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Priority entitlements

Proportional entitlements

Advantage

Different levels of supply reliability can be purchased

Entitlements are homogeneous, easier to establish market, i.e., lower transaction costs

Disadvantage

Entitlements are heterogeneous, more difficult to organize market

Different levels of reliability can be created by holding extra shares a

Tradability

Difficult to trade

Easy to trade

When water supply is highly variable

Protects investments but results in some short-term inefficiencies

Difficult to protect investments but equates marginal values where users are alike

Risk distribution

A fixed risk allocation that prefers high to general security entitlement holders in dry years

Equally sharing risk and capable of managing new risks created by new demands on the system

Note: While purchasing more proportional entitlements would increase the volume of water available in a season, this 'reliability' is not what is normally referred to as the reliability of an entitlement.

Note: While purchasing more proportional entitlements would increase the volume of water available in a season, this 'reliability' is not what is normally referred to as the reliability of an entitlement.

3.2 Class-Based or Share-Based Entitlements

Two options are available when governments face escalating demands and increasing water scarcity: (1) continue to permit users to consume water on a first-come-first-served basis. This would have resulted in some low-value users enjoying supply priority based on historical precedent and at the expense of potential high-value users; and (2) regulate the consumption of water resources by allocating water among different competing needs (Sturgess & Wright 1993). Priority entitlements and proportional entitlements are two main types of rights in water quantity that have evolved under an appropriations doctrine (see Table 1). Since water entitlements are typically defined as proportional shares rather than fixed quantities, the only way to have secure supplies during a drought is to hold excess water entitlements in reserve in the absence of the ability to trade. This is especially critical for citrus and other permanent crops, where the investment at stake is much higher than losing a single year's production.

3.3 Tradable Water Entitlements

Water entitlements supplied by schemes owned by state governments are generally volumetric allocations. These entitlements are in the most part 'statutory entitlements' rather than proprietary rights in the legal sense (Tan 2002). These traditional statutory rights to water provided limited security and were not divisible or transferable (ACIL Tasman 2004). Individuals in environments with such insecure property rights will choose to engage only in self-enforcing contracts, which provide less potential for the society to realize gains from trade and build a foundation for economic growth (Fuchs 2003). These water entitlement arrangements limit transactions to spot sales of water or to the lease of water for a single year rather than to permanent sales of water entitlements. The lack of long-term secure access to water under such a system also discourages investment in activities that require access to large amounts of water.

Over the last two decades, a sustained shift has been observed, in the literature as well as in reality, from a preference for centralized allocation of scarce resources to the belief that private ownership and decentralized allocation is more appropriate (Raymond 2003). The consumptive use of water will generally require a water access entitlement, separate from land, and described as a perpetual or open-ended share of the consumptive pool of a specified water resource. Entitlements will have characteristics that allow free and open trade, and will be cancelled by governments only in the case of water users not meeting their conditions of entitlement. The separation of the water access entitlements from the water use approvals will streamline the process for water trading, as it is the water access entitlement and its components that are the tradable commodities. The trading of water access entitlements will be the major means by which new developers can obtain water and existing developers can expand their production.

Table 2: Existing 22 categories of entitlements in regulated surface water system in three states

Table 2: Existing 22 categories of entitlements in regulated surface water system in three states

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