Water markets in the Murray-Darling Basin

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Water markets in the Murray-Darling Basin R. Quentin Grafton a,∗ , James Horne b a b

Crawford School of Public Policy, The Australian National University, Building 132, Lennox Crossing, Acton, ACT 0200, Australia 11 Grey St Deakin, ACT 2600, Australia

a r t i c l e

i n f o

Article history: Received 8 May 2013 Received in revised form 21 November 2013 Accepted 2 December 2013 Available online xxx Keywords: Water markets Water planning Water governance Murray-Darling Basin MDB Basin Plan Economics Environment Price Water trade

a b s t r a c t The paper reviews the history of water markets and recent water reforms in the Murray-Darling Basin (MDB), Australia. A detailed examination of water markets in the MDB is given with a focus on: water charge and trading rules, trade restrictions, gains from trade, water market information, inter-temporal market price responses, and the environmental benefits of trade. Twelve lessons from the development of water markets in the MDB are provided to assist decision-makers interested in establishing or improving water markets in Australia, and beyond. © 2013 Elsevier B.V. All rights reserved.

1. Introduction Many countries grapple with the issue of how to allocate water across competing uses (United Nations, 2011; World Water Assessment Programme, 2012) and how to reallocate water in systems where current water extractions are the principal cause of conflict and environmental degradation (Grafton et al., 2012a,b). We describe a markets-based approach to water allocation and reallocation that has been adopted in the Australia’s Murray-Darling Basin (MDB) that covers parts of six jurisdictions: four states (Queensland, New South Wales, Victoria and South Australia), the Australian Capital Territory, and the Australian government. Water rights in the MDB comprise: (1) water access entitlements (hereafter referred to as water entitlements) held on the

Abbreviations: ABS, Australian Bureau of Statistics; ABARE, Australian Bureau of Agricultural and Resource Economics; ACCC, Australian Competition and Consumer Commission; BRS, Bureau of Rural Sciences; CEWH, Commonwealth Environmental Water Holder; COAG, Council of Australian Governments; GL, Gigalitre or one billion (one thousand million) litres; MDB, Murray-Darling Basin; MDBA, Murray-Darling Basin Authority; MDBC, Murray-Darling Basin Commission; ML, Megalitre or one million litres; NWC, National Water Commission; NWI, National Water Initiative. ∗ Corresponding author. Tel.: +61 2 61256558. E-mail addresses: [email protected] (R.Q. Grafton), [email protected] (J. Horne).

balance sheet of owners that provide an on-going share of a consumptive pool in a water resource plan and (2) water allocations which are the volume of water assigned to a water entitlement in a given water season under a specified water resource plan. Since the 1980s both of these water rights have over time become transferable although some barriers to trade remain. Overall, water trade in the Murray-Darling Basin (MDB) has encouraged on-farm innovation in water use, enabled more effective risk management and helped to move water from low to higher value consumptive uses via trade (National Water Commission, 2010a). Water markets within the Basin have also facilitated the reallocation of water from consumptive to non-consumptive uses through government purchases of water entitlements from willing sellers. While every country and catchment will have its unique set of challenges, we believe the approach to water markets within the MDB offers valuable lessons for water management (Turral et al., 2005; Young, in this issue), especially in other countries and river basins that face the dilemma of trying to improve productive efficiency and agricultural value add from water use without compromising key riparian ecosystem services. The market ‘experiment’ in the MDB is not only important for Australia, but is of global significance as the Basin has become one of the world’s largest water markets in terms of the annual market value of water traded (Grafton et al., 2011). Our contribution is to review the development of water markets in the MDB, describe the current status and opportunities to reduce transaction costs and to enhance

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productive efficiency further, and offer insights from the MDB experience for river basin management elsewhere. Section 2 reviews the development of water markets in the MDB while Section 3 describes the current status of water trading in the Basin with special reference to water charge and trading rules, trade restrictions, the gains from trade, water market information, intertemporal market price responses, and the environmental benefits of trade. Section 4 examines current interventions into water markets designed to increase environmental flows. Section 5 offers 12 lessons from the process of development of water markets in the MDB. The final section provides conclusions. A glossary of terms is included to provide a common, understandable lexicon. While a common definition of key water terms has been supported by all Australian governments for a decade, and notwithstanding ongoing efforts by various agencies (see National Water Commission, 2013a,b), differences in definitions and terminology remain.

2. Water markets in the Murray-Darling Basin In the MDB water markets involve transactions between a buyer and seller for the right to receive either an ongoing share of the available water entitlement, or a specified volume of water in the current water year (water allocation) assigned to a water entitlement over a water year (1 July to 30 June). Water entitlements do not require the holder to utilise the allocated water to maintain the entitlement, but limits and rules apply to the physical carryover of unused water allocation from one year to the next (Loch et al., 2012). Trading in allocation water involves one of two main types of transactions. It may involve the movement of environmental water derived from a water entitlement held by an environmental water manager in one part of the basin to use elsewhere in the basin. This is a relatively recent development, consequent on the growth of water entitlements being used for environmental purposes. Trading in allocation water also refers to transactions where users purchase additional water for agricultural, industrial or residential use. Such transactions occur because the buyer has a higher value use for the purchased water than does the seller and, if freely undertaken, are mutually beneficial to both parties. To be able to utilise the water allocation assigned to a water entitlement, a water use license is required. Such a licence may impose conditions or obligations on the user that vary according to where the water is consumed. Unlike water entitlements or water allocations, a water use license is bundled to the land where obligations on use are imposed and, therefore, it is not tradable with the water entitlement or water allocation. Delivery rights are required to ensure allocated water is delivered. If water is to be delivered by an irrigation infrastructure operator (IIO) the water user requires a delivery share or right so as to be able to utilise the available infrastructure to deliver the water to the desired location. In addition to tradable water rights, farmers can access water directly from a water source under a long-standing riparian right, but only for stock and domestic use, and this right is generally not tradable.

2.1. Property rights for water Australian agriculture in the MDB developed under a system of largely statutory water rights. These rights are provided by the state to water users with conditions attached to access and use. This is similar to freehold land title, where use conditions are also determined by the state. Statutory water rights exist only in so far as they are state authorised and may be allocated independently of whether or not a water user has riparian access.

