Meeting the challenge of sustainable water allocation Main report

176 Pages·2011·2.29 MB·English

A right
to water?
Meeting the challenge of
sustainable water allocation Main report

February 2011 i

Building a sustainable water allocation
regime
Foreword 1
1 Introduction 3
2 Challenges facing the water allocation regime 5
2.1 Impact of climate change on water availability...........................................................5
2.2 Pressure from more challenging environmental standards............................................6
2.3 Increases in water demand........................................................................................6
3 The water allocation regime in England and Wales 11
3.1 Users’ water rights................................................................................................11
3.2 Meeting the water needs of the environment............................................................13
3.3 Changing or reviewing water rights........................................................................13
3.4 Current arrangements for trading water and water rights........................................19
4 Objectives for a sustainable regime 23
4.1 The absence of a unifying set of objectives...............................................................23
4.2 Proposed objectives for the regime...........................................................................25
5 The case for reforming the current regime 29
5.1 Emerging issues for the regime...............................................................................29
5.2 Changing the level of licensed abstractions..............................................................31
5.3 Enabling water to be reallocated between users.......................................................36
5.4 Developing workable recommendations for reform...................................................38
6 Recommendations for improving processes for changing licensed
abstractions 41
6.1 Options for reform................................................................................................41
6.2 Improving the current administrative approach.......................................................44
6.3 Moving towards reverse auctions............................................................................53
6.4 Proportional reductions.........................................................................................56
6.5 Scarcity charges.....................................................................................................58
ii February 2011

7 Using trade to reallocate water between users 61
7.1 Why trade?..........................................................................................................61
7.2 Trading of water rights to date..............................................................................63
7.3 International experiences with trade.......................................................................65
7.4 Scope for beneficial trades......................................................................................67
8 Addressing barriers to trade 83
8.1 Increasing the visibility of the market.....................................................................84
8.2 Reducing transaction costs by streamlining the approval process...............................85
8.3 Removing regulatory disincentives to trade..............................................................92
8.4 Uncertainty around the future...............................................................................97
8.5 Using trade to meet the environment’s water needs..................................................97
9 Summary of recommendations 99
9.1 Recommendations aimed at improving processes for changing licensed abstractions....99
9.2 Recommendations for enabling trade....................................................................100
9.3 Implementing the recommendations......................................................................101
Annexe 1: International water allocation regimes and experiences with
trade 105
Annexe 2: Theory of water rights 149
Annexe 3: Scope for water trading 157
February 2011 iii

Building a sustainable water allocation
regime
Figure 1. Percentage of abstraction volumes* in England and Wales (excluding
water from tidal sources) going to different uses 7
Figure 2. Percentage of 2008 abstraction volumes (excluding water from tidal
sources) going to different types of use 7
Figure 3. Typical attributes of water rights 12
Figure 4. The Environment Agency’s assessment of CAMS resource availability
15
Figure 5. The EA’s current processes for addressing over-abstraction 17
Figure 6. Objectives for a sustainable water allocation regime 28
Figure 7. Links between the emerging issues and the key choices involved in
allocating water rights 30
Figure 8. Emerging issues for the water allocation regime 31
Figure 9. Policy options relating to the processes where there is an identified
need for reform 39
Figure 10. Criteria used for evaluation 40
Figure 11. Policy reform options for reviewing licensed abstraction levels 42
Figure 12. Effectiveness of various reforms in addressing over-abstraction in
different contexts 43
Figure 13. Range of reductions applied to trades 46
Figure 14. Alternative mechanisms for reallocating water between users 62
Figure 15. Annual quantities of water rights traded in ML 64
Figure 16. Comparison of water use in England and Wales and Australia 67
Figure 17. Scenarios for trade 71
Figure 18. Licences by users in East Anglia 71
Figure 19. Abstraction licences by users in East Anglia 73
Figure 20. Types of market participants by catchments 74
iv February 2011

