater Canterbury Plains § Fast-flowing, highly variable surface water system with minimal storage § Connected to a fast flowing unconfined aquifer 3

Climate shifts occur 8 yrs. 11 yrs. A drought, Australia should have expected (not a 1 in 1, 000 years event) 4

River Murray Inflows 2007/8 By May 2007, all Murray System dams empty 2007/8 inflows => 1, 000 GL & South Australia got its 1/3 => 333 GL But SA system evap. + losses => 1, 300 GL Balance – 967 GL Add back Wellington weir + Lake Bonney & triage L. Alexandrina and L. Albert + 1, 100 GL Available allocation to cities, vines, etc +133 GL Lakes became Southern Hemisphere’s Aral Sea! 5

New Governance Well briefed, in Jan 2007 Howard requested referral of MDB management powers to Commonwealth. Allocated $10 b to fix. States finally agreed to an Independent Murray Darling Basin Authority responsible for § Allocation announcements & trading rules § Entitlement registers § Stopping over-allocation from re-occurring Moving from one political system to another was not enough! Interim arrangement until over-allocation fixed. Minister for Env. and Water given complete control MDBC. 6

MDB Act and new Agreement In 2008, Act established an Authority using the “Uhrig” Commission template § New MDB Agreement to be established as schedule SA insisted on a detailed agreement § 200 GL minimum flow through Mouth to recover the Lakes and save the Coorong § SA’s high security entitlements combined with NSW and Victoria’s and Adelaide’s urban water tradeable § Carry over for all water in all States § Binding power referral only when over-allocation solved (When the Agreement came into force, the Responsible Minister was no longer Malcolm Turnbull!) 7

Recovering from over-allocation 2008 Commonwealth started buying entitlements Used simple one page buy-back offer § (The 2007 30+ page efficiency contract failed) One year later 2, 000 GL had been bought and leased back for two years at cost of $3 billion Some compulsory acquisition of isolated farms. 8

SA’s South East Ground water system Been progressively and quietly converting from area licences, to meters, to volumetric allocations and then shares over 8 years Full volumetric allocation system from 2009 with capacity to carry forward up to 90% of any allocation Gave all an initial 25% carry over at the start No-one complained. The SE NRM Board had been open, inclusive and transparent. Coonawarra wine just kept on coming from the system! Dairy moved autonomously from the SA lakes to the SE. 9

MDB Authority functions and powers s. 9 The Authority, in the performance of its functions, must pursue the objectives of § Ensure over-allocation does not recur § Efficient and cost effective management § Maximise economic efficiency in use of MDB water § Ensure accountability § Achieve cost-recovery targets s. 10 The Commission must do all things that are necessary or convenient to be done for, or in connection with, the performance of its functions. 10

Neutralising flow-reduction activities As the Aust. NWI gave states until 2010 to plan to fix water interception, nothing was done until 2011 Economists, scientists, the Senate, the Productivity Commission had repeatedly warned that about an interception train wreck! The 93/94 Cap was set so that only 28% of mean flow went to the environment. Since then flow interception by forests, by farm dams, by increases in salinity interception, and by increases in water use efficiency had reduced the mean flow allocation to 10%! And they were still going out backwards. It was finally realised that this was why the lakes were dead and a dredge was used to keep open Murray Mouth! 11

Plantation Forestry offsets South East introduced offset rules for rainfall interception in 2006 and tapping by roots into aquifers in 2008 Forestry in top of MDB catchment costs $3, 000 per hectare in water entitlement erosion All based upon science in Lu Zhang’s curves that forest industry claimed was not good enough In 2011, MDB Authority announced it was better to be around 80% right than 100% wrong and ordered use of the Zhang curves States forced to surrender sufficient entitlement to offset the estimated effect or the Authority would do it for them 12

Water use efficiency and flow erosion South East in 2006 converted area licences into entitlements that recognised that under flood irrigation 50% of groundwater returned to aquifer. Decided if an irrigator moved to a more efficient spray or drip system they would be allowed to pump less => much less! MDB Authority decided to try to deal with the issue in the River Murray system. Technical increases in water use efficiency decreased river flow! 13

Infrastructure investment and technical efficiency Howard Plan § $3. 1 b for delivery efficiency gains § $1. 6 b for on farm efficiency gains § “savings” to be split 50: 50 If the Plan went ahead 1, 250 GL would have to be purchased. => an additional 53% cost burden. By 2009, it was realised that it was more carbon efficient to stay with gravity fed systems and more economically efficient to solve over-allocation by buying water and fixing this accounting problem. Leave structural adjustment to farmers and infrastructure management to water supply companies. By 2015, all water supply companies became carbon neutral 14

Offsetting the effects of farm dam As with trees, farm dams stop water flowing into rivers. In 2016, decided to make Local Government in NSW and Victoria pay for the cost of offsetting this impact. (SA had NRM board levies. ) Resulted in dramatic local government boundary reform and transfer of NRM to local governments now aligned with catchment boundaries. The Authority’s power to do all necessary to stop over-allocation from re-occurring was starting to bite. 15

Ground surface water connectivity Under the NWI, 2014 was the D-day for Govt to start paying compensation for scientific error. But there was no allocation in the NWI or the Plan for research. New science in 2015 revealed connectivity underestimated by 30%. More entitlements would have to be purchased! 16

Funding change How could all this be financed? Commonwealth already charged § A fixed fee per entitlement for system overheads § A fee in proportion to any allocation made States charged § A fee in proportion to the volume used In 2015, Parliament considered a return to the River. Every year, 2% of each entitlement holding would be put up for tender and the money used to support community development and stop over-allocation. The debate was whether or not to have a “River return” 17

