Water Rights and Water Trading

1. Water Rights and Water Trading Jon Stern CCRP, City University FLJS Conference Wolfson College, Oxford 19 March 2013

2. Rights, Ownership and Markets • The three main groups of people who take “rights” most seriously are: (i) Moral philosophers (ii) Lawyers (iii) Economists • For rights to be meaningful, they must be defined and enforceable • For economists, defined, secure and enforceable property rights are crucial for markets to operate effectively.

3. Property Rights, Markets and Contracts • Most market transactions are carried out by contract, many of 5,10, or 25 year duration • Spot market contracts make up a only small proportion of trades – particularly in business-to-business trades • Defined, secure and enforceable property rights are absolutely crucial for viability of long-term contracts (See New Industrial Economics literature) • Note such property rights do not need to be individually owned but can be collectively owned (viz. Elinor Ostroy) • Example of New Zealand fisheries rights

4. Water Rights • Retail water customers have “rights” e.g. on quality, terms of sale, whether or not they can be cut-off, etc. • Very important for social and health issues but not discussed further here • Wholesale market trades involve water companies and others buying and selling water. • In the UK and other OECD countries, there are two types of wholesale water trade: • Trade in abstraction licences (typically within a catchment area); and • Trade in bulk water e.g. sales of raw water from Wales to Birmingham

5. Water Rights for Trade Purposes What property rights underpin water trades? • Water license trade and bulk water trade requires abstraction licences which permit such trades • In UK issued by Environment Agency (and SEPA) • Abstraction rights owned by companies allow wholesale and retail sales of water according to Ofwat supply licences • But, who owns “the water” to which the abstraction licences are attached? • For an underground water source on a single property, it is the land-owner (different from hydrocarbons owned by State) • For flowing water (e.g. a river) no-one owns “the water” : water use rights are usually riparian (reasonable use) rights associated with property at side of river • Abstraction rights have typically been closely linked (sometimes ‘grandfathered’) with riparian rights

6. Water “Commons” • Water has been treated in law as a “commons” good – like “the air”, or fisheries in international waters • This is fine while there is sufficient water for the environment and all private demand • System breaks down when supply shortages emerge • Assuming climate change leads to significant increase in summer water availability in UK, shortages of water will increasingly arise – particularly in South and South-East England • Problem is ensuring enough water availability both for human uses and for environment (river quality – Water Framework Directive) • We already have quite large parts of the country either over-abstracted or over-licensed

7. Demand and Supply of Water Resources in England : Environment Agency Map March 2008

8. Trade as Method of Managing Growing Water Shortages • Trade in abstraction licences the most common form of water trade in Australia, California – allocates water to highest value users (wine not alfalfa growers) • Important but basically works within river basin area. Need something more for long distance –inter-basin trade • Some short-duration licence trades (e.g. for 2-3 months in summer) => effectively bulk water trades. • Traded bulk water accounts for around 4-5% of delivered water in England and Wales but around 8% in South-East. E&W figure very stable over many years • Over 75% E&W traded water is raw water (e.g. Elan Valley to Birmingham). • But, in South East, only around 35% is raw water and around 65% of traded water is treated, potable water

9. Water Trade and Abstraction Licences • Where significant excess demand for water and threat to “commons”, some form of rationing required • Rationing can be by quantity (central allocation) or by price (market based solution) – or some combination (e.g. by price but with quantity controls for identified essential uses, extreme drought) • Central allocation locates water rights in State for central or local government/agency to allocate. • Major information, inefficiency problems plus incentives for corruption • Not seen any proposals for UK • Market solutions create property rights in water – commodification of water ownership and use (cf. taxes and/or emission limits on SO2, NOx and carbon gases) • This is solution used in Australia, Western US and proposed for UK • Requires major reform to abstraction licences • Promotes bulk water trade (but that also requires changes in Ofwat licensing of water companies)

10. Water Licence Reform In England and Wales I Main focus is on abstraction licences • These could be modified so that abstraction licences included scarcity based abstraction pricing measures • Unpopular not least because feeds directly into wholesale and retail bills – problem of public health etc externalities • Doesn’t address problem of existing and potential use of “excess” water use from over-licensing/over-abstraction • Not likely to be effective because demand responses to changes in water prices low except in very long-term • Alternative is to modify quantity limits in licences • Most promising option is to redefine abstraction licences in terms of percentage shares of available water rather than volumes of water • Similar to operational Australian scheme – and New Zealand fisheries licensing • Has a number of good economic properties e.g. prices emerge from demand/supply and observed trade transactions rather than being set by government/agency on basis of very limited information

11. Water Licence Reform In England and Wales II • Redefining abstraction licences into shares of available water also good in terms of water rights • Allows continuation of licences without limited fixed term: no need for buyback • Implies that secure property rights continue for abstraction licences -which provides incentives for efficient investment • Avoids EU Human Rights problems on confiscation of property rights • BUT, may require action to prevent abuse of monopoly power from concentration of licence ownership • Proposal primarily intended to foster local/regional abstraction licence trading rather than bulk water trade but pricesset in licence market will provide marker prices for trade in bulk water • Alsoprovides incentives for regional water network planning and organisation, regional wholesale markets and (most importantly) interconnector investment • Key step in enabling benefits of trade => greatly reduced likelihood of local/regional water shortages, moderate and severe droughts

12. Abstraction Licence Reform and Water Ownership How does this impact back onto ownership of “the water”? • Abstraction licence reform of the type proposed effectively separates the link between water ownership and water use. • Riparian rights may continue for fishing, cultivating water plants and similar but the link to irrigation and commercial uses of water is broken – water commons are greatly restricted • A ‘water share’ abstraction mechanism is a major contribution to commodifying the use of water while ensuring sufficient water “for the environment” • Ownership of “the water” can continue on the current basis - but the rights associated with it are greatly reduced and are commoditised on the basis of environmentally-based resource pricing