Incorporating temporary trade with the buy-back of water entitlements in Australia

30 Oct 2011

Alternatives to the current buy-back of water entitlements by the government in the Murray Darling Basin are assessed using multiple criteria based on the western U.S. experience, real options theory, scenario analysis and policy adoption criteria.

This analysis suggests the following benefits of incorporating temporary water trade and buying entitlements gradually over a twenty-year period: incremental structural adjustment; increased flexibility and efficiency; enhanced environmental flows and increased irrigator willingness to participate. However, the inclusion of temporary trade will probably involve: i) more complex institutional arrangements; ii) different types of transaction costs as environmental managers and irrigators learn how to interact in the market; and iii) an increase in the direct costs of the scheme.

Authors: Sarah Wheeler, Dustin Garrick, Adam Loch and Henning Bjornlund

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