At the beginning of the 1990s, broadening of water reform and trade began in earnest. Numerous reports and enquiries concluded that the states were individually unable to manage MDB water resources effectively without coordination and investment by the Commonwealth (Connell and Grafton, 2011). Negotiation between the MDB governments resulted in a new Murray-Darling Basin Agreement in 1992, providing the basis for initiatives to drive management of land, water and environmental resources on a basin-wide scale (Papas, 2007) via market-based institutional arrangements to reallocate resources (Hatton MacDonald and Young, 2001). To maintain the momentum of this agreement, its objectives were included in subsequent Council of Australian Government (COAG) meeting agendas.
COAG established a Working Group on Water Resources Policy to examine, among other things, barriers to the effective transfer of water between competing uses (Working Group on Water Resource Policy, 1994). This led to COAG initiatives for the separation of land and water rights, and principles for water trading arrangements (ARMCANZ, 1996). Each of the states now worked to unbundle land and water assets, establish new water property rights, and develop the means of transferring those rights between users (Hamstead et al., 2008). Transfers of water remained limited during these early phases. However, in 1995 an audit of river flow regimes in
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the MDB concluded that median annual flow-to-sea levels were 27% of pre- development; and that severe drought-like flow patterns occurred in 60% of years as compared to 5% of years in natural conditions (MDBC, 2004). As growth in water extraction would exacerbate this problem a cap on further extraction increases across the MDB was made effective from July 1 1997, enhancing earlier efforts to address over-allocation and environmental water requirements (Bjornlund, 2005). The cap restrictions resulted, perversely, in the activation of previously unused (sleeper) or under-used (dozer) water entitlements (Crase et al., 2009). Irrigators also sought to increase their access to supplementary water and/or take advantage of gaps in licence moratorium restrictions—such that between 1984 and 1994 MDB water diversions increased by nearly 8% (NWC, 2011f).
But, in concert with cap barriers to licence expansion, the gradual removal of water trade restrictions, increasingly efficient market transaction costs and 1994/95 drought effects slowly resulted in increased water allocation trade (Bjornlund, 2006a), while water entitlement trade remained subdued (Turral et al., 2005).6 It was expected that state-based water management and planning arrangements would address over- allocation issues via the reallocation of water resources. However, these instruments proved unsuccessful at addressing the central over-allocation task and by 2004 it was recognised that many of the states had failed to deliver on their commitments to provide sustainable levels of water extraction (NWC, 2007, Crase, 2012b). In response, an assessment of sustainable MDB water requirements was undertaken; concluding that at least 1,500 GL of water was needed for environmental flows to maintain a moderate probability of environmental health (Jones et al., 2003). A prolonged period of drought that began in 1998/99 also started to impact on water resource availability in the sMDB, such that in 2004 dramatic development of water reform and markets took place once more. Since the early 1980s initiation of water markets in the sMDB, trade in water allocations and entitlements have increased considerably (Figure 13 and Figure 14).
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Reasons for this include perceptions that interstate water allocation trade was less risky due its temporary and reversible nature. Interstate water entitlement trade commenced (under Schedule D of the MDB Agreement) with a geographically limited pilot project in 1998, close to the intersection between the NSW, SA and Victorian borders that initially involved only private diverters. An extension in May 1999 subsequently included high security entitlement transfers below Nyah. By 2003 the Murray-Darling Basin Ministerial Council had agreed to expand interstate trade to encompass the whole of the sMDB (NWC, 2011f). Other barriers included restrictions on water entitlement transfers out of irrigation districts or states, discussed in depth in Section 4.
Figure 13 Water allocation and entitlement trade in the sMDB
Source: (NWC, 2011b, pg. 13)
Figure 14 Net Water allocation trade in sMDB - 1998-99 to 2009-10
Source: (Wheeler et al., 2012c)
-1200000 -800000 -400000 0 400000 800000 NSW Lower Darling NSW Murray NSW Murrumbidgee SA Murray Vic Goulburn Vic Loddon and Campaspe Vic Murray Above Barmah Vic Murray
Net ML traded
There was a significant increase in the volume of trade following the establishment of the interim cap in the mid-1990s, which capped the volume of surface water extractions. Over the decade, trade volumes have increased in response to climate and water supply variability and the implementation of water market reforms. Since 2007–08, there has been considerable growth in entitlement trade, driven primarily by federal government purchasing of water entitlements and severe drought (Wheeler et al., 2012c).
Prices have also fluctuated widely, especially water allocation prices (Figure 15). Some major drivers of water trade activity include the availability of water supply in each region, the relative differences between commodity prices and water entitlement/allocation prices, the capacity of irrigators to adjust to short-term (water allocation) and long-term (water entitlement) seasonal change, and the expected availability of water in both current and future seasons (Bell et al., 2007). Expected future water availability can be impacted, however, by the presence of carry-over provisions in the MDB. These are discussed in more detail later.
Figure 15 Mean monthly water allocation trade ($/ML) in the sMDB from 2002/03 – 2010/11
Source: UniSA data