Macquarie Journal of International and Comparative Environmental Law
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Macquarie Journal of International and Comparative Environmental Law |
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THOMAS GARRY[*]
The western United States is facing an enormous water allocation problem.[1] The current distribution among the three categories of water users (agriculture, cities and the environment) is unsustainable. More water needs to go to fast growing urban centers to meet increasing municipal and industrial demands. Likewise, more water needs to be dedicated to increasing instream priorities. In turn, low-value agricultural and industrial users necessarily must have a reduction in their share.
This is fundamentally a reallocation problem. For the foreseeable future, with the end of the Reclamation Era and the now better understood limits of groundwater resources, there will be little in the way of new water supplies. Added to this is the uncertainty of climate change and its effect on water resources that are already generally insufficient to meet existing demands in most western water basins, even in historically normal flow years.[2] Not only are there generally no new water supplies to allocate, but the rights to nearly all existing surface water resources have been fully distributed. The parties to whom these water entitlements are committed generally have enduring and legally protected rights in those water resources. The result is that to address the problem existing water rights must be shifted from one party to another.
Water reallocation is an enormous question that has hung over western policy makers for the last several decades but it is one quickly coming to a head. As some commentators have labeled it, the post-Reclamation Era in the American West is best described as the ‘Reallocation Era’.[3]
Both the principal and necessary solution to the reallocation problem is a transfer of existing water rights from uses to which society assigns a low value to socially higher value uses. The essential question is what mechanism to use to accomplish this: one based on governmental command and control or one based on market allocation.[4]
Since the 1970s a great number of academics and policymakers have pointed to market-based allocation as the preferred mechanism.[5]
In theory, water markets are the favored approach because markets are generally a more efficient allocator of resources than regulatory regimes and operate on voluntary participation and decentralised coordination.[6] The buying and selling of water rights would redistribute water from low-value activities (e.g., water-intensive/low-value crops, water inefficient industries) to higher-valued uses (e.g., municipal domestic uses, more water efficient agriculture and industrial uses). In addition to facilitating such reallocation, markets have the potential to (i) create economic incentives for water conservation; (ii) enable the efficient resolution of water conflicts among competing users; (iii) facilitate the acquisition of water rights for instream uses; and (iv) provide a flexible allocation system able to adjust over time to changing social priorities, drought and climatic circumstances.
Furthermore, it would seem many of the basic ingredients for a market are already in place in the western United States: (i) demand exceeding supply means a scarce resource; (ii) the predominance of the prior appropriation system provides an existing system of alienable water rights to trade; and (iii) existing basic infrastructure to move the water among market participants. Critically as well, markets would appear to be a more politically palatable method for redistributing water rights, in comparison to involuntary reallocation by government regulation.[7]
Yet, despite the advantages and potential benefits of water markets as well as the considerable academic, policy and lobbying support behind them for the last three decades, they have proven very difficult to develop in practice.[8] Most water trading today remains local and seasonal in duration, lacking the scale and the permanent transfer of water rights to make a sizable impact on the reallocation problem.[9] This is not to say there have not been successful examples of well functioning interregional water markets. The success of trading within the Colorado-Big Thompson Project, for example, shows that given the right institutional circumstances, water markets can be socially beneficial and address the reallocation problem.[10]
There is a large body of literature regarding water trading, analyzing what has prevented the development of robust water markets and what institutional changes are needed to facilitate their development.[11] In summary, the obstacles can be grouped into two categories: (i) political opposition, primarily from those who do not currently control water rights but who benefit from their current allocation; and (ii) the difficulty in designing market rules and institutions appropriate to minimise transaction costs while also capturing the potential third party effects of trading.[12]
These two obstacles are in large part interrelated, as solving the latter institutional design hurdle will in many ways lessen, though not eliminate, the political opposition of those who fear they will be unfairly harmed by water markets.[13] Thus, for purposes of this paper, the main obstacle to successful water markets will be treated as institutional design. More specifically, this paper will focus on the water entitlement system as the primary design element for developing successful water markets.[14]
Australia faces a water reallocation crisis similar to the American West. Consumptive demands exceed sustainable rates of extraction. As in the western United States, the supply augmentation strategies that had previously satisfied increasing demands reached their fiscal, environmental, and political limits more than a decade ago.[15] Many Australian water systems are over-allocated principally for agricultural irrigation purposes.[16] The restoration of over-allocated rivers, which has become both an environmental and political priority, will require a substantial redistribution of water from agriculture to instream uses.
To address its reallocation problem Australia has similarly, though more comprehensively than in the United States, looked to water markets as the preferred solution. The 1994 Water Reform Framework marked a major national shift away from decades of administrative water allocation. It focused on the economic development of increasing water supplies towards market-based allocation based on limited supplies and principles of sustainability and resource management.[17]
Yet like the experience in the western United States, and for some of the same basic reasons, the decade following the 1994 Framework saw the development of largely incomplete and small Australian water markets.[18] What water trading did occur was primarily local and temporary in duration, again on a scale too small to address the reallocation problem significantly. The inadequacies of the existing water entitlement system for facilitating trading became apparent, yet needed reforms languished.
In 2004, with the signing of the National Water Initiative (NWI), Australia renewed and strengthened its national commitment to water markets as the cornerstone for managing its water resources.[19]
As a necessary part of that commitment, a timeline was established for comprehensive legislative reform of the water entitlement system. The aim was to encourage trading by increasing security in water rights, lowering transaction costs and more efficiently regulating third party effects. The intent of the NWI was to develop an active, integrated interstate water market, which not only managed short-term supply fluctuations but also addressed the long-term reallocation problem.
While the legislative measures to carry out the NWI's objectives have begun, it is far too early to measure the NWI’s success. Nevertheless, the institutional design framework outlined by the NWI in many ways represents the current ‘best thinking’ for water markets that, importantly, has crossed the bridge from academic commentary to governmental action.[20] In this regard, given the similarities between Australia and the western United States in terms of aridity, cooperative federalism and English common law roots, as well as the water reallocation problem, the NWI can be instructive for efforts to develop stronger water markets in practice in the American West.
This paper will review the approaches Australia has taken to restructure its water entitlement system under the NWI and investigate the potential lessons from Australia’s experience with water rights that could be applied in the western United States. In summary, the potential lessons from Australia’s experience with water rights that could be applied to the western United States are: (i) the unbundling of water entitlements into constituent rights to facilitate trading; (ii) clear and well defined property rights in water resources; and (iii) use of water entitlements as transparent tools for risk allocation.
The restructuring of Australia’s water rights system, while the centerpiece of the NWI, is only part of the larger water management reforms currently taking place in Australia under the NWI and other national agreements. However, rather than examine the breadth of the NWI and Australia water management reforms, this paper will focus on the reforms to the Australian water rights system contemplated by the NWI. It is these water rights reforms that arguably have the greatest potential for direct transferable lessons to the American West. The larger Australia water policy context, though, will be described as necessary to put these changes to water rights in some context.
The first section of this paper will briefly answer the who, when, where and how questions of Australian water resources and water law, drawing comparisons with the western United States as applicable. The second part will briefly outline the Australian water entitlement system and compare it with the prior appropriation system dominant in the western United States. The third section will provide a short primer on water markets, how they work and the obstacles to making them work. The fourth section will turn to the NWI, describing its basic reforms to the water entitlement system and what water trading problems it leaves unresolved. The final section will examine what lessons the NWI offers for improving water markets in the western United States. Unless indicated otherwise, the discussion of water resources will refer to surface water as most efforts to develop water markets have focused on surface water.
American legal commentary on the NWI (not surprisingly given its recent date) and Australia water markets generally is limited. Most American scholarly comparisons of Australian and American water markets have been performed by economists.[21] The legal commentary comparing American and Australian environmental laws is more extensive.[22] Such literature points to the dangers of overemphasizing the similarities between the Australian and American legal systems, particularly in the context of environmental law.[23] The differences between the physical, cultural, and legal environments of the two countries are substantial, and the particularities of each counties’ environmental problems necessarily require individualised legal solutions. Yet, relative to the comparisons among other countries, the commonalities of the American and Australian legal systems and traditions as well as environmental problems are considerable. As a result, examining Australia’s experience with reforming its water laws can shed useful light on opportunities for reform in the American West.
A discussion of water reallocation and water markets needs to begin with several basic questions. How much water is available and where is it? Who needs it? Who controls it and how they do so? In general, both Australia and the western United States exhibit characteristics of what economists term “mature water economies”. The general features of a mature water economy are:
A central dilemma faced in a mature water economy is that as increasing demands further stress a relatively static water supply, more complex allocation and management systems are needed to sustain the water system. [25]
Australia is commonly referred to as the driest inhabited continent, but in terms of rainfall per capita Australia ranks only behind Russia and Iceland.[26] Precipitation however is unevenly distributed, both geographically and seasonally. Most rain falls in the sub-tropical north and flows directly into the ocean.[27] Across the continent, only about 5% of all precipitation is put to human use.[28] Most inland areas receive less than 500 millimeters (approximately 20 inches) of rain per year and have high evaporation rates.[29]
For most of the country, surface supplies tend to be highly variable. This is particularly the case in the more populated eastern states where the El Niño – La Niña pattern causes seasonal swings from flood to drought. The flow of the Murray River - Australia’s primary river in economic and agricultural terms - can vary between 2,500 gigalitres to 40,000 gigalitres depending on seasonal conditions.[30] Many of the 246 river basins across the country do not have permanent flows.[31] Most river channels - to the extent they have not been modified - have diffuse flows over a broad flood plain with a larger portion of the flow below the surface.[32]
Australia has one of the world’s largest groundwater aquifer systems, the Great Artesian Basin. However the groundwater systems are subject to very low rates of replenishment.[33] Further, most rivers are tightly connected to underground aquifers, with groundwater providing most of the base flow of rivers.[34]
Given the high variability of surface waters and to facilitate agricultural and urban development, Australia has built a large dam and distribution system over the course of the twentieth century to store and control supplies, with the complete reversal of flows in some catchments. As a result, few water systems resemble their natural state.[35]
The most developed and economically important water system in Australia is the Murray-Darling Basin. Covering over 1,000,000 square kilometers (approximately 386,000 square miles) in the southeastern part of the country and spanning five states, the basin is Australia’s bread basket with 75% of the country’s irrigated agriculture.[36]
Over 83% of the total area of the basin is in agricultural production. Though the basin’s rivers are highly regulated by dams, the system still has highly variable surface flows from one year to the next given Australia’s climate and variable rainfall.[37]
Australia’s major cities rely almost entirely on surface water.[38]
The majority of urban water comes from large dams and is piped to cities.[39] Notable exceptions to this are Perth, which relies largely on groundwater sources and desalination, and Adelaide, which is located at the mouth of the Murray River.