Counter-cyclical trading of Env. water Environmental water managers can sell one year’s allocation in a drought and use the money to buy entitlements. By 2013, the MDBA held over 3, 000 GL for the Environment and it was a drought again. Agreement was amended to allow counter-cyclical trading. Early in 2014, a superannuation trust took the MDBA to court for “insider trading”. The claim was that the Authority announcements took into accounter-cyclical trading opportunities. In 2015, an Independent River Murray Environment Trust was established. 18

Water Supply Sharing In 2014, the new Env. Trust moved immediately to broaden the portfolio of water products it held. Options contracts were ruled out. Revived Murrumbidgee Irrigation’s “River Reach” Proposal Trust purchased a “wet-period” share in a 50 GL Murrumbidgee River entitlement. § Split allocations 50: 50 split based on a 10 yr moving average § 100% to irrigators when under the moving average § 100% to Trust when over the moving average Entitlement “time share” contracts were born. By 2027, this accounted for 25% of the Trust portfolio. 19

A climate-adjusted cap In 2007, the South East decided to allocate water volume on basis of moving average of last 5 years recharge estimates. Allocations would adjust autonomously with long term supply shifts – to stop over-allocation. Carry over of allocations allowed. In 2010, when the MDB Authority commenced, it immediately defined the cap as a 10 year moving average. The Authority defined all unconfined groundwater within 5 kms of the River as “surface” water. 20

Water entitlements, registers and trading While each MDB State has its own register, the Howard Plan promised a single MDB register! § In 2007, new Minister for Water asked SA to unbundle Water licence (Consent) Entitlement Shares in perpetuity Bank-like Allocations Use licences with limits & obligations All registers transferred to Victoria. Register integrity guaranteed. Electronic trading of allocations started in 2009. 21

Salinity Recharge Accounts In 2016, applied to all land use not just irrigated land Land use Recharge rate mm Area ha Recharge KL Native vegetation 5 100 500 Plantation Timber 5 300 1, 500 Dryland lucerne 10 400 4, 000 Other Dryland 80 3, 000 240, 000 Irrigated 120 200 24, 000 270, 000 Total Groundwater load Recharge Entitlement @ 70 mm/ha/yr @ 4, 000 ha = 280, 000 KL Farm Credit/Deficit 10, 000 KL Less credits sold 5, 000 KL Credits available for sale 5, 000 KL 22

Allocation announcements & derivatives In late 2006, many MDB allocations were cut. SA announced an 80% allocation and people started trading, a month later it was cut to 70% and then another month later to 60%. Some NSW irrigators had water allocations they had carried forward cancelled. In 2008, the MDB Commission announced it would make monthly announcements that were definitely available. Allocations, once made, were guaranteed. In 2009, a futures market emerged § Sydney Futures Market offered contracts on 600 ML of water to be delivered at Griffith on 30 th December. 23

Barriers to water trading In 2009, the World Bank reviewed Australian water reform and focused on exit fees. In 2010, the Authority enforced the ACCC’s 2006 recommendation that exit fees should not be greater than 8 times the annual access charge. Late in 2010, banks began were offering a 1% discount on loans whose mortgaged was registered on the Victorian entitlement register. Water supply company shareholders revolted and at AGMs across the country voted to devolve entitlement ownership to each individual and transfer them to the Victorian register. 24

The business of water trading Burnt by insider trading allegations in 2014, in 2015, the Authority ruled that no water supply company could have any interest in any water trading business. Victoria was forced to sell off Goulburn Murray Water’s Watermove internet trading business and Queensland to sell off Sunwater’s trading business. Purchased by Waterfind and the Water Exchange. In 2018, water trading moved to the Bendigo Stock Exchange’s electronic trading network. 25

Learning from Australia - 2008 Critical to address governance, planning, allocation, trading and Maori issues simultaneously. Proposed new 10 point template for reform. South Island Maori (Ngia Tahu) in partnership with fish and game and irrigation industry leaders put forward a vision – a proposal. A pathway that would take NZ out of the seemingly endless and expensive court room battles. A way forward that would § resolve many NRM, environment and dev. issues associated with water § improve environmental quality and recreation § create opportunities for investment § autonomously adjust with climatic changes and variability 26

NZ’s 10 Point Water Management Proposal 1. Unbundling of consents into unit shares and use approvals. 2. Shares in perpetuity with a 1% return to the Maori via tender. 3. Independent Water Allocation & Management Boards responsible for all connected surface and groundwater in a region. 4. “WAM” Boards to make final non-appealable decisions on environmental flow, abstraction limits, allocations, trading rules, etc. 5. No more consents when any part of a water body gets to 70% of WAM estimate of abstraction potential. Remaining 30% shares to be tendered. Classify water bodies as heritage, conservation or working. There is very little abstraction in a heritage river. 6. Credit for returns to ground and surface water systems. 7. Mandatory off-set of impacts of forests, farm dams, and increase in water use efficiency. 8. Mandatory nitrate off-set trading in all pollution hotspots. 9. Shares issued to individuals (not supply cooperatives). 10. Carry forward of unused groundwater and storage allocations. 27

Insights from the future 1. Governance and robust accounting have been Australia’s two biggest water management mistakes 2. Attention to detail is critical. Design systems for § Trading § Change (climate, technical, economic & social) § Wealth creation and environmental protection 3. Need to consider how “hard” each system is to be worked. Worth a Ph. D in 2027? We hope not! We think it is already possible to design a robust water allocation and management system. 28

The future depends upon how we talk about it Contact: Prof Mike Young Water Economics and Management Email: Mike. Young@adelaide. edu. au Phone: +61 -8 -8303. 5279 Mobile: +61 -408 -488. 538 www. myoung. net. au