Theory and Practice in Australia
New Horizons in Environmental Economics series
Edited by Jeff Bennett
Chapter 9: Water Trading Instruments in Australia: Some Thoughts on Future Development of Australian Water Markets
David Campbell INTRODUCTION Despite commendable progress in the evolution of water trading markets in Australia, there remains a range of regulatory and institutional impediments to valuable evolution. Even with the removal of these constraints, it will take time for a mature market to emerge. This chapter focuses on a number of these constraints and discusses a range of instruments that are likely to find increasing use in the future. A key emphasis is on the potential role of derivative markets in providing more flexibility to deal with the high water supply volatility in Australia, and to encourage better integration of demand and supply side instruments in deriving maximum value from these markets. Other suggestions include selective separation and trading in delivery capacity rights and a measured transition to the use of tagging as opposed to exchange rate mechanisms in respect of inter-jurisdictional trading. This chapter draws heavily on a study conducted by ACIL Tasman (2003)1 for the Water Reform Working Group (WRWG). The study essentially covered current trading instruments and possible gaps and limitations in these instruments, and suggested the types of instruments that might reasonably emerge in coming years. The report extended to thoughts on the role, if any, for government in encouraging these instruments and associated trades or, perhaps more pertinently, for lowering existing barriers to their emergence. This chapter discusses a range of ideas and ways of looking at these possibilities, but is not prescriptive, beyond some emphasis on removing unnecessary barriers to the emergence, testing...
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