Australia as a whole has experienced a consistent drying trend over the last 50 years, with a decline in rainfall in the more populated areas.[40] Droughts have become hotter and more intense, with the most recent drought being the most severe in recorded history.[41] These trends are consistent with the effects models predict for Australia under global warming scenarios, and are expected to continue. A November 2006 study revealed that 16 of Australia’s 24 major cities have some form of water restrictions.[42] The same study forecasted that dams in southeast Queensland would be completely dry within a year and half without an increase in inflows and significant use restrictions.[43] Likewise, agricultural uses have recently faced significant supply stresses. Drought conditions in 2007 threatened to require water officials to cut off all irrigation allocations in the Murray-Darling Basin.[44]
While there are increasing demands on water resources, the supply augmentation strategies of the early twentieth century (dam building, river diversions, etc.) have largely been exhausted. Such strategies are no longer cost effective from an economic, ecosystem and technology perspective.[45] In addition, the political will for such projects has diminished in light of public concerns about their environmental effects.
The western United States is effectively defined by water, or the lack of it. The 17 conterminous states located west of or on the 100th meridian receive far less precipitation that the states to the east.[46] However, like Australia, precipitation in the West is geographically unevenly distributed. The Pacific Northwest and the northern Rockies receive rainfall at rates comparable to or in excess of areas in the eastern United States. Yet, the western states are predominately semi-arid and arid.
Also like Australia, rainfall amounts vary greatly seasonally, as well as year to year. Many of the West’s rivers rely on spring snow melt from the mountains for their stream flow, while parts of the Southwest rely on summer thunderstorms.[47]
As was the case in Australia, during the twentieth century the western United States needed adequate and stable year round water supplies to encourage and support agricultural irrigation and urban development. As a result, storage and delivery infrastructures were constructed across the West to control natural variations in surface flows and deliver supplies to urban areas not located near sufficient natural supplies. Facilities on the Colorado River, for example, can store four years worth of the river’s average annual flow.[48] As in Australia, the era of construction of major new dams and storage facilities, particularly those funded by the federal government, has concluded as such projects are neither environmentally desirable, nor politically or economically feasible. However, to meet increasing urban water demands, municipal suppliers are expected to continue to construct smaller facilities for offstream water storage. [49]
Groundwater aquifers are also an important water supply in the West, a large portion of which is tied to the High Plains aquifer.[50] The relative importance of groundwater for consumptive use varies considerably between geographic regions. In Nebraska, for example, groundwater withdrawals are almost twice the amount of surface water withdrawals.[51] Whereas in Wyoming and Montana groundwater use represents a small fraction of overall water use.[52]
Parts of the West regularly suffer from seasonal and multi-year droughts. Similar to Australia, the periodic El Niño/Southern Oscillation effect influences precipitation levels across the West. In the coming years, climate change is expected to cause disparate effects and increase the extremes of precipitation levels. There may be reduced water availability during the summer months across the West, while the Pacific coast may experience increased flows in the winter and spring due to increases in precipitation and snow-melt.[53]
The surface water supplies in both Australia and the western United States are characterised by geographic and temporal variability. Over the course of the twentieth century each country constructed substantial storage and delivery systems to manage the variable water supply and facilitate agricultural irrigation and urban development. Such supply augmentation and control strategies have largely been exhausted and are not expected to play a critical role in the foreseeable future.
Groundwater extraction is important in both countries as a source of water, though groundwater in the American West, depending on the region, may be more of a sustainable source given the comparatively slow recharge rates of Australian groundwater systems. In the coming years, both the American West and Australia will face increased natural stresses on supplies due to climate change.
Agricultural irrigation dominates consumptive water use in Australia. About 75% of water extracted is for irrigation, with the balance going to urban/industrial uses (including mining) and rural services (e.g., stock). About 20% of Australia’s total water use comes from groundwater sources.[54]
Water use has increased by 65% since 1980, with the use in agriculture the most dramatic. Between 1983 and 1997, the total land area under irrigation increased by 26%.[55] During approximately the same period, water use for irrigation increased by 75%, compared with a 55% increase for urban and industrial uses. At the same time, irrigated agriculture has become critical to the Australian economy as a whole, and forms the basis for rural employment and income in many areas. Agriculture accounts for 3% of Australia’s gross domestic product and 22% of the value of all exports, with irrigated agriculture contributing over 25% of the total value of agricultural production.[56]
Per capita domestic water use in Australia is higher than in Europe, but less than the United States, New Zealand and Canada.[57] Urban industrial use is not large and is declining as industries become more water efficient.[58] Likewise, per capita domestic use is falling. Nevertheless, many urban areas have domestic water use restrictions due to increasing stresses on supplies. Most major Australian cities currently have policies which target reducing per capita water use by 20 per cent or more. Yet, planners forecast that conservation alone will generally be insufficient to meet the demands of an increasing population.[59]
The increase in water use has led to considerable environmental degradation, such as declining water quality, increasing salinity, toxic algae outbreaks and the loss of biodiversity. One third of rivers are described as being in extremely poor condition.[60] Of Australia’s 325 surface water basins, 84 are classified as overused or close to it, with these 84 accounting for 55% of the total water use.[61]
In response to increasing scientific and public concerns about environmental degradation, increasing instream flows has become a priority at all levels of government.[62] Repairing the degradation will be an enormous undertaking.[63] For example, to restore the Murray River, the government plans that between 20% to 40% of irrigation water needs to be reallocated to the river.[64] Unless such measures are taken, it is forecasted that, among other ills, by 2020 the salinity of the Murray River will exceed the World Heath Organization’s salinity drinking water standards, 50% of the time.[65]
As in Australia, agriculture is the dominant consumptive water use in the American West. The percentage varies among states but in most states, irrigation accounts for between 75% and 80% of water use, with industrial, thermoelectric and domestic use making up the balance.[66]
After decades of increase during the twentieth century, water extraction rates in the seventeen western states have generally stabilised in recent years. However, by 2020 demand is expected to increase by 51% from 1990’s level. Nearly all of this demand increase is expected to be for uses other than thermoelectric and irrigation.[67]
In recent years, irrigation’s portion of water withdrawals in both absolute terms and as a percentage of overall withdrawals has decreased. This has been due both to a retiring of irrigated lands for home construction as well as reduction of use rates on farms due to more water-efficient irrigation systems, conversion to crops using less water and declining groundwater well levels in some areas. Projections hold that by 2020, irrigation use will increase slightly over 1990’s levels (from 133 million acre-feet to 137 million acre-feet) but will fall from 77% to 71% of total water use in the West.[68]
This relative decline in irrigation’s share of the water pie corresponds with a decline in the economic importance of agriculture in the West. The number of farm jobs and the proportion of all personal income earned on farms has been declining in the West during the latter part of the twentieth century. For example, in 1995 only 1% of the personal income in California, Colorado, and Arizona came from agriculture. Nevertheless, Western agriculture still contributes greatly to national agricultural production, accounting for 45% of the value of agricultural exports and much higher percentages of certain vegetables, nut and fruit crops, particularly in California.[69]
The 51% increase in water from 1990’s level is predominately due to increases in municipal demands resulting from rapid population growth. Population in the western United States is expected to increase by 51% from 1990 to 2020, with nearly all of the growth in urban areas. Per capita domestic water use increased from 1960 to 1990, but is expected to decrease as western cities increase conservation programs in response to the population grown. Yet conservation programs are expected only to slow the rate of growth of urban water use, not the total urban water demand. In response, most water cites have initiated plans for enlarging their water supplies to meet the expected growth.[70]
In addition to the increased municipal need, the demand for more water for ecosystem maintenance and recovery is expected to increase. Years of alteration of western rivers and unsustainable extraction levels have led to the extinction or near extinction of many aquatic species and insufficient instream flows for wildlife, fish habitat and wetlands.[71] Public demands and a shift towards more sustainable water management practices means that restoring instream flows will place an additional stress on water supplies.[72]
Water use in both Australia and the western United States is dominated by agriculture. However, in the coming years both will need to reduce the portion of the water supply that goes to agriculture. In Australia, this will be primarily to increase the portion of water resources dedicated to environmental flows in rivers and secondarily to increase urban supplies. In the western United States, the reduction will be necessitated primarily by an increasing urban demands resulting from rapid population growth, but also to meet increasing instream flow needs.[73] In both countries, this reduction in the water supplies to the agricultural sector conflicts with the economic importance of irrigated agriculture.
Like the United States, Australia inherited the English common law and its system of private water law rights. This system worked in England where property was largely in private hands and water was relatively plentiful. But it did not translate effectively to nineteenth century Australia where water was scarce and land and water resources were controlled by the colonial bureaucracy. By the turn of the century and after a series of droughts in the 1880s, the inadequacy of the common law had become apparent. In reaction, over the course of two decades each jurisdiction passed legislation creating a framework for the public management of water. These statutes had no uniformity of approach or language, other than they vested control of water resources in the government.[74]
After federation in 1901, power over water and water resources remained vested in the states. The Commonwealth Constitution did grant the Commonwealth Parliament some limited and indirect authority over inland waters via such constitutional powers as defense, control of interstate commerce, external affairs management and financial assistance, the last being the most significant. But, as a general matter, the federal government had no legislative capacity over inland water resources.[75]
Over the course of the twentieth century each state developed a complex and multi-layered administrative system for managing groundwater and surface waters, oriented almost entirely on satisfying consumptive demands. Each state produced significant variations in their statutory approaches and regulatory practices. This stemmed from each state’s differing hydrological circumstance and economic priorities, as well as the limits of federal coordination.[76]
The primary component of each state’s water entitlement system was a license or permit under which statutory rights to water were allocated administratively, essentially on a ‘first come, first served basis’ and generally on a zero cost basis. Across the states, these statutory rights had several common features:
1. Licenses were conditional rights to access or withdraw water, rather than ownership rights in water.
2. Rights were generally granted for certain users (e.g., individual irrigators, irrigation cooperatives/districts, urban water supply authorities) for certain designated uses (e.g., irrigation, municipal water supplies). Over the course of the twentieth century as the statutory regimes became more complex, the designated uses became more specific, with, for example, some rights varying depending on the type of crop that was being irrigated under a particular license. The state of New South Wales licensing regime evolved such that it developed seven different types of licenses for surface water.
3. Initially licenses for irrigation were defined by the amount of land that was to be irrigated, but most states transitioned to regimes based on volumetric allocations.
4. Licenses were generally tied to the land on which the water was to be used, and thus not severable from land. If a party wanted additional water in times of shortages, they had to buy additional land.
