History of Australian water markets

Managing our water resources has been a challenge since European settlement. Australia’s rainfall and river flows are variable. Water is plentiful in some areas and scarce in others.

Water markets are a mechanism that allows water to be used where it’s needed most.

Early approaches

In the early 1900s, finding ways to share the River Murray water resources was a big problem. Australia inherited the British system of water rights tied to land rights. To get more water, irrigators needed to buy more land. This could be costly and time consuming.

Early approaches to water management relied on engineering solutions to regulate river flows. Between 1918 and 1970 the Australian government invested heavily in:

  • building dams
  • constructing locks and weirs
  • water storage infrastructure.

This enabled a steady supply of water for towns and irrigators. But it reduced the amount of water in the river system. It also disrupted the rivers natural flooding patterns. The health of the river and its surrounding environment began to decline.

A better way

Pressure on our water resources has increased since 1960. This was due to growth in populations and irrigated agriculture.

By the 1980s, the water resources in many catchments were fully allocated. Options for harvesting water were dwindling. Awareness was growing of the negative environmental impacts of engineering solutions.

Irrigators needed a mechanism to transfer water rights from one user to another. Some irrigators and policy makers advocated to separate water rights from land rights.

Emergence of water markets

Water markets function as a ‘cap and trade’ market. Two fundamental reforms enabled water markets to develop:

  • caps were set on the total amount of water for consumptive use across the Basin
  • water rights were separated from land rights, so that water could be traded on its own.

Widespread drought in 1982 and 1983 created the need for water trading. This helped increase the acceptance of separating water rights from land rights. Water trading began to emerge in South Australia, New South Wales and Victoria.

South Australia

In 1983, South Australia separated water rights from land title. Private diverters began trading entitlements and allocations. Trading within irrigation districts began in 1989. Trading was allowed between private diverters those in irrigations districts in 1995.

New South Wales

New South Wales began trading water allocations in 1983. Entitlement trading among private diverters began in 1989. Intervalley allocation trading was enabled in 1991.

Victoria

Allocation trading in Victoria began in 1987. It gained momentum after new laws were passed in 1989. Entitlement trading within districts was allowed in 1991. Entitlement trading between districts began in 1989.

While these first steps were significant, trading was restricted and localised. It wasn’t until the mid-1990s that markets started to expand.

National Water reform

Water markets expanded from the mid-1990s. Trading activity grew rapidly across the Murray–Darling Basin (MDB). During this period, a range of factors led to a national approach to water reform:

  • the effects of drought on farmers, communities and the environment
  • an increased awareness of environmental degradation
  • the need for economic efficiencies.

Major intergovernmental initiatives were set up:

  • Murray–Darling Basin Agreement 1992
  • COAG Water Reform Framework 1994
  • National Water Initiative 2004

These initiatives led to:

  • interstate entitlement trading
  • an MDB wide cap on water extractions
  • further reforms of entitlements
  • efforts to address overallocation in the MDB.

Environmental awareness

There was a marked increase in environmental awareness in the late 1980s and early 1990s. Australia was part of the global push for ecologically sustainable development.

The National Strategy for Ecologically Sustainable Development (NSESD) was set up in 1992. The NSESD agreed on the use of economic measures to deal with environmental problems. Water trading was one of these measures.

Economic efficiency

Increased awareness of environmental issues coincided with a microeconomic reform agenda.

The National Competition Policy 1995 was Australia’s landmark microeconomic reform program. These reforms recognised that markets should serve consumer and community interests.

Trading platforms

As markets grew in the late 1900s and early 2000s, so did the number of brokers and other intermediaries. Governments, water businesses and brokers in the MDB introduced electronic trading platforms. These platforms led to reduced transactions costs and gave price and market information.

Sustainable water markets

By 2007, water trading had become the key mechanism to manage water scarcity. But we needed to improve the efficiency of the markets.

The millennium drought had badly affected farmers, communities and the environment. This led the Australian government to reform water resource management. A series of changes improved institutional and governance arrangements in the Murray–Darling Basin.

Water for the Future Plan

The Water for the Future Plan contained a range of reforms. It aimed to improve governance arrangements in the Murray–Darling Basin. It committed to:

  • invest in irrigation infrastructure
  • buy back permanent entitlements for the environment.

Water Act 2007

The Water Act 2007 required consistent rules and arrangements for water markets.

The Water Act set up the Murray–Darling Basin Authority (MDBA). The MDBA enforced the Basin Plan Water Trading Rules until 2021. This role has transferred to the Inspector-General of Water Compliance in 2021.

The Australian Competition and Consumer Commission (ACCC) advise on water market and trading rules.

COAG reform

In 2008 the Council of Australian Governments water agreed on changes to:

  • reduce time taken to process trades
  • better inform market players
  • improve water trade contracts.

Water market and charge rules

The first Water market and charge rules were set between 2009 and 2011.

Securing the future of water markets

Today, Australia is recognised as a global leader in water markets. Our market has an annual turnover of between $1 and $3 billion.

Water markets continue to evolve. At times reform is needed to ensure their efficiency and resilience. We’re setting up an independent expert panel on market reform. The panel will respond to recommendations from the ACCC’s inquiry into the MDB water markets.

Last reviewed: 25 August 2021
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