Exploring the use of water markets for improved environmental outcomes

Abstract

Water resource development has historically proceeded with little consideration for the environment. In the Murray-Darling Basin (MDB) Australia, water resource development has resulted in considerable ecological degradation and a diminishment of flow-dependent ecosystem services (ES). In response, MDB water policy has undergone considerable reform in the past decade, culminating in a commitment to reallocate water from consumptive use back to the environment. This thesis examines potential further use of water markets, and issues associated with this, to provide greater and more efficient environmental flows. The main question investigated in this thesis was the potential for an environmental water holder (EWH) to use the water allocation market to reallocate water to the environment for improved ecological condition and ES generation. To answer this question, an interdisciplinary mixed-methods approach was employed involving: a) the development of a hydro-economic model that simulates the annual trade decisions of a forward-looking EWH in a MDB sub-catchment; b) 49 qualitative face-to-face interviews across the US and Australia with stakeholders from industry, non-profit and government agencies regarding the role of non-government environmental water holders (NGO EWHs); and c) quantitative survey analysis of 1,000 southern MDB irrigator preferences in 2015-2016 for the sale of environmental water. Key findings of this thesis show that trading water allocations for the environment can have positive ES benefits by improving floodplain inundation. Under particular hydrological and fiscal conditions, the increase in floodplain carbon storage may be of sufficient market value to offset the cost of environmental water allocation purchases. This indicates a potential carbon-water trading strategy which may provide a novel revenue stream for self-financing EWHs. It was shown that NGO EWHs play a unique role in environmental water reallocation through the provision of flexible and multi-functional water trade arrangements. Results also highlight the importance of social capital in facilitating successful environmental water trades. Lastly, results demonstrate that southern MDB irrigators show a clear preference for the local management of water resources, and in particular NSW and Victorian irrigators rank the federal government among their least preferred buyers of water entitlements. Southern MDB irrigators also demonstrate a clear preference for the use of water allocation trade for the environment. Key recommendations based on these results include: a) the further judicious expansion of market-based reallocation policies, particularly water allocation trade, in place of continued infrastructure-based reallocation; b) the use of carbon credit generation and sale to cost-effectively finance annual environmental water reallocation; and c) the need to encourage an increased partnership of federal agencies with local and NGO EWHs, in order to increase irrigator participation and sustain local values in environmental water management.