5. The duration of licenses varied among the states, from as short as one year to as long as fifteen, depending on the water’s use and whether the water source was a regulated or unregulated waterway or a groundwater source. Administrative agencies had the power to amend or cancel licenses at any time, without compensation.[77] However, in practice this power was not exercised, and expiring licenses were routinely automatically renewed, creating expectations among water users of perpetual rights.
6. Administrative agencies had the right to suspend extraction rights during periods of shortages. States had priority schedules for shortage periods, with domestic needs having highest priority and irrigation having the lowest.
7. Licenses were generally not tradable. Not until the 1980s did a few states begin to allow permit trading.[78]
While license systems amongst the states shared these common features, they also shared some of the same weaknesses. In her review of the states’ water regimes, Poh-Ling Tan identified five common weaknesses: (i) statutory evolution created overlapping, internally inconsistent and byzantine regulatory systems; (ii) each state’s regime granted water authorities a great deal of administrative discretion, which was often exercised according to unwritten rules, resulting in uncertainty in how the system operated in practice from year to year; (iii) the persistence of English common law concepts regarding water systems that did not fit the arid conditions of Australia; (iv) the disconnect between the systems governing groundwater, surface water and flood plains, in an environment where these systems were intimately connected hydrologically; and (v) no incorporation of the environmental impacts of consumptive water use.[79]
One of the major consequences of these weaknesses was the widespread over-allocation of water systems. Many water administrators operated on the assumption that allocated water would be used in most but not all years. As a result, the allocations for many water systems were between 10% and 20% in excess of available surface water and as much as four times the sustainable yield for groundwater systems.[80] In all of New South Wales, for example, it is estimated that water licenses equal 120% of total available water resources.[81]
The weakness of the states’ regulatory regimes came to a head in the late 1980s and early 1990s. The two driving forces were increasing concerns about environmental degradation and concerns among users about security of supply given the increasing competition. Several states had earlier attempted piecemeal reforms but the interstate nature of the problems demanded a coordinated national effort.[82]
This need coincided with a strengthening trend of cooperation among the states and the federal government on environmental and resource management issues. The cooperative pattern that was emerging was the states and the federal government coming to so called intergovernmental agreements on policies and legal objectives. These agreements in turn led to legislative reforms at the state level.[83]
In 1994 the Council of Australian Governments (COAG) - a product of this cooperative federalism approach - established the Water Reform Framework.[84]
The Framework sought to fundamentally reform the Australian water resource management system. The key goals for the water entitlement system were (i) allocating water for the environment and (ii) the use of market tools for the more efficient and transparent allocation of scarce water resources.
To achieve these goals, the Framework outlined a number of reforms the states needed to undertake. Over the next decade, the states incrementally legislated to implement the Framework. Yet, by 2002, COAG determined that many of the reform objectives of the Framework had not been met.[85] Out of this recognition, the states and the Commonwealth agreed in 2004 to the National Water Initiative (NWI), to reinvigorate the reforms outlined by the Framework, give them more detail and to provide a specific plan and timeline for legislative implementation by the states.[86] The NWI is the subject of Section IV of this paper.
Like the Australia system, water rights in the Unites States are generally the provenance of the states and state law largely governs the acquisition, use and transfer of water rights. Similar to the history of Australia, the water rights system in the western states evolved out of the English common law to meet economic development needs in an arid and semi-arid landscape. The prior appropriation system is the dominant system among the western states for the management of surface water, though some states have dual systems with features of both riparian rights and prior appropriation.[87]
Though initially a product of the judiciary, prior appropriation is now a statutory permit system in all states but Colorado.[88] Modern prior appropriation law has evolved into a complex management system operated by state administrative bodies, local water authorities and irrigation districts. Nevertheless, the powers of administrative agencies and the rights of water users are still influenced by the doctrines courts had developed earlier.
Under the prior appropriation system, water rights are usufructuary for a particular volume of water. They are not water ownership rights (i.e. the holder of the right does not own, in the property sense, a particular volume of water but rather has the right to use that water). The traditional core of the system is the “first in time, first in right” principle. Once a water appropriation right is acquired by a party, typically by satisfaction of the statutory application procedures and completion of the water diversion for beneficial use, it is superior to all rights that come after. If there is a water shortage, all senior rights must be satisfied in full before any junior water right holder is entitled to receive any water. Most water systems in the West are either fully appropriated or substantially over-appropriated, with the permitted volume of water often greater than actual amount of water carried by the river.[89]
Once obtained, prior appropriate permits are traditionally open-ended in length. However, they are not entirely secure. Permits can be attacked by third parties or the state on several grounds and lost. The most significant ways in which this can occur are under the rules for (i) waste, (ii) abandonment, (iii) forfeiture, and (iv) failure to satisfy the historical use requirement.[90] These rules were originally judicially developed but most now have been codified.
Unlike older Australian water licenses, appropriation permits are generally transferable, provided certain statutory procedures are followed.[91] The purpose of these procedures is principally to protect the interests of third parties from being adversely affected by the transfer (primarily other appropriators on the same water system), and to determine what water is for sale. As one commentator has described them, the transfer procedures are “generally pro forma, but they initiate a grueling public comment evaluation, and often precipitate litigation”.[92] As will be discussed further below, the costs and risks associated with the transfer process limit the fluidity of water markets.
The prior appropriation system has come under criticism.[93] Foremost, the system tends to lock water in inefficient agricultural uses as it neither encourages transfers to higher value users or instream uses nor provides incentives for water conservation. The "use or lose it" rules of abandonment and forfeiture encourage irrigators to draw the maximum amount and to forego investments in water conservation technology.[94] Likewise, the strict enforcement of priorities in times of drought is economically inefficient, as junior appropriators may value the water more than senior appropriators.[95]
Western states carried forward the common law tradition of treating surface water separately and differently to groundwater.[96] Generally this remains the case today. Similar to the development of prior appropriation for surface water, the law regarding groundwater allocation has evolved from common law rules to modern regulatory management regimes. Recent groundwater management rules tend to be fragmented and vary within geographical regions, depending on the local hydrological circumstances. However, some states have made efforts to integrate their ground and surface allocation laws.
In comparison to the Australian federal system, the United States federal government plays a more active and direct role in water allocation and regulation. The American federal government’s role in large part stems from its involvement in the development of water resources and its continued control of a large portion of the storage and conveyance infrastructure in the West. The federal government typically allocates the water it controls via contract with individual users or local water authorities, though state law still generally affects how water rights under those contracts are distributed, transferred and vested.[97]
Among the western states there is generally less cooperation and consultation than there is among the Australian states. There are probably multiple reasons for this. Foremost, as a practical matter the smaller number of Australian states makes dialogue among the states more feasible. In addition, in its interpretations of the Commonwealth Constitution, the Australian High Court has restrained unilateral federal action more so than generally is the case in the United States, where the Supreme Court’s interpretation of the Commerce Clause of the Federal Constitution has generally given the federal governmental a broader ability to take unilateral action without the consent of the states.[98]
Evidencing this more direct involvement in water management, certain federal laws directly impact state administered water rights in the American West. Of these, the most significant are the Clean Water Act, the Federal Power Act, and the Endangered Species Act (ESA).[99] These laws generally preempt contrary state laws and can alter the water available for allocation in a particular water system.[100] The ESA for example gives the federal government authority to limit diversions or modify the operation of a federal reservoir, notwithstanding the rights of state water permit holders.[101]
State water rights are also affected by water rights of Native American Indian tribes. Many tribes hold water rights that are senior to the rights of private appropriators under state law, but have only recently be adjudicated or quantified or are yet to be adjudicated or quantified. In many cases, the sources of water to satisfy these senior tribal rights have already been fully allocated to non-tribal users under state law. This conflict between tribal and state law water rights creates further demands on water resources.[102]
The water entitlement systems in both Australia and the western United States developed from an inherited English common law system not designed for water scarce regions. Both retained the common law tradition of water rights not equating to ownership of water but rather the right to use a certain amount of water. However, from this common starting point, the two took divergent paths. Australia developed a public management system based on administratively allocated water licenses. Though these licenses have created some expectations among water users of having enduring entitlements, they nevertheless remain subject to alteration by administrative authorities without compensation. This gives the Australian system a greater capacity for legislative reform.
In contrast, the prior appropriation system of the American West allocates water rights that are generally infinite in duration, subject to certain rules regarding non-use and misuse. The infinite duration combined with the priority principle creates strong investment-backed expectations among holders of prior appropriation rights. [103] As a result, legislative reforms that may alter those expectations are comparatively more difficult to accomplish.
Markets in general perform a relatively simple function. They allocate a scarce resource among multiple users. Price signals inform buyers and sellers about the relative availability and demand for the resource. Via exchanges for money typically, the resource ends up in the hands of the party that values the resource the most. In the absence of transaction costs and regardless of the resource’s initial allocation, in theory, such exchanges will continue until, in the static sense, the marginal values of all the possible uses of the resource are equal.[104]
In the context of water, users on a particular water system, whether that be an irrigated farm, a factory, a household, or the environment, each associate a value with the benefit provided by a unit of water. Over time and as circumstances evolve and change, the market would continually reallocate water rights to maximise the marginal value of each available water unit among the users.
Markets take many different forms. Some markets are highly fluid (e.g., stock exchange). Others are less so but nevertheless operate to allocate a resource comparatively efficiently. Nearly all markets though share the basic characteristics of voluntary participants and decentralised coordination among participants via price signals. Aside from the economic good that is the subject of the market, the differences among markets arise from an array of factors but the most prominent is the legal framework under which the market operates.[105]
In recent years, there has been increasing interest in and use of so-called “environmental markets”. [106] These are markets in which participants trade entitlements to consume the environment as a way to reduce the social costs associated with environmental regulation and to provide greater flexibility to regulated parties. In these markets, an administrative body determines an acceptable amount of pollution or use of a particular resource and the market works to allocate the right to pollute or consume among the market participants.[107]
There are three principal arguments for why markets are the favored mechanism for allocating water: conservation incentives; creating additional policy options; and efficiency.[108] First, markets create incentives for the development and implementation of conservation technology. The incentives are twofold since new water users must pay a market price for their water and existing water users have the option of selling conserved water for more than the water's opportunity costs.
Second, water allocation is necessarily a contested issue given the number of interests and users competing for a scarce source. Market based allocations increase the number of possible outcomes and the opportunities for win-win resolutions of water conflicts.
Third and perhaps the strongest argument, market allocation is more efficient than the primarily alterative method for allocation: centralised government distribution. Markets use price signals to quickly convey information to voluntary buyers and sellers about the marginal benefit of particular water uses. In comparison, the regulatory information collection process and its reliance on command and control procedures, is more costly and time-consuming. As a result, markets can more quickly and efficiently respond to changes in water availability and demands than centralised government allocation.[109]
In the context of Australia and the United States, a strict dualism between markets and regulatory allocation is largely artificial. Few if any entirely laissez-faire markets exist in either country. Further, markets - particularly in the case of markets for natural resources - cannot operate efficiently and sustainably without the support of extensive governmental institutions such as private property rights and environmental protection laws.
