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The Evolution of Markets for Water

Theory and Practice in Australia

Edited by Jeff Bennett

This book presents a detailed picture of the evolutionary processes at work in water markets with a particular focus on theory and practice in Australia. Policymakers are striving to strike a balance between the pros and cons of a property rights/market based approach to the allocation of water resources, as opposed to an approach that centres on government regulation. The current movement in Australia is toward the use of markets, and numerous reforms are either underway or under consideration in that direction. This provides an ideal opportunity to observe the factors at play in determining the balance and hence the mix of policy instruments at work. The distinguished contributors offer a range of perspectives – economic, legal, environmental – and combine conceptual analysis with evidence from real policy decisions.
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Chapter 9: Water Trading Instruments in Australia: Some Thoughts on Future Development of Australian Water Markets

David Campbell


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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