Australia’s water tragedy has urgent lessons for America

Large irrigation projects in Australia and America have long attracted an aura of shady deals from special interests.

As early as 1975, this reality was reflected in the cinema. Roman Polanski’s film ‘Chinese district‘, which revolves around irrigation, theft and corruption, is now widely regarded as one of the best films of all time.

Actors Jack Nicholson and Faye Dunaway in the 1975 movie ‘Chinatown’ revolve around irrigation, theft and corruption. Image: Getty Images

Fast forward 45 years, and in Australia, rights to irrigation water can now be traded as a market commodity like energy or soybeans.

The annual trade in irrigation water rights amounts directly to A $ 1.8 billion. the total market value of water rights is estimated at A $ 26.3 billion, and the actual value of the trade and duties is far higher than these numbers suggest.

Apart from an overall “cap” on the volume of water that can be used for irrigation, there are few limits in the market, including where water can be marketed, how it is used and who can participate in the market.

As a result, professional traders and brokers and hedge funds have established strong positions in the Australian water market, actively trading different types of rights in pursuit of arbitrage profits – buy and sell water to take advantage of price differences.

Federal and state governments and others welcomed these traders as a source of market “liquidity” and as a motor for correct pricing of water rights.

Australia’s overall goal ‘cap and trade ‘ The approach to water is to make the best use of a scarce resource while limiting the overall extraction of the river system.

Like Australia, California has recently experienced devastating bushfires – those of last year “The hell of forest fires” saw 4.1 million California acres burnt. After the fires, the southwestern United States missed its “usual” winter rains and is now experiencing what some call the worst drought in 1200 years.

Lake Isabella, California in June 2021. The lake’s water level continues to drop below 16% and authorities are bracing for a driest year on record for the Kern River, carrying only about a quarter of its medium meltwater from the Sierra to the Lake. Image: Getty Images

Yurok Fisheries Director Barry McCovery Jr said ‘ a climate catastrophe ‘ in June 2021 following reports of dead and dying salmon in California’s second largest river, the Klamath. Elsewhere in the Western States, farmers bulldozed thirsty almond trees because there was not enough water for them.

These events mean that US policymakers are looking to Australia for lessons on managing water extraction and use.

In Colorado, for example, private “investors” play a major role in water transfers. The pursuit of profit has become a powerful force in water management, which is of great concern to some leaders and policy makers.

In February 2021, for example, Colorado Attorney General Phil Weiser told the Colorado Water Congress: “Just like in Australia, there are those inside and outside Colorado ready to take advantage of the markets of. water in times of crisis for our state. . . . But Australia teaches us that open markets alone cannot solve the problems we face as a state.

There are many lessons the United States can learn from Australia – about market design and the risks and pitfalls that no design can solve. First, here are some design issues.

1. The designers of the Australian water market did not pay enough attention to the conduct or integrity of traders. There are few controls in Australia on water exchanges or water brokers.

A 2021 report by competition regulator ACCC concluded that the water market had “major deficiencies” in the conduct of traders and the quality of market information.

There are few controls in Australia on water exchanges or water brokers. Photo: Murray-Darling Basin, Tim J Keegan / Flickr

Behaviors prohibited in other markets are widespread in the water trade. As ACCC Vice President Mick Keogh told the ABC this year: “There is no law against market manipulation in the . . . water markets, so it’s not illegal, even if it happens ”.

2. Australia’s water market is too fragmented. The designers of the market have let a thousand flowers bloom.

There are several trading platforms, and for each type of water, there is no single “market price” at any given time. Information is fragmented and the entire market is in a state of permanent imbalance. As we told Ben Ryder Howe for the New York Times, the result is’a haven for arbitration ‘.

3. The cap-and-trade model does not cover the entire river system. Some farmers engage in “floodplain harvesting” – the unregulated capture of water, which is then used or sold. It is estimated that only one company (currently under study by the New South Wales Water Watchdog) “harvests” up to 9 billion liters a year and sells them to farmers for nuts and other water-hungry crops.

This practice undermines the fundamental purpose of the cap and trade system and reduces confidence in the market.

4. Market design and associated policies have had perverse consequences on water use. Before water rights had a market value, some rights were not used (they were “sleepers”) or were used only rarely (“dozers”).

But the water trade and rising water prices have woken up sleepers and bulldozers, increasing overall use. Sarah Wheeler of the University of Adelaide recently discovered that other government policies (such as grants under the Murray-Darling Basin Plan of A $ 13 billion) encouraged irrigators to increase production and use more water.

The Australian water market has a huge power imbalance between farmers and professional traders who have big advantages. Image: Shutterstock

In addition to these design issues, the Australian experience also highlights a fundamental problem with the free trading of water rights. There is a huge power imbalance between farmers and professional traders. Big advantages in speed, computer programs and market expertise allow professional traders to dominate the market, while farmers have to devote time to farming.

External traders were invited to the market because they would provide “liquidity”. But Australia has paid too much for liquidity (in the form of lucrative arbitrage profits at the expense of farmers), and the liquidity itself is shoddy and the market is not functioning well.

Words of water keeping us all in the dark

In the United States as in Australia, there is less and less water – and more and more people want it. Climate change and drought are bargains for traders, who relish the scarcity and desperation of farmers.

With this confluence of disasters, the management of irrigation water is in urgent need of reform. But in both countries, the political debate is bogged down by a lack of clarity.

There is little precision in the debate – terms such as “hoarding,” “speculation” and “investment” are used inconsistently – and water market officials use language in a way that baffles outsiders. .

An airplane drops fire retardant on a wildfire in California in 2020. Photo: Getty Images

The phrase “invest in water”, for example, is used to mean many different things, some benign, others less, including (i) buying water and using it in agricultural production; (ii) invest in on-farm water management and efficiency (directly or through a fund); (iii) the acquisition of a water-consuming agricultural enterprise; (iv) the purchase and holding of long-term water rights; (v) active trade in short and long term water rights; (vi) put money into a fund that holds water rights as a long-term financial investment; and (vii) put money into a hedge fund that actively negotiates water rights.

As documentary producer Lynne Kirby told Constance Penley of the University of California, Water and electricity: a burglary in California (2017), “the language of water is an obstacle to transparency and therefore to good policy”.

We hope the Australian Federal Government will follow President Biden’s pledge to tackle climate change. But at the same time, we hope America does not follow Australia’s path to water market failure.

And for the debate on water policy to advance in both countries, we must all speak the same language.

Banner: Badwater Basin, 282 feet below sea level, is seen inside Death Valley National Park on June 17, 2021 in Inyo County, California. Getty Images

About Alma Ackerman

Check Also

Boring Star is really a stripped, pulsating core in the sky, scientists say

Image: Artur Plawgo via Getty Images Scientists believe a well-known bright star in the southern …

Leave a Reply

Your email address will not be published.