Australia was a pioneer in introducing a water trading scheme more than 30 years ago. The system is now being emulated elsewhere in the world, including California. In December 2020, the state launched a water futures contract that allows investors to trade on the value of the resource on the Chicago Mercantile Exchange (CME). Interview with Mike Young, one of the founding fathers of the Australian water trading system.
When did Australia introduce its water market?
The idea first came up in the late 1980s, when we realised that we had reached the limits of what we could extract from the Murray River, a river that runs through the southeastern region of the country. We introduced quotas, along with the option to sell them, either temporarily or permanently, to the highest bidder. Some of the water was set aside for the cities – based on their needs – and the rest was allocated to farmers in the form of shares that could be traded on markets. The government buys any surplus water to maintain natural biotopes. In 1994, the system was formally launched and then extended to the entire country in 2004.
How has this impacted water shortages that regularly plague the country?
The water market helps local communities to allocate the resource in the most efficient way. In periods of drought, farmers struggling to grow crops or make a profit will choose to give up their water and sell it to another farmer who can use it more efficiently. This means that certain unprofitable, water-intensive crops, such as rice and cotton, are supplanted with higher value crops like fruit trees (avocado, orange, grapevines). In Kerang, Victoria, an over-cultivated region that had problems with soil salinity, many farmers began selling their water to grape growers elsewhere in the state.
What has the impact been on water prices?
The shares allocated to farmers tend to increase in value over time. In the Murray River region, their price rose fourfold in the decade following their introduction. But the increase is less about the system itself than about global warming, which increases the need for water while decreasing its supply. These conditions are merely reflected in the price that the market determines for this precious resource.
Is this "commodification" of what should be a public good the right direction?
By putting a price on water, we give it value. We stop wasting it, and stealing it becomes a crime, punishable in the same way as burglary. I don’t think it’s the worst way to manage a scarce, vital resource. And when people have to start paying for water, they become very inventive. In Australia, sophisticated new forms of irrigation have been developed, such as drip systems, or the use of sensors to measure exact soil moisture levels.
But how do we ensure that everyone has access to the water they need, a right guaranteed by the UN?
If a farmer cannot afford to buy the water he needs, it means his business model is not profitable and bankruptcy is inevitable. The water market allows only viable farms to remain in business and weeds out the rest. As for city residents struggling to pay their water bill, this is a poverty issue that should be addressed with social benefits, not by offering free water.
Is there not a risk of encouraging monoculture, especially for particularly profitable species such as almond trees?
Monoculture is probably the best use of water in some regions. Elsewhere, nothing is stopping the government from introducing safeguards to preserve biodiversity. But again, this is not a problem that will be solved by allowing everyone to use water, without paying for it and without limits.
Water trading has also led to the emergence of financial intermediaries and investors who see these markets purely as a tool for speculation...
Shares trading on the water market are very valuable, which has attracted institutional investors. Some farmers have also started storing water in good years and selling it in the next drought at a higher price. But there is no large-scale manipulation of these markets. This was recently shown in an investigation initiated by the Australian consumer protection agency. Overall, markets seem to be better than governments at allocating water in the most efficient way.
Is the Australian model being duplicated elsewhere in the world?
Trials are under way in Nevada, California, Chile and the Canary Islands. But Australia is the only country where the entire water management mechanism was overhauled to create a sophisticated water market. Elsewhere, trading rules have simply been layered on top of the existing water allocation system.
Is this economic model applicable in non-drought areas such as Western Europe?
Yes, and it’s actually preferable. It is better to take action before water shortages occur, in the hope of avoiding them. With global warming, no country is immune to drought. When we intervene to repair a system that is already broken – like in California’s Central Valley, where farmers have pumped so much water that the land is sinking and houses have collapsed – the challenge becomes much greater.
THE WATER MASTER
Mike Young holds a Research Chair in Energy, Water and Environmental Policy at the University of Adelaide in Australia. He contributed to developing a market-based approach to managing water in the country’s southeastern region, featuring a set of proposals for the system architecture. He has also worked as an advisor to several states in the United States, including California, and the United Kingdom. In addition to developing a system to introduce quotas and a carbon emissions market in Australia, he has focused on measures to conserve biodiversity and reduce kangaroo overpopulation. Before joining the University of Adelaide, Mike Young worked for 30 years with the government-based organisation Commonwealth Scientific and Industrial Research Organisation