Statutory rights for water were created first in Victoria in 1886 and then New South Wales in 1888 with the intention that water would be allocated by the state to meet policy objectives (Martin, 2005). The key reason why Australian states established statutory water rights was to encourage economic development, primarily based on navigation of the major rivers (such as the Murray River) and farming (Connell, 2007). Throughout much of the twentieth century a key goal of public policy was to expand agricultural production and employment via the free allocation of water licenses and to ‘drought proof’ agriculture through the subsidisation of infrastructure including dams, weirs and irrigation channels (Connell and Grafton, 2011). The maximum permissible volumes of water that can be extracted within each State in a given year has been mutually agreed to by state governments and the Australian Capital Territory as part of intergovernmental agreements. The initial allocation of statutory water rights was in the form of water licences to farmers that were not tradable and were bundled with the land. State water licences, at least initially, did not limit the volume of water that could be used, but restricted the land area that could be irrigated. These original statutory water rights required the license holder to be the owner or manager of land bordering the infrastructure development where the water was delivered. In a process that begun in the 1960s and continued into the 1970s, at different speeds across states, water licenses were transformed into volumetric entitlements typically equal to one acre-foot per acre or equivalent to three megalitres (ML) per hectare (Martin, 2005). In some areas supplementary licences for water were also established, that provided irrigators with existing water licences with extra volumes of water in periods of high inflows. 2.2. Transition to water markets Until 1969 in South Australia, and up to 1977 in New South Wales, new water licenses could be obtained by farmers, but increasing concerns in terms of over-allocation eventually led to a prohibition of the granting of additional state water licenses. Despite the capping of additional licenses, diversions of surface water expanded as statutory water rights previously unexercised (sleepers) or used infrequently (dozers) were increasingly utilised (Murray-Darling Basin Ministerial Council, 1995), particularly in New South Wales. This ‘overhang’ was substantial because, even in the absence of any further granting of water licences, close to 40% of the nominal volumes of water assigned to water licences had never been exercised by 1992–1993 (Murray-Darling Basin Ministerial Council, 1995, p. 8). In response to growing concerns over water access by farmers, and especially following a widespread drought in 1982–1983, the trading of water allocations was gradually permitted by states. Trade in water allocations was first allowed in New South Wales and South Australia in 1983 and then later in Victoria in 1987. Trade in water entitlements within an irrigation district was permitted in the states of South Australia in 1983, New South Wales and Queensland in 1989, and Victoria in 1991. Initially, trading was allowed only within the same catchment or irrigation district. In New South Wales and Victoria there was also an initial reluctance to allow inter-valley water entitlement trade because of concerns about the social and economic effects on communities from the sale of water out of irrigation districts (Bjornlund and O’Callaghan, 2003, p. 4). Inter-valley and inter-district trade only became permissible later, beginning first in New South Wales with the commencement of inter-valley trading of water allocations in 1991 (National Water Commission, 2011b, p. 50). Further reforms to water trading and the register of water entitlements continued in the 1990s, including an in-principle agreement by the Council of Australian Governments (COAG) in 1994 to separate all statutory surface water rights from land rights

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(Council of Australian Governments, 1994). The ‘unbundling’ of water rights, first in terms of water from land, and more recently with the separation of access, delivery and use rights is intended to promote water trading and its transfer to higher value consumptive uses. The 1994 COAG reforms greatly boosted trade in annual water allocations that increased eight-fold between 1993–1994 and 1994–1995 (Grafton et al., 2012a,b). It coincided with the implementation of a limit on surface water extractions to existing levels (called the ‘Cap’) in the Southern part of the Basin in 1995 and was made permanent in 1997. The Cap, which allowed surface water extractions to vary depending on inflows, was established with two purposes in mind. First, it would halt further increases in what was already perceived to be over-extraction of surface water from several rivers within the MDB that was causing environmental degradation. And, second, it would limit the erosion of the reliability of existing water entitlements. The objective of the Cap was not to stop additional ‘greenfield’ irrigation development, but rather to limit the total surface water extracted from the Basin’s rivers and streams. A key goal of governments in encouraging the expansion of water markets was to mitigate the costs of limiting overall surface water extractions in the Basin. The intent was for water trading to allow for further developments and to permit existing irrigators with higher value uses to increase the amount of water they diverted relative to lower value consumptive uses. In New South Wales, in the period after the Cap was introduced, irrigators were permitted to fully activate their ‘sleeper’ and ‘dozer’ water licences that resulted in a reduction in the reliability of already activated water entitlements (Martin, 2005, pp. 175–177). The pace of water reform was much slower than initially committed to by governments in the mid-1990s (Horne, 2012). As a result, a further impetus for reform was agreed to with a National Water Initiative (NWI), signed by most state governments and the Australian government in 2004. The commitment for water reform shown in the NWI was, in part, a desire for all governments to provide mechanisms for farmers to cope with a worsening drought. The thrust of the NWI was to “deliver a nationally compatible, market, regulatory and planning based system of managing surface and groundwater resources for rural and urban use that optimises economic, social and environmental outcomes” (Council of Australian Governments, 2004, para. 23). It also had a stated goal to return all currently overallocated or overused water systems to environmentally sustainable levels of extraction. Coincident with the NWI, the Murray Darling Basin Ministerial Council provided a $500 million commitment to improve the environment at six icon sites in the Basin and to eventually increase environmental flows in the Murray River by as much as 500 gigalitres (GL) per year (Grafton and Hussey, 2007), derived from improving water use efficiency and through direct purchases from irrigators. In 2007, a new stage of institutional and market reforms was embarked upon, as a direct result of very low water storages and allocations during the worst year of the Millennium Drought, and the continuing slow pace of implementation of agreed-to- reforms. The focus was on implementing the NWI framework in detail and also on basin-wide reform rather than state-based planning. In particular, a key goal was to put in place a more comprehensive approach to over-allocation and overuse of water resources in the MDB, which would be addressed in a Basin-wide plan. This was supported by a $10 billion funding package to be spent over 10 years, with $3 billion allocated for the purchase of water entitlements for environmental purposes. The 2007 reforms included a foundation Commonwealth Water Act that established the Murray-Darling Basin Authority, with responsibility to develop a Basin Plan that would set sustainable diversion limits (SDLs) for surface and groundwater, basin-wide

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environmental objectives, and measures to improve the security of water entitlements. The reforms also included critical basinwide measures to improve competition within the water markets and availability of water information (Connell and Grafton, 2011; Horne, 2012). In terms of water markets, the 2007 reforms were intended to remove restrictions on trade, especially across state boundaries. In addition, charges by IIOs were to be regulated to limit the fee that could be imposed for the delivery of water and also ‘termination fees’ should farmers sell their water entitlements outside of an IIO’s delivery area. While barriers to inter-state trade for water allocations have been successively removed, and despite a Pilot Interstate Water Trading Project from 1998 to 2006 intended to reduce the barriers to trade, there has been negligible inter-state trade of water entitlements following a 2009 agreement by the Murray-Darling Basin Ministerial Council to expand such trade. This is attributed to the requirement that water entitlements retain their source characteristics, including their level of reliability, when traded across state boundaries (Grafton et al., 2012a,b). In 2011, the National Water Commission summarised the priorities for further water market reform as including: the facilitation of groundwater trade, further improvements in trade approval processes, mandatory disclosure of price data of water trades and verification of this data, greater transparency about the determination of water allocations, and a code of conduct for market intermediaries (water traders and brokers) (National Water Commission, 2011a). In November 2012, the first Murray-Darling Basin Plan (commonly known as the Basin Plan), envisaged in the Water Act 2007 (Commonwealth), entered into force. The Basin Plan provides a new water planning and governance framework covering, inter alia, limits on surface and ground water extraction, new trading rules, and obligations concerning environmental watering intended to enhance the security and reliability of water entitlements, and the sustainability of water use in the MDB. The test for MDB governments going forward is to ensure its effective and timely implementation (Horne, 2013).

