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Not all MBI approaches considered and assessed are implemented. The Coleambally Tradable Salinity Recharge Credits Pilot Project assessed the potential use of cap and trade mechanisms to manage salinity. While the project did not progress beyond a pilot, the issues outlined below provides a useful outline of how cap and trade mechanisms could be used for salinity management.
All irrigated agriculture ‘leaks’ to some extent. As with many areas in the Murray-Darling Basin, the ‘leaking fraction’ of water applied to farmlands in the Coleambally region leaks through the ground to recharge the underlying groundwater faster than the capacity of the groundwater aquifer can cope.
The result is a rising trend in groundwater levels, bringing salt to the surface, salinising low-lying farmland in the region, and impacting on natural values such as trees and wetlands. It also contributes to rising salinity levels in river water, which are felt most acutely in South Australia.
The Coleambally irrigation region is located in southern inland NSW between the Murray and Murrumbidgee rivers, and is part of the Murrumbidgee irrigation system. It was developed for irrigated agriculture between 1958 and 1970 to use water made available from the diversion of water inland via the Snowy Scheme.
At peak production levels, around 80,000 hectares are under production in the Coleambally region, mainly for annual crops such as rice, wheat, barley, oats, canola, soybeans, maize and sunflowers.
Salinity does not respect farm boundaries. If one farm is contributing to rising salinity in a shared groundwater aquifer, a significant proportion of the impacts—including costs—are borne by other farms in the region, by the natural environment and by downstream water users. Therefore, there is little incentive for individual farmers to invest in addressing salinity, as most of the benefits will be realised beyond the farm gate.
An expert team was assembled, with funding from the National Market Based Instruments Pilots Program, to assess the best and most cost-effective way to encourage individual Coleambally farmers to improve their management of salinity.
Soil type, water application rates, irrigation technologies and the type of annual or perennial plants grown all contribute to the extent individual farms contribute to rising groundwater. Salinity management incentives need to take these differences into account.
A computer model was developed to estimate the relationships between land and water management and salinity levels, using data sourced from an extensive network of groundwater monitoring equipment. This model, named SWAGMAN, enabled:
- individual farmers’ groundwater impacts to be quantified as a ‘point source’ contribution to the salinity problem, and
- the measurement and prediction of changes to ‘net recharge’ as a result of management and use of land and water resources1.
The NSW Blueprints for Catchment Sustainability Framework provided the Coleambally community with a method for developing groundwater recharge targets in the Coleambally irrigation area.
After the targets for recharging the groundwater were established, the pilot considered the best and most cost-effective way of enabling the Coleambally community to achieve their targets.
A mix of approaches already existed in the region: regulation via water licence conditions, financial incentives under the regional Land and Water Management Plan and extension programs aimed at improving farmer knowledge and adoption of better salinity management practices.
Because the ‘recharge reduction’ target was known, but the specific means of achieving the target was not, a ‘tradeable recharge credit’ approach was agreed. The advantages of this approach include:
- landholders and other participants have flexibility to decide how they can contribute to reducing groundwater recharge
- the flexibility encourages greater innovation, helping to drive down the cost of meeting salinity recharge targets, and
- the costs of collecting catchment levies and redistributing them to pay for remediation works are avoided.
A tradeable recharge credits scheme required the creation of a legally recognised ‘recharge credit’ that could be traded from one irrigation farmer to another. These rights, which define how much water each participant can contribute to the groundwater aquifer each year, were to be enforceable under existing NSW law via water supply contracts with Coleambally Irrigation Corporation Limited.
As can be seen in Figure 2, the total pool of recharge credits, or property rights, must be equal to, or less than, the regional net recharge target. Where some farmers may exceed their personal share of this target though on-farm actions, others may fall short. Capacity to trade recharge credits should minimise the overall cost of meeting the regional target.
A number of issues surround the introduction of tradeable recharge credits:
- Who should own net recharge credits? Anyone who can change land management practices to reduce net recharge could be eligible to own net recharge credits. Ideally, all significant contributors to net recharge, both negative and positive, should be included.
