Developing a methodology to calculate water trading exchange rates

Abstract

The rationale for developing water markets is straightforward: to allocate water to the use where it will be valued most highly. However, designing and implementing a market for water entitlements that is efficient, equitable and sustainable, is very difficult. A simple system allowing people to buy and sell entitlements with no outside intervention does not take account of issues such as losses incurred in supplying the entitlement at the new location, changes in security level or third party impacts such as return flows and environmental degradation. The cumulative effect of unconstrained trade could reduce the value of existing entitlements, decrease system reliability and jeopardise ecosystems. Many of these issues can be addressed through the design of an exchange rate system.

This paper focuses on the underlying causes of potential market failure and developing a rationale for where exchange rates can be used effectively. This framework will ultimately be used to identify a preferred methodology for calculating exchange rates for the Murray-Darling Basin.

Keywords:

• Water trading
• exchange rates
• third party effects
• market failure

Additional information

Notes on contributors

Teri Etchells

Teri Etchells is a PhD Student studying in the Department of Civil and Environmental Engineering at the University of Melbourne, as part of the Co-operative Research Centre for Catchment Hydrology. She graduated from Monash University in 1997 with degrees in Engineering (first class honours) and Commerce. Teri first developed an interest in the water industry through a cadetship with Melbourne Water and then moved into strategy consulting with The Boston Consulting Group before starting her Ph.D.

Hector Malano

Dr. Hector Malano is Associate Professor in the Department of Civil and Environmental Engineering and Director of the International Technologies Centre at the University of Melbourne, Australia. He has 28 years of teaching and research experience in the area of irrigation systems operations and management, and management of water resources. His international research and consulting has focussed on Vietnam, China, and Thailand.

Thomas A McMahon

Thomas A McMahon is Professor of Environmental Hydrology in the Department of Civil and Environmental Engineering at the University of Melbourne and Deputy Director of the Co-operative Research Centre for Catchment Hydrology. Areas of active research interest include soil/water/plant relationships, hydrology and water resources engineering, stochastic processes, hydrology-ecosystem relationships and urban hydrology. Tom holds a Ph.D (NSW) and D. Eng (Melb) and was elected a Fellow of the Australian Academy of Technological Sciences in 1986.