National Water Initiative–The Economics of Water Management in Australia–An Overview - Water and Agriculture: Sustainability, Markets and Policies - page 14

Water pricing reform is currently a very active area for most state and territory
governments. The overall intent is to ensure that prices set by mechanisms other than the
market (i.e., by governments, public/private water service providers, and/or independent
pricing bodies) do not lead to perverse outcomes either in secondary water markets or for
water-related investment activity. This is critical to facilitating market based instruments
as more prominent mechanisms for managing water in Australia.

Figure 3. Elements of water pricing reform

Cost recovery
for water
storage and
delivery (lower
bound pricing)

Cost recovery
for water
planning and
management

Addressing
environmental
externalities

Consistency
in pricing
policies

Consumption
based
pricing

Conclusion

The National Water Initiative is the national blueprint for ongoing water reform by
governments. Through it, governments have committed to a range of actions designed to
achieve a nationally compatible market, regulatory and planning based system of
managing water resources. This paper has demonstrated how the National Water
Initiative is designed to create many of the conditions for market based mechanisms to
become more prominent in managing Australia's water resources.
In practice, how well governments make this transition to market based mechanisms
will depend in part on how successfully they optimise the mix of all policy instruments.
This will, of course, also involve getting the sequence of policy instruments right
(e.g., improved water accounting to support water trading; trading to promote greater
transparency for pricing arrangements; etc).