- What information is needed about the owners of recharge credits? Tradeable recharge credits would be legally enforceable and would have a market value that may be subject to a third party interest, for example banks. Probity demands that key information, such as details of credit holders, third-party interests and the nature of the credit itself, is recorded on a formal register.
- What net recharge targets should be in the scheme? As well as a target (or cap) for the whole Coleambally region, sub-regional targets can also be appropriate given the localised nature of many salinity impacts and ‘upstream/downstream’ salinity processes. Sub-regional targets help ensure that trade in credits does not result in perverse salinity outcomes. The pros and cons of various timeframes for revisiting rights should also be considered.
- How should the initial allocation of rights be determined? Options included issuing rights on the basis of current or past performance, best management practice or auctioning to the highest bidder.
- When and how should the cap be met? One approach was to revisit the cap periodically, and reduce it over time, compelling credit holders to make further improvements. Another option was for the government to purchase and ‘retire’ credits, thereby reducing the cap over time.
Working through these issues was difficult. While farmers were concerned about equity, there were potential cost associated with tradeable recharge credits, and some felt that they had an existing right to impact on groundwater aquifers.
Once a farmer’s share of the regional net recharge target is determined, and a formal credit established, the farmer would then undergo an annual assessment to predict the net groundwater recharge for the proposed crop mix and land and water management strategy. Scheme administrators would do this using the SWAGMAN modelling tool.
The farmer would then compare this result against their recharge credits, and decide whether:
- to modify the year’s farm plan
- to buy or sell salinity credits.
It would be the responsibility of the scheme administrator to monitor compliance. Penalties for non-compliance (such as fines, orders for remedial works, or suspension of a water supply agreement) would apply.
The project team undertook detailed economic modelling to estimate the relative benefits of a ‘cap-and-trade’ approach against a number of other policy options including:
- business as usual
- a ‘cap’ approach without capacity for trade
- a cap on rice production—the crop that contributes most to salinity recharge, and
- a cap on water use.
The economic modelling found that the long-term impact of salinity would result in a decline in farm profit margins over the next twenty years. Of all the options tested, the results suggested the proposed tradeable recharge credits approach performed the best and would deliver a net benefit compared to the status quo.
A computer-based market experiment was designed to further test how a market might work in practise, including testing the level of transactions, the effect of information on participation and whether penalties provide enough disincentive for non-compliance.
The experiment involved workshopping with individual irrigation farmers to show them how a salinity market might work.
The experiment found that participants traded less than anticipated, which would reduce the potential benefits from a tradeable credits approach.
More detailed simulations of a recharge credits market were undertaken where volunteer farmers participated using information from their own farms.
While the simulation demonstrated that farmers are able to quickly switch their cropping strategies to reduce groundwater recharge, no clear conclusions on the value of trading were drawn.
Participants also lacked confidence in the SWAGMAN model and were sceptical about the benefits of a tradeable recharge credits approach.
Overall, the results of modelling and experimentation can be summarised as follows:
- Economic modelling predicted that significant economic gains were possible from a tradeable recharge credits system compared to other options.
- However, such gains were small compared to farm profits, suggesting that there is little financial incentive for farmers to participate in trade.
- Limited trade by participants in experiments meant that less than one-half of the gains predicted in the economic modelling were realised.
- Farmers were concerned about the acceptability of the scheme.
The project team concluded that a tradeable recharge credit scheme would not be viable because there were insufficient incentives for farmers to participate.
However, under other circumstances, the proposal could be revisited. If wider community benefits, such as reduced impacts on public infrastructure, can be captured and if water supply conditions for the region become more favourable, the potential benefits of a salinity recharge credits scheme would increase.
While cap-and-trade models are potentially more complicated than other policy approaches, they can be highly effective and, if well managed, broadly accepted by stakeholders.
The Coleambally case study highlights the importance of expert involvement in the design and testing phase, not just in cap-and-trade schemes, but also in all market-based approaches. Despite expert design of the scheme, a rigorous experimental phase demonstrated that a cap-and-trade approach was unlikely to deliver sufficient benefits to warrant its adoption.
A market-based approach should only be put in place if the benefits are there to be realised.
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[1] However, the model and its predictions have some uncertainty. Prolonged drought and climate change, for example, may considerably reduce the long-term impacts of salinity considerably. |