3. Water trading in the Murray-Darling Basin Water markets in the MDB account for over 80% of all entitlement trade and seasonal allocation trade in Australia (National Water Commission, 2011b). By volume, regulated entitlement trade in the Southern MDB totalled 279 GL in 2007–2008, peaked in 2008–2009 at 1355 GL, before falling sharply to 542 GL in 2010–2011 coincident with a water year with above normal inflows, and then increased to 719 GL in 2011–2012 (see Table 1). Almost all entitlement trade occurs within states and when traded across state boundaries the entitlement is ‘tagged’ so that it retains its original source characteristics. Previously, interstate entitlement trade was carried out on the basis of an agreed-to exchange rate that promoted trade, but was perceived to cause undesirable third party impacts. About 5% of all surveyed farmers in the MDB traded water entitlements in 2008–2009 (Ashton et al., 2011, p. 30) and some 15% of surveyed irrigators in 2010–2011 had traded water entitlements in the previous three years (National Water Commission, 2011b, p. 106). In the Southern Murray-Darling Basin trade in allocation water increased every year over the past five years and rose from 796 GL in 2007–2008 to 3698 GL in 2011–2012. By comparison, longterm average surface water use in the MDB is 10940 GL per year (Murray-Darling Basin Authority, 2010a, p. xviii) while annual average inflows into the Murray River over the past 120 years are some 11000 GL. Nearly all the volume traded is surface water in the areas of the MDB where there are regulated releases of water from common storages or dams. Since 2007–2008, trade in allocated water in

Please cite this article in press as: Grafton, R.Q., Horne, J., Water markets in the Murray-Darling Basin. Agric. Water Manage. (2014), http://dx.doi.org/10.1016/j.agwat.2013.12.001

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Table 1 Regulated water entitlement and allocation trade in the Southern Murray-Darling Basin. Type Entitlement trade (GL) Entitlement trade (number) Allocation trade (GL) Allocation trade (number)

2007–2008 279 2573 796 22,733

2008–2009 1355 4171 1717 22,412

2009–2010 1252 5739 1871 17,709

2010–2011 542 3875 3124 7538

2011–2012 719 4709 3698 10,908

Data sourced from the National Water Commission (2013a).

Fig. 1. Water entitlement trade in the Southern Murray-Darling Basin. Data Source: National Water Commission (2013a, Tables A.5 and A.22)

the southern MDB has amounted to around 30% of water allocated in a given water year (National Water Commission, 2011b, p. 74), involved about half of all surveyed farmers in 2008–2009 (Ashton et al., 2011, p. 30) and comprised almost 11,000 separate trades in 2011–2012. In 2011–2012 about 20% of all allocation trades were interstate (National Water Commission, 2013a, p. 6). Removal of restrictions on interstate trade following the 2004 NWI increased across border trade in water allocations, but trade still occurs within a water resource plan and water entitlements traded across plans must be ‘tagged’ to ensure the original characteristics are maintained after trade. The decision by the Australian government to purchase water entitlements from irrigators so as to increase environmental flows, and that began in 2008, have also had a major effect on volumes for the entitlement trade. The volumes purchased by the Australian Government as a proportion of the total water entitlement trade in the Southern MDB is presented in Figure 1. As a percentage of the nominal volume of water associated with water entitlements in the Southern MDB, the Australian Government accounted for 4% of the total trade in 2008–2009 and 37% of the total trade in 2011–2012. By contrast, in 2011–2012 water entitlement trade across irrigation districts/zones for both regulated and unregulated water accounted for about 46% of the total volume traded while trade within irrigation districts represented a little less than 20% of the total volume in the Southern MDB (National Water Commission, 2013a, pp. 89 and 97). The sharp increase in water trade in seasonal allocations after 2007 was, in part, attributable to a severe drought that dramatically reduced water allocations (National Water Commission, 2010a; National Water Market, 2012a). The Millennium Drought led to zero opening water allocations for many general security (medium reliability) water entitlements, and historically low opening water allocations to high reliability water entitlements. To make up the water shortfall to their entitlements during the drought, irrigators with high value crops (especially perennial crops) used the water allocation market to secure water that, in the past, they would have received as allocations assigned to their own water entitlements. For example, horticulturalists on the lower reaches on the Murray River were major purchasers of water allocations in 2007–2008 that were sold by dairy (pasture) irrigators in the

Fig. 2. Average prices for water allocation trades in the Murray-Darling Basin ($/ML). July 2007–2008 figures not available. Data Source: National Water Commission (2013a, Table A.9)

Victorian Goulburn region and Murrumbidgee rice growers further upstream. In addition to water trading, farmers responded to less available water during the Millennium drought by changing crop mixes, input substitution and improvements in technology to reduce water application rates (Kirby et al., in this issue). The market price for water allocations has varied in response to scarcity or water availability. During the Millennium Drought in 2008–2009, for example, the average price of allocation water exceeded $400/ML, as shown in Fig. 2. At this price, water extraction is uneconomic on many crops, and effectively encouraged its sale to irrigators who grow higher value crops, or permanent plantings (such as orchards). In 2010–2011, which was a very wet year, the average price for allocation water fell to around $20/ML (National Water Commission, 2011b, p. 34) (Fig. 3). 3.1. Water charge rules Historically, restrictions on sales of water entitlements were used by states and IIOs to mitigate what they perceived to be economic and financial losses (lower employment, reduced turnover of agricultural suppliers, etc.) associated with the trade of water

Fig. 3. Average prices for water access entitlement trades in the Murray-Darling Basin ($/ML). Data source: National Water Commission (2013a, Table A.20)

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from out of an irrigation district and a state. By contrast, since the 1980s the water allocation trade within irrigation districts with a common infrastructure operator faced far fewer, if any, restrictions. IIOs had until 2010 imposed their own rules in terms of the termination and exit fees on water delivered to their members. These restrictions were legally permissible because they held the water access entitlements of their members in bulk in South Australia and New South Wales. From 2010, building on the passage of the Water Act 2007 (Commonwealth), the behaviour of operators was controlled under new ‘water market and water charge rules’, intended to strengthen the operation of the water market in the MDB. The water market rules developed by the Australian Competition and Consumer Commission (ACCC) apply to IIOs that hold an aggregated water access entitlement under which the member irrigators have a right to a share of that water. The water market rules ensure that an operator cannot prevent or unreasonably delay the transformation of bulk entitlements to water under irrigation rights into separately held water entitlements (Australian Competition and Consumer Commission, 2013a,b). The ACCC determinations over the past few years include a set of water charge rules that apply to termination fees and the fees levied by infrastructure operators and state agencies for water planning and management services (Department of Sustainability, Environment, Water, Population and Communities, 2012a). In the case of termination fees, the rules limit the fee imposed by IIOs on irrigators who terminate their access to all or a part of the infrastructure network to a maximum of 10 times the annual fixed access fees payable (Australian Competition and Consumer Commission, 2011). Prior to the implementation of these rules some infrastructure operators imposed arbitrary exit fees on the sale of water entitlements that hindered the sale of water entitlements from irrigation districts. Under the ACCC rules for water charges, termination fees are not imposed when water entitlements are traded, but only when a supply contract or delivery share is terminated. This has allowed some irrigators to trade their water entitlements and to retain an existing delivery contract when they purchase water allocations. The ACCC has observed that compliance to both water market and water charge rules has been improving, and costs in some areas have declined as IIOs become more familiar with the operating framework. Concerns of IIOs and communities about the impact of large Commonwealth water purchase programs on remaining irrigators and the viability of cost effective delivery across the irrigation infrastructure have not been borne out in practice, as sellers have sought to retain water delivery rights (Australian Competition and Consumer Commission, 2013a,b). 3.2. The Basin plan and trading rules Trading rules that will become operational on 1 July 2014 as part of the Basin Plan are designed to ensure efficient water markets and are based on detailed advice from the ACCC. These rules should help to ensure that trade in surface and groundwater is free from most types of restrictions, and that information in relation to water delivery rights and irrigation rights is available (Minister for Sustainability, Environment, Water, Population and Communities, 2012). The principal areas covered by the rules that come into effect in 2014 are in relation to surface water and include: the separation of water access entitlements from any other rights (including delivery shares); the free trade of surface water entitlements except for restrictions allowable for environmental reasons; the identical treatment of water entitlements acquired by trade or otherwise including carryover; no trade restrictions on water entitlements in terms of purpose of use; no restrictions on the volume of water that can be traded; and an allowance for recovery of damages for compensable losses if trading rules are contravened (Minister for

