Historically, the Commonwealth and Victorian environmental water holders have been able to sell water on the open market under certain conditions, and they have avoided any impact on water prices; the so-called ‘good neighbour’ approach.
This latest report from ABARES suggests any negative impacts on the market are counter-balanced by positive impacts.
“... price impacts have distributional consequences, but they do not cause ‘harm’ in aggregate, and are consistent with being a ‘good neighbour’,” the report said.
The research report argues that environmental water holders, who currently hold more than 2000 Gl of water, should be allowed to participate in the water trading market, the same as other stakeholders.
VFF Water Council chair Andrew Leahy responded that individual farmers can’t compete with the Commonwealth Environmental Water Holder in the market due to their excessive market power.
“To think trading 25 per cent of water will have no impact is ludicrous,” Mr Leahy said.
“Buying up 25 per cent of water in a drought year would create a food crisis.
“The report suggests with the CEWH participating in the market they would increase the water price by $174/Ml taking it to $1133/Ml. We know these prices will break farmers.
“The report doesn’t mention the Commonwealth wanting to secure a further 450 Gl and the CEWH having even greater market power — water prices will be even higher.”
Mr Leahy said the report ignored all the special rules available to the environment when transferring water that are not available to irrigators.
“The environment can get water through the Barmah Choke when the trade rule is closed, the environment can request which storage water is released from, the environment is credited with return flows.”
The report is called Making Every Drop Count, and is largely about how the environmental water holders can use allocation water to achieve environmental outcomes.
The report suggests practical steps to help make the most of the opportunities presented by environmental water trade, including clarifying the definition of ‘harm’ under the ‘good neighbour’ principle and developing more sophisticated trading strategies, potentially drawing on mathematical optimisation methods.
“To realise the potential benefits of environmental water trade for the environment, EWHs will need to change how they engage with the water allocation market,” the report found.
“Other water market participants use water markets freely in pursuit of their objectives. EWHs should do the same.
“Current legislation allows many but not all types of environmental water trade. In particular, there are constraints on the ability of the CEWH to sell water to fund other environmental activities that would also improve the health of water-dependent ecosystems.
“This raises the question of whether these types of trade should be allowed.
“The challenge is that the timing and location of allocations received do not always align with the timing and location of environmental demands.
“This is due to the characteristics of water entitlements, which were primarily developed for irrigators, and the composition of environmental water portfolios,” the report said.
“A potential concern is that environmental water trade could harm irrigators by increasing or decreasing water allocation prices.
“Our modelling of the Goulburn catchment shows that trades in the order of 25 per cent of Commonwealth Environmental Water Holder allocations received would not necessarily have a significant impact on water allocation prices, if spread throughout the year.
“That said, larger trades in the order of 100 per cent of CEWH allocations received could have a significant effect.
“The price impacts of trade are likely to differ across catchments depending on the market share of CEWH entitlements in each catchment and market characteristics of each catchment.”
The CEWH ran a tender to sell water allocations in the Goulburn catchment in January 2023.
However, no allocations were sold as the offers received were below the minimum reserve price.
The Commonwealth Environmental Water Holder’s portfolio is currently made up of 2001 Gl (long-term average annual yield) of entitlements with an estimated market value of at least $8 billion and 20 per cent market share.
The Victorian Environmental Water Holder holds about 600 Gl of northern Victorian water.
