The Commonwealth Government’s decision to sell up to 10 billion litres of its water allocation in the Murray-Darling Basin back to farmers could prove to be a win-win for irrigators and the river.
On the surface the decision seems to make no sense. The government bought the rights to water from farmers in the first place to restore the health of the river, why would it sell them back?
But the new decision reflects the variability of water supply and prices.
What water is the government selling?
The Commonwealth currently holds registered entitlements of just over 1,700 gigalitres, including 109 gigalitres in the Gwydir Valley where the proposed sale has been announced. Since 2009, the government has used these entitlements to allow extra water to flow through the river system, maintaining and restoring its health.
The decision to sell water back to farmers does not affect the government’s entitlement to water, which gives it the right to either use the water that is allocated to them, to carry it over for use in future years, or to trade it on the water market. This it will keep and with it, the right to use the allocation in full next year and the year after.
Instead, the government will sell part of its annual allocation of water. As of 31 December 2013, the Commonwealth had a total annual water allocation across the Murray-Darling Basin of close to 1,400 gigalitres. The annual allocation is made against the water entitlements purchased by the Commonwealth Environmental Water Holder. The proposed 10-gigalitre sale by the Commonwealth is less than 1% of this total.
Has the government bought too much water?
If we were talking about land bought for a national park, and then sold a few years later, then this would indeed be strange.
But unlike having a title to land, the amount of water allocated under a water entitlement varies from year to year. Irrigators know this well and plan for variable water allocations from year to year.
In dry years, when less water is allocated to title holders, water is traded from willing sellers who can do without for a year to those who need the water to keep permanent plants alive and the water price will increase. The National Water Commission estimates that water trade increased Australia’s gross domestic product by A$220 million in 2008–09 through reallocation of water used in agriculture.
The government is simply doing the same thing. The Water Act, which established the Commonwealth Environmental Water Holder, also allows the government to trade its water if either (1) the water is not required and cannot be carried over to the following year; or (2) the proceeds from the sale are used to purchase water entitlements that are more effective in achieving the commonwealth’s environmental objectives.
This matches the logic that an irrigator might use in deciding whether or not to sell a water allocation. The irrigator will sell if the water can’t be used and can’t be carried over to the next year. Alternatively, the irrigator will sell if the proceeds can be used to purchase water at a different time or in a different catchment if this offers greater potential for the farm business.
Better for everyone
For some time the Commonwealth government has been reflecting on the question of actively trading environmental water. It released a discussion paper last year and received feedback from irrigators and others.
One of the irrigators’ main concerns is that the Commonwealth’s water holding is very large, so any trade has the potential to affect water price. Given that the Commonwealth’s future trading behaviour is uncertain, so are any fluctuations in price. This makes it harder for irrigation businesses that rely on water trade to make decisions.
The other side of this is that the sale of environmental water allocations will only occur if irrigators see benefit in using the allocation they are purchasing. A trade will only occur if there is mutual benefit for both the environment and the farmer.
On this basis, one would hope that some trade of environmental water will see benefits for irrigators. Indeed, trade will overcome one of the most challenging aspects of water governance in Australia: achieving an optimum allocation of water between environmental and agricultural water use.
If we seek to place an impermeable divide between these two uses, labeling each drop of water as either for the environment or for farmers, then we have missed a huge opportunity. The same drop of water can deliver benefits for both environment and farmers and the best outcomes for regional communities will be achieved with arrangements that allow flexibility in the way water is allocated and delivered so that it can be used to find these win-wins.
Like all things in water management, it won’t be a panacea and there will no doubt be problems, but it is likely to be a step forward for productive use of water in the Murray-Darling Basin.