Total returns – median allocation and entitlement prices compared to capital growth, and S&P ASX accumulation index returns
5 year holding period ending Annual return – median Annual return – capital growth Annual return – S&P ASX
Figure 15: Annual returns from selling allocations (dark blue) and capital growth (light blue) in the value of a water entitlement compared with an index of the value of shares in the Australian Stock Exchange,
Goulburn Murray System, Murray-Darling Basin Source: Bjornlund and Rossini (2007)
approaches to respond rapidly to changes in water supply. Consistent with the notion of increased returns from taking a green approach to the development of an economy, the introduction of water markets in Australia has produced an estimated internal rate of return in excess of 15 per cent per year over the last decade (see Figure 15). The result has been a considerable increase in the wealth and welfare of those involved.
In a green economy, the environment is given rights that are either equal or superior to those of other users of a water resource. In countries where property right systems are robust and users comply with entitlement and allocation conditions, environmental managers are beginning to purchase and hold water entitlements for environmental purposes. In Oregon, USA, for example, the Oregon Water Trust has been buying water entitlements from irrigators since 1993 (Neuman and Chapman 1999) and then using the water allocated to them to maintain and improve the function of streams and water-dependent ecosystems (Scarborough and Lund 2007). In Australia, the Commonwealth Environmental Water Holder (CEWH) has recently acquired 705 GL of water entitlements from irrigators for similar purposes in the Murray Darling Basin and has announced its intention to continue to do this until it holds in the vicinity of 3,000 to 4,000 GL of water entitlements (Murray Darling Basin Authority 2010). If this process is completed, the CEWH will hold between 27 per cent and 36 per cent of all the Basin’s water entitlements.
5.5 Reducing input subsidies and charging for externalities
In some cases, subsidies can be justified but unless implemented with great care, they can have a perverse
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effect on progress towards the greening of an economy. In most cases, subsidies encourage the exploitation of water at unsustainable rates. In India’s Punjab Province, for example, electricity for groundwater pumping is supplied to farmers either at a heavily subsidised price or for free. Experience is now showing that these subsidies encourage farmers to pump much more water than otherwise would be the case and, as a result, water levels in 18 of Punjab’s 20 groundwater districts are falling rapidly. Officials are aware of the adverse effects of subsidising electricity to this extent but have been unable to find a politically acceptable way to phase them out (The Economist 2009).
Processes that attempt to reflect the full cost of electricity use include funding research on the adverse effects of providing these subsidies and stimulating public debate about the wisdom of continuing to do so. If this research is rigorous and the communication strategies well developed, it is hoped that ultimately there will be sufficient political pressure to enable these subsidies to be removed (Ménard and Saleth 2010). As soon as this starts to happen, the money saved can be used to invest in other more sustainable activities. An alternative, much more expensive approach is to build a separate rural power supply system so that access to electricity can be rationed.
5.6 Improving water charging and finance arrangements
As noted by the OECD (2010), water-supply pricing policies are used for a variety of economic, social and financial purposes. Ultimately, water policies need mechanisms that distribute water to where it is needed, generate revenue and channel additional sources of finance.