Basil Sharp: A generation of lost opportunity

Water rights trading would enable farmers to better plan their business operations. Photo / Getty Images

We need to allow trading of water use rights for the future of the environment and the economy.

Creating a market for water use rights would be good for the environment and the economy. It's true to say New Zealand has no overall water shortage. True, but meaningless in practice.

Yes, we are blessed with six times the water per person compared to Australia and 16 times that compared to the US. But rainfall varies geographically and seasonally. Droughts are expected to get longer and more frequent. Ask farmers in Canterbury and Otago, and increasingly in Waikato, if water is scarce.

If water is scarce then it has value. Yet, here's the paradox: water is one of our most valuable natural assets but we don't know its economic value. Successive governments have failed to provide a workable framework that reveals value and enables the exchange necessary for efficient use.

Almost 30 years ago, Sir Geoffrey Palmer, then Minister for the Environment, recognised there was no incentive to make efficient use of water because of the first-come-first-served system and limits on trading access, still in place. His clever fix was this: abstraction rights could be traded within limits that ensured minimum river flows. Focusing on use rights (and the responsibilities that come with them) sidesteps the politically charged issue of ownership.

The current system works like this: farmers hold a permit to irrigate their land and can exercise this use right for the duration of the permit. They also have to follow usage rules. Councils can and should monitor use rights and recover compliance costs.

If farmers and other users could transfer their use rights - trade them for money - then the price of water would be revealed. It's already common for water permits to be transferred when land is traded. But what if the opportunity to transfer was freed up? Farmers within a catchment could trade their use rights and trades could occur across industries. They could occur for the duration of the permit, or be leased. This would all take place within sustainability limits.

Water would gravitate to its most highly valued use. Transfers would adapt to changes in demand. A new element of certainty around use would enable water users to better plan their business operations.

River flows and the recharge of many aquifers naturally vary. This new scheme would cope with that by defining use rights as a percentage of the total water available, possibly on an annual basis. So, if my regional government announces that 1000 cubic metres are available this year and I hold use rights to 10 per cent, then I can plan my operations around 100 cu m being available.

If farmers and other users could transfer their use rights - trade them for money - then the price of water would be revealed.

It would be necessary to tweak availability if conditions change, such as a particularly good snow pack. This may sound complex but it's practical and feasible. Meaningful limits could be established by applying science and involving the affected community.

What about the idea of government or councils setting the price of water? Should the price of water in Nelson be set higher, or lower, than in Otago, depending on local demand and supply (thirsty vineyards vs thirsty cows)? Environment Minister Nick Smith argues that it would be unfair to charge water bottling companies for the water they use and not charge other users, such as farmers.

In a recent Dialogue piece, he gave the example of E'stel, a Nelson water-bottling and export company. It has a consent to draw water from an under-used aquifer. E'stel's permit to use water is the outcome of first-come-first-served.

Labour environment spokesman David Parker has made a case for government collecting a resource rental on water, as it already does for minerals and oil. The problem with water, unlike gold, for example, is that we do not know the value of water taken. Resource rentals were tried, without success, in the fishing industry. Pricing water this way would create uncertainty and lead to distortions in the economy. Imagine the uncertainty created by political parties promoting pricing strategies.

It's time for Parliament instead to build the foundations for efficient use by requiring regional councils to set sustainable limits, free up the opportunity to transfer water use rights, and let the market reveal value.

We have lost 30 years of opportunity. The cost is obvious: water is over-allocated in numerous catchments, patterns of use can't readily adapt to changing economic conditions, and water quality has deteriorated. We can do better for the generation that follows.

Basil Sharp is Professor of Energy and Resource Economics at the University of Auckland.