Developing Economic Arrangements for Water Resources Management—The Potential of Stakeholder-oriented Water Valuation - Water and Agriculture: Sustainability, Markets and Policies - page 132

Water rights trading in the Murray-Darling Basin
Introduction to the case
The Murray-Darling river basin spans several states in the south-east of Australia and
some three million people inside and outside the basin heavily depend on its water
resources. The development of the basin's water resources has enabled the expansion of
agricultural activity, and currently the agricultural produce of the basin exceeds
AU$ 10 billion (MDBC, 2004). Since the 1950s, the growing water demands have caused
declining water quality, rising water tables and increased salinity. To help prevent further
degradation of the water resources, a cap has been put on diversion, limiting annual
diversions, effective from July 1997.
Within the cap, water entitlements may be traded and prices are determined by the
market. The trading arrangements that are in place for the Murray-Darling river basin in
Australia are an often cited example for river basin management and well-functioning
water markets (e.g. Tarlock, 2001; Bjornlund and McKay, 2002; Moss et al., 2003, FAO,
2004b). Trading arrangements have first been put in place at state level and, although a
pilot has been started on interstate water trading, the state level experiences are more
advanced. The specific trading arrangements are illustrated here for the state of New
South Wales (NSW).
Water trading arrangements in New South Wales
Water trading in New South Wales is based on the trading of water rights, which are
separated from land titles. Individual water rights are vested in water licences that define
a share in the available water resources, expressed as a unit share rather than as a fixed
volume per year. The actual volume that a licence-holder is entitled to differs per year,
based on water availability, and is called the annual water allocation. Water licences as
well as annual water allocations can be traded, and water licences can be split and
consolidated (DIPNR, 2005).
Generally, at the start of the water year government officials make an available water
determination (AWD), specifying the water volumes per unit (e.g. 0.8 megalitres per
unit), taking into account aspects such as climate, storage, flow levels and historic usage.
This provides the basis for the annual water allocations to individual licence holders,
which is calculated as units in the licence x water volume per unit . This annual water
allocation is credited to the water allocation account of the licence holder, which, similar
to a bank account, specifies how much units of water a licence holder is entitled to. For
some licence categories, AWDs may be made throughout the year if more water becomes
available (DIPNR, 2005).
The system of tradable water licences and water allocations deals mainly with water
diversions for commercial purposes, such as irrigation of crops. The overall extraction
limits for the source, specific environmental water rules and the rules under which the
available water determinations are made available, are determined in the water sharing
plans, which are mandatory for all water sources in NSW. Rural landholders are entitled
to basic rights to water without a licence and there also is a provision that recognises the
cultural and spiritual importance of water to Aboriginal people in NSW (DIPNR, 2005).
In dry periods, priority is given to the environment, urban water supply, rural drinking
water supply and finally irrigation (Huckell, 2005). This means that in dry years, the