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Sustainability, Environment, Water, Population and Communities, 2012). The Basin Plan trading rules present a sound approach to minimising restrictions to water trading in the long-term. If there is a deficiency it is that while transitional and interim plans water resource plans operate, they override the Basin Plan trading rules where they differ (Minister for Sustainability, Environment, Water, Population and Communities, 2012, p. 122). Effectively, this means that the full implementation of the trading rules will not happen until 2019 or after when all current state water plans are replaced by water plans compliant with the Basin Plan. When trading rules become operational from July 2014, along with the already operational market and charge rules, restrictions on water trade should over time become increasingly less important. Areas of uncertainty that remain in the trading rules should be resolved in the process of implementation, as transitional and interim water resource plans expire. Notwithstanding the likely removal of remaining restrictions over coming years, the market for trading water entitlements may not return to the peak levels of 2009–2010 when trade was supported by purchases of 488 GL in the Southern MDB and 172 GL in the Northern MDB of water entitlements by the Australian government intended to achieve environmental objectives (National Water Commission, 2013a, pp. 97–98). The on-going purchasing program is expected to be on a much-reduced scale over the period 2013–2019 with potential purchases over this period projected to be no more than 239 GL (Department of Sustainability, Environment, Water, Population and Communities, 2012b, p. 20). As at 30 June 2013, water entitlements with a nominal volume of 1629 GL or 1190 GL in terms of long term average yield had been acquired by the Australian government either by direct purchase of water entitlements (about 70% of the nominal volume of water entitlements acquired), via state actions (about 10%) or through water recovery by infrastructure investments (about 20%) (Department of Sustainability, Environment, Water, Population and Communities, 2013). 3.3. Trade restrictions An oft-used illustration of the regulations restricting water trade is the 4% annual limit that applies in the state of Victoria and limits the volume of net outbound entitlement trade from an irrigation district to a maximum of 4% of the total volume of water entitlement held in each district. In the past there have been other trade restrictions such as the 10% limit in Victoria on the ownership of water entitlements by non-landowners that was in effect 2007–2009. The Victorian 4% rule has prevented some water trade in four out of nine irrigation areas within the state for high reliability water entitlements, and in one out of eight irrigation areas for low reliability entitlements (Australian Competition and Consumer Commission, 2011, p. 105). It continued to restrict trade in 2011–2012 (National Water Commission, 2013a) although the Victorian government has committed to removing the 4% rule by 1 July 2014. In addition to constraints on trade between irrigators, the Victorian 4% rule has constrained the sale of water entitlements for environmental purposes until June 2009 when an exemption was granted to the Australian Government. In reaction to the initial Victorian position, New South Wales also put in place an embargo on the sale of water entitlements for environmental purposes from May until September 2009 when it agreed to a partial relaxation of its restrictions. In January 2013 the New South Wales government imposed a 10-year 3% trade cap on water entitlements out of each Basin valley if purchased for environmental purposes. This cap essentially precludes any further purchases of water entitlements in New South

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Wales by the Australian government. This appears more restrictive than the Victorian 4% rule and is in direct contravention of the trading rules in the Basin Plan. The New South Wales 3% restriction, if used as the basis for denying trade, provides an early test for the enforcement role of the MDBA, and underlines a key reason why the Australian government has sought involvement in the Basin water planning and governance framework, namely, to protect and strengthen the rights of entitlement holders and facilitate free trade in water. In addition to trade restrictions, states have periodically also imposed trade bans. For instance, from 11 April to 1 July 2011 Victoria imposed a trade suspension that prevented entitlement holders in New South Wales from directly selling their allocations into Victoria to take advantage of Victoria’s more generous carryover arrangements because such trades would have reduced the reliability of Victorian Murray water entitlement holders. Between April and June 2012 New South Wales suspended allocation trading into South Australia while South Australia suspended allocation trade for a week in March 2013 (National Water Commission, 2013a, p. 62). These suspensions reduce confidence in water markets and impose sovereign risk and costs on farmers who are prevented from undertaking beneficial trades. 3.4. Gains from trade Water trade generates very substantial economic returns to irrigators (both buyers and sellers) and their farming communities. The National Water Commission completed a review of water trading in the southern MDB in June 2010 (National Water Commission, 2010a). It found that water trading increased the gross regional product of the southern MDB by some $370 million relative to a scenario where no trading is available. The boost to gross regional product from trade by State was for New South Wales ($79 million), South Australia ($16 million) and Victoria ($271 million). In an updated analysis released in 2012 the National Water Commission noted that: (1) Interregional and intraregional trade reduced the effect of the Millennium Drought on regional domestic product in the southern MDB from $11.3 billion to $7 billion over a five-year period; (2) the expansion of water trade accounted for $845 million of the benefits from the reduced effects of the drought; (3) Most of the water trade occurred in the driest years when the need to reallocate water is greatest. In the exceptionally dry years of 2007–2008 and 2008–2009 the total benefits of water trade were estimated at $1.5 billion and $1.2 billion, respectively, whereas total benefits in the much less dry year of 2010–2011 were less than $500 million (National Water Commission, 2012, xii). Water trade also reduces risks to towns and cities and industry in the Basin because it allows them to purchase additional water if their initial or historical allocation is inadequate to meet current needs. This is an option that is particularly valuable in periods of extended drought. 3.5. Water market information A key issue for water markets, and water trading as a whole, is to determine whether transaction costs are higher than they should be, and whether market information is sufficient to allow timely and accurate decision-making by market participants. To improve decision making the Australian government, in conjunction with the States, is constructing a National Water Market System. The system was designed to provide real time access to accurate market information on trading in the many entitlement and allocation markets that exist in the MDB, and elsewhere. It currently includes, inter alia, a reference table listing remaining restrictions on trade (National Water Market, 2012b).

The pace of development of the market information system has slowed in recent years while key parts of the website have remained unchanged for periods of 12 to 18 months (National Water Market System, 2013). Creating and maintaining an up-to-date database, however, is critical to improve the efficiency of water markets. While the trading rules in Basin Plan seek to improve the level of market transparency, through improved information availability, the lack of progress by states and the Australian government to develop a National Water Market System is an on-going concern for market participants. 3.6. Water market price responses Competitive markets should respond to changes in supply and demand. Such responsiveness is represented by the inter-temporal price variability that occurs in water markets in the MDB. For example, during the severest years of the drought from 2006 to 2008 when the average water allocations to water entitlements (proportion of the nominal volume of the water entitlement actually received during the water season) were lowest, this coincided with a peak in water allocation prices. In 2010–2011 allocation prices fell sharply as water availability greatly increased with the end of the Millennium Drought. By comparison, there has been much greater stability in the price of entitlement trades. This is because water entitlement prices represent expectations about returns over many years rather than just a given water year. Traded prices are greater for water entitlements with higher levels of reliability where there is an increased probability that the entitlement holder will receive the nominal volume of water specified on the entitlement. For high reliability entitlements this probability, defined as the reliability factor, is about 90% or more while for low reliability entitlements the reliability factor varies significantly from around 80% for some NSW general security products to as low as around 25% for some low reliability products in Victoria. All South Australia water entitlements are of high reliability. While water entitlement prices have changed over time, and declined with the ending of the Millennium Drought, the price variation has been much less than for the water allocation trade. High prices for both water entitlements and water allocations during the Millennium Drought encouraged investments in onfarm water efficiency and have contributed to annual productivity improvements of about 3% per year over the past two decades (Australian Bureau of Agricultural and Resource Economics, Bureau of Rural Sciences, 2010, p. 28). The ability to trade water and to adjust the volume and mix of high and low reliability water entitlements to reduce risks of insufficient water supplies has also permitted investments in perennial agriculture that may otherwise not have been contemplated (National Water Commission, 2010a). 3.7. Environmental impacts of trading Surface water extractions for irrigated agriculture have imposed large environmental costs in the MDB (Murray-Darling Basin Authority, 2010a). Given there has been a Cap on the total amount of surface water extractions since 1995, a key issue is whether or not water trade within this Cap has exacerbated the environmental costs of extractive water use. A review of the impacts of trade in the southern MDB over the period 1998–1999 to 2007–2008 modelled the end-ofsystem flows, with and without allocation trade (National Water Commission, 2010a). In some rivers within the Basin, water allocation trade increased end-of-system flows. This is consistent with the direction of trade in water allocations from upstream to downstream users. For example, in the case of the Murrumbidgee River, the third largest river in the Basin, the volume of end-of-system flows due to water trade represented over 80% of the total flow in