The question thus is not one between market and regulatory systems but rather what balance to strike between regulation and market mechanisms. Too much regulation and the market may not operate effectively due to high transaction costs. Too little regulation and the social and environmental costs associated with market transactions outweigh the social benefits.[110]
The foremost role of law in a market is to define what is being traded.[111] In the case of water, this is a water entitlement, a right to use a particular amount of water. Generally, the standard requirements for an entitlement to be tradable are:
(i) clearly specific so that the right’s owner and potential buyers generally understand the benefits and obligations associated with the entitlement;
(ii) secure such that the right holder is protected from arbitrary modification other than those modifications clearly contemplated by the terms of the entitlement;
(iii) exclusive whereby the owner bears all the costs and enjoys all the benefits associated with the ownership and use of the entitlement;
(iv) enforceable such that the entitlement can be monitored as to its use and transfer, and there are remedies when others encroach on the entitlement; and
(v) transferable and divisible so that the entitlement can be transferred in whole or in part.[112]
To the extent the law fails to provide water entitlements with any of these attributes, this creates unpredictability in market transactions which in turn raises the transaction costs.
Moreover, to maximise social efficiency as well as the private efficiency of market allocation, the definition of the water entitlement must capture the social costs associated with trading the entitlement. If this is not the case, externalities arise when a buyer and seller enter into a transaction. Externalities, or third party effects, are costs associated with the transaction that are not borne by either the buyer or seller but by parties not involved in the transaction or society at large. The presence of third party effects makes a market socially inefficient by causing the market participants not to equate the marginal social benefits (and costs) of the transaction with the marginal private benefits (and costs).[113]
Given the quantity and ubiquity of water, it would appear to have the qualities of a typical commodity, and therefore defining legal rights to water would be relatively easy. Water however has a number of basic qualities that make it different than a standard commodity.[114] First, water is not a static stock but an ever changing flow. Supplies can vary dramatically from year to year, season to season and therefore questions of reliability are inherent. Second, water is heavy, incompressible and can be neither cheaply stored nor quickly transported long distances or up elevations. Third, not all water is the same; water quality varies and some water uses require a certain water quality. Fourth, not all water use is consumptive. Non-consumptive uses such as hydropower and environmental benefits (e.g., instream uses for aquatic life, etc.), as well as the return flows to downstream users, have considerable value.[115] Lastly, water has public good qualities such that, among other things, a significant use or alteration of a water system affects many parties, making it difficult to obtain the assent of all significantly affected persons to those changes.[116]
Water’s unique properties create the potential for a number of third party effects when entitlements are traded.[117] The most prominent affected third parties are: (i) downstream users, (ii) instream users, (iii) parties in the area where the seller extracts the water to be traded (i.e. area of origin), and (iv) infrastructure owners and users other than the buyer and seller.[118]
Water trades can impact downstream users in a number of ways. Most apparent, a water trade can change the point of diversion, from a location downstream of a particular user (User X) to another user located upstream from User X. Alternatively, a trade by an upstream user can take water to a different basin from where downstream User X is located. In either case, the trade could result in there being less water available in the stream for User X. Not only could this mean there is insufficient water to satisfy User X’s right but also the quality of the water for User X could change (e.g., increase salinity or pollution levels).
An upstream trade can also alter the amount of return flows going to User X. When, for example, an upstream irrigator (User Y) extracts a certain amount of water, some portion of that is not consumed and returns to the water system of origin as runoff or via the groundwater system. This return flow is then available to User X and other downstream users who ‘piggyback’ on User Y’s right. If, however, User Y trades his water right to a user with a more intensive water use or a location further upstream, there may be less return flow on which User X and other downstream users can piggyback. A water market can encourage such alterations to return flows by creating incentives for users to be more water efficient (i.e. reduce the amount of water lost and returned to the system as return flows).
Instream users such as fish, riparian ecosystems, wetlands and recreational users, can similarly be affected by water trades that relocate where water is used or the intensity of its use. Further, unless there are non-market mechanisms that allocate water to instream uses, markets will tend to allocate too much water to out-of-stream uses.[119]
When the site of water diversion is relocated, the place where the water was originally used (the area of origin) is also affected in a number of ways. From an economic perspective, decreased farming as a result of less irrigation may reduce employment and business activity. From a social perspective, rural communities can be disrupted as the tax base is reduced and families relocate due to less economic activity. The environment in the area of origin may suffer as well as fallow fields provide opportunities for noxious weeds and soil erosion.[120] Likewise, the groundwater system in the area of origin may be over-extracted as a substitute water source for the relocated surface water. [121]
Transfers can also have a number of effects on the water infrastructure system. For a water trade to occur in arid regions, there needs to be a storage and delivery infrastructure to move the water from the buyer and the seller. This infrastructure often requires a considerable upfront sunken capital investment. When a trade results in the point of diversion being relocated or the volume of water increased, this may cause greater use of infrastructure at the buyer’s end and less use of infrastructure at the seller’s end. At the buyer’s end, this may cause congestion on the delivery system to the detriment of other water users. In turn on the seller’s end, if the cost of the infrastructure is allocated among fewer entitlement holders, costs will rise for those remaining.
For some of these third party effects, it is relatively easy to incorporate their cost into the water rights system. For example, taxes can be imposed on the trading of entitlements outside a particular infrastructure system, to recoup any increases in costs to the remaining users in that system. A number of these third party effects, however, are difficult to capture, particularly the effects on downstream users due to the complexity of hydrological systems and the difficulties in conveying water use information among multiple users. Traditionally, these more elusive third party effects have been captured through direct regulatory restrictions on, or administrative involvement in, water trading. Doing so however raises transaction costs.[122]
This dynamic between third party effects and transaction costs have led some commentators to assert that a socially efficient water market is not achievable. These commentators argue that the regulations necessary to reduce the third party effects to a socially desirable level are simply too burdensome for an efficient market to operate, and therefore the idea of water markets as a solution to the reallocation problem should be abandoned.[123] Most commentators however do not share this pessimism.[124] The trading that has occurred in recent years in the Murray-Darling Basin and in the Colorado-Big Thompson Project for example show that, given favorably institutional circumstances, active water markets will develop.[125]
Yet even in those basins that have active water trading, the markets exhibit two characteristics that limit their capacity to address the reallocation problem: (i) the local nature of the trading and (ii) the predominance of temporary trades. The confining of trade within a small geographic area keeps the market thin with a small number of buyers and sellers. This significantly reduces the ability of the market to reallocate water rights to high-value users on a large scale.[126]
Similarly, a high ratio of temporary/seasonal trading to permanent trades limits the capacity of markets to bring significant long-term structural changes to water allocation patterns. This stem primarily from the fact that short-term trades reduces the incentive both to invest in water saving technology and make permanent switches to higher value crops. In addition, short-term trading may slow the exit of inefficient water users by increasing their income from the short-term leasing of their excess water rights.[127]
Markets have the potential to be a cost effective and equitable method of solving water reallocation problems.[128] However, the unique hydrological and public good characteristics of water mean that the substantial externalities of water trading can make water markets socially inefficient. Designing the institutions of a water market - particularly water entitlements - to capture these externalities without making transaction costs too high is the central problem. Several examples of local water markets in both Australia and the western United States show that robust water markets are achievable, though even the most successful of these examples are still incomplete markets, limited by the predominance of local and short-term trading.
The National Water Initiative (NWI) is now the primary statement of water policy for both the Australian federal and state governments. All water legislation and regulations must comply with the NWI.[129] The centerpiece of the NWI’s reforms is to “fast-track ‘an efficient water market structure, expanding markets to their widest possible geographic scope’".[130] Specifically, the objectives with regard to water markets are to:
(i) facilitate the operation of efficient water markets and the opportunities for trading, within and between states, where water systems are physically shared or hydrologic connections and water supply considerations will permit water trading;
(ii) minimise transaction costs on water trades, including through good information flows in the market and compatible entitlement, registry, regulatory and other arrangements across jurisdictions;
(iii) enable the appropriate mix of water products to develop based on access entitlements which can be traded either in whole or in part, and either temporarily or permanently, or through lease arrangements or other trading options that may evolve over time;
(iv) recognise and protect the needs of the environment; and
(v) provide appropriate protection of third party interests.[131]
To achieve these objectives, the agreement lists specific water management reform actions that the states must undertake and timelines for accomplishing them.[132] These actions are primarily the states’ responsibility because of their constitutional control over inland water resources.
The states have some latitude in the legislative approach they make take, but a key principle of the NWI is that there be compatibility between the water management systems and markets among the states to, among other things, facilitate interstate trading. A federal body, the National Water Commission, monitors and coordinates the legislative activity among the states, backed by the federal government’s investment of a considerable amount of money in support of the states’ reforms.
National compatibility is a key element of the NWI.[133] Removing institutional barriers and enabling inter-jurisdictional trade to the extent water systems are physically shared or hyrdologically connected will expand the market to a larger pool of buyers and sellers as well as facilitate more efficient management of shared water systems.
To foster this compatibility, the NWI requires that all institutional and regulatory barriers to temporary inter-jurisdictional water trades be removed immediately. With respect to permanent trades, until 2009 no more than four percent of the total annual water entitlements can be permanently traded out of an irrigation area in a given year. This four percent rule and the effects of permanent inter-jurisdictional trade will be reviewed in 2009, but by 2014 there are to be no barriers to permanent inter-jurisdictional trades.[134] The purpose of the four percent cap is to help manage concerns about the adjustment of regions to water trade, and to allow for study of the socio-economic impacts of trading.[135]
The NWI does not require that the states and irrigation districts produce identical statutory schemes and regulations in response to the policies established by the NWI. Uniformity would be impossible given the differing physical, hydrological, economic and water storage circumstances of each state and district. Rather, compatibility is the goal such that trade can occur within and between states and districts without first having to investigate and establish the details and rules of the system in each region.
To have a national market despite some statutory and regulatory diversity among jurisdictions, the NWI contemplates that exchange rates and tagging systems will be developed.[136] Under a tagging system, water allocation entitlements retain the characteristics from their region of origin, regardless of the ultimate destination of the water under the entitlement. Any volumetric calculations, for example, with respect to such entitlement would be based on the entitlement's place of origin. Exchange rates perform essentially the same function as tagging but do so by converting an entitlement in one jurisdiction to an equivalent entitlement in another jurisdiction. Regardless of whether a tagging or an exchange rate systems is used, such a system is necessary with inter-jurisdiction trades, particularly those of the permanent variety, to insure that risks associated with such trades are to the purchaser, not the water system as a whole.
