Journal of Environmental Management (2001) 62, 113–120

doi:10.1006/jema.2001.0423, available online at http://www.idealibrary.com on

The environmental impact of water

markets: An Australian case-study
J. G. Tisdell

Water markets are developing as part of a Council of Australian Governments initiative to promote an efficient
use of Australia’s water resources. The consequences of these policies on river health is yet to be fully
understood, but recognised as having significant interrelationships which need to be explored. This paper
examines the consequences of introducing trade and allocating water for environmental use in the Border
Rivers region of Queensland. The results of this study suggest that: (1) trade in water entitlements is likely
to increase the differential between extractive demand and historical flow regimes as extractive water-use
concentrates on the most profitable crops, and (2) water markets are likely to limit the effectiveness of water
policies aimed at restoring natural flow regimes. As a result, trade-offs between environmental needs and
income from extractive use will need to be determined.
This work is important and timely in water-policy development demonstrating the linkages and trade-offs
between ecological and economic objectives.
 2001 Academic Press

Keywords: environmental flows, water policy, water allocation, water trading.

Introduction understood or adequately accounted for

In 1992 the Council of Australian Govern-
ments (COAG) put in place principles to
promote efficient and sustainable use of water
resources in Australia (ARMCANZ, 1995,
NCC, 1998). Markets for entitlements to
extract water have been introduced in many
states of Australia as a mechanism for redis-
tributing available water to its most efficient
use (Brennan and Scoccimarro, 1999; Dra-
gun and Gleeson, 1989; Topp, 1998; Topp
and McClintock, 1998). To achieve an effi-
cient distribution of the resource market
transaction costs must be minimal and exter-
nalities accounted for (Chan, 1989; Colby
et al., 1993, Russell, 1995). Water markets
may lead to significant environmental exter-
nalities, as they are dependent on hydro-
logical constraints and have the potential of
adversely impacting on flow regimes and as a
result riverine environments (Bjornlund and
McKay, 1995).
How trade in aggregate will impact on
health of Australia’s rivers is yet to be fully
Email of author: j.tisdell@mailbox.gu.edu.au
(Allan and Lovett, 1997). Uncertainty sur-
rounding the needs and dynamics of riverine
ecosystems makes it difficult to give appropri-
ate consideration for environmental needs.
Methodologies to model the relationship in
specific catchments in Australia are evolving
(Black, et al., 1996, DNRQ, 1999a). Following
the precautionary principle, policy options
are being developed to account for the per-
ceived needs of riverine environments (ARM-
CANZ, 1996, Young, 1997, DNRQ, 1999a).
The work in this paper will contribute to that
development.
This paper explores the consequences of:
(1) introducing transferable water entitle-
ments on flow regimes; and (2) reducing the
level of extractive allocations to allow for
water to be used for environmental use. Lin-
ear programming models have been used to
model trade between 112 irrigation farms on
the Queensland side of the Border Rivers.
Faculty of Environmental
The results of the modelling suggest that: Sciences, Griffith
(1) free trade has the potential to significantly University, Brisbane,
alter flow regimes; and (2) improvements in Australia, 4111.
flow regimes can be achieved by reducing Received 9 March 2000;
the announced allocation by 5 to 10% and accepted 22 January 2001

