The Murray-Darling Basin (MDB) is the biggest catchment in Australia. It covers 1,072,000 square kilometres and encompasses roughly three-quarters of New South Wales (NSW), half of Victoria, a substantial portion of southern Queensland, and a small part of eastern South Australia (SA) (see Figure 1). Although the MDB receives only 6% of Australia's rainfall, it is the scene of 70% of Australia's irrigation. It contains 42% of Australia's farmland and produces 40% of the nation's food. The diverse legislative, geographic, economic, environmental and political history of water use and management in the MDB has left us with a plethora of water entitlement systems for different purposes (e.g., for irrigation, industrial use, and domestic supply). Currently, there are 22 categories and 438 types of surface water entitlements throughout three jurisdictions (i.e., NSW, Victoria and SA) in southern MDB. Among them, nine categories and 183 types of entitlements are for irrigation purposes (Shi 2005, 2006). The variety of forms and structures of water entitlements reflect the differing approaches by the states to partitioning and dealing with a range of water users. The Council of Australian Governments 1 (COAG), the Murray-Darling Basin Ministerial Council (MDBMC), industry, politicians and conservation organizations are all calling for improvements in the way water entitlement systems are defined and administered.

Figure 1: The Murray-Darling Basin

1 COAG comprises the Premiers of the various sovereign states, together with the Prime Minister of the Commonwealth of Australia. It debates matters of national significance.

Water resource management is complex and evolving because of the different physical characteristics of water systems and the various super-imposed institutional and cultural frameworks. Water entitlement systems occur at incompatible scales of analysis and are classified differently by different states. The absence of appropriate exchange rates 2 has further created impediments to entitlements trading due to variability in the entitlement attributes. Exchange among different water entitlements creates opportunities for arbitrage, administrative error and potentially is highly restrictive, costly and inefficient. Therefore, water entitlement systems should be defined in a consistent manner as an antecedent to trade proceeding at both the intrastate and interstate level to reduce the likelihood of an inefficient allocation of water resources. The COAG Water Resources Policy 1994 and the National Water Initiative 2004 represent strategic attempts to standardize approaches to water resource management at a national scale. However, there is no consensus about the most appropriate way to establish a well-defined system of tradable water entitlements.

1.1 Coag Water Reform

In Australia, water illustrates most of the difficulties in specifying property rights for natural resources. One of the most important reforms endorsed at the February 1994 COAG meeting was for states to develop and implement a comprehensive system of water allocations or entitlements backed by separation of water entitlements from land title and clear specification of entitlements in terms of ownership, volume, reliability, transferability and, if appropriate, quality (COAG 1994). Government policies have also identified establishing competitive markets for tradable water property rights as the most appropriate instrument for allocating scarce water between different commercial uses. In implementing a national water market, the discrepancies between the different entitlement systems in each state need to be addressed.

Most water entitlement arrangements are based on the water acts (e.g., NSW Water Act 1912, Victoria Water Act 1905, SA Water Resources Act 1976) written in a time when water was plentiful and focused on encouraging water development rather than water allocation. As Young & McColl (2002) state, the existing plethora of water entitlement systems in the legislation has been derived piecemeal over time and has not been built for trading - in effect, trading has been "bolted on". The entitlement systems and legislative arrangements therefore do not adequately consider the potential environmental, social and economic implications of entitlement arrangements and associated water use activities. The water reforms have recognized the need for thorough examination of the entitlement systems to ensure the effectiveness and to align them more closely with water management requirements under the COAG water reform framework.

Exchange rates provide a methodical accounting of the variable attributes of water entitlements, and within infrastructure constraints, they enable the predictable supply and delivery of water.

1.2 National Water Initiative

Effective water management requires collaboration between researchers, policy makers and the community. These integration concepts have been reflected most recently in the National Water Initiative3 (NWI), which is attempting to achieve equitable access to and sustainable use of water resources by all stakeholders (including environment), while maintaining the characteristics and integrity of water resources within sustainable limits. In this inter-government agreement, water access entitlements are defined as open-ended or perpetual access to a share of the water resource that is available for consumption as specified in water plans. The consumptive use of water (i.e., irrigation, industry, urban, and stock and domestic use) will require a water access entitlement separate from the land, be enforceable, and will indicate the responsibilities and obligations of entitlement holders (COAG 2004).

It is increasingly acknowledged that current water entitlements are not well defined and this undermines the certainty of entitlement holders (Crase et al. 2000). It is important to identify the difference between what is stated in each entitlement and the way this is (and has been) translated into on ground commitments and opportunities (Young & McColl 2002, 2003; Productivity Commission 2003). In order to minimize the transaction costs and maximize the benefits, it is imperative to simplify the array of existing water entitlement systems and develop a coherent and consistent framework for alternative water entitlements arrangements.

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