In effect, the NWI amounts to a roadmap for designing the foundation of a national water market. The central component is remaking the water entitlement system, to provide the instruments for water trading. The central elements of the reforms to the water entitlement system are: (i) unbundling of water entitlements into constituent rights to facilitate trading; (ii) clear and well defined property rights in water; and (iii) use of water entitlements as transparent tools for risk allocation. This section will look at each of these elements in turn, and then discuss some additional potential reform steps that the NWI did not take.
Unbundling refers to separating water entitlements into their constituent rights. Foremost under the NWI, this has meant separating the long-standing connection in Australia between land titles and water rights.[137] That is, under the NWI, a party can acquire, hold or transfer a right to access a particular volume of water without owning rights in any land on which to use that water.
This land-water separation however is only the first level of unbundling. The NWI further requires that water allocation entitlements (the right to a particular amount of water) be distinct from the water use entitlements (the regulatory approval for the right to use that water at a particular location or for a particular use).[138] Thus if a party acquires a right to a particular volume of water they will need to acquire a separate entitlement to use that water. Typically, the use entitlement will be detailed under the local water management plan.[139]
The NWI also contemplates that this unbundling concept may be extended further such that delivery, storage and water quality rights, for example, may also be separate from the water allocation entitlement. The rational behind unbundling is to increase the ‘liquidity’ of each component of the water entitlement system by making each more transparent and easily accessible to buyers and sellers.[140] Instead of having a single water entitlement that incorporates allocation, use, storage, and externality characteristics, etc., for which there would be a relatively thin and necessarily local market, unbundling produces a set of relatively homogenous water entitlement products for which there can be a wider market.
Each of these components may have different values at different times to different users and by separating them out the market can more efficiently allocate them. For example, irrigators of summer crops may have a greater need for the use of water storage and delivery facilities during the drier summer months, as opposed to irrigators of winter crops who rely more on natural stream flows during the wetter winter months.
Not only does unbundling increase marketability of water entitlements, but it also facilitates the regulation of third party effects. This is somewhat counterintuitive as conceptually, externalities arise from incomplete water rights.[141]
Yet, by separating land from water and allocation from use, the externalities of trading in a particular region can be identified and separately regulated without saddling the entire entitlement system with those regulations.[142]
Separation thus allows for the management of externalities independent of a party’s right to a particular allocation of water. For example, in regions subject to salinity, an irrigator who has purchased additional water allotments for expansion could also be required to purchase additional salination credits before those additional water allotments could be exercised. Hence, for regulating third party effects, the key is the completeness of the entire entitlement system, not the completeness of individual entitlements.
In theory, a water market would work most effectively if the entitlement system completely unbundled water allocation rights from all associated rights.[143] This would allow users to make separate decisions on the use, conservation or sale of each component of the system, such as delivery, environmental impacts, etc. However, each additional tradable component in the system adds additional costs, as each has to be defined, monitored and enforced. Thus each level of separation must be weighed against the benefits it provides. In this regard, NWI only obligates states to legislate the land-water and the allocation-use separation. Further unbundling is a decision left to the states.
A successful water market requires a system of clear and well defined water rights. Ambiguity in water rights creates uncertainty among buyers and sellers about what is the subject of the sale, increasing transaction costs.
Accordingly the NWI requires that water allocation entitlements be “perpetual or open-ended share[s] of a specified water resource”.[144] Fixed term allocation entitlements are only permitted under special circumstances. Once issued, allocation entitlements can only be varied by agreement between the holder and the government or in statutorily defined emergencies, and allocation entitlements can only be terminated if the express conditions of the entitlement have clearly been breached. Further, the allocation entitlements must have the essential characteristics of durable property rights: exclusive, subdividable, amalgamatable, mortgageable, enforceable and freely alienable.[145]
To protect the holders of allocation entitlements and third party interests (e.g., mortgagees) and to disseminate information to facilitated water traders, the NWI requires that each state develop a water titling system to record all allocation entitlements and all temporary and permanent trades. The titling systems are to be in effect Torrens-like systems for water rights. The titling systems are to be publicly accessible and compatible among the states.[146]
In the same vein, to protect water allocated for environmental purposes, entitlements for instream uses have the same degree of security and protection as entitlements for consumptive uses.[147]
The water allocation entitlements prescribed by the NWI not only entitle a party to a volume of water but they also serve as vehicles for clearly assigning risk of supply variability. To function in this manner, states are first required to establish what amount of water is available to be traded in all relevant water systems. Each water system is to be covered by a water plan which, among other things, establishes a volume of water that can be sustainably extracted for the system. In the case of currently over-allocated water systems, such plans need to establish short-term extraction schedules that will in stages return the system to sustainability.[148] This sustainable extraction level is referred to in the NWI as the “consumptive pool” for each water system.[149]
Until 2014 entitlement holders bear all risk associated with changes to water plans that reduce the amount of water in each consumptive pool. In effect this gives the states a window to determine sustainability levels for each water system with some confidence. After 2014 governments and entitlement holders are to share the risk of water reductions according to the following rules:
These rules serve to make clear the conditions of when the government will bear and share the risks of reduced water allocations.[150]
As between entitlement holders, risks are generally shared equally as each entitlement is a right to a percentage of the available consumptive pool.[151] Some jurisdictions however have created a limited number of different classes of entitlements, tied to the reliability of supply, with higher priority entitlements having more secure supplies.
This consumptive pool and risk assigning regime, as well as the water market framework as a whole, relies on accurate water accounting. As in most types of commodity-like markets, there needs to be an agreed standard for measuring the commodity being traded. The NWI requires that in all areas where trading is to occur there must be consistent water metering. Further, by 2007 national standards for installing meters and measuring water are to be in place, along with guidelines for national reporting, and by 2008 accounting systems for groundwater and surface water.[152]
Given the extent of reforms ushered in by the NWI, unsurprisingly it has encountered criticism on many fronts. Among other things, critics have pointed to overconfidence in the current scientific understanding of water systems, an unrealistic faith in a largely self-operating market system at the expense of environmental considerations and an underestimation of the institutional complexity of pursuing a coordinated multi-jurisdictional approach to water management.[153] Nonetheless, it appears the NWI has on the whole garnered positive responses from across the political spectrum and is generally seen as a positive step in reforming Australia’s water management system.[154]
In terms of water entitlement design, the NWI’s principal weakness is that the entitlement system does not account for return flows. The allocation entitlements operate in terms of a gross volume of water they entitle a holder to extract. Though the entire volume specified in the entitlement may be extracted, not all of it is consumed and returns to the system as return flows. Downstream users in turn rely on these return flows to satisfy their own gross volume entitlement. However, because the entitlements are defined in terms of a gross volume of water, the upstream user has the implicit right to trade or use the return flow without consideration of the downstream externalities.[155]
Changes in return flow volumes can have a significant effect on downstream users both in terms of water quality and reliability of supply. Increased trading is expected to compound this situation as upstream users now have economic incentives to increase their water efficiency (i.e. use their volume of water more intensively) and to trade water that would otherwise return to the system as return flows.
Two alternatives to restructure the entitlement system were proposed to account for return flows: (i) create a separate entitlement for return flows; or (ii) change entitlements to be defined on a net water used basis rather than a gross volume extracted basis.[156] The latter approach has been the alternative most aggressively pushed by commentators.[157] Under this approach, an allocation entitlement would give the holder the right to consume a certain net volume of water. Any increase in net usage would require the acquisition of additional entitlements and the sale of any water would require a reduction in water entitlements held. The difficulty in both approaches is that the measuring and monitoring of return flows is costly and expensive, particularly since there can often be a significant time delay before return flows migrate back to the water system of origin.[158]
In the end, the water entitlement system contemplated by the NWI did not incorporate return flow concepts, apparently because the costs of doing so in terms of increasing transaction costs were thought to outweigh the benefits. In this regard the water entitlement system is incomplete in that it does not capture the effect trading has on return flows. To the extent they do so, states account for return flow effects through the water planning process rather than the market mechanism. As a practical matter, though, the non-capture of return flows in the entitlement system means that a user’s sale or increase use of return flows means a reduction in water allocated to instream uses.
Under the NWI, Australia has radically reformed its water entitlement system. Rights to water have been separated from land ownership and a right to a certain allocation of water has been separated from the right to use that water. Well defined property rights have been created in water to increase security and investment and to clearly assign the risk of supply variability. A path has been laid out to make compatible the formerly disparate state water regulation systems in order to facilitate a national and interregional water market. Nevertheless, the entailment system remains incomplete, particularly in that it does not capture the critical issue of the effect of trading on return flows.
For the western United States, a number of reform lessons can be drawn from the NWI in terms of water entitlement reform to encourage water trading. Any of these lessons though must be couched in the context of the established prior appropriation system. Not only is prior appropriation dominant in the West, but it is deeply entrenched in the states and courts such that for the foreseeable future, water entitlement reform will most likely take place within the system rather than from outside it.[159]
The Fifth Amendment to the Federal Constitution and comparable provisions of state constitutions further complicate any reform of water rights. Once vested, appropriative water rights enjoy a measure of constitutional protection from governmental alteration, albeit not as great as some other property rights. [160] In comparison, this is generally not the case in Australia where state water entitlements have generally been freely alterable by the state.
While Australia generally has an underlying system more amenable to wholesale reform, the water entitlement system in the western United States is not inflexible. The prior appropriation framework is an evolving one, having gone from a simple set of judicial rules to a complex statutory permit system that has managed to accommodate such new uses as hydropower.[161] Likewise some state legislatures have shown a recent willingness to alter prior appropriation doctrines to pressing environmental needs.[162]
This reform capacity though is restrained by jurisdictional divisions surrounding water regulation and allocation. The federal government, state governments, tribal authorities and local water authorities and districts provide four or five layers of institutions that complicate reform efforts and must generally align in order for comprehensive change to the water allocation system. Though state law is the primary mechanism for water allocation and where most attention is focused for improving water markets, federal environmental laws generally trump state action and therefore place a significant institutional restraint on state reform. Similarly many tribes hold water rights, some not yet realised, that are superior to state interests and therefore in some circumstances confine state policy options. Local institutions, given the sheer volume of water they control and their parochial nature, tend to resist change, particularly changes that would cause water to leave their jurisdiction.[163]
This section will look at what lessons the American West can take from the NWI, given the context of the prior appropriation system and the constitutional and institutional restraints on wholesale reform. The section will be organised around the same categories of entitlement reforms used in the previous section.
