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Freshwater cap-and-trade scheme - Expert Reaction

Managing freshwater by cap-and-trade would help address iwi claims, manage contaminants and fairly allocate the freshwater estate, according to the New Zealand Initiative.

The report says the current system allows too much water to be drawn from some catchments and too much pollution back in, so we need a better way of managing our freshwater at a catchment level.

The SMC asked experts to comment on the report. Please feel free to use these comments in your reporting.
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Dr Viktoria Kahui, Natural Resource Economist, University of Otago, comments:

"A cap-and-trade system governed by a trustee arrangement is a step in the right direction for New Zealand’s water management.

"First-come, first-served is not an efficient solution for water allocation in New Zealand because it does not allow for the transfer from low value uses to high value uses. For example, a company may have secured access for the sale of bottled water but a subsequent proposal, such as an avocado farm, is denied even though it may be more beneficial to the region in terms of income and employment.



"The New Zealand’s Initiative’s suggestion of a cap-and-trade system for water addresses this type of inefficiency, and in theory, is an improvement to the status quo. An important part of the Initiative’s report centres around ownership. If no one owns water, it will be overexploited, something that is known as the tragedy of the commons. A trusteeship rights arrangement such as for the Whanganui river would provide a solution in two ways; it implements kaitiakitanga and it recognises the complex interactions in an ecosystem.

"There are caveats. If water is priced, it becomes valuable. People can ‘capture’ water elsewhere as it rains (on their farms and properties), thereby reducing the flowback of water into the catchment. In Australia, the initial over-allocation of water rights due to previously unused rights led to a costly buyback program. In Chile, trading was slow because owners retained their surplus rights.

"The trustees of a self-owning river as decision makers need to be aware of these issues and guide the process carefully to get good outcomes, both environmentally and economically.”

No conflict of interest.
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Dr Julia Talbot-Jones, Victoria University of Wellington School of Government, Motu affiliate, comments:

"The New Zealand Institute’s latest report on freshwater management is a welcome addition to the freshwater debate. The report lays out a framework for addressing water scarcity in New Zealand using market mechanisms. Using a similar model to what was first outlined in 2017, the report proposes that a cap on water take be determined jointly by community, iwi, and hapū and then the trade and exchange of consents be permitted between water users in order to achieve greater efficiency in use.

"Elsewhere in the world, water trading has helped meet the demands of changing economies and growing populations. It has played a vital role in encouraging conservation and stewardship and helped address cultural, social, and environmental priorities. However, water markets are not a panacea. Getting the cap right is difficult – you set it too high and users have no incentive to change their behaviour; you set it too low and the costs imposed on users could be too great. You also need to make sure property rights are well defined and defended, transaction costs are low, water rights are decoupled from land rights, there are enough active traders responding to price signals, and there is regular monitoring and enforcement.

"Because of this, shifting from the status quo in New Zealand is likely to be costly. Significant changes in legislation at the national and local level will be needed, as well as meaningful investment in determining initial allocations, capacity building, and Crown-iwi negotiations. Yet, should assessments indicate that net benefits from trade could be gained, establishing a water entitlement and allocation system that makes rapid, low-cost water trading possible is certainly one policy tool that could build flexibility and resilience into New Zealand’s water management system going forward."

No conflict of interest.
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Professor Troy Baisden, Freshwater scientist, University of Waikato, comments:

"The New Zealand Initiative’s Eric Crampton has released the first paper in a two-part series proposing to solve New Zealand’s water woes with market economics in the form of cap-and-trade systems. What’s proposed in this paper – using markets to manage water quantity – is worth considering. The end-point of the series, a focus on cap-and-trade for nutrient pollution will be more problematic.

"Crampton leans heavily on the first use of cap-and-trade systems to solve acid rain. This worked because the big power plants could predict and manage their emissions well. What came next hasn’t been so promising.

"In the last 20 years, the same cap-and-trade systems have been tried in many forms to manage greenhouse gas emissions causing climate change. Has this worked? Many would say no, and I suspect this includes both Greta Thunberg and foresters heavily exposed to price fluctuations in New Zealand’s emissions trading scheme (ETS). Crampton’s proposal suggests we haven’t learned from what hasn’t worked.

"The problem is that the complex process of designing market-based trading schemes is a source of first delay, and then uncertainty mixed with confusion. Delay happens because ‘allocation’ of permits within the cap to use or pollute a resource is difficult. Determining allocation means determining who gets what – and is a profound argument of fairness and equity reaching into the past and the future.

"Even more than setting the cap, determining allocation requires science that we typically don’t have. It is a stretch to say we can account for all the freshwater flows across New Zealand. At catchment scale we’re not too bad off, but can we always do this fairly for each farm?

"Problems with our modelling frameworks make accounting for nutrient pollution even harder. For every three or four units of nitrogen that leaches from the root zone in the Overseer model, only one typically shows up downstream in water. We lack frameworks for determining where this nitrogen went, and whether anyone should get credit for its removal prior to causing impacts on our freshwater.

"These are the factors that cause confusion in cap-and-trade schemes. If too much uncertainty or complexity undermