National Action Plan for Salinity and Water Quality

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Tradable recharge credits in Coleambally Irrigation Area: Experiences, lessons and findings

Final report for MBI project 33
CSIRO & BDA Group
July 2005

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About this report

This paper is an overview of a two-year research program. It synthesises the results presented in a series of reports investigating a market-based approach to manage the threat of salinity and waterlogging in the Coleambally Irrigation Area.

Executive Summary

Across Australia, a range of complex natural resource management problems are confounding traditional management approaches. In many instances, the loss in resource yield or quality is impacting resource using industries while the costs of changing management practices and ensuring the future sustainability of our land, water and biodiversity resources appears substantial.

This has prompted Governments, industries and communities to investigate alternative strategies and policy instruments that could promote sustainable resource use at lowest cost. One initiative under the National Action Plan for Salinity and Water Quality is the National Market Based Instruments Pilots Program. Market Based Instruments (MBIs) are policy tools that encourage changes in management practices through market signals, rather than through explicit directives such as regulation. Instruments generally work through the modification of prices faced by resource users (such as through taxes or subsidies) or through the creation of tradeable rights (sometimes referred to as environmental markets).

The management of irrigation induced salinity in irrigation areas such as Coleambally in NSW represents one of the resource management challenges where MBIs are being investigated under the National Market Based Instruments Pilots Program.

Irrigated agriculture often leads to groundwater recharge greater than regional aquifers can absorb. This in turn leads to rising watertables that can cause waterlogging and salinity impacts. The resource management challenge presented is to limit the ‘net recharge’ to sustainable levels. That is, to prevent water application beyond the evapotranspiration of crops, leaching requirements of soils, and water movement within underlying groundwater systems.

Salinity impacts in the Coleambally Irrigation Area is leading to production losses, increased management costs, and damage to environmental amenities and infrastructure assets in the region. While a number of policy instruments have been adopted to address the threat that irrigation induced salinity poses, no strategy to date has been wholly successful in achieving community management targets. This prompted interest by the Coleambally Irrigation Cooperative Ltd (CICL) in investigating the potential use of a tradeable rights instrument and the subsequent development of a MBI Pilot in collaboration with CSIRO and BDA Group.

The tradeable rights instrument investigated is a ‘cap and trade’ scheme. Under this type of policy instrument, a limit on the overall level of an activity or pollution associated with the environmental damage is established, and ‘rights’ to the agreed level of activity are allocated among users. Through the trading of these rights, greater efficiency, effectiveness and flexibility can often be achieved relative to other policy instruments.

The overarching goal of this study has been to explore the potential application of a cap and trade approach to manage net recharge in the Coleambally Irrigation Area. This has involved the conceptual development of the instrument, the development of the necessary biophysical information base, economic assessment of alternative policy approaches, experiment testing of institutional frameworks, and ground-proofing of our research findings within the Coleambally region.

This report provides an overview of the study with a particular focus on the key findings to emerge and lessons that can be extrapolated to broader applications of this type of policy instrument. Earlier reports have focused on individual components of the research including identifying the institutional design needs, modelling the economic costs and benefits of alternative policy options, exploring the biophysical research methods and conclusions, designing and conducting economic experiments, and testing institutions with Coleambally landholders.

Management of net recharge has a number of similarities with other environmental markets, where the actions of a group of individuals or businesses are degrading a common property resource such as an airshed or waterway. Cap and trade schemes have proved both workable and efficient where the impactors have been of a point source nature. That is, the source and nature of impacts are readily observable and measurable, such as pollution discharges from a chimney or drain.

However, net recharge is essentially a non-point source problem for which cap and trade approaches have had limited application. Critical to the use of tradeable rights instruments is a robust scientific knowledge base and a regulatory platform from which to establish the new rights. For many non-point source problems, spatial and temporal factors can affect the ultimate impact of recharge associated with alternative activities and often these activities may face limited regulation that could provide the basis for establishing new rights.

However, the circumstances of irrigation management and research support in the Coleambally Irrigation Area suggested that a means to accurately and cost-effectively estimate paddock scale recharge and a clear means to establish and enforce tradeable net recharge rights was possible.

Over recent years, the CSIRO Division of Land & Water in Griffith had developed several modelling techniques in the region to inform and aid recharge management including a series of multi-layer groundwater flow and salt transport models called‘SWAGMAN’. The SWAGMAN Farm model has been calibrated to provide an accurate and repeatable framework for estimating paddock scale recharge and thus a suitable metric as the basis for recharge property rights.

In addition, the rights of irrigators to contribute net recharge could be defined via changes to water supply contracts that all irrigators must hold with CICL. While this would require irrigator agreement to the creation of the new property rights (because CICL is a cooperative owned and managed by CIA irrigators), such an agreement was thought likely as the CIA irrigators would be the main beneficiaries of the scheme.

In our investigation of the merits of a cap and trade scheme to the management of irrigation water logging and salinity in the CIA, we have addressed a number of specific knowledge gaps including:

The findings from our investigations support enthusiasm for MBIs as a means to target cost-effective management actions, but also caution that these instruments will not always be the best policy tool when all policy factors are considered.