The NWI requires that water allocation entitlements be separated from land ownership as well as from the right to use the allocated water. With respect to land-water separation, in most western states appropriation rights are not appurtenant to land and can be transferred separately. In those states where there are still appurtenancy rules, generally they remain only as outdated relics of the homestead era and have exceptions that permit water transfers separate from land.[164] Some new appurtenancy laws have recently emerged in some states as part of family farm preservation laws and certain environmental protection schemes.[165]
Notwithstanding state law, the contracts under which federal reclamation water is provided create some links between water rights and land ownership. Water subject to the Reclamation Act can only be transferred to an occupier of the land where the water is going to be used and the transferee’s parcel can be no larger than 960 acres.[166]
While the federal contract restrictions and the remaining state appurtenancy rules generally do not create per se prohibitions on the transfer of water apart from the land, they do increase the heterogeneity of water rights both intrastate and interstate.[167] This in turn increases transaction costs and reduces the ‘liquidity’ of appropriation rights. As under the NWI, the elimination of all appurtenancy rules would facilitate water marketing. Those few remaining public purposes still served by appurtenancy rules can be accomplished in a more direct fashion that creates fewer transaction costs.
The NWI’s separation of a water allocation entitlement from the right to use that allocation does not translate to the prior appropriation system. Under prior appropriation, the volume of water a permit holder is entitled to use is generally defined by the very amount of water that has been put to use. This intimate connection between allocation and use makes the NWI’s unbundling of allocation from use largely infeasible in prior appropriation jurisdictions absent substantial reform.
One of the primary aims of the NWI is to eliminate ambiguity in the entitlement system in order to reduce transaction costs arising from uncertainty surrounding water instruments. This is done by making the attributes of the water entitlement (e.g., whether it is a secure right, its transferability, the volume of water associated with it, the reliability of delivery of that water, etc.) clear to both the holder and third parties.
Once vested, prior appropriation rights are generally open-length, exclusive and enforceable property rights. They are however not entirely secure. They can be attenuated in whole or in part under the rules for waste and non-use at any time by challenges from junior appropriators or water agencies.
Generally, though, it is during the transfer process that these rules are most likely to impact water rights. It is then that water agencies will scrutinise the transferor's appropriation right to see if any part of it has been abandoned or forfeited by nonuse, or to see if the water use has been wasteful.[168] Moreover, it is during transfer proceedings that junior appropriators are most incentivised and positioned to attack a senior appropriator’s right for waste or non-use. Hence, it is at the very time of transfer that the insecurity of an appropriator’s right is most likely to be made manifest.[169]
Uncertainty also arises at the time of transfer due to questions about just how much water the seller has to transfer. Generally water agencies only permit a transferor to convey the amount of water that has been actually historically used under that water right. Consequently, the amount allowed to be transferred may be something less than the paper right.[170]
Further, just as appropriators generally have no right to water they have not historically used, they have no right to their return flow water.[171] This is the opposite of the Australian system. In the western United States, downstream users are entitled to return flow water as if it had never been extracted upstream. To protect downstream users, all western states have “no-injury” rules in connection with transfers.[172] These rules in essence provide that transfers or changes in water use by upstream users cannot injure downstream users by changing the timing, amount or quality of return flows. Proving the negative of non-injury, though generally achievable, can be expensive and time consuming.
The rules regarding waste, non-use, historical use and no-injury lessen the security and clarity of prior appropriation rights and therefore reduce their liquidity as instruments for water trading.[173] A number of commentators have cited both the increased transaction costs created by these rules and the deterrence effect they have on water trading. The question then is whether the rules make appropriation rights more complete. In other words, are the increased transaction costs that result from these rules simply a product of prior appropriation rights capturing certain third party effects of water trading?
With respect to the rules of waste, non-use, and historical use, this appears not to be the case. As Janet Newman concluded, these rules in their current form are still principally designed to serve the West’s water needs of a century ago, needs that are either no longer priorities or inconsistent with today’s water management objectives.[174]
The primary goals of these rules were to prevent water speculation, monopoly and to maximise water use to encourage economic development, while at the same time giving flexibility to users as to how they wanted to use their water. Speculation and monopoly concerns, though still present to some extent today, have largely been superseded by desires to make water use economically efficient through trading. Likewise, water management policies are no longer oriented around economic development and the encouragement of water use but rather how to increase conservation and manage economic development in light of stressed water resources. And while flexibility for water users remains a goal of current water policies, in order to encourage innovation among other things, the increased need for the more efficient use of water resources and the protection of instream needs means inevitably that water users are no longer given the free reign for water uses they had a century ago.[175]
Thus, the rules of waste, non-use, and historical use either do not function to capture third party effects of water trading or they capture third party effects that are not a priority given the transaction costs they create. Therefore, these rules do not make prior appropriation rights more complete water rights for trading.
On the other hand, no-injury rules clearly serve to capture the externalities imposed on downstream users by water trading. In this regard, appropriation rights are more complete than those prescribed under the NWI. No-injury rules however impose high transaction costs and efforts to reform their application are necessary to improve water trading.
The simple hydrologic uncertainty of determining whether downstream users will be affected by a particular transfer (particularly in the case of interregional transfers) means there are limits to which the administrative review process can be streamlined.[176] As a number of commentators have noted, the most practical solution to the transaction costs created by the non-injury rules is to re-measure appropriative rights according to the amount of water that each user can consume rather than the total amount each can divert, thereby eliminating the need to measure return flows each time a right is transferred.[177] A change to such a net water use system would require considerable advances in measuring and monitoring return flows, as well as considerable upfront administrative and transition costs.
Thus, to increase the liquidity of prior appropriation rights, the rules of waste, non-use, and historical use should be abandoned. However, the no-injury rule serves to capture a critical externality of water trading, but needs reform to lower the transaction costs associated with it.
A water allocation system must not only allocate specific volumes of water among users but must also allocate the risk of supply shortages. This risk has two primary sources: natural variation in supply, and changes in governmental policy that reduce the amount of water available for consumptive use. Under the NWI, between users these risks are generally allocated on a pro rata basis or based on a limited number of entitlement classes. Between the government and users, reductions resulting from policy changes are allocated on fixed risk splitting formulas.
1 Shortage Risks as between Users under Prior Appropriation
Prior appropriation allocates water shortage risks between users based on priority. On any prior appropriation water system, no two appropriators can have equal priority. If there is insufficient flow, senior users must have their allocation satisfied in full before any junior users can divert any water, regardless of the relative downstream/upstream locations.
This is not a hard and fast rule in practice as the system does not always result in the application of strict priority.[178] For example, if a senior appropriator is at the bottom of a stream and return flows from junior upstream users are sufficient to satisfy the senior’s right even in a drought, then the junior users may be able to continue to divert their allocations despite the priority ladder. Furthermore, administrative discretion and various statutory preferences will sometimes defeat a senior's claim during periods of shortage.[179] Dan Tarlock argues that, due to the inefficiency, inequity and impracticality of strict enforcement, there is in fact far less enforcement of priorities in practice than the formal priority rules suggest. Rather, risk is being allocated in individual watersheds or basins via ad hoc schemes agreed to by stakeholders given the local circumstances, and these local schemes may therefore modify the priority schedule.[180]
Nevertheless, prior allocation still plays the primary role in allocation of water shortage risks and dispute resolution among users. Though as a practical matter, water users have to plan simultaneously for reductions dictated by the strict enforcement of priorities and for reductions via alternative ad hoc schemes.[181]
For water trading, this creates further uncertainty surrounding the use of appropriation rights as trading instruments. By itself, the priority rule impedes the development of water markets by making each appropriation right uniquely dependent on its place on the seniority ladder. Each appropriation right is in effect unique, increasing transaction costs by complicating the seller’s process of finding suitable water rights and negotiating the price. The adjustment of risk allocation outside of the appropriation system only adds further uncertainty for water transactions.
The primary alternative to a distribution of risk based on priority is a pro rata sharing rule, as used in Australia. Adopting this rule in the western United States, however, would require a wholesale change to the prior appropriation system. Foremost, the amount of water that could be appropriated on each system would need to be surveyed and capped to prevent a tragedy of the commons. Without a cap, new appropriators would not be forced to account for the loss of security suffered by existing senior users when evaluating whether to divert water from a particular water system. Second, sophisticated enforcement and monitoring systems would need to be implemented since it is much easier to determine whether a junior appropriator is still diverting water as opposed to whether every user on the system has reduced their allocation by the appropriate share.[182] Lastly, the transition to such a system would be enormously complicated and costly as every existing senior appropriator could face an adjustment in the security of their supply during shortage periods.
Under prior appropriation, the allocation of water shortage risk between users is part-and-parcel of the entitlement system, and thus would be transferred between buyer and seller in a sale transaction. This risk allocation component makes each appropriation right unique. This creates added transaction costs in water trading by increasing the need to investigate the security of each water right. Furthermore, while the risk allocation system is clear in principle, in practice it is less certain, often subject to ad hoc water system-specific risk allocation schemes outside the prior appropriation system. The net result is that the prior appropriation system does not provide a system of transparent risk allocation among water users.
2 Shortage Risks As Between The Government and Users Under Prior Appropriation
The mechanisms for allocating supply reductions resulting from changes in government policy are similarly transparent in principle but not clear in practice, particularly compared to the fixed risk formula used by the NWI. Generally, once prior appropriation rights are vested the government cannot reduce or otherwise alter the water right unilaterally without compensation, except pursuant to the inherent characteristics of the water right itself.[183]
The often litigated question is what these characteristics are and what their scope is in particular circumstances. For example, since water in the West is publicly owned, courts have read prior appropriation rights to be subject to prior claims of the public interest, through the public trust doctrine and other judicial principles.[184] The extent to which government action is permitted without compensation by these prior public claims is generally a matter of case law, and thus tends to be fact specific.[185]
Hence, the level of certainty in this risk allocation regime is less than under the NWI’s express schedule for allocating the risk of water shortages resulting from government policy changes. In an attempt in part to address this uncertainty, one state statutorily eliminated the application of the public trust doctrine to water rights.[186] Yet, it remains an open issue whether doing so exceeds a legislature’s constitutional authority. The Arizona Supreme Court, when confronted with the question, held that the legislature cannot constitutionally abrogate the public trust doctrine, thus pointing to inherent limits on the extent to which the prior appropriation system can be fundamentally reformed.[187]
In order to tackle its water reallocation problem and more efficiently manage its limited water resources, Australia has undertaken a comprehensive reform of its water rights system as a central part of its commitment to develop a robust national water market. Given the legal, climatic and water resource similarities between Australia and the western Untied States, these reforms provide several instructive lessons for reforming the water entitlement system in the American West in order to facilitate the development of more complete water markets. Those lessons are: (i) the need to eliminate all appurtenancy requirements between land and water rights to increase the liquidity of water entitlements; (ii) the need to abandon the rules of waste, non-use, and historical use in order to increase the security of water rights under the prior appropriation system; and (iii) the need for statutory reform or new judicial rules to bring greater certainty to the prior appropriation system in terms of how the risk of water shortages are allocated among users in practical, on-the-ground terms.