0301–4797/01/050113C08 $35.00/0  2001 Academic Press

114 J. G. Tisdell
releasing the water in accordance with natu-
ral requirements.
Water allocation,
environmental flows and trade
While there are variations in the structure
of water allocations, most regulated water
in Australia is allocated to irrigators under
a doctrine of non-priority (Randall, 1981).
Irrigators are issued with permits to a nomi-
nal allocation of water. Each water year, the
water authority, dependent on the availabil-
ity of supply, declares an announced alloca-
tion; a percentage of the nominal allocations
of water that each irrigator may extract. The
announced allocation has been dependent on
demand, the hydrological characteristics of
the catchment and evaporation transmission
losses.
Over the last 30 years demand for rural
water has changed significantly as a result of
changing farm practices and greater areas of
land under irrigation (Edwards et al., 1996).
In order to redistribute existing water enti-
tlements to their most efficient use trade
in water entitlements has been introduced.
At the same time, increasing pressure on
the riverine ecosystem to service irrigated
agriculture has resulted in significant out-
breaks of blue-green algae (BGATF, 1992).
While environmental water requirements
have historically been considered in deter-
mining announced allocations, they have not
been given sufficient weight. Where water
trading is introduced, formal consideration of
environmental flows will be necessary to give
status to instream water uses. Water flows,
previously considered unused, will need to
be recognised as a legitimate use of water.
In fully allocated systems announced allo-
cations may need to be reduced to provide
water for environmental use. Understand-
ing the economic/environmental interactions
arising from with the introduction of trade
in water entitlements and consideration of
environmental flow regimes is critical to
water policy development in Australia and
in other countries developing water alloca-
tion and trading rules (Rosegrant and Bin-
swanger, 1994, Shatanawi and Al Jayousi,
1995, Bauer, 1997).
The convention has been to re-establish
natural flows in some form—be they in total,
as first—flush flows, or as minimum flow
regimes (DNRQ, 1999b). In Australia the
dominant idea is that the natural or pre-
development flow pattern should be mim-
icked (Hart and Campbell, 1991, BGATF,
1992). The Queensland State Government in
Australia, for example, is developing water
allocation management plans for each of the
catchments in the State (DNRQ, 1999b). Mea-
surement of the impacts of extractive uses
of water on environmental flows is judged
against such natural or predevelopment flow
regimes, taking into account key biological
trigger processes (DNRQ, 1999b). The rela-
tionship between flows and aquatic benefits
is site specific and gaining an understand-
ing of it requires familiarity with biological
models beyond the scope of this study.
A case-study of the border
rivers region of queensland
Trade in water entitlements in Queens-
land formally first started in the Border
Rivers region. The Border Rivers separate
the states of New South Wales and Queens-
land. The catchment consists of three main
rivers—the Dumaresq, Macintyre and Bar-
won (see Figure 1). Extractive use of water is
regulated between Bonshaw and Mungindi,
a distance of approximately 130 km (Brown
et al., 1983). In total 231 000 ml and 62 900 ml
are allocated to individual water users in
Queensland and New South Wales, respec-
tively. In this study the extractive use of
water was modelled using data on 112
licensees on the Queensland side of the Bor-
der Rivers region. Historical flow records of
the catchment till 1979 are used to calculate
natural flow regimes.
Data was collected on crops grown, irri-
gatable land area and the water allocation of
each farm. Data was also collected on regional
crop factors, rainfall and evaporation and
crop gross margins. Data from the 1985/1986
water year was used because it was the first
official year of trade in water entitlements in
the region. In that water year the announced
allocation of water was 60%, which resulted
in a total of 37 472 ml of water being allocated
to the 112 licensees in this study.
 The environmental impact of water markets 115

Border Rivers Region N

Great

Maranoa
Roma
Co
Rive nd
r em
in
QUEENSLAND Ri
v
er e

River Toowoomba

Ri
Beardmore

ve
Brisbane

Di
Dam

r
e

vi
r
nn

ve
St. George

d
lo

in
Ri
Goondiwindi
Ba

g
Coolmunda
Moonie

Boomi Weir Weir Weir

Regulators Dam
River Goondiwindi Warwick
yre Dum
ac int areso Glenlyon Stanthorpe
er er Little Weir M Boggabilla
'Keetah' Dam
v Weir
Ri Ri
v River Diversion
er

River
Mungindi Glenarbon Weir Texas
er R iv
iv Cunningham Weir Mingoola Gauging Station
River R
Mungindi Weir Bonshaw
a Tenterfield
n

ar Weir
ie

ra

Range
kh Moree
rr

ar

Bo
Bi

Pindari
N

g oa
Cul Dam
Inverell
r Glen Innes
ve Barwo
n
Ri Bourke Walgett

N E W S O U T H WA L E S

Scale
0 50 100 150 200

Kilometres

Figure 1. Map of the Border Rivers Region. Source: DPIWR, Toowoomba.

The flow regime prior to major human in 1975/1976. It was assumed that the aim
intervention was assumed to represent the is to mimic the environmental flow regime of
environmental flow requirement. The flow of that water used for extractive use. This sim-
water over Bonshaw Weir in the recorded ple flow regime based on monthly averages
years prior to commencement of construc- is recognised as having a number of limita-
tion of Glenlyon Dam was be taken as tions. By averaging the monthly flows, the
representative of the natural flow regime extreme variation in flow and environmen-
of the river (QWRC, 1980). Glenlyon Dam tal conditions inherent in Australia’s riverine
is the main dam regulating the flow of systems are damped. Modelling of irregu-
water in the river basin. Bonshaw Weir lar events such as floods usually involve
was selected because it is the first recording probabilistic models over time. The mod-
station below the dam and is largely unaf- elling in this study is static in that it uses
fected by ancillary rivers and streams enter- data from a single water year only. Using
ing the main river system. Monthly stream alternative environmental measures, such
flow records over Bonshaw Weir were first as meeting minimum flow requirements or
collected in 1965. For this study, recorded extreme flow events, may well produce dif-
monthly streamflow averages for the water ferent results and is an important area for
years up to the construction of Glenlyon Dam further research.
116 J. G. Tisdell

