Refreshing water and valuing the priceless

The latest issue of Policy Quarterly covers freshwater management. My article in there makes the case for cap-and-trade systems for both freshwater abstraction and for nutrient/effluent management.

Here's the abstract:

The most promising way of reducing water use and nutrient load in overburdened catchments builds on the same kind of policy New Zealand is developing to reduce greenhouse gas emissions: cap-and-trade systems that operate at the water catchment level. Because cap-and-trade approaches are more cost-effective than other regulatory approaches, they allow us to do more good at less cost than other alternatives. Developments in smart-market technology and geospatial mapping allow for smart-market solutions that overcome barriers to success in existing trading arrangements. And, if initial rights allocations respect both the existing use rights of current users and incipient iwi water claims, they build a powerful constituency in favour of environmental management institutions that can withstand changes in government.

I'll be talking on similar issues at the coming WaterNZ conference in Hamilton.

I argue that:

• Cap-and-trade systems that provide allocations to existing users help ensure a just transition; if the government just abolished existing use rights in favour of either a water tax or nutrient charge, a pile of current users would be bankrupted. Current land prices are predicated on an existing rights and regulatory structure. If you want a system that can withstand a change in government, or its first experience with reality, you need one that can have buy-in from current users. 
• Current cap-and-trade setups for water abstraction (Canterbury) and for nutrients (Taupo) are stymied by high transaction costs. Council has to sign off on trades. It's all just too hard. Council has to be involved to be sure that the trade results in comparable environmental effects, but that process isn't easy. So we have rather illiquid markets. That can be overcome through a smart-market interface that runs the environmental constraints in the background. 
• But the whole thing has to start with a reckoning of iwi water claims. If there are claims that weren't extinguished by sale, contract or Treaty, those have to be dealt with; avoiding the issue with the fiction that water is either unowned or Crown owned is the main reason we don't have functioning cap-and-trade systems as yet. 
• Where the allocation to iwi and to existing users creates an overallocation, deal with it by attenuating existing users' rights over time, building up iwi rights over time, and using Crown buybacks through the system to get the rest of the distance - the burden cannot fall exclusively on current users. It has to be shared because the benefits of a cleaner environment are not solely enjoyed within the affected catchments, and to effect the kind of just transition that builds buy-in to the system.