Please cite this article in press as: Grafton, R.Q., Horne, J., Water markets in the Murray-Darling Basin. Agric. Water Manage. (2014), http://dx.doi.org/10.1016/j.agwat.2013.12.001

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2006–2007 and 2007–2008 (National Water Commission, 2010, p. 92). Increased end-of-system flows due to water trade were also observed on the Goulburn and Loddon Rivers in Victoria. The 2010 National Water Commission study also found that during the Millennium Drought the increased end-of-system flows in these rivers were beneficial to downstream ecological assets.

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rules should help to ensure that movement of water held for environmental purposes is not disadvantaged relative to other forms of water. There may also be environmental advantages from the trading of water entitlements held for the purposes of increasing environmental flows (Connor et al., 2013). 5. Lessons learned

4. Water markets and environmental flows Water for the environment is provided in two main forms. These are ‘rules-based’ water and ‘entitlement’ water. Rules-based water is the water left in the river after the rules that govern extractions have been applied. It is the water remaining or the residual after all holders of water rights have taken or on-sold their allocations. Environmental entitlement water, in this context, represents the specified volume of water allocated to water entitlements held by governments and used expressly for environmental purposes (Docker and Robinson, 2013). Rules-based water allocations for the environment are determined by State governments and are detailed within catchmentlevel water resource plans. These rules-based environmental allocations are determined on the perceived needs and interests of the individual States rather than the collective interests of the entire Basin. For example, during the Millennium Drought the decline in environmental flows in the Basin was about four times greater than the reduction in irrigation diversions as a result of water planning rules (Commonwealth Scientific and Industrial Research Organisation, 2008, p. 59). The discretionary nature of rules-based water was one factor in prompting the purchase of water entitlements by governments, especially the Australian Government, so as to ensure appropriate volumes of water are available for environmental flows (Connell and Grafton, 2011; Horne, 2012). To address concerns in terms of over-extraction of water in the Murray-Darling Basin, the Australian government in 2008 established the Water for the Future package which revamped the 2007 A$10 billion water reform commitment and included a $3.1 billion program for the purchase of water entitlement from willing sellers. Its stated goal was to obtain water for the environment that represents ‘value for money’. As of end June 2013, the Australian government had exchanged contracts for over 10% of total water entitlements in the MDB (Department of Sustainability, Environment, Water, Population and Communities, 2013) for an estimated total cost of just under $2 billion. These direct purchases have made a meaningful contribution, or about 40% progress, towards meeting the planned-for target in the Basin Plan to re-allocate 2750 GL of water for environmental purposes and impose SDLs on consumptive use (Department of Sustainability, Environment, Water, Population and Communities, 2013). About 70% of the Australian government’s current water portfolio (held by the Commonwealth Environmental Water Holder) has been derived via a series of reverse tenders, all of which have been at market prices and obtained from willing sellers. There have been over 4500 individual trades (purchases) over the period to mid-2013 (Department of Sustainability, Environment, Water, Population and Communities, 2013). The Australian government’s estimate of water yield from its own funded infrastructure projects at end June 2013 was 344 GL. Together, the water entitlement holdings acquired by the Australian government by purchases and water from infrastructure projects accounts for around 60% of the 2750 GL target to reallocate water from consumptive to environmental uses (using a 2009 baseline) (Department of Sustainability, Environment, Water, Population and Communities, 2013). A key requirement under the Basin Plan is the preparation and implementation of an environmental watering plan. The trading

Australia’s experience with water markets in its MDB illustrate that markets, in conjunction with an effective regulatory and compliance framework, can contribute towards achieving a sustainable balance between the environment and agriculture. How relevant this is to other countries and river basins will depend on their history, current governance and rights arrangements, and the perceived benefits from change to and within the community. The history of water reform in the MDB shows that crises provide opportunities for change, but are no guarantee for success. Whether the establishment of water markets makes sense in a particular country or river basin will depend on the costs and benefits of unravelling existing arrangements and putting in place a revised framework for water reallocation. Based on the experiences in the MDB and the insights of previous studies, including the National Water Commission, we offer 12 lessons about water markets and water market reform. 5.1. Crises may facilitate reform The critical water reforms in the MDB have occurred in response to a crisis, most recently in response to a severe drought, but previously in the context of an economy wide microeconomic reform debate, and a realisation that water use had begun to reach a limit. As the focus on the crisis fades, so may do the reform zeal. This ‘stop and go’ reform process suggests that determination is required to make consistent progress, but that a crisis can facilitate reform. 5.2. Water markets support regional resilience Water markets support the resilience of communities and regions, by supporting the resilience of agriculture and the environment. In the MDB water markets have contributed substantially to the resilience of agriculture and its transformation as domestic and international conditions for specific commodities change. They have allowed water entitlement buyers and sellers a way to adjust their balance sheets or sell excess water (sellers) or to increase their water asset portfolio or water access in a particular year (buyers) (Australian Competition and Consumer Commission, 2013a,b). The geographical distribution of markets has meant these benefits have been concentrated in areas of greatest connectivity of the resource (the southern Murray-Darling Basin) where there is also the widest cross-section of users. An example is the significance of selling water by opportunistic commodity producers (such as rice growers) to perennial crop producers (such as citrus growers). The operation of water markets has also the potential to strengthen the resilience of the environment. This is because as understanding of river basins improves, water allocations from entitlement water held by environmental water managers can be used to maintain and restore priority environmental services. 5.3. Political and administrative leadership is critical Developing strong markets needs effective basin-wide political leadership and supporting action from the expert bureaucracies in all parts of the Basin. This involves teams with a range of skills, much broader than the engineering-based specialists that have traditionally managed water resources. Without this diversity of skills and

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experience, the development of water markets is likely to be slow and unnecessarily difficult. The Australian government has been a driver of water market reform in the MDB (Horne, 2012; National Water Commission, 2011a). Over the past 20 years State governments, in collaboration with the Australian government, have agreed to change the rules that govern water entitlements and water allocations. These changes have, over time, substantially reduced barriers to trade and have been a key development in the effective operation of water markets in the MDB. Despite the successes, securing lasting market reform has been difficult, and barriers to trade, especially for environmental water entitlements, remain.

