National Water Initiative–The Economics of Water Management in Australia–An Overview - Water and Agriculture: Sustainability, Markets and Policies - page 12

governments bear the risks of any reduction in water allocation which arises from
changes in government policy - in such cases governments are to recover this water
from entitlement holders in the most cost effective manner;
governments and water access entitlement holders share the risk of any reduction in
water allocation which arises from a change in knowledge of a water systems' capacity
to sustain a particular extraction level.
Apart from providing a foundation for greater security for entitlement holders, the
NWI risk assignment framework helps to create the conditions for more efficient use and
management of water through: clearer conditions around when governments will bear
and share the risks of reduced water allocations; explicitly providing for governments to
recover water for environmental or other policy goals (including through market purchase
of water); and creating a shared stake in reductions in available water, therefore
potentially reducing the incentive for gaming by governments or entitlement holders
when reductions in allocations are required.
Efficient water markets
As noted above, temporary trade of water allocations (i.e., on a seasonal basis) has
been occurring in Australia for some time. In the NWI, governments have committed to
further reducing barriers to trade in temporary water allocations, and to trade in
permanent water entitlements.
At present, there are a range of institutional barriers to the trade of permanent water
entitlements out of many irrigation districts in Australia - either in the form of trading
rules, policies governing public irrigation authorities, or policies contained in the
memoranda and articles of association of some private irrigation corporations (notably in
New South Wales). Governments - including those in the southern Murray Darling
Basin (New South Wales, Victoria and South Australia) - are taking steps to free up trade
out of their irrigation areas.
Initially, trade out of each irrigation area is intended to be enabled up to four percent
of each area's total water entitlement. This measured step is provided in the NWI in
order to help manage concerns about the adjustment of regions to trade, and to enable the
National Water Commission to monitor the socio-economic impacts of trade.
Expansion of water trade will also rely heavily on reducing the transaction costs of
trades. In particular, the NWI requires compatible water registers between states and
other compatible institutional arrangements in order to enhance trading opportunities.
There is still a way to go to build not only the efficiency of water markets in
Australia, but also the community acceptance of, and confidence in, water market
outcomes. For example, other commonly held concerns about water trading centre on:
the scope for trade out of irrigation areas to result in stranded irrigation assets, and a
higher cost burden for maintaining infrastructure on remaining users;
the potential for trade from rural to urban settings - indirect trade in this direction has
already occurred in Adelaide and Perth to improve the security of those cities' water
supplies, however, rural use of water will always dwarf urban demand in aggregate
terms;