Drawing on the modelling capacity developed at CSIRO Land and Water we were able to develop an aggregate recharge target and means to allocate and costeffectively monitor net recharge at the farm level. An institutional framework to support the new recharge market was postulated that would leverage off existing water supply obligations, would be workable from an administrative and enforcement perspective, and through an internet trading platform is likely to enable transaction costs to be kept low.

Nevertheless, the costs of developing and implementing a cap and trade scheme and the ongoing transaction costs incurred by irrigators in trading recharge rights are likely to be greater than the costs incurred in administering current policies. Therefore the merits of a cap and trade scheme rest on it achieving greater recharge management benefits net of scheme costs.

Accordingly our investigations focussed on identifying the likely extent of these benefits. Economic modelling indicated that salinity is imposing relatively small costs on CIA irrigators currently, and that under a ‘business as usual’ scenario these costs would only serve to reduce annual agricultural income by some 8.5% after 20 years.

By reducing recharge to a sustainable level under a cap and trade scheme, income is initially reduced from that which would have prevailed under business as usual, but is greater in later years. The higher net income achieved under the cap and trade scheme when accounting for the lower incomes initially, and with the effect of discounting, was found to be small, less than 1% of estimated farm income over the 20 year period.

Such small benefits do not support the adoption of tradeable recharge rights in the CIA. Modelling by its very nature involves estimations and simplifications, and the estimated level of benefits is not statistically significant. In addition, benefits would need to net out transaction costs and a premium reflecting the risks in introducing a new policy regime. Furthermore, experimental tests indicate that it is unlikely the full gains from a cap and trade scheme could be accessed by irrigators, thus further reducing the net benefits available over current recharge management policies.

Despite the empirical findings, our investigations have raised a number of issues for recharge management in the CIA and for the use of tradeable rights instruments more broadly.

In relation to recharge management in the CIA, there are a number of areas of both underpinning science and institutional development that may improve the prospects of tradeable recharge rights in the future. For example, we were unable to fully explore the impact of stochastic climatic variability and extreme events on the potential benefits of alternative policies, nor the impact of water right reforms. Also, the offfarm benefits from adopting improved recharge management were not included. Hence, we suggest that CICL revisit tradable net recharge credits in the future, particularly when broader policy reforms provide the means to incorporate environmental and downstream benefits into a recharge market.

The research does indicate that a focus on net recharge can provide an effective management tool to guide policy instruments otherwise based on inputs or activity levels. The biophysical research undertaken to support recharge management within this project and more generally in the CIA provides the means to more accurately target the current policy regime – that limits the area of rice grown – with recharge goals.

Finally, the experiments conducted with irrigators indicate that the provision of recharge information and opportunity for communication between irrigators may in itself achieve a significant proportion of the desired recharge outcomes. It will also assist in engendering irrigator support for CICL in maintaining and refining its rice policy instrument.

Turning to the implications of our research for the broader application of tradeable rights instruments, a number of observations are notable. Firstly, through application of a sophisticated biophysical information base, it has been possible to design tradeable rights to essentially a non-point source pollutant. Importantly the metric used, net recharge, has a direct and measurable relationship with the environmental impact being managed and performance against this metric can be cost-effectively measured.

Secondly, the analysis highlighted the importance of robust economic analysis in both policy design and the evaluation of alternative policies. Despite the enthusiasm for MBIs, they will not always offer the best policy response. And this may be compounded where property rights cannot be fully defined, as in these instances a market instrument cannot guarantee an improvement in social welfare.

In this study, the available biophysical information indicated a high level of complexity in developing a robust property right. For example, we expected spatial complexity based on previous applications of tradeable rights to atmospheric pollutants and nutrient management in the US. We also anticipated that climate driven stochastic variability would be an issue. However despite the significant knowledge about spatial and stochastic factors the interaction between stochastic rainfall events, biophysical outcomes and thresholds, could not be fully developed in the time available. Until this can be done, the robustness of any recharge rights created will be uncertain.

Finally, the experimental economics component demonstrated the value of this relatively new area of economic investigation to the development of MBIs. The experimental investigations confirmed that traditional economic analysis will overstate potential benefits as real world market participants rarely conform to the myopic profit maximising agents typically assumed in economic analysis. Moreover, while the experimental economics can be used to help develop and pre-test market design prior to implementation, the findings on the value of information and communication underlie the potential of these alternative policy instruments to provide some of the gains offered through market constructs.

In concluding, the study has brought together a diverse set of resource managers, policy makers, scientists and economists who have collaborated in investigating the potential for tradeable recharge rights in the CIA. While the study results do not support such a policy approach at this time, the analysis has provided insight as to the significance of the environmental problem and confirmed the value of biophysical investigations, the appropriateness of the current policy regime and provided insights for the broader use of these instruments. For these reasons the MBI pilot has proved successful, and the research partners are appreciative of the support provided by the National Market Based Instruments Pilots Program.

Cover of Tradable recharge credits in Coleambally Irrigation Area: Experiences, lessons and findings

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