Trading into trouble? Lessons from Australia's mistakes in water policy reform sequencing

Abstract

The changes in land-use practice and investment that flow from the modification of an abstraction regime to allow water trading can bring significant economic gains. If these gains from trade are to be unequivocally beneficial to all members of society and to the environment simultaneous reform of the abstraction regime may be necessary. In particular, it is critical to understand how trading will affect return flows, the capture of overland flows and abstraction from connected water resources. Failure to attend to the sequence of reforms needed to establish a robust abstraction regime capable of sustaining the pressures from trade can be very expensive. In retrospect, it can be argued that Australia got its water reform sequence wrong. As a result and unnecessarily, she had to spend billions of dollars restoring balance to the Murray Darling Basin. The cost to society of restoring balance to abstraction arrangements appears to be greater than the benefits that flowed from the rapid development of water trading. Those who recommend a transformational change to a policy regime have a responsibility to consider the system-wide consequences of adopting the change they recommend.