Figure 21. Distribution of licences by number of users’ types within a resource
unit 75
Figure 22. Area of focus for the trading exercise 77
Figure 23. Possible impacts of a change in abstraction point 90
Figure 24 Timetable of reforms 103
Figure A25. Australia’s Murray Darling Basin 113
Figure A26. Supply availability in the Greater Goulburn Zone, in Victoria 117
Figure A27. Volume of allocations and entitlements traded 120
Figure A28. Water use by purpose for Australia and England and Wales 125
Figure A29. Trend in use of leases vs. permanent trades 131
Figure A30. Trend in use of trading for municipal, irrigation and environmental
purposes 132
Figure A31. Incremental cost of water by regtion in England and Wales (p/m3)
159
Figure A32. Industrial value of water use (per m3) 161
Figure A33. Seasonality of irrigation licences (kL licensed) 163
Figure A34. Variety of water uses within each category, in East Anglia 165
Figure A35. Distribution of resource units by number of licences 166

Table 1. Water sources at risk of not meeting the WFD objectives because of
abstraction pressure 6
Table 2. Assessment of reforms to improve current administrative arrangements
53
Table 3. Assessment of reverse auctions 55
Table 4. Assessment of proportional rule-based reductions 57
Table 5. Assessment of scarcity charges (in isolation from other mechanisms) 59
Table 6. Water rights’ trades by types of users involved 64
Table 7. Water rights’ trades by region 65
Table 8. Summary of water valuations (2009 prices) 69
February 2011 v

Table 9. Recommendations for improving the processes for reducing licence
abstractions 99
Table 10. Recommendations targeted at facilitating the reallocation of water
between users through trade 100
Table A11. Illustration of trade-offs between attributes 154
Table A12. Gross margins from a range of irrigation products in Australia 160
Table A13. Summary of water valuation (2009 prices) 162
Table A14. Number of catchments in which each type of user is represented 165

February 2011 1

Foreword
The Anglian Water region is on the frontline of the global climate change
challenge. It serves the largest geographical area of any water company in
England and Wales and is the driest and fastest growing in UK, with over a
quarter of the land below sea level. The impact of climate change will be felt here
first, with likely severe consequences.
With global demand for water expected to increase by 30 per cent by 2030,
Anglian Water has an important role to play in shaping how to respond to the
challenge of future water resourcing.
Anglian Water has a strong track record in securing and conserving water
resources. Despite a 20 per cent population growth in the region since 1990, its
successful demand management strategy means that it supplies the same amount
of water today as it did those 20 years ago. Anglian Water is proud of that track
record and looks to draw on that experience as we move forward.
We need to explore and exploit innovative solutions. Our partnership with
Frontier Economics does just that.
We present this report as an important contribution to the debate on how best
to consider the decisions, processes and arrangements for how the water that
sustains our environment and economy is protected and shared between
different uses – what we’ve termed water allocation.
We recognise the importance of protecting the natural environment and
safeguarding the value it brings to our society - it is part of our “natural capital”.
Individuals, as well as families, communities and businesses all rely on water: it is
essential to our personal well-being, to our society and environment and to our
economic prosperity.
The current arrangements for balancing these needs have worked well so far but
in the face of serious challenges, making the arrangements for allocation of water
sustainable, efficient and effective will be crucial.
Our project set out to answer:
 How can we ensure the environment gets the water it needs while
securing a reliable public water supply?
 How can we ensure everyone understands the true value of water and
that we have the right conditions for making good economic decisions
and efficient investment?
Fundamental to each of these is the essential question about ‘rights’ to water. We
have all grown up engaging with “our” water, but we suggest this approach may
have to change. We think that markets have the potential to offer new
2 February 2011

approaches that will help answer these questions and balance the needs of all
users by revealing value and enabling effective decision making.
We think that today’s water allocation arrangements may need to adapt to meet
the challenges and uncertainties that we face. We make specific suggestions for
improvements that build on the current approach but we do not underestimate
the effort that will be required to make positive changes.
For our part, Anglian Water is committed to changing fundamentally how we all
engage with and use water. Our campaign for the future is called Love Every
Drop and our ambition is to put water at the heart of a whole new way of living
– across the UK. The work presented in this report is an important part of this
ambition.
We think that the time is right for embarking on a new course and would
welcome the opportunity to be part of other pilot projects to test these ideas in
practice.

Peter Simpson Dan Elliott
Managing Director Director
Anglian Water Frontier Economics