Estimated extractive demand for estimated by:

water
X
3 X
n X
m X
12
Maximising GMkijq xkijq .2/
Extractive demand for water in the region
kD1 iD1 jD1 qD1
stems predominately from irrigation. Farm-
ing in the Border Rivers is broad acre agricul- Subject to:
ture with pasture, lucerne and cereal crops
such as sorghum upstream and cotton domi- X
3 X
n X
m X
12 X
3 X
m

nating downstream agriculture. Due to the wkijq xkijq  akj

length of the river system the basin was kD1 iD1 jD1 qD1 kD1 jD1
divided into three climatic zones: Glenlyon Water constraint
Dam to Macintyre Brook, Macintyre Brook
X
3 X
n X
m X
12 X
3 X
m
to Boomi Weir, and Boomi Weir to Mungindi. wkijq  lkj
The water requirements of crops grown in the kD1 iD1 jD1 qD1 kD1 jD1
three zones were estimated using crop fac-
Land constraint
tors, and zone rainfall and evaporation data
on a monthly basis. The aggregate extrac-
tive demand for water without trade was Evaluating the differences between
estimated by:
extractive and environmental flow
X
3 X
n X
m X
12 regimes
Maximising GMkij xkijq .1/
kD1 iD1 jD1 qD1 Here, the environmental objective was defi-
ned in terms of minimising the average sum
subject to: of squared differences between the actual and
natural flow regimes, subject to the extrac-
X
n X
12
tive use of water and available water for
wkijq xkijq akj for all k and j environmental use. This was estimated by:
iD1 qD1
 2
Water constraints X
3 X
n X
m

X12  
X
n X
12  
xkijq lkj for all k and j  kD1 iD1 jD1 
 
qD1 .wkijq xkijq /Ceq hq
iD1 qD1

Land constraints Minimising MSDD

12
.2/
where: subject to:
 
GMkijq is the gross margin in zone k X12 X 3 X n X
m X
3 X
m
for crop i on farm j in month q  .wkijq xkijq /Ceq   akj
xkijq is the area of irrigated land qD1 kD1 iD1 jD1 kD1 jD1
planted in zone k with crop i
on farm j in month q where:
akj is the allocation of water in
zone k to farm j eq release of water for environmental
lkj is the total area of irrigable use in month m
land in zone k on farm j hq natural flow of water prior to the
wkijq is the water requirement in construction of Glenylon dam in
zone k of crop i on farm month m
j in month q
Environmental flow performance measures
When water entitlements are tradeable in most countries are based on some mea-
the farmers are no longer constrained by sure of flow deviation. The annual propor-
their individual water allocation but theo- tional flow deviation (APFD), for example,
retically by the aggregate supply of water. is based on the difference between exist-
Extractive demand for water with trade was ing and natural flow regimes (Gehrke et al.,

