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So far in this paper individual water supply systems have been considered in isolation from the broader surface water network. Where multiple water supply systems share a hydrological connection this introduces a number of important issues including inter-system water trade and the potential dependency of downstream systems.
Water supply systems (such as system 2 in network A of figure 8) may have varying degrees of dependence on upstream systems for inflows. Some systems may receive a large proportion of inflows from independent tributaries, while others may be almost exclusively dependent on receiving outflows from upstream systems. The introduction of capacity sharing based property rights may have significant implications for dependent systems. The South Australian portion of the Murray River is one example of a highly dependent supply system.
Under the approach outlined in the previous section, all water resources in a system are fully allocated: no water resources are left for downstream systems. In practice, even a fully allocated system will have some outflows, as a result of return flows, minimum flow requirements or any unallocated tributary flows. A more advanced approach would involve defining explicit rights to these return flows (this is discussed in more detail later). Regardless, a capacity sharing approach to property rights has the potential to advantage upstream systems at the expense of downstream dependent systems.
A potential solution to this problem is to allocate water users in downstream systems rights to inflows in upstream systems. Under a pure capacity sharing approach, individual users in the downstream region would be allocated individual shares of inflows (and potentially storage) in the upstream system in addition to their rights in their own system. A more pragmatic approach would involve defining an aggregate upstream water account that could potentially be held by the water authority responsible for the downstream system. The majority of the inflows into this account could be released into the downstream system. These releases would then be treated as part of the inflows into the downstream system and shared according to downstream water users’ inflow shares.
An implication of a capacity sharing approach (pure or pragmatic) is that, following initialisation, any (hydrologically feasible) allocation of water across systems could follow as a result of trade. For example, if delivery losses were especially high in downstream systems, substantial amounts of water could potentially be traded to upstream systems. Ideally, water property rights would adequately reflect in-stream values, such that any environmental implications of trading large volumes of water upstream would be internalised.
Consider the systems illustrated in figure 8 and assume that within each water supply system, capacity sharing based property rights to water are defined. For network A, downstream trade involves users in system 2 purchasing water at the point of storage in system 1. Unlike within system trade, between system trade involves a change in the stored location of water, which requires physical delivery. Water purchased by users in system 2 must be physically released from storage and delivered downstream. This water can then be credited to the balance of the users’ storage accounts, subject to delivery constraints and marginal delivery losses.
This process of adjustment would likely involve net batch processing. Releases would be made on a daily or weekly basis, rather than every time a trade occurs. Net trade volumes would be calculated and appropriate transfers would be made. To avoid double counting there will be a need to ensure that water transferred downstream as a result of trade is not included as part of inflows and is credited only to water purchasers. Also, as long as sufficient water is available in the downstream system, the crediting of user water accounts need not wait for the physical transfer of water from the upstream system.
While water cannot physically be transferred upstream, a form of upstream water trade can be facilitated either through offsetting downstream trades or through trading upstream rights, which allows for net upstream trade. For example, in the pragmatic upstream account approach, where water is traded upstream from system 2 to system 1, the upstream account would be debited and this water would be credited to the purchasing users in system 1. The selling users in system 2 would have their water accounts debited by the same volume, less an adjustment for delivery losses. This water would then be treated as an inflow and shared among system 2 users. Under many conditions, the pragmatic approach would operate as efficiently as a pure approach. Under either approach there is an effective upper bound on upstream trade, which is the point where all upstream water is fully allocated to upstream users.
Similar approaches to inter-system water trade could be applied in more complex configurations such as system B in figure 8, where system 1 could have an account in both upstream systems (1 and 3). This is similar to the case discussed in the previous section. Direct water trade between systems 1 and 3 would not be possible although both systems could engage in trade with system 2.
Traditional approaches to water management within the Murray-Darling Basin have involved the imposition of limits on the volume of consumptive (e.g. agricultural, industrial and urban) water use or diversions in each supply system, such as the current Basin cap on diversions or the proposed sustainable diversion limits (SDLs).
However, a capacity sharing approach to property rights could potentially render limits on water use unnecessary. Under capacity sharing, all users including both environmental and agricultural water users are allocated equivalent rights to water (e.g. shares of inflows and storage). If more water for the environment is desired, this can be achieved within the property rights framework.
A capacity sharing approach potentially offers greater flexibility than a system of use limits. Under capacity sharing, the allocation of water across users, specifically across agricultural and environmental users, can vary across time, across states of nature and across location (potentially as a result of market transactions). A water use limit might be viewed as defining an informal, and therefore non-tradable, environmental water right such that the allocation between the environment and agricultural users is necessarily fixed, at least for the duration of the limit. In practice, centralised setting of long-term volumetric limits is a challenging task involving enormous information requirements. An advantage of a capacity sharing approach is that it may provide greater flexibility for adjustment over time, in response to changes in conditions and the arrival of new information.
In addition, setting a volumetric limit (even a state dependent one) remains a challenging exercise in the presence of extreme variability over seasonal water availability. As noted by Young and McColl (2008a, 2008b), defining agricultural and environmental water rights as proportional shares of available water resources is likely to be a more robust approach in the face of extreme variability and long run climate changes.
However, there may remain some legitimate concerns about abandoning systems of volumetric limits. First, there are a number of aspects of real world hydrological systems that are not incorporated into this proposed property rights approach. These include environmental externalities from water use (e.g. salinity) or in-stream environmental values which might justify the imposition of a limit on water use in a given region. Volumetric limits might then be viewed as a second best approach when property rights are non-exclusive. Second, volumetric limits might be preferred where they can be more easily implemented at a lower cost and over a shorter time frame than a major reform of water rights.
As discussed, one of the more significant implementation issues is the initialisation of user shares. In the context of multiple connected supply systems, a number of more ‘macro’ level share allocation decisions become apparent. First, there is the initial distribution of water rights across connected supply systems which involves determining the appropriate size of the upstream water accounts. An acceptable transition will likely require that the existing distribution of water across systems, as defined by existing volumetric limits and state sharing agreements, is at least approximately maintained. Similarly, determining the environmental share of water resources that will satisfy the status quo is likely to be complicated given that current environmental allocations are defined by a range of interacting local, state and federal rules and policies.
Another practical issue will be managing water accounting between water supply systems. Implementing a capacity sharing approach to water rights in each system, and to trade between systems, will require consistent water accounting frameworks in each system and some form of linkage and reconciliation between systems. Ideally, a single water accounting system would be developed for the entire regulated river system across all jurisdictions, which would record water flows and use in each system and transactions (trades) between systems.