Water trading is the new paradigm

Two news stories in the last 24 hours illustrate the extent to which water management issues in Australia are increasingly becoming the province of water trading markets rather than direct control and regulation by government.

In NSW, the government is achieving its environmental aims of returning environmental flows by purchasing these flows directly in the market:

The New South Wales Government has begun buying water from the Macquarie and Lachlan valleys to return to the Macquarie Marshes. The Riverbank program will see $105 million spent on buying back water from licence holders over the next four years to replenish the state's wetlands. Environment Minister Bob Debus will visit Dubbo today and says expressions of interest are being sought from licence holders wishing to sell their water.

Meanwhile in Victoria, farmers are complaining that water trading is "destroying local farms":

The Parliamentary Secretary responsible for water, Malcolm Turnbull, has met farmers in Shepparton. They have told him they cannot compete for local water which is being sent down the Murray to irrigate vineyards and almond farms, and that they enjoy tax breaks through managed investment schemes (MIS).

This second story illustrates one of the limitations of markets: as I’ve observed before in relation to water markets, they only deliver the most efficient allocation if the economic system in which they operate does not include other inefficiencies (such as unequal tax treatment). If that is not the case, introducing trading can actually lead to a less efficient allocation than before.