5.4. Capping extractions promotes effective use and sustainability A key to the development of water trading in the MDB has been monitoring and enforcing surface water extractions and an overall Cap or limit on total surface water extractions that was initiated in 1995. Not only did this result in increased use of groundwater resources that were not immediately affected, but the largest percentage annual increase jump in the water allocation trade occurred immediately following the implementation of the 1995 Cap. This suggests the impost of a cap or overall limit on water extractions has promoted water trade. As the Australian experience shows, any cap should be comprehensive and all water sources should be included to avoid substitution to uncontrolled or inadequately measured sources.

5.5. Regulated water framework facilitates water trading Water entitlements delivered via regulated water storages account for the about 90% of the water entitlements traded in the Southern MDB. Further, the Southern Basin consists almost entirely of regulated water and accounts for over 90% of the total allocation water trade in the MDB. This supports the view that by storing water and allowing for its controlled release, water trade can be greatly facilitated as it permits downstream sellers to trade water to upstream buyers, and for downstream purchasers to use water purchased upstream at a time of their choosing. Further, the nature of the controlled releases in the MDB is that stream flows are increased during the dry, summer months than they would otherwise be. In turn, that helps extend the period of active allocation trading.

5.6. Reliable, accessible and timely market information promotes effective decision-making Along with changes in regulations, the Australian government is investing over half a billion Australian dollars in improved water information and regulations. These developments include more timely access to tools in addition to information and research largely through the Australian Bureau of Meteorology and efforts to create a national water market information system paid for by the Australian government. This information initiative includes ongoing, enhanced regulatory oversight by the ACCC, and improved information reporting requirements in the context of the Basin Plan. This package of measures will assist to consolidate and make more transparent water trade in the MDB. The current and planned market information developments add value to market participants while allowing for more effective monitoring of sustainability. A key aspect of these changes is that responsibilities have been assigned to the government agencies best able to deliver the desired outcomes, and not just water agencies. For instance, the ACCC has expertise in market operations, market power and ways to promote competitive markets while the

Bureau of Meteorology is a science-based agency ideally suited to the provision of water-based data and information. 5.7. Statutory rights offer flexibility but carry risks An important factor in the growth of water trade in the MDB has been the flexibility in reconfiguring water rights in a way that promotes trade. This has been possible because the water rights held by users are statutory rights that can be modified without recourse to the courts although this feature introduces uncertainty to the right holders. Further, unlike riparian rights, it has been possible to unbundle water rights from land rights, and then unbundle access rights from delivery rights and also separate bulk water entitlements held by IIOs on behalf of their members or shareholders into individual water entitlements. All of these developments to unbundle water rights have facilitated trade. Further, the specification that water rights with the same level of reliability are treated identically has promoted trade relative to a system where each holder of a water right has a given level of seniority of use, as is the case with appropriative rights. A potential downside of statutory rights is sovereign risk, or the possibility that the value of existing water rights can be degraded by changes in regulation and discretionary behaviour by state governments. The NWI specifies that policy-induced changes should be fully compensated by governments and any Australian government action that affects entitlement holders is, under the Australian constitution, appropriately compensable. Although States are not legally required to follow the principles of the NWI, increasingly there is societal pressure for them to act in such a manner. 5.8. Markets can promote environmental outcomes An important insight from the MDB is that water markets can be made compatible with public and environmental interests. Evidence to date indicates that water trade in the Basin has provided added benefits in terms of increased end-of-system flows from upstream tributaries, especially during the Millennium Drought. This outcome is not guaranteed as it depends on the direction of trade of volumes of water that, in turn, is determined by the value of marginal quantities of water across different water users. A key aspect of the environmental interest and water markets is that the Commonwealth Environmental Water Holder–who is responsible for managing water entitlements held by the Australian government to achieve the environmental objectives in the Water Act 2007 (Commonwealth)−may need to trade the Australian government portfolio of entitlements and allocations to optimise the delivery of water for the environment. Such trading should generate improved environmental outcomes. Trading should always be subject to a public interest test. Where there are important public interests, such as flow volumes at key locations or the need to ensure minimum levels of water quality, trade may need to be constrained for environmental reasons. The reason for these constraints on trade should be made explicit and transparent and the desired goal arising from the restriction should be assessed for both its environmental and cost effectiveness. Section 12.18 in the Basin Plan seeks to address this issue. An example of this approach is the Basin Salinity Management Strategy that seeks to reduce salinity: actions that reduce salinity are treated as credits and actions that increase salinity as debits on State salinity registers. This Salinity Management Strategy has been operational for over two decades and has resulted in a measurable beneficial impact on salt loads (Murray-Darling Basin Authority, 2010b). Through this mechanism, an aggregate trade that contributes to measurable increases in salinity must be offset by activities that reduce salinity. The introduction of the Water Market Rules noted above (and

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overseen by the ACCC) to promote unbundling of water entitlements from water-use licences (Australian Competition and Consumer Commission, 2013a,b) is also assisting in achieving environmental goals. This is because the trade of water entitlements will allow water markets to reallocate water from low to higher value uses while unacceptably high environmental costs from particular uses of the water should be prevented by water-use licenses. 5.9. Acquiring water for the environment through buybacks has proved effective Notwithstanding the role of water markets, and advantages of having irrigators make their own investment decisions about water-use efficiency, the Australian government has invested in on and off farm infrastructure to acquire water for the environment. A subsidy approach is a more costly way to acquire water for the environment (Productivity Commission, 2010; Qureshi et al., 2008; Grafton and Hussey, 2007) and distorts water markets because it favours those receiving subsidies relative to those irrigators that have already undertaken cost-effective water use efficiency investments. Another advantage of water buybacks for the environment in the Southern MDB, at least at the scale undertaken to date, is that they appear to support rather than detract from regional economic activity (Dixon et al., 2011). 5.10. Prices contain information on scarcity and risk Water markets provide price signals that represent the relative scarcity of the entitlement class, or the allocation water being traded. In the case of the MDB, the price signals appear to provide good indicators of water scarcity. For instance, the price of seasonal allocations for specified volumes was, in some locations, in excess of A$1,000/ML during the 2007–2008 irrigation season – a period of severe drought. By contrast, in the 2010–2011 water year following large inflows in almost all parts of the Basin, water allocation prices were less than $10/ML in many locations. While water entitlement prices have not varied nearly as much, as would be expected, they have also responded to changes in demand and expectations. As a result of the Millennium Drought, higher reliability entitlements demanded a higher price relative to lower reliability entitlements some of which received zero initial water allocations during the drought. Given that future expected reliability might vary from nominal reliability by differing degrees, and that these have changed across the different water entitlements in the Basin with the Millennium Drought, water markets have allowed for these variations in risk perceptions and preferences to be reflected in water entitlement prices. 5.11. Basin-wide and local perspectives have roles to play While local issues and expertise often contribute to policy settings (particularly in developing environmental recovery strategies), and can contribute positively in many circumstances, local input can also prevent or undermine the emergence of strong water markets. Independent development of water resources within each state in the southern MDB led to the over-extraction problem that currently exists. Developing a robust water market that crosses state borders requires ‘basin-wide thinking’ to support basin-wide outcomes. Governments need to see through short-term and sometimes parochial interests to facilitate optimal use in the longer term. 5.12. Effective monitoring and control of extractions are critical for sustainability The introduction of a Cap in 1995 on overall surface water use contributed to the growth of water markets in the MDB, but also