[*] A.B. Princeton University, J.D. University of Minnesota. An earlier version of this article was prepared by the author for submission as part of his Master of Laws (LLM) studies at the The University of Auckland, New Zealand. The author would like to thank Prof. Sandra Zellmer for her helpful comments on an earlier version of this article.
[1] See eg, Robert Glennon “Water Scarcity, Marketing, and Privatization” (2005) 83 Texas Law Review 1873, 1876-1888; Brent M. Haddad Rivers of Gold: Designing markets to allocate water in California (2000) 1-17; National Research Council (U.S.). Water Science and Technology Board. Committee on Western Water Management Water transfers in the West: Efficiency, Equity, and the Environment (1992) 21-23.
[2] U.S. Bureau of Reclamation, Water 2025: Preventing Crises and Conflict in the West, (Aug 2005) [1] <http://www.doi.gov/water2025> at 27 May 2007; A. Dan Tarlock and Sarah B. Van de Wetering “Western Growth And Sustainable Water Use: If There Are No ‘Natural Limits,’ Should We Worry About Water Supplies?” (2006) 27 Public Land & Resources Law Review 33, 46.
[3] See eg, Steven J. Shupe, Gary Weatherford and Elizabeth Checchio, “Western Water Rights: The Era of Reallocation” (1989) 29 Natural Resources Journal 414.
[4] For a general discussion of this question see Jeff Bennett “Markets and Government – An Evolving Balance” in Bennett, Jeff (ed) The Evolution of Markets for Water: Theory and Practice in Australia (2005) 1-7.
[5] See eg, State Water Resources Control Board, Governor’s Commission To Review California Water Rights Law Final Report (December 1978) [59-70] California Environmental Protection Agency <http://www.swrcb.ca.gov/general/publications/index.html.> at 5 May 2007.
[6] Howard Chong and David Sunding “Water Markets and Trading” (2006) 31 Annual Review of Environment and Resources 239, 248.
[7] See generally, Barton H. Thompson, Jr. “Markets for Nature” (2000) 25 William & Mary Environmental Law & Policy Review 261.
[8] Haddad, above n 1, 15.
[9] See eg, Ibid Appendix 1.
[10] For a discussion of the Colorado-Big Thompson Project and the institutional features that facilitate water trading in comparison to other Western water projects, see Janis M. Carey and David L. Sunding, “Emerging Markets in Water: A Comparative Institutional Analysis of the Central Valley and Colorado-Big Thompson Projects” (2001) 41 Natural Resources Journal 283, 284.
[11] Glennon, above n 1, 1886. Glennon lists many of the water works examining the lack of successful water markets in the West.
[12] Haddad, above n 1, xix; Chong, above n 6, 251.
[13] There are additional related arguments against water markets, such as water is a public good that should not be treated as a market commodity. See eg, Chong, above n 6, 259.
[14] There are other additional elements for designing successful water markets such as integrating markets with water pollution regulations and water planning mechanisms, but they are generally beyond the scope of this paper.
[15] See eg, Daniel Connell, Stephen Dovers and R. Quentin Grafton “A Critical Analysis of the National Water Initiative” (2005) 10 Australasian Journal of Natural Resources Law and Policy 81, 85-86.
[16] See eg, M. D. Young and J. C. McColl “Robust Reform: The Case for a New Water Entitlement System for Australia” (2003) 36(2) Australian Economic Review 225, 226.
[17] Council of Australian Governments’ Water Reform Framework (1994) Australian Government – Department of the Environment and water Resources < http://www.environment.gov.au/water/action/coag.html> at 30 April 2007; Michael Woolston “Registration of Water Titles: Key Issues in Developing Systems to Underpin Market Development” in Bennett, Jeff (ed) The Evolution of Markets for Water: Theory and Practice in Australia (2005) 78.
[18] See eg, Turral, H. N. et al “Water Trading At The Margin: The Evolution Of Water Markets In the Murray-Darling Basin” (2005) 41(7) Water Resources Research W07011.
[19] Intergovernmental Agreement on a National Water Initiative (NWI), 25 June 2004 <http://www.nwc.gov.au/nwi/index.cfm> at 29 April 2007.
[20] In its international review of water policy, The Economist magazine concluded that “[t]he country that takes top prize in water management is Australia.” Cited in M. D. Young and J. C. McColl “Parting the Waters: Frontiers in Water Management” (2004) 23(3) Dialogue, the Journal of the Academy of the Social Sciences in Australia 4, 5.
[21] See eg, Chong, above n 6.
[22] See eg, Kenneth M. Murchison “Environmental Law in Australia and the United States: A Comparative Overview” (1995) 22 Boston College of Environmental Affairs Law Review 503.
[23] Ibid 555.
[24] Statistics South Africa, Natural Resource Accounts Updated Water Accounts For South Africa: 2000 Discussion Document - D0405, (December 2006). [4] <http://www.statssa.gov.za/Publications/D0405/D04052000.pdf> at 1 June 2007.
[25] Young & McColl above n 20, 6.
[26] Alan Moran “Preface” in Bennett, Jeff (ed) The Evolution of Markets for Water: Theory and Practice in Australia (2005), xii.
[27] Ibid.
[28] Ibid.
[29] Lee Godden, “Water Law Reform in Australia and South Africa Sustainability, Efficiency and Social Justice” (2005) 17(2) Journal of Environmental Law 181, 183.
[30] Gary L. Sturgess “Transborder Water Trading among the Australian States” in Anderson, Terry Lee and Hill, Peter Jensen (eds) Water Marketing, the Next Generation (Rowman & Littlefield, Lanham, MD, 1997) 127-145, 130.
[31] Godden, above n 29, 183.
[32] Ibid.
[33] Naomi Carrard Southeast Asia Geography Conference Panel: Water Governance in Context: Case Study of Australia (2004) [1] Australian Mekong Resource Centre University of Sydney <http://www.mekong.es.usyd.edu.au/events/past/GeogConference2004/australia_casestudy.pdf > at 3 May 2007.
[34] Young & McColl, above n 16, 225.
[35] Ibid.
[36] Murray-Darling Basin Commission Murray-Darling Basin e-Resources 2005 http://www.mdbc.gov.au/subs/eResource_book/chapter3/p1.htm> at 1 May 2007.
[37] Ibid.
[38] Marsden Jacob Associates Securing Australia’s Urban Water Supplies: Opportunities and Impediments, A Discussion Paper Prepared For The Department of The Prime Minister and Cabinet (November 2006) [paragraph 21] Australian Government - Department of the Prime Minister and Cabinet < http://www.pmc.gov.au/water_reform/index.cfm> at 14 May 2007.
[39] Ibid paragraph 28.
[40] Ibid paragraph 23.
[41] Ibid.
[42] Ibid paragraph 15.
[43] Ibid paragraph 2.
[44] U.S. Water News Online Southern Australia will have no water for irrigation if drought continues, leader says (April 2007) <http://www.uswaternews.com/archives/arcglobal/7soutaust4.html> at 4 May 2007.
[45] See eg, Young & McColl, above n 20, 6.
[46] Western Water Policy Review Advisory Commission Water in the West: Challenge for the Next Century (1998) University of New Mexico <https://repository.unm.edu/dspace/handle/1928/2761> at 1 May 2007.
[47] Ibid 2-3
[48] Ibid 2-5.
[49] Ibid 2-6.
[50] Ibid 2-5.
[51] Susan S. Hutson et al, “U.S. Geological Surveyor Circular 1268: Estimated Use of Water in the United States in 2000” (2004) [Table 1] U.S. Department of the Interior <http://pubs.usgs.gov/circ/2004/circ1268/> at 3 May 2007.
[52] Ibid.
[53] Western Water Policy Review, above n 46, 2-3.
[54] National Land & Water Resources Audit, Water Resources – Allocation & Use – Australia, Australian Natural Resources Atlas <http://audit.ea.gov.au/anra/water/water_frame.cfm?region_type=AUS®ion_code=AUS&info=allocation> at 5 May2007.
[55] J.J. Walcott, H. Zuo and H. Rath, Recent Changes in Agricultural Land Use in Australia (2001) Department of Agriculture, Fisheries and Forestry-Australia <http://www.regional.org.au/au/asa/2001/p/11/walcott.htm> at 15 May 2007.
[56] Daryl Quinlivan, An Australian Perspective on Water Reform, OECD Workshop on Agriculture and Water: Sustainability, Markets and Policies, Session No. 1, 14-18 November, 2005 [2] Organisation for Economic Co-Operation and Development <http://www.oecd.org/document/16/0,2340,en_21571361_34281952_35453968_1_1_1_1,00.html> at 29 April 2007.
[57] Marsden Jacob Associates, above n 38, paragraph 13.
[58] National Land & Water Resources Audit, above n 54.
[59] By 2025, Australia’s population is projected to have increased from 20.3 million in 2005 to 24.7 million in 2025. Marsden Jacob Associates, above n 38, paragraph 11.
[60] Council of Australian Governments, Council of Australian Governments' Communique 3 November 2000 < http://www.coag.gov.au/meetings/031100/index.htm#natural> at April 30, 2007.
[61] Rowan Roberts, Nicole Mitchell and Justin Douglas, Water and Australia’s Future Economic Growth (2006) [56] Australian Government – The Treasury <http://www.treasury.gov.au/documents/1087/PDF/05_Water.pdf> at 1 May 2007.
[62] Ibid 52.
[63] See eg, Lin Crase, Phil Pagan and Brian Dollery “Water Markets As A Vehicle For Reforming Water Resource Allocation In The Murray-Darling Basin Of Australia” (2004) 40(8) Water Resources Research W08S05, 1.
[64] Young & McColl, above n 16, 226
[65] Ibid.
[66] Chong, above n 6, 240; Western Water Policy Review, above n 46, 2-23.
[67] Western Water Policy Review, above n 46, 2-22.
[68] Ibid.
[69] Haddad, above n1, 1-14.
[70] Western Water Policy Review, above n 46, 2-22.
[71] Ibid 2-12, 13.
[72] Ibid 2-13.
[73] The need to satisfy tribal water rights that have recently been asserted and quantified will be an additional stress on water resources in the western United States. See eg, ibid 3-45-46.
[74] Godden, above n 29, 186-194.
[75] Section 100 of the Commonwealth Constitution reads: “The Commonwealth shall not, by any law or regulation of trade or commerce, abridge the right of a State or of the residents therein to the reasonable use of the waters of rivers for conservation or irrigation.”
