Trading the Commonwealth’s Environmental Water Holdings

Kate Owens looks at the implications and challenges of water trading by the Commonwealth Environmental Water Holder

In January, the Commonwealth Environmental Water Holder (CEWH) made 10GL of its Gwydir Valley water allocation available for sale by way of a competitive tender process. The move was accompanied by the introduction of a raft of governance arrangements, including a trade framework, operating rules, procedures and protocols.

This was the CEWH’s first tentative step towards a more active management of the Commonwealth’s environmental water portfolio. A further 400 megalitres of the Commonwealth’s water allocation in the NSW Peel Valley was opened for tender last week.

The initiatives have sparked debate over the environmental implications of water trading by the CEWH.

Environmental Impacts

The ability of the CEWH to trade these holdings has been in contemplation for some time, initially through the National Water Initiative in 2004 and then under the Water Act 2007 (Cth) (Water Act), subject to certain restrictions. The CEWH’s transition from an era of buy and hold to one of trade has, however, raised perceptions of a wind back of hard-won protection measures for river systems; an argument voiced by the Australian Greens. This is despite the fact that the CEWH is, at least at the moment, intending to trade only a small proportion of the Commonwealth’s seasonal water allocations, and not permanent entitlements.

From an environmental perspective, there are two key watchpoints as the CEWH’s trading activities unfold. The first is the independence of the CEWH in carrying out its functions under the Water Act. The second is the ability of the CEWH to make trading decisions in the context of complex hydrological systems.

Independence of the CEWH

The Water Act provides the CEWH with a broad discretion to make independent decisions as to when, where and what to trade. However the Commonwealth Government controls the Commonwealth Environmental Water Office’s/Holder’s budget and has the ability to make legislated operating rules in relation to the CEWH’s activities. Pressure may be brought to bear on the CEWH at times of low inflow and storage, with the Victorian Farmer’s Federation having already made pleas for further Commonwealth environmental water sales to relieve price pressures on temporary water in that state.

Maintaining Confidence in Environmental Outcomes

The regime appears to assume perfect knowledge on the part of the CEWH in deciding the timing, location and volume of water to release to meet environmental water requirements.  According to the Commonwealth Environmental Water Office, “[a]n assessment of the opportunity cost should be undertaken of using water relative to opportunities for carrying water over for future use; trading water from one catchment to another; or selling water and using the proceeds to purchase water in a different catchment or at a future time”.

Trading decisions are likely to be complicated, however, by the complexities inherent in managing hydrological systems. Uncertainties abound in relation to, among other matters, the nature of ecological demands for environmental water and in relation to future inflows. In particular, there is considerable uncertainty as to the likely ecosystem responses to additional water, the required frequency of flows, and the particular ecological thresholds for plants and animals “beyond which their survival or ability to reproduce is lost” (Murray-Darling Basin Authority; Nguyen et al).

The Victorian Environmental Water Holder (VEWH) has made a series of observations in relation to the complex and highly variable nature of the water market, based on its experience of trading. It noted in particular that environmental demands in any given year are highly variable dependent on seasonal conditions, which can change in “days or weeks”.

Temporary trades of the Commonwealth’s Environmental Water Holdings have a key role to play in providing an adaptive response to environmental watering requirements. However both the VEWH’s and MDBA’s observations suggest that an assessment of the benefit of selling water against the advantages of using it to provide an environmental benefit in a given year, or carrying over for a subsequent dry year, is no straightforward matter. Indeed it would seem that there is the potential for over-reliance on temporary trades as an adaptive management tool.

These two key areas serve to highlight the exacting nature of the CEWH’s task under the Water Act. Considerable efforts have been made to build institutional arrangements that recognise the “expanding scale, function, range of watering possibilities and complexity of the activities and responsibilities of the Commonwealth Environmental Water Office”. However these measures will only go some way towards assisting the CEWH in applying the market to what is a classic example of a “wicked” environmental problem.

Kate Owens is a PhD Candidate at the Sydney Law School and teaches in the University’s environmental law program. She is researching the role of law in market-based water allocation frameworks