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had unintended consequences in the absence of effective regulation of groundwater and on-farm diversions. For example, in designing the cap on surface water, insufficient consideration was initially given to the incentives for water users to move to alternative water sources. Farmers made substantial investments to increase their on-farm retention of water that might otherwise have flowed to the Basin’s streams and rivers. Similarly, groundwater extractions increased by about half over the period 2000–2001 to 2007–2008 (from about 1250 GL to 1750 GL) (Murray-Darling Basin Authority, 2010b, p. 143) as market users sought access to other cost effective water supplies (Hafi and Goesch, 2006). While the control of groundwater has been addressed in the 2012 Basin Plan with the introduction of SDLs for groundwater and surface water, further research is required to ensure that the extraction limits have not been set too high. This is especially important given the Basin’s highly variable climate, and the possible impacts from climate change. 6. Concluding remarks Water markets in the Murray-Darling Basin have been developed and supported by state governments and the Australian government to address the challenges of over-allocation, overuse and water scarcity. Since trading began in the 1980s water rights have been unbundled from land and further unbundling is underway such that eventually water will be defined by a tradable and on-going entitlement to a share of a consumptive pool, a tradable physical volume of water allocated to the entitlement each water year, a tradable delivery share or right to ensure the water is transported to where it is required, and a non-tradable water use license that imposes obligations on how the water is used at given locations. The gradual removal of trade restrictions, greater water market information and limits on overall diversions have all helped to increase the number and volume of water trades (entitlement and allocation) by several multiples in the past 20 years. Water entitlements and water allocations have proved compatible with environmental goals in terms of increasing downstream flows during the Millennium Drought, and a means by which the Australian and state governments have been able to reallocate water from consumptive to environmental use. Effective water markets just do not just happen by chance. They build on basic hydrological attributes such as stream connectivity and agricultural diversity of use, and require governments to work with all water users to deliver more efficient outcomes. Physical systems such as the network of dams and the delivery system underpin the supply side of water markets. On the demand side, access to accurate, transparent and timely information on water availability is critical to the effective execution of water trades. In Australia, developing a clear and transparent regulatory framework has taken about two decades to achieve yet some issues, including some barriers to trade, remain outstanding. Time, patience, persistence and effective governance arrangements underpin the emergence of robust water markets in Australia. These factors are likely to be prerequisites to deliver positive outcomes from water markets in other locations. We close by highlighting the importance of comprehensively linking water markets with water planning–a process that has been advanced with the 2012 MDB Basin plan. The Basin Plan’s effective implementation will require state water resource planning that limits overall extractions to sustainable levels and ensures minimum levels of water quality. Water markets are a key component of the Basin Plan and are needed to mitigate the trade-offs between extractive water use and water for the environment, and also to help irrigators respond to water scarcity and to climate change and climate variability.

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Canberra. www.mdba.gov.au/sites/default/files/archived/cap/95 Audit report. pdf (last accessed 18 September 2013). Minister for Sustainability, Environment, Water, Population and Communities, 2012. Explanatory Statement, Basin Plan 2012. Canberra. www.mdba.gov.au/sites/ default/files/Basin-Plan/Explanatory-Statement-Nov2012.pdf (last accessed 18 September 2013). National Water Commission, 2010. The Impacts of Water Trading in the Southern Murray-Darling Basin. Commonwealth of Australia, Canberra. National Water Commission, 2011a. Strengthening Australia’s Water Markets. Commonwealth of Australia, Canberra. National Water Commission, 2011b. Water Markets in Australia a short history. Commonwealth of Australia, Canberra. National Water Commission, 2012. Impacts of water trading in the southern MurrayDarling Basin between 2006–2007 and 2010–2011. Commonwealth of Australia, Canberra. National Water Commission, 2013. Australian water markets: trends and drivers 2007–2008 to 2011–2012. Commonwealth of Australia, Canberra. National Water Commission, 2013. Australian water markets report: 2011–2012. Commonwealth of Australia, Canberra. National Water Market, 2012. Water Allocations. www.nationalwatermarket. gov.au/announcements/allocations.html#vic (last accessed 18 September 2013). National Water Market, 2012. Water trading restrictions quick reference table. www.nationalwatermarket.gov.au/rules-restrictions/restrictions-reference.html (last accessed 18 September 2013). Productivity Commission, 2010. Market Mechanisms for Recovering Water in the Murray-Darling Basin. Final Report (Canberra, Productivity Commission). Qureshi, M.E., Schwabe, K., Connor, J., Kirby, M., 2008. Environmental water incentives policy and return flows. Water Resources Res. 46, W04517, http://dx.doi.org/10.1029/2008WR007445. Turral, H.N., Etchells, T., Malano, M.M., Wijedasa, H.A., Taylor, P., McMahon, T.A., Austin, N., 2005. Water trading at the margin: The evolution of water markets in the Murray-Darling Basin. Water Resources Res. 41, w07011, 10.11029/2004WR003463. United Nations, 2011. International UN-Water Conference. Water in the Green Economy in Practice: Towards Rio+20. 3–5 October 2011. Conference Book. www.un.org/waterforlifedecade/green economy 2011/ (last accessed 18 September 2013). World Water Assessment Programme (WWAP), 2012. The United Nations World Water Development Report 4: Managing Water under Uncertainty and Risk. Paris, UNESCO. Young, M. Designing water abstraction regimes for an ever-changing and very-varying future. Agricultural Water Management, http://dx.doi.org/ 10.1016/j.agwat.2013.12.002 (in this issue).

Glossary Appropriative water right: A water use right where the priority of allocation and use is determined by which users have the earliest recognised beneficial use of the water. The users with the oldest recognised rights have the most ‘senior’ rights and these rights holders must receive their full water allocation before more junior right holders receive their allocation. Basin Plan: A plan that entered into force in 2012 that was developed by the Murray-Darling Basin Authority under the auspices of the Water Act 2007 (Commonwealth). Its intent is to ensure integrated and sustainable water management of both surface and groundwater across the entire Basin, ensure the return to environmentally sustainable levels of extraction and to promote the use and management of water resources in the Basin to optimise economic, social and environmental outcomes. This is to be achieved, in part, by the determination of sustainable diversion limits (SDLs) which are long-term and sustainable levels of water extraction for consumptive purposes. Bundling: The requirement that rights cannot be separated and kept together when traded. For example, a riparian water use right is, typically, bundled to the land which borders its water source and is, therefore, not separately tradable. Cap: A limit placed on the total surface water that could be extracted during a water year in the Murray-Darling Basin. It is not a fixed volume of water, but is the water that would have been able to be delivered with the infrastructure prevailing in 1993–1994. Under the new Murray-Darling Basin Plan, it has been replaced by sustainable diversion limits. Carryover: The volume of water permitted to be held over from one water season to another. The amount of carryover allowed and the rules applying to it vary from state to state. Consumptive use: See extractive use. Delivery right: See delivery share. Delivery share: A share of the available capacity of an irrigation infrastructure operator’s supply channel or water course that allows the irrigator to have this capacity and associated water volume delivered to a designated location along the channel. Dozer: A water license or water access entitlements granted to a user that was only infrequently used by the statutory right holder. Environmental entitlement water: Water access entitlement used for the express purpose of achieving environmental goals, but is otherwise identical to a water

