Water trading benefits farmers, communities and the environment

National Water Commissioner, Mr Laurie Arthur, last week released the Commission's report on the Impacts of water trading in the southern Murray-Darling Basin, saying that it demonstrates that water trading is providing significant economic, social and environmental benefits across the southern Basin.

Speaking at the Australian Irrigation Conference in Sydney, Mr Arthur said:

The report demonstrates that water trading is a major success story for water reform in Australia. Without the ability to trade water, the impacts of drought in the region would have been much worse-for both individuals and rural communities.

Participation in water markets has given irrigators much needed flexibility in how they run their farm businesses during tough times-helping them to improve cash flow, retire debt and manage risk. The hardships endured by many people in the southern MDB have been driven primarily by drought and other pressures such as changing global commodity prices. Water trading is part of the solution, not part of the problem.

Economic modelling for the report has estimated that water trading in the southern Murray-Darling Basin added $220 million to Australia's GDP in 2008-09; with net production benefits of $79 million in New South Wales, $16 million in South Australia, and $271 million in Victoria.

The report identifies and assesses the economic, social and environmental impacts (both positive and negative) of water trading in the southern Murray-Darling Basin from 1998-99 to 2008-09. Its purpose was to:

fulfil the National Water Commission's obligation under the National Water Initiative (NWI) to monitor and report on the impacts of interstate trading
address the need for a comprehensive assessment of the impacts of water trading, given its status as a centrepiece of water reform in the southern Murray-Darling Basin
inform future water market and trading reforms in the Murray-Darling Basin and Australia.

The study looks back at the effects of water trading in the southern Murray-Darling Basin over the past decade of severe and prolonged drought. It does not attempt to forecast the potential future impacts of trading.

The Commission will reassess the impacts of trading in 2012, when more evidence will be available on the impacts of recent Commonwealth purchases and increases in trading due to other factors. Overall, the report contains 37 findings for consideration by the Commonwealth and southern Basin states via the Murray-Darling Basin Ministerial Council.

Report Summary

Water trading has been progressively introduced in the southern Murray–Darling Basin (sMDB) since the late 1980s, along with further reforms in the mid-1990s and again in the mid-2000s. The introduction and subsequent expansions of water markets were based on the premise that trading provides economic benefits to buyers and sellers, and to society as a whole, by reallocating scarce water resources to higher valued uses.

murray_darling_basin However, there have been concerns that changes associated with water trading might have adverse economic, social and environmental impacts.

This report presents the final results of the National Water Commission’s assessment of the economic, social and environmental impacts of water trading. It fulfils the Commission’s obligation under the National Water Initiative (NWI) to monitor and report on the impacts of interstate water trade in the sMDB. It also provides baseline data for a second assessment in 2012.

The study covers the period from 1998–99 to 2008–09—a decade marked by severe and prolonged drought. The study sought to assess how water trading affected individual water users, communities, the regional and national economy, and the environment. Importantly, it recognised that social, economic and environmental outcomes could also be caused by factors other than trade, such as the drought and climate variability, commodity prices, and demographic change. A major challenge for the study was in distinguishing the impacts of trade from other factors driving change. A rigorous analytical framework and multiple, complementary assessment methods were used to inform the study findings.

Download the Executive Summary here

Key Findings

This study demonstrates unequivocally that water markets and trading are making a major contribution to the achievement of the NWI objective of optimising the economic, social and environmental value of water. The overwhelming conclusion of the study is that water trading has significantly benefited individuals and communities across the southern MDB.

lower_murray_river_scaled Water trading has given individual irrigators more flexibility in their water use and production decisions. This flexibility has helped them respond to external factors such as the drought. The benefits of trading to individuals have translated into benefits for communities, regions and the Basin as a whole.

The environment has also benefited from the net downstream movement of water during the drought. The ability to trade water provided flexibility in water use, production and farm management that was not previously available. This helped water users manage risk and debt in response to changes in external factors and their own business objectives.

Consultations revealed that there is growing acceptance of water trading and a greater understanding of how the market operates. Market participants are becoming more sophisticated in using the market. In most cases, the benefits to individuals translated into benefits for associated industries, regions and communities.

For example, intraregional trading provided unequivocal economic benefits to regions. Without water trading, additional water sources would not have been available to maintain long-lived horticultural assets. If those assets had been lost, the irrigators and community would have faced a long period of rebuilding to recover this agricultural productive capacity.

Urban water users also benefited from the purchase of entitlements and allocations by urban water authorities in many areas, including Adelaide, Bendigo and Ballarat. Those purchases bolstered supply security during critical periods and alleviated severe water restrictions.

Differences in the water-use characteristics of buyers and sellers result in a range of positive and negative environmental impacts. The overall effect is difficult to determine. For example, water trading may have contributed to the ongoing trend towards increasing water-use efficiency, which has also been driven by drought, technological change and other factors. In turn, increased water-use efficiency may reduce return flows to the environment as a result of the current specification of entitlements. However, reduced return flows also produce water quality benefits.

The development of a new Basin Plan by the MDBA provides an opportunity to ensure that key environmental assets are protected. In most other cases, water-use licences are the appropriate instrument for managing negative environmental impacts associated with water use. Differences in water-use characteristics highlight the need for ongoing improvements to water accounting and metering practices.

Download the full report from the National Water Commission here