[76] Poh-Ling Tan “Legal Issues Relating to Water Use” in Land & Water Australia (ed) Property: Rights and Responsibilities, Current Australian Thinking (2002) [13-42, 15-22] <http://www.lwa.gov.au/News/News_Stories/News_2002/Property_Rights_and_Responsibilities_Current_Australian_Thinking/indexdl_2265.aspx.> at 28 April 2007.
[77] In general, the Australian states have no compensation obligation when they acquire a property right of an individual (though there may be a political obligation as a practical matter). However, the Commonwealth does have such a constitutional obligation to provide compensation under Section 51(xxxi) of the Commonwealth Constitution. See eg, ibid 34.
[78] Ibid; Woolston, above n 17, 77.
[79] Tan, above n 76, 19.
[80] Young & McColl, above n 16, 228.
[81] Roberts et al, above n 61, 55.
[82] See eg, Water Act 1989 [Vic] and Water Administration Act, 1986 [NSW] [now repealed]; for a discussion see Godden, above n 29, 187-188; Tan, above n 76, 19-23.
[83] Godden, above n 29, 187-188.
[84] The members of the COAG consist of the Prime Minister, State Premiers, Territory Chief Ministers and the President of the Australian Local Government Association; Council of Australian Governments’ Water Reform Framework (1994) Australian Government – Department of the Environment and Water Resources < http://www.environment.gov.au/water/action/coag.html> at 30 April 2007.
[85] Roberts et al, above n 61, 58.
[86] NWI, above n 19.
[87] Law of Water Rights and Resources (C. Boardman 1988, July 2006 Update), 1:1.
[88] Ibid.
[89] Committee on Western Water Management, National Research Council (U.S.), Water Transfers in the West: Efficiency, Equity, and the Environment (1992) 25; C. Carter Ruml “The Coase Theorem And Western U.S. Appropriative Water Rights” (2005) 45 Natural Resources Journal 169, 175.
[90] Ruml, above n 89, 171-173.
[91] Law of Water Rights and Resources, above n 87, 5:71; Barton H. Thompson Jr, “Institutional Perspectives on Water Policy and Markets” (1993) 81 California Law Review 673, 703.
[92] Ruml, above n 89, 176.
[93] Chong, above n 6. A. Dan Tarlock “The Future Of Prior Appropriation In The New West” (2001) 41 Natural Resources Journal 769.
[94] Tarlock, above n 93, 780.
[95] A. Dan Tarlock, “Prior Appropriation: Rule, Principle, or Rhetoric” (2000) 76 North Dakota Law Review 881, 901-902.
[96] Law of Water Rights and Resources, above n 87, 2:4.
[97] Section 8 of the Reclamation Act of 1902 (43 U.S.C. 383); Law of Water Rights and Resources, above n 87, 5:81.
[98] Murchison, above n 22, 511.
[99] 33 U.S.C. § 1251; 16 U.S.C. §§ 791-828; 16 U.S.C. §§1531-1544.
[100] Law of Water Rights and Resources, above n 87, 9:23-31.
[101] See eg, Klamath Irrigation District v United States, 67 Fed. Cl. 504 (2005). U.S. Court of Federal Claims held that the withholding of irrigation water due to requirements of the Endangered Species Act is not a taking of irrigation rights under federal water contracts.
[102] See eg, Western Water Policy Review, above n 46, 3-45 – 33-50.
[103] Tarlock, above n 93, 884.
[104] For a discussion of the basic rationale and workings of water markets see Haddad, above n 1, 19-32.
[105] Ibid 24.
[106] See eg, Thompson, above n 7.
[107] Ibid 262.
[108] Haddad, above n 1, 19-32.
[109] Bennett, above n 4, 2-4.
[110] Ibid.
[111] Joseph W. Dellapenna, “The Importance of Getting Names Right: The Myth of Markets for Water” (2000) 25 William & Mary Environmental Law & Policy Review 317, 327.
[112] Australian Government – Department of the Prime Minister and Cabinet, National Water Initiative - Water Trading Study, Final Report (June 2006) [v] <http://www.pmc.gov.au/water_reform/index.cfm> at 29 April 2007. This iteration of the requirements for a tradable entitlement in large part parallel the characteristics often listed for the elements of ownership of private property. See eg, Haddad, above n 1, 22-23.
[113] John Freebairn “Principles and Issues For Effective Australian Water Markets” in Bennett, Jeff (ed) The Evolution of Markets for Water: Theory and Practice in Australia (2005) 8-23, 8-10.
[114] Chong, above n 6, 242-243.
[115] Ibid.
[116] Dellapenna, above n 111, 329-336.
[117] For a thorough discussion of third-party effects, see National Research Council, above n 1, 38-67.
[118] See eg, Chong, above n 6, 252-256.
[119] J. W. Freebairn, “Issues in The Design of Water Markets,” Melbourne Institute Working Paper; No. 18/2005 (December 2005) 7.
[120] See eg, Chong, above n 6, 254.
[121] Ibid.
[122] See eg, Ruml, above n 89, 178 (noting one study of the regulatory transfer processes in Colorado and New Mexico that estimated that the regulatory processes added 20% to the cost of water trading).
[123] See eg, Dellapenna, above n 111.
[124] See eg, Haddad, above n 1.
[125] In the Colorado-Big Thompson Project, a key institutional advantage is that the water district owns all return flows (as opposed to downstream users). As a result, the transfers within the Project are not burdened by the “no injury” rule with respect to downstream users. The “no injury” rule is discussed further below. Carey & Sunding, above n 10, 304-305. For a discussion of the institutional advantages of water trading in the Murray-Darling Basin see Crase et al, above n 63.
[126] Crase et al, above n 63, 8.
[127] Ibid; Freebairn, above n 119, 96.
[128] Chong, above n 6, 248; Glennon, above n 1, 1883-1886; Haddad, above n 1, 19-32.
[129] Roberts et al, above n 61, 58.
[130] Woolston, above n 17, 79.
[131] NWI, above n 19, paragraph 58.
[132] Ibid Schedule A.
[133] David Campbell “Water Trading Instruments In Australia Some Thoughts On Future Development Of Australia Water Markets” in Jeff Bennett (ed) The Evolution of Markets for Water: Theory and Practice in Australia (2005) 139-164, 159.
[134] NWI, above n 19, paragraph 60.
[135] Malcolm Thompson, National Water Initiative - The Economics of Water Management in Australia - An Overview, OECD Workshop on Agriculture and Water: Sustainability, Markets and Policies, Session No. 2, 14-18 November, 2005 [10] Organisation for Economic Co-Operation and Development <http://www.oecd.org/document/16/0,2340,en_21571361_34281952_35453968_1_1_1_1,00.html> at 29 April 2007.
[136] NWI, above n 19, paragraph 60.
[137] Ibid paragraph 28.
[138] Ibid paragraph 30.
[139] Ibid paragraphs 36-40. Trading cannot occur within an area unless there is a water plan covering those areas.
[140] Quinlivan, above n 56 [8].
[141] Stephen Beare and Anna Heaey, Externalities and Water Trading In The Murray Darling Basin Australia, Australian Conference of Economists, September 30 – October 3, 2002, [5] <http://www.abareconomics.com/publications_html/landwater/landwater_02/cp02_water2.pdf> at 30 May 2007.
[142] M. D., Young and J. C. McColl “Robust Reform: Implementing Robust Institutional Arrangements To Achieve Efficient Water Use In Australia” CSIRO Land and Water, S/03/1258, (November 2003) [25-26] <http://www.clw.csiro.au/publications/consultancy/2003/Robust_Reform.pdf> at 29 November 2007.
[143] Australian Government - Department of the Prime Minister and Cabinet, above n 112, v-vi.
[144] NWI, above n 19, paragraph 28.
[145] Ibid paragraphs 28-34.
[146] Ibid. Schedule F.
[147] Ibid. paragraph 35.
[148] Ibid paragraphs 41-45.
[149] Ibid Schedule B(i).
[150] Ibid paragraphs 46-50.
[151] Ibid paragraph 28.
[152] Ibid paragraph 83, 87-89.
[153] See eg, Connell et al, above n 15, 81; Daniel Connell and Stephen Dovers “Tail Wags Dog – Water Markets and the National Water Initiative” (2006) 8 Public Administration Today 17-23.
[154] See eg, Young & McColl, above n 16; Connell et al, above n 15.
[155] Young & McColl, above n 142, 46-47.
[156] Australian Government – Department of the Prime Minister and Cabinet, above n 112, 57-59.
[157] See eg, ibid.
[158] Australian Government - Department of the Prime Minister and Cabinet, above n 112, 57-59.
[159] Tarlock, above n 93, 773-774.
[160] See eg, Joseph L. Sax “The Constitution, Property Rights and The Future of Water Law” (1990) 61 University of Colorado Law Review 257.
[161] Tarlock, above n 93, 777-778.
[162] Ibid.
[163] Thompson, above n 91, 671.
[164] Law of Water Rights and Resources, above n 87, 5:72.
[165] Ibid.
[166] Ibid 5-82; Carey & Sunding, above n 10, 302-303.
[167] Carey & Sunding, above n 10, 302-303.
[168] Janet C. Neuman “Beneficial Use, Waste, and Forfeiture: The Inefficient Search For Efficiency in Western Water Use” (1998) 28 Environmental Law 919, 960.
[169] See eg, Ruml, above n 89, 171-179.
[170] Neuman, above n 168, 960.
[171] Thompson, above n 91, 703-704.
[172] Ibid.
[173] See eg, Ruml, above n 89, 171-179. Ruml discusses the costs that the transfer process adds to the costs of buying water rights under the prior appropriation system, noting that one study indicated the process increased the cost of water rights by 20%.
[174] Neuman, above n 168, 962-977.
[175] Ibid.
[176] Thompson, above n 91, 706-707.
[177] Ibid; David P Jones. “Meeting Idaho’s Water Needs Through The Water Right Transfer Process: a Call for Legislative Reform” (2001) 38 Idaho Law Review 213.
[178] See eg, Tarlock, above n 93.
[179] Thompson, above n 91, footnote 20.
[180] Tarlock, above n 93, 786.
[181] Ibid.
[182] Thompson, above n 91, 682-684.
[183] See eg, James H. Davenport and Craig Bell “Government Interference with the Use of Water: When Do Unconstitutional ‘Takings’ Occur?” (2005-2006) 9 University of Denver Water Law Review 1.
[184] Law of Water Rights and Resources, above n 87, 5:51-59.
[185] Ibid 68-69. Often the critical questions are the water users investment-backed expectations, and the nature of the government's action at issue.
[186] Law of Water Rights and Resources, above n 87, 5:59. In 1996, Idaho statutorily abrogated the public trust doctrine. Idaho Code § 58-1203(2)(b).
[187] Ibid; San Carlos Apache Tribe v Superior Court of Arizona, 972 P.2d 179, 199 (Ariz. 1999).
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