Wednesday, March 20, 2024

Trade water, NZ Inititative says

Neal Wallace
A trading scheme for water, similar to that for emissions, will improve water quality, the New Zealand Initiative says.
Reading Time: 3 minutes

Its chief economist Eric Crampton’s report, Refreshing Water: valuing the priceless, advocates a cap and trade market system backed by hard-wired environmental constraints to manage and sustain freshwater resources.

A well-functioning system can ensure all users follow best practice but cannot choose between the merits of competing water and land uses.

Central to any reorganisation of water management is recognising the interests of existing consents holders but also those of iwi, a failure he says is the root cause of water issues.

“Real solutions raised the spectre of costly Treaty claims and so were avoided. 

“Whether iwi claims can be resolved through negotiations towards regulatory solutions or a full Waitangi Tribunal process we believe the game is worth the candle.”

The  first-come first-served system has caused the over-allocation of some catchments, haphazard and poor management of contaminants and failure to fully acknowledge the issue of urban pollution.

While science is a key to finding solutions tradable water rights will achieve environmental goals.

Those goals should reflect the aims and aspirations of the community while the price of water in sub-catchments will reflect the degree of environmental challenge.

A 2014 study for the Iwi Advisers Group estimated it will cost $50 million to implement a water rights system and $30m a year to run it but provide $370m of economic benefits from better water use.

Those economic benefits explode out to more than $500m during a drought.

Crampton said a cap and trade system must have consistent catchment-wide management, something missing in managing the recovery of Australia’s Murray Darling River, which is suffering from salinity, erosion, algal blooms, quality issues and invasive species.

Access to water in the basin can be bought and sold but flowing through five states its recovery has been hampered by disparate management of differing state government rules.

Crampton says one set of rules for each catchment is crucial.

“We’re suggesting that cap and trade be done at a catchment level and it would be a lot easier in NZ because regional government jurisdiction is based on water catchments.”

There are parallels with water management in the 1980s when United States scientists found sulphur dioxide emissions caused acid rain and had to be lowered.

Scientists could not identify which factories should close or those needing to introduce scrubbers so an emissions cap was created and emitting factories were given tradable permits within that cap.

Those able to easily cut their emissions did so and sold excess allocation to those less able to do so while the dirtiest, hardest to fix factories shut down and sold their permits.

Water consent-holders including farms, industries, commercial users and councils would have their existing consents converted into tradable water permits.

Electronic trading systems would allow water users to submit bids to buy water allocations from other users or sell their own allocation but it will be backed by hard environmental constraints.

“Hydrological mapping lets the system know the effects of drawing water from aquifers and rivers at different places within the catchment.

“It then incorporates the downstream effects of upstream water drawing into its workings and generates different prices for water at different places in the system.”

Crampton says tradable rights provide far greater incentive and therefore certainty of improved water quality than a water tax.

If water was taxed, should demand exceed government expectations then it would be easy for the total water draw to exceed a catchment’s sustainable limit.

Having a price on water might also encourage councils to put a higher priority on fixing leaks or installing water meters to create surplus water rights that can be sold.

Adding a futures market for water rights could help finance irrigation projects, which are now part-funded by shareholders buying permanent rights to draw water from the scheme but valuing those shares is difficult without factoring in future scarcity.

“Some water users may only need the scheme’s water in 10 or 15 years’ time rather than today and could not justify the investment.”

Water rights form part of the value of the land when it is traded. 

A 2010 study found farms with irrigation sell for up to 50% more than similar farms without irrigation.

Crampton is recommending the Government take responsibility for developing and establishing a tradable rights system with caps no lower than current uses, with the scheme trialled in Canterbury.

The NZ Initiative is also working on a study to develop a trading platform for nutrient emission credits.

“Achieving any cap on total catchment-level emissions is simpler when trading is allowed.

“Alternatively, stronger environmental quality can be achieved at similar overall cost by allowing trading.”

Crampton says farmers changing land use or becoming more efficient could trade those rights with those seeking extra capacity.

Similarly, if a council-owned sewage system overflowed, a council could have to buy emission credits.

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