Evaluating water market products to acquire water for the environment in Australia

Australia currently provides a leading example of a government buying back water for the environment. The Australian Government is at the midpoint of a $3.1 billion programme of buying water for the environment. The current acquisition programme relies heavily on the purchase of water entitlements (the long-term right to receive seasonal water allocations). An alternative acquisition method would be to use time-limited water products such as water allocations (temporary right to use water), entitlement leasing and options contracts. Scenario analysis, the Western US experience and irrigator surveys are used to examine whether the use of such alternative water products may be viable in the Australian context. This approach distributes the costs of transition over a longer period and has the potential to generate several benefits, namely: incremental structural adjustment; increased flexibility; enhanced environmental flows; increased irrigator willingness to participate; and, in some circumstances, increased cost-efficiency. However, the inclusion of alternative water products will involve more complex institutional arrangements and the need for more understanding of the dynamics of water markets and government budgeting processes.