An Assessment of the Efficiency of
Water-Trading Markets in the
Murray-Darling Basin
James Smits
Supervised by Professor Snow Barlow
University of Melbourne, Summer 2010
Adam Smith
• “Nothing is more useful
than water: but it will
purchase scarce any
thing; scarce any thing
can be had in exchange
for it. A diamond, on the
contrary, has scarce any
value in use; but a very
great quantity of other
goods may frequently be
had in exchange for it.”
Source: Smith, Adam. An Inquiry into the Nature and Causes Of the Wealth of Nations
Image Source: http://www.greekshares.com
How does one place a value on water?
The Murray-Darling Basin
Source: Wikipedia
Source: Murray Darling Association, http://www.mda.asn.au/
The Murray-Darling Basin
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Crosses five (of the six) states of Australia
23 river valleys
14% of total area of Australia
Annual average rainfall 530,618 gigalitres
39 % of the national income from agricultural
production
• 53% of the Australian cereals grown for grain
• 28% of the nation’s cattle, 45% of sheep, 62% of
pigs
Source: http://www. mdba.gov.au
Present state of the MDB
• Natural assets of the MDB are currently in poor or
very poor health due to climactic, social, and
economic factors
• The nature of the MDB is also a problem – sufficient
flows of water and periodic flooding required to
maintain the ecological functions of the Basin
• Drought has persisted since 1997, exacerbating these
problems
Source: Wentworth Group of Concerned Scientists, Sustainable Diversions in the Murray-Darling Basin: An analysis of the options
for achieving a sustainable diversion limit in the Murray-Darling Basin
How is efficient use and distribution of
water possible?
Water Trading
Water trading:
• a transfer of an entitlement from one legal
entity to another, with or without a change in
location,
• a trade of water allocation from one
authorized water user or another, or between
water accounts held by the same water user,
with or without a change in location
Source: National Water Commission, Australian Water Markets Report 2008-2009
Water Trading (cont.)
• Water access entitlements – a perpetual
entitlement to exclusive access to a share of
water from a specified consumptive pool
• Water allocation – the specific volume of
water allocated to water access entitlements
in a given season
• Technically, entitlements can be transferred,
while water allocations can be traded
Source: National Water Commission, Australian Water Markets Report 2008-2009
Why is this all possible?
• Unbundling – the separation of “bundled”
entitlements into their individual elements
– Separates a water entitlement from a land
property title, allowing the trade of the water
entitlement independently of water
– Most water entitlements in Australia have been
unbundled from the land
Source: National Water Commission, Australian Water Markets Report 2008-2009
Water Trading in Australia
• National level, 1800 GL of entitlements were
traded in 2008-09
• 7% of total entitlements on issue were traded in
2008-09
• Total value of turnover of entitlements was
estimated to be $2.2 billion for the 2008-09 water
year – a 162% increase on 2007-08
• Total sales of water allocations were $606 million
– a 28% decline in estimated value (volume of
trade increased 35%, but the average price
decreased 40%)
Source: National Water Commission, Australian Water Markets Report 2008-2009
Water Trading in the MDB
• 1980s - Water trading began
• 1990s - Basin-wide cap on water diversions
• June 2004 - National Water Initiative introduction of “interim threshold limit” (cap)
• 2009 - Phasing out of cap on entitlement
trading
• 2014 – Caps to be removed entirely
Source: National Water Commission, The impacts of water trading in the southern Murray-Darling Basin: An Economic,
social, and environmental assessment
MDB By the Numbers…
• MDB water trading accounts for 60% of the
national entitlement trade and 81% of the
national water allocation trade (by volume)
• Negligible interstate entitlement trade
between connected systems in the MDB
• Interstate trade accounted for 28% of the
allocations traded (by volume)
• Entitlement trade increased 75% (for SMDB)
• Allocation trade increased 41% (for (SMDB)
Source: National Water Commission, Australian Water Markets Report 2008-2009
Strengths of Water Trading
• Risk and debt management tool
– Entry/exit from the industry
– Uncertain rainfall
• Changes in management practices and
efficiencies including new irrigation systems
• Economic benefits to both buyer and seller
• Helps irrigators manage variation in seasonal
water availability
• Flexibility – unbundling
Source: National Water Commission, The impacts of water trading in the southern Murray-Darling Basin: An Economic,
social, and environmental assessment
Weaknesses of Water Trading
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Transaction time
Restrictions on trading
Exchange rates between states
Lack of available data
Environmental impact
– Changes in flow, quality, timing, or storage of water
• Social and political impact?
Source: National Water Commission, The impacts of water trading in the southern Murray-Darling Basin: An Economic,
social, and environmental assessment;
Recommendations
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More detailed databases
Decrease barriers to trading
Transaction time
Government interaction with system
– e.g., Electricity market in Australia
• Public understanding
Works Cited
• Greek Shares, http://www.greekshares.com
• Murray Darling Association, http://www.mda.asn.au/
• National Water Commission, Australian Water Markets
Report 2008-2009
• National Water Commission, The impacts of water trading
in the southern Murray-Darling Basin: An Economic, social,
and environmental assessment
• Smith, Adam. An Inquiry into the Nature and Causes Of the
Wealth of Nations
• Wentworth Group of Concerned Scientists, Sustainable
Diversions in the Murray-Darling Basin: An analysis of the
options for achieving a sustainable diversion limit in the
Murray-Darling Basin
Special Thanks
• Professor Snow Barlow, Professor Ignacio
Rodriguez-Iturbe, Professor Steven Pacala,
Sunday McKay, Professor Michael Robinson,
Professor Iven Mareels, the staff in the Primary
Industries and Climate Change Centre
• Princeton Environmental Institute
• Grand Challenges Program
Questions?