This report assesses the social, economic, and environmental costs and benefits of water trading and the implications of using ‘market-based’ instruments (MBIs)  or adaptation, in particular the barriers and limitations to climate change adaptation in small inland communities. MBIs are tools that utilise a range of market- like approaches to positively influence people’s behaviour. MBIs achieve outcomes by: altering market prices; setting a cap or altering quantities of a particular good; improving the way a market works; or creating a market where no market presently exists. The project found that water trading has potential to deliver as a beneficial adaptation strategy, although for some people and industries there can be negative impacts that are not well understood.

Executive Summary

This report provides an extension to the “Drought and the future of small inland towns” historical case study which was recently completed as part of the National Climate Change Adaptation Research Facility (NCCARF) Synthesis and Integrative Research Programme (Phase 1). The previous project investigated adaptation measures being put in place as a result of the knowledge gained from previous drought experiences. This report focuses on the social, economic, and environmental costs and benefits of water trading and insights are gained from this as to the implications of using ‘market-based’ instruments (MBIs) for climate change adaptation.

On the whole it was found that water trading has potential as a climate change adaptation strategy with many benefits experienced in previous and current versions of water trading. However, there are also some significant limitations and the people and industries that are negatively impacted by water trading are hit hard. These social impacts and limitations of water trading have not been thoroughly investigated and are not well understood. 

Similarly, significant uncertainty also exists around the impacts of water trading on the environment (e.g. changed hydrological regimes, underestimation of sustainable environmental flows etc). Proper quantification of these impacts is needed, however, it is a very complex task given the current lack of understanding as to what is sustainable and what is not and how to best balance and optimise the water needs of the environment, agriculture, other non-agricultural industry, and human settlements. 

In assessing the limitations of water trading, and MBIs in general, as a climate change adaptation tool it is crucial to note the difficulties of separating the impacts and issues attributable to water trading or water policy and those that are caused by drought or other climate impacts. The highly variable nature of Australia’s climate poses a significant barrier to overcome when developing and assessing the performance of any water trading scheme. There is an urgent need for more research into this area in order to differentiate what part of the changes in water use (or limitations or failure of water policy) are due to inadequate water policy and which parts are due to variable (or permanently changed) hydroclimatic conditions. The two are strongly related in that robust water policy (including a robust water trading scheme) should account for and be able to cope with changes in hydroclimatic conditions but to date there has been minimal effort focussed on assessing whether the existing and proposed water trading schemes are robust under the range of historical and projected Australian climate conditions or in fact whether such a ‘climatically resilient’ water trading scheme is even possible. 

Finally, it appears that ‘cap and trade’ quantity-based MBIs such as water trading will eventually do what they are designed to do (i.e. reallocate a resource to ‘high value’ users). However, given that the ‘low value’ users in this case are agriculture and supply of drinking water and the ‘high value’ users are mining, manufacturing, and electricity production (i.e.industries with high greenhouse gas emissions) the question that must be asked is do we really want the water trading MBI to achieve its objective? And, what would the social and environmental ramifications of such a shift in water use within Australia be? These questions, along with the above-entioned barriers, limitations and potential implications of using water trading (and MBIs in general) as a climate change adaptation tool, must be carefully considered and rigorously investigated before implementing if past drought and water policy failures are not to be repeated. 

Please cite this report as: 
Kiem, AS & Austin, EK 2012, Limits and barriers to climate change adaptation for small inland communities affected by drought, National Climate Change Adaptation Research Facility, Gold Coast, 36 pp.