Managing freshwater: how to value the priceless

Improving New Zealand's freshwater management system is vital, but politically fraught, says Eric Crampton of the New Zealand Initiative. The think-tank has released a report calling for a "cap and trade" system to achieve the Government's objectives.

Last October, Minister for the Environment David Parker announced a two-year agenda for an improved freshwater management system. Following on from an election campaign in which freshwater management featured prominently, the announcement should not have come as a surprise.

Improving freshwater quality and bringing the country’s more overburdened water catchments back within environmental limits is rather important. And tweaks around the status quo are unlikely to do the job.

But improving outcomes has been politically fraught. Reducing the burden on our water systems in places where that burden is too great requires some water users to cut back. Capping the total amount of water taken from rivers and aquifers to respect environmental limits can mean locking out those who never received a resource consent to take water. And water allocations under a strict cap on total water use start looking more and more like a valuable property right that risk opening iwi claims to water.

Those problems have stymied progress in freshwater management for at least a decade, resulting in policy approaches that did far less to improve outcomes than was really required.

This week, the New Zealand Initiative released a report providing what we think is the most promising way of achieving Minister Parker’s objective in improving freshwater management. Our report, Refreshing Water: Valuing the Priceless, proposes a system that incorporates hard environmental bottom-lines, respects the position of those with consent to draw water while sharing the burden of achieving sustainable outcomes, and recognises the importance not only of resolving potential iwi claims to water but also respecting kaitakitanga.

Our report, like many others, recommends a cap-and-trade system to let us do the most good for the environment. Under a cap-and-trade regime, the total amount of water drawn from a catchment (a shared aquifer or river basin) is capped to environmentally sustainable levels. Water users within the catchment, or people without existing water allocations, can trade in water. Tradability helps ensure that the least valuable water uses are the ones first curtailed if total water use needs to decline.

We suggest adopting a smart-market system developed jointly by academics at the University of Canterbury and the RAND Corporation. It embeds strong environmental constraints into the operation of the system, so that aquifer sustainability and river flow are protected. Environmental bottom-lines are an integral part of the system.

While previous reports have recommended cap-and-trade systems for managing water use in places where water is scarce, all have hit hard against the issue of initial allocations. The more that water allocations look like property rights, the more likely it is that iwi may take the issue to the Waitangi Tribunal. When everyone pretends that water is completely unowned until it is in a pipe, trough or bottle, iwi rights can perhaps be ignored. But when permission to trade water allocations becomes more formalised through a cap-and-trade system, and when those traded permissions start looking a lot like de facto property rights, Treaty claims may be the consequence.

Fear of those treaty claims has stymied useful progress in freshwater management. Effective systems require caps; caps imply allocations of water under the caps; and allocations look more and more like property rights.

We argue that if iwi rights to water were neither extinguished by Treaty nor contract, those claims should be addressed. It is not just a matter of natural justice, but also necessary for substantial improvement in freshwater management.

We consequently propose an initial allocation that grandparents existing consent-holders and provides, by negotiation between Crown and iwi, additional water rights to iwi in recognition of legitimate claims.

In places where water is scarce, that would result in an overallocation: there would be permits to draw more water than could sustainably be drawn. The burden of reducing water use to sustainable levels should then be shared between existing water users and the Crown. We all benefit from a more sustainable environment, so the burden of achieving that should not fall only on existing water users. And existing water users should not be asked to bear the full burden of accommodating iwi water claims.

We suggest that some rights grandparented to existing consent-holders be scaled down over time, and that granted iwi rights accumulate over time, helping ease the transition. Crown buy-backs of water rights through the trading system would get us the rest of the way to sustainable outcomes.

Reducing water use by buying back water drawing rights means a just transition is more than an afterthought. Farms with irrigation consents can sell for substantially more than farms without those consents, with work by Victoria University economist Professor Arthur Grimes suggesting that up to a third of the value of irrigated land is tied up in the associated irrigation consent.

Abolishing those rights or setting high taxes on drawing water could easily bankrupt families who have recently purchased their farms. Allowing those farms instead to choose whether to sell their water rights back into the system can then be an important part of a just transition.

A cap-and-trade system not only protects the environment, it also opens up a lot of opportunities.

A town council that fixes leaky water mains would find itself able to sell water back into the system for other users – and could use that revenue to fund the required infrastructure repairs. Irrigation schemes could use prices on water futures markets to help decide whether the investment in additional capacity makes sense. And land owners who have not been able to get resource consents for water under the current first-come, first-served system would find it far easier to get the water they need. Better environmental quality and stronger regional development can work hand-in-hand.

New Zealand deserves a far more sustainable water management system – and cap-and-trade systems are the most promising way forward. We hope our report helps Minister Parker in achieving his government’s Essential Freshwater agenda.

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