The impact of volumetric restrictions on water entitlement trade

The Australian states of Victoria and New South Wales both impose volumetric limits on inter-regional trade in water access entitlements.

Frontier (Australia) recently completed a report on these volumetric trading limits for the Australian Competition and Consumer Commission (ACCC), as an input in the ACCC’s position paper on water trade rules for the Murray-Darling Basin. The paper was released on 10 September 2009.

Volumetric limits on inter-regional trade have been designed to manage the pace of community adjustment. However, Frontier’s analysis in this paper suggests that these limits are likely to compromise the achievement of both efficiency and equity objectives.

Frontier found that efficiency losses due to the limits are not so much to do with the inability to move water to higher-valued uses in response to seasonal conditions (as this can still be done via allocations trading), but instead relate to longer-term considerations such as foregone ability to:

  • invest in new enterprises or divest from non-viable enterprises;
  • manage risk efficiently;
  • adjust to alternative forms of dryland or less intensive irrigated agriculture.

Volumetric constraints also result in a number of other unintended and detrimental distributional or equity impacts

Frontier’s analysis suggests that the volumetric restrictions on trading of water entitlements have significant potential to, and increasingly in practice do, have an adverse impact on the achievement of the Basin water market and trading objectives of the Commonwealth Water Act 2007.

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