Saving the Murray, one incentive at a time
On the world’s driest inhabited continent, water can often be hard to come by. This was the case ten years ago, when grave fears were held over the ecological health of the Murray-Darling Basin (MDB) – colloquially known as the nation’s food bowl.
In the midst of one of Australia’s worst droughts, a great deal of water was being diverted away from rivers within the Basin, mainly for irrigation. This was necessary to some extent, given the importance of the region’s agricultural output to the Australian economy. Unfortunately, existing environmental problems were exacerbated as a result – inflows into the Murray and Darling rivers fell to their lowest in over a century, and the impacts of a water-deprived Basin began to take hold. Concerns over Basin flows were not exclusive to the environment too; South Australian communities located downstream could not be guaranteed an adequate supply of water for commercial and domestic use.
The threat of irreversible environmental damage within the Basin prompted policymakers to formulate clearer plans as to how more water could be returned to the environment, given existing economic pressures on water resources. Significant water reform began with the passage of the Water Act in 2007 by the former Howard Government, which paved the way for greater Basin governance at the federal level. Many of the strategies and objectives proposed in relation to environmental water were formalised through the approval of the Murray-Darling Basin Plan in 2012, which is currently being implemented across the region.
Government policies imposing tighter constraints on water consumption for the sake of the environment are naturally unpopular. On the regulatory side of things, the rollout of reduced diversion limits under the Basin Plan has angered stakeholders who currently rely on irrigation and agriculture for their livelihoods.
Perhaps the most controversial measure implemented since the passage of the Water Act has been the use of water buybacks, a market-based policy instrument involving the voluntary acquisition of water rights from water users. Under these schemes, users are compensated for reducing or relinquishing their water rights, and the volume of water ‘saved’ in conducting these transactions is returned to the Basin’s rivers.
The market for water
What better way to ensure the efficient use of water than to let the invisible hand work its magic? This was the attitude adopted by state governments in the early 1990s, when they decided to move the nation towards a market-oriented water system. Water markets were established across the Basin and water was transformed into a tradeable commodity, with its price influenced by market forces. Water users (largely irrigators in the context of the Basin) are awarded a water access entitlement, allowing them to take an allocated amount of water from the Basin’s resources. Irrigators are able to adjust their allocation by trading with other participants in water markets, depending on their needs and how much they can afford.
From both and economic and environmental standpoint, the marketisation of water sounds great on paper. Assuming that market exchanges are highly accessible and water can be transported seamlessly, individuals can benefit from selling any surplus water they have on hand. Water trading moves water to where it is demanded the most and thus, where it can be used most productively. They have the potential to be environmentally efficient when government-determined allocations capture the full environmental cost of water use. A lower allocation pushes the market price of water upwards, inducing behavioural change among unsustainable water users – such as shifts towards more efficient use, or decisions to abandon water-intensive industries.
In reality however, water trading mechanisms have failed to fully internalise the environmental cost of water consumption due to years of over-allocation. Irrigators were permitted to extract unsustainable volumes of water, even as prolonged drought conditions left rivers extremely deprived. Although the creation of water markets has led to some economic benefits in terms of production and efficiency, the environmental effects that had been hoped for failed to transpire.
Returning water to the environment
As part of their push to restore environmental flows within the Basin and correct the over-allocation problem, governments have implemented a number of water buyback schemes over the past decade. Under these schemes, the government enters the water market and purchases water entitlements on behalf of the environment. Water users were provided with strong economic incentives to sell their rights to the government, who would then return the water to rivers.
Though a direct means of recovering water for the environment, water buybacks have not sat well with many Basin communities. The sale of water rights to the Commonwealth reduces the total pool of water available for irrigators to purchase in markets. In many cases, this has forced water-intensive industries to significantly scale down their production or close entirely, with socio-economic effects spilling out into nearby towns. These effects have been most prominent in the northern Basin, where irrigation-dependent towns have suffered as a result of job losses and population decline.
Water buybacks highlight the complexity of water policy and the trade-off problem. Many initiatives aimed at improving water use with respect to the environment tend to require concessions, whether it be in the in the form of economic losses or major social disruption. Recent policy movements away from buyback schemes suggest that their socio-economic consequences outweigh the environmental gains, or perhaps our politicians would just prefer to avoid a politically volatile course of action. If markets do not hold the solution to the sustainability challenges facing the Murray-Darling Basin, then we’d better hope that other initiatives will suffice.
 Australian Bureau of Statistics. (2009, June 2). 4610.0.55.007 – Water and the Murray-Darling Basin – A Statistical Profile, 2000-01 to 2005-06. Retrieved from http://www.abs.gov.au/ausstats/[email protected]/0/94F2007584736094CA2574A50014B1B6?opendocument
 Department of the Environment and Energy. (2007, April 20). Murray-Darling Basin Dry Inflow Contingency Planning – Overview Report to First Ministers. Retrieved from http://www.smh.com.au/pdf/waterreport.pdf
 Department of Environment, Water and Natural Resources. (2014). Millennium drought. Retrieved 5 May 2017, from https://www.environment.sa.gov.au/managing-natural-resources/river-murray/about-the-river/millennium-drought
 Parliament of Australia. (n.d.). Murray-Darling Basin management. Retrieved 5 May 2017, from http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/MurryDarlingBasin
 Department of Agriculture and Water Resources. (2016). History of Australian water markets. Retrieved 5 May 2017, from http://www.agriculture.gov.au/water/markets/history
 Parliament of Australia. (n.d.). Chapter 3 – ’Over allocation’ – the major problem. Retrieved 5 May 2017, from http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Rural_and_Regional_Affairs_and_Transport/Completed_inquiries/2004-07/rural_water/report/c03
 Frontier Economics. (2012, April 18). Australian National Water Commission Launches Water Trading Report. Retrieved from http://www.frontier-economics.com.au/australian-national-water-commission-launches-water-trading-report/
 Vidot, A & Worthington, B. (2016, November 22). Murray-Darling Basin Authority recommends reducing water buybacks in northern communities. ABC News. Retrieved from http://www.abc.net.au/news/rural/2016-11-22/murray-darling-basin-northern-communities/8042496
 Premier of Victoria. (2014). Victoria Backs Action To Improve Basin Plan [Media release]. Retrieved from http://www.premier.vic.gov.au/victoria-backs-action-to-improve-basin-plan/