1995) and is used to assess environmental
flows in Queensland (DNRQ, 1999b). Such
models are used in conjunction with hydro-
logical models (such as the Integrated Water
Quality and Quantity Model (IQQM) (Black
et al., 1996)) and ecological indicators (such as
fish species diversity) to assess environmen-
tal flow requirements. Data requirements for
such integrated environmental evaluation is
significant and to date have occurs in a select
number of catchments. As such integrated
modelling and assessment of environmen-
tal flow requirements develops it is hoped
that accurate measures of environmental
improvement as a result of a specific reduc-
tion in extractive water use will be possible.
Results of the modelling:
environmental and extractive flow
regimes compared
Figure 2 shows the monthly water use prior
to trade, the monthly water use after trade
and the environmental water requirement.
The water year for this region operates from
October (Month 1) to September (Month 12).
The historical flow regime peaks during Octo-
ber through to February then declines during
the winter months and finally rises dur-
ing August and September. The results of
the modelling suggest that the extractive
demand for water is less during the winter
months of May and June and is high dur-
ing November and December. The allocative
demand for water prior to trade estimated
using Equation (1) peaks during November
9000
8000
7000
6000
Water (ml)
5000
4000
3000
2000
1000
0
Oct Nov Dec Jan Feb Mar Apr May Jun
Figure 2. Extractive and environmental demand for water. Historical flows ( . . . . . ); pre-trade extractive use
( ); at equilibrium after trade ( ).
The environmental impact of water markets 117
and December with the final watering of
crops such as cotton. The water demand of
crops during the winter months of June and
July mean that the flow during these months
is less than the natural flow regime. The
effect of trade estimated using Equation (2)
is to concentrate water use on the more
profitable crops, thereby concentrating the
demand for water to particular months and
locations. This is demonstrated clearly with
the demand for water during November and
December far exceeding the environmental
flow requirement. Demand for water during
December is estimated at over 8000 ml after
trade, compared to an estimated pre-trade
extractive demand of 4563 ml and an environ-
mental water requirement of only 3976 ml.
These results suggest that the introduction
of transferable water entitlements have the
potential to further differentiate extractive
from natural flow regimes. The modelling
empirically suggests that trade will signif-
icantly change in flow regime of the rivers
away from the natural flow regime that
existed prior to the construction of the dam.
Empirically, the cost on the environment of
introducing trade is reflected in the increase
in the MSD. At 60% announced allocation
the without trade MSD is 30 000 compared to
over 1Ð8 m with trade.
Consequences of decreasing the
announced allocation
Decreasing the announced allocation will
make water available for improving the
Jul Aug Sep
Month
118 J. G. Tisdell
2 300 000
2 250 000
Income (AUS $)
2 200 000
2 150 000
53%
2 100 000 52%
51%
2 050 000
0 5000 10 000 15 000 20 000 25 000 30 000 35 000
Figure 3. MSD and income as announced allocation declines without trade.
flow regime. Figure 3 shows that without
trade significant improvements in environ-
mental flows can be achieved by reducing
the announced allocation from 60 to 50% and
dedicating 10% of available water to envi-
ronmental use. At 60% announced allocation
the MSD is approximately 30 000. Reduc-
ing the announced allocation to 50% and
dedicating 10% of available water to the envi-
ronment reduces the MSD to below 40 with
an associated decrease in aggregate income
from AUS $2Ð3 m to AUS $2Ð06 m, a decrease
of AUS $240 000. As expected, the shape of
the curve suggests that the marginal cost of
reducing announced allocations increases as
the announced allocation declines, especially
below 55% announced allocation. Reducing
the announced allocation from 60 to 55%
without trade reduces the MSD from 30 000
to 7600, a relative decrease of 75%.
Figure 4 presents the results of modelling
reductions in announced allocations with
trade. Comparing Figure 3 with Figure 4
suggests that: (1) improving the flow regime
to comparable levels requires much greater
4 000 000
3 500 000
3 000 000
Income (AUS $)
45%
2 250 000 40%
35%
2 000 000
1 500 000
1 000 000
500 000
0 500 000
Figure 4. MSD and extractive income after trade for various levels of announced allocation.
60%
59%
58%
57%
56%
55%
54%
MSD
reductions in announced allocation if trade
occurs; and (2) the cost of reducing announced
allocations by 5% from 60 to 55% is greater
if trade occurs. In absolute terms the cost is
approximately AUS $113 000 without trade
compared to AUS $161 000 with trade. In
relative terms however the costs are simi-
lar; 4Ð9% without trade and 5% with trade,
as trade results in greater aggregate farm
income. A 5% reduction in announced alloca-
tion reduces the MSD from over 33 million to
1Ð88 million, a relative decrease of 43%.
These results suggest that trade will have
a significant impact on the flow regime of
rivers and with or without trade, reducing the
announced allocation by 5% during median
climatic years from 60 to 55% could make
significant improvements in the flow regime
at a similar relative cost to extractive users
of water.
Throughout this study, the cost of water
available for environmental use has been
measured by the income loss to extrac-
tive users from an associated decrease
in announced allocations. It should be
60%
50% 55%
1 000 000 1 500 000 2 000 000
MSD

remembered that increasing such flows also
creates non-market benefits, such as recre-
ational and aesthetic values; increased water
quality which may reduce treatment costs
and potentially increase extractive options
downstream. Introducing tradeable environ-
mental entitlements is also possible. Mod-
elling these values and trade options in Aus-
tralian catchments is the challenge ahead.
Conclusions
This paper explored the environmental con-
sequences of two water policy options for an
Australian River system. The results of this
study suggest that: (1) trade in water entitle-
ments is likely to increase the differential
between extractive demand and historical
flow regimes as extractive water use con-
centrates on the most profitable crops; and
(2) water markets are likely to limit the effec-
tiveness of water policies aimed at restor-
ing natural flow regimes. Trade-offs between
environmental needs and income from extrac-
tive use will need to be determined.
The flow regimes resulting from extrac-
tive demand were compared to historical flow
records prior to the construction of major
dams on the river system. The needs of the
riverine ecosystem are still being discovered
and as they become more transparent so the
results of this study can be modified. Never-
theless, it was clear that the trade of water
entitlements distorts the flow regime further
away from the needs of the environment.
While this study does not capture the full
dynamic nature of flow regimes; due to its
deterministic structure, it does contribute
to the important debate on water policy in
Australia. The issues expressed and method-
ologies used could be modified for other insti-
tutional water structures and policies.
The question still remains whether trade in
water entitlements is a long-term ecologically
sustainable mechanism for supplying water
with quality to extractive users. As knowl-
edge of riverine ecosystems improves, this
analysis may provide a platform for greater
analysis.
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