NO.111

PRODUCTIVITY COMMISSION TO EXAMINE WATER MARKETS AND EXTERNALITIES

The Treasurer announced today that the Productivity Commission will undertake a research study into water markets and externalities.

The outcomes of this study will assist jurisdictions in implementing their water trading commitments under the National Water Initiative (NWI). The NWI, which was agreed through the Council of Australian Governments on 25 June 2004, has been signed by all States and Territories excluding Western Australia. One of the key objectives of the NWI is to establish an efficient water market structure and expand markets to their widest practical geographical scope, enabling increased returns from water use.

The Commission will report on the feasibility of establishing workable market mechanisms that provide incentives for investment in rural water use efficiency. The Commission will also report on ways to deal with rural water-related environmental externalities. In doing so, the Commission will draw lessons from existing examples of market mechanisms.

The terms of reference for the study are attached. Interested parties are encouraged to make submissions to the Commission.

Further information on the study can be obtained from the Productivity Commission’s

website at

www.pc.gov.au or by contacting

the Commission directly on (02) 6240 3239.

MELBOURNE

13 December 2005

Contact: Amanda Kennedy

03 9650 02440

Terms of Reference

STUDY TO ACHIEVE PARAGRAPH 61(iii) OF THE NATIONAL WATER INITIATIVE

PRODUCTIVITY COMMISSION ACT 1998

The Productivity Commission is requested to undertake a research study to assist jurisdictions in implementing their commitments under the Intergovernmental Agreement on a National Water Initiative (NWI).

The NWI was agreed between the Commonwealth of Australia and the Governments of New South Wales, Victoria, Queensland, South Australia, the Australian Capital Territory and the Northern Territory on 25June 2004. Tasmania signed up to the NWI on 2June 2005. The NWI sets out objectives, outcomes and actions for the ongoing process of national water reform, and timelines to achieve this reform.

In relation to water markets and trading, States and Territories have agreed to establish water market and trading arrangements that will (NWI clause 58):

i) facilitate the operation of efficient water markets and the opportunities for trading, within and between States and Territories, 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.

To support jurisdictions in achieving these outcomes, the NWI requires that the signatories complete a series of studies and to consider implementation of any recommendations in relation to a range of studies. This terms of reference relates to the study described in clause 61(iii) of the NWI.

In undertaking the study the Commission is to:

• assess and report on the feasibility of establishing workable market mechanisms:
  • to provide practical incentives for investment in rural water-use efficiency and water related farm management strategies; and
  • for dealing with rural water-management related environmental externalities;
• take into account relevant practical experiences in other areas, such as with establishing tradeable salinity and pollution credits;
• recognise that the purpose of the study is to support the parties in achieving the water markets and trading outcomes and actions under the NWI; and
• consult with signatories to the NWI (including through the inter-jurisdictional water trading group) and the National Water Commission.

The Commission is to report within six months and its report is to be published.

PETER COSTELLO