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access entitlement with the same reliability factor and under the same water resource plan utilized for extractive use. Environmental flow: Water either planned or unplanned for that provides flows principally for the benefit of the riparian ecosystem. Exit fee: A fee that was payable to an irrigation infrastructure operator on the sale of a water entitlement when the water entitlement and delivery share were bundled. Exit fees are no longer permitted where water entitlements and delivery shares are unbundled and, instead, a termination fee is charged. Extractive use: Also known as consumptive use or the utilization of water for private benefit. General security water: Water entitlements in New South Wales that have low reliability. High reliability water access entitlements: Water access entitlements that, typically, have a reliability of about 90% or more. See Reliability factor. Irrigation infrastructure operator (IIO): any person or entity who owns or operates water service infrastructure for the purpose of delivering water to another person for the primary purpose of being used for irrigation. Murray Irrigation Limited and Murrumbidgee Irrigation are the two largest irrigation infrastructure operators in New South Wales, and Goulburn Murray Water the largest such operator in Victoria. Low reliability water access entitlements: Water access entitlements that, typically, have a reliability of about 80% or less. See Reliability factor. Millennium Drought: A period of extremely low rainfall and much higher temperatures that greatly reduced inflows into the Murray-Darling Basin over the period 2001–2002 to 2009–2010. The severity of the drought varied over this period and by location, but it was most severe in many locations in 2006–2007 and 2007–2008. National Water Initiative: A 2004 intergovernmental agreement agreed by the Council of Australian Governments (COAG) that established pathways to achieve national water reform over the period 2004–2014. It extended the 1994 COAG framework and was intended to increase the productivity and efficiency of Australia’s rural and urban water use while maintaining community needs and ensuring both surface and groundwater systems are returned to environmental sustainable levels of extraction. Northern Murray-Darling Basin: Basin catchments in northern New South Wales and southern Queensland, including the Darling River and its tributaries upstream of Menindee Lakes, the Macquarie-Bogan, Castereagh, Namoi, Border Rivers, Moonie, Condamine-Balonne, Paroo and Warego catchments. Over-allocation: A situation where the long-term average yield of water entitlements in a catchment is less than the nominal volume of water associated with the catchment’s water entitlements. Overuse: A situation where the total volume of water actually extracted for consumptive use in a particular system at a given time exceeds the environmentally sustainable level of extraction for that system. Overuse may arise in systems that are overallocated, or it may arise in systems where the planned allocation is exceeded due to inadequate monitoring and accounting. Permanent water: Name previously given to a water access entitlement. Regulated water: Water where the flow is governed by infrastructure. In the MurrayDarling Basin planned releases from water storages regulate stream flows in a counter-cyclical way such that stream flow is, typically, greater during the summer than they would be in the absence of regulated releases. Reliability factor: The frequency with which water allocated under a water access entitlement can be supplied in full. For example a reliability factor of 98% implies that, based on long-term averages, the water access entitlement will receive 100% of the water volume on the entitlement 98 years in 100. Riparian water right: A water right that arises by virtue of the landholder having access to or bordering on an available water source. Rules-based environmental water: Water directly allocated to the environment under a state-based water resource plan rather through a water entitlement. Seasonal allocation: See Water allocation. Separation: See Unbundling. Sleeper: Water license or water access entitlement granted to a user that has never been exercised. Southern Murray-Darling Basin: All southern catchments in the Murray-Darling Basin including the lower Darling, Murrumbidgee, Murray, Goulburn, LoddonCampaspe rivers and their tributaries. The term covers all Basin catchments in South Australia, the Australian Capital Territory and Victoria. Statutory water right: A water right assigned to a user by a State which typically imposes conditions on use and tradability. Stock and domestic use: A riparian water right that is non-tradable from the land where it is exercised and that provides a small volume of water, but only if it is used for domestic consumption purposes and for watering livestock. Storage losses: Evaporative and other losses incurred from the storage of water over a defined period of time. Supplementary license: A water license with a very low reliability factor that provides existing holders of water licenses or water entitlements access to additional

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water when water available is deemed by the state to be in excess of the requirements of all other water license or entitlement holders and the needs of the environment. Sustainable diversion limits (SDLs): The allowable, long-term average volume of extraction from surface and groundwater that is permitted in each of the catchments of the Murray-Darling Basin, and in the Basin as a whole, under the 2012 Basin Plan. The Basin Plan’s SDLs are intended to come into effect by 1 July 2019. Tagged water: Assignment of the source characteristics (including its reliability factor) and rules of the state of origin to water entitlements when they are traded across state boundaries. Temporary water: Name formerly given to a water allocation. Termination: When a person terminates or surrenders the whole or part of a right of access to the irrigation infrastructure operator’s network. Termination fee: A fee payable to an irrigation infrastructure operator on termination of a delivery share or right and that is regulated by the Australian Competition and Consumer Commission. Trading rules: Rules imposed on the regulation and the trade of water access entitlements and water allocations intended to increase trade and to remove unnecessary barriers to trade. Transmission losses: Evaporative and other losses incurred in delivery of water from one location to another. Unbundling: The division of water rights into their separate components. This may include the unbundling of water rights from land rights as well as the unbundling of water rights into an access entitlement, water allocation to that entitlement, and a delivery share to allow water to be delivered to a particular location. Water access right: Any right conferred by or under a law of a state to hold water from a water resource or to take water from a water resource. This includes stock and domestic rights, riparian rights, a water access entitlement, a water allocation and any other right relating to the taking or use of water prescribed by regulations made under the Water Act 2007 (Commonwealth). Water access entitlement: Also known as a water entitlement. It is a state water right that provides for an on-going entitlement under state law to a share of a consumptive pool in a water resource plan. Water Act 2007 (Commonwealth): An Act of the Australian Parliament intended to improve the water governance of the Murray-Darling Basin and ensure water in the Basin is managed in the national interest. The Act, inter alia, created the Murray-Darling Basin Authority, which was given responsibility to prepare the Basin Plan and which is intended to provide a framework for the management of the Basin’s water resources in the national interest. Water allocation: The volume of water assigned to a water access entitlement in a given water season (1 July to 30 June) under a specified water resource plan. Water allocation trade: Trade in water allocations that involves transferring some or all of the water assigned to water entitlement in a given water year or for an agreed number of years. Water charge rules: These rules comprise three elements: (1) Water Charge (Infrastructure) Rules 2010 (WCIR): water charge rules for fees and charges payable to an infrastructure operator for: bulk water charges, access to the irrigation infrastructure operator’s network or services provided in relation to that access matters specified in regulations made for the purposes of s. 91(1)(d) of the Water Act 2007 (Commonwealth). (2) Water Charge (Planning and Management Information) Rules 2010 (WCPMIR): rules relating to charges for water planning and water management activities in the Murray-Darling Basin and requiring the publication of information on the details of the charge and the process for determining the charge. (3) Water Charge (Termination Fees) Rules 2009 (WCTFR): water charge rules for fees or charges payable to an irrigation infrastructure operator in relation to terminating access to an operator’s irrigation network (or services relating to such termination), or surrendering a right to delivery of water through the operator’s irrigation network. Water delivery right: A right to have water delivered by an infrastructure operator. Water license: A state-based entitlement that permits the extraction of water for particular purposes in a defined area. Water market rules: Rules dealing with actions or omissions of an irrigation infrastructure operator that prevent or unreasonably delay the transformation of irrigation rights held as part of a bulk water entitlement by an irrigation infrastructure operator into individual water access entitlements. Water resource plan: A state-based plan at a catchment level that is generally developed in consultation with stakeholders and sets the rules governing water use. Water trading rules: Rules that seek to remove trade barriers and to support the information and processes associated with water trade. Water-use efficiency: The ratio of the amount of water used by a crop to the amount of water applied. Water use license: A statutory, state license that typically imposes conditions of water use at a given location. Water year: A period from 1 July to the 30 June the following year.

Please cite this article in press as: Grafton, R.Q., Horne, J., Water markets in the Murray-Darling Basin. Agric. Water Manage. (2014), http://dx.doi.org/10.1016/j.agwat.2013.12.001