A real Murray Darling Water Plan
Posted by Possum Comitatus on May 21, 2007
This whole back of the envelope, “lets piss $10 billion up the wall on the Murray without having a clue what we’re doing” business is…welll. Words don’t do justice to the broad general stupidity of it.
Let’s create a real Murray Darling water plan that deals with appropriate allocation, prevents over-allocation, guarantees that water flows to its highest value use, is properly market priced and builds sustainable environmental flows into the system as a foundation stone.
First off, you need two bodies.
The first body, some independent agency similar to the Reserve Bank of Australia that decides on the actual quantity of water to be allocated in the Murray-Darling
Basin. Let’s call this body the Murray-Darling Water Authority (MDWA)
The second body, some water trading statutory monopoly that can act as a secondary trading market for that water, akin to the ASX. Let’s call this body the Murray Darling Water Exchange (MDWE)
The key point to maximising the commercial value that can be generated by a finite resource, in this case water, is to let it be priced according to what users are willing to pay for it. et water flow to it’s highest value use.
This is easily achieved. Every year the MDWA could determine how much water can be pulled out of the basin for commercial use based on the prevailing science. This then allows for water release to be based on a very simple formula:
Commercial water volume = Total River Flow – Environmental Flow – Town Water Requirements.
The rights to this commercial water can be sold each year, via two primary market sales.
The first is the sale of rights, by megalitre, for use in the following year.
The second is the sale of rights, by megalitre per year, for use in the next three years.
This provides a primary market for short-term use (the single year rights sale) and also for longer term use (the three year rights sale) which gives the water market a
capability to pay a premium price for longer term water security. It may even be possible to sell water allocations as a 5 year right as well.
The key to making this work though is the process by which these rights are sold.
Using some simple (and and grossly understated numbers) as an example. Let us say that the MDWA concludes that 6 gigalitres of water can be used for commercial purposes in the next year. So the authority keeps a gigalitre for themselves in their reserve, and tenders the remaining 5 gigalitres to the public for commercial use in the basin.
The way to run the tender is simple, each year everyone who wants to buy water issues a tender to the MDWA saying how much per megalitre they are willing to pay, and how many megalitres they wish to buy.
At the close of the tender, the MDWA then allocates the available water from highest per-megalitre tender to lowest until the available water allocations are exhausted. So let us say that the market put in tenders to buy 9 gigalitres of water, but there are only 5 gigalitres available for sale.
So if the highest price someone put in their tender was $1000 per megalitre, and they wanted 2000 megalitres, then they get 2000 megalitres of the available 5 gigalitre issue at a price of $1000 per ML.
If the next price was $950 per ML and they wanted 1000 ML, then they too get their full desired amount for the price and so the tender continues from the highest per ML tender, right through until all of the 5 gigalitres of water available for issue has been purchased.
Let us say that this process had continued until there was only 30,000 megalitres left in the allocation and the next priced tender was $200 per ML and they wanted 50,000 ML. That last tender gets 30,000ML at $200 per ML and everyone else, the other 4 gigalitres worth of tenders who bid too low miss out. They have no commercial water allocations from the primary market for the year.
The same thing can be done for 3 and possibly even 5 year water allocations.
But all is not lost for those that missed out.
The other body, the Murray Darling Water Exhange, allows farmers that haven’t used, or dont plan to use all of the allocation they purchased, to sell their surplus on a secondary market.If a farmer purchased 1000ML for next year, but heavy rain was experienced in February, reducing their need for that water down to only 700ML, 300ML could be put up for sale by the farmer on the Exchange so that others who originally missed out on water allocations could purchase some on the secondary market, or allow others who underestimated their needs to top up their allocation.
It also would allow the Authority to buy and sell some or all of their reserves on the secondary market according to the needs of environmental flow requirements or instances of demand/supply volatility that could interfere with normal business practices.
It would also allow places like Adelaide or other interested parties to purchase water rights and not use them, essentially paying to increase the flow of the Murray-Darling Basin.
The same system could be used for groundwater and surface water, and would of course, have to be done within catchments – the original water allocations would be sold with catchment specific requirements. People at the upper end of a tributary feeder river for the basin couldn’t buy rights from someone with Darling River frontage, but they could certainly sell their rights to them if they are further down the river system.
This way, not only would water flow to its highest value use, there are mechanisms that allow proper secondary trading, options to pay for water guarantees longer term, a mechanism to allow the Authority to accommodate environmental effects like floods and droughts as well as to be able to smooth out damaging volatility in the spot price.
The beauty of such a system, apart from letting commercial water use flow to its highest value use, is that it also allows for the development of water futures markets. That would become, over time, essentially an important water insurance and risk market that would let the widespread information that water users have be be disseminated into price signals.
The key issue though is back at the beginning with the body that determines the amount of water to be released through primary allocations – the Murray Darling Water Authority. It needs to be independent, free from the intervention of the agrarian socialist lobby come election time. The money raised from the primary water auctions would allow the Authority to be self funded, as well as allow the authority to fund efficiency measures in terms of water infrastructure development within the catchment. The key role of the MDWA would actually be environmental flow determination and determining the allocation for town water use by towns along the catchment, as the commercial allocation is simply a function of the total flows minus these two requirements.As long as environmental flow determination was done as an open process, with public hearings, submission mechanisms and well funded science – we would be able to solve water overallocation once and for all.
The only problem is the requirement to buy back every single license in the catchment first, and the funding of some structural adjustment program to assist people to get out of the industry, or relocate to where water is less scarce. But that is inherently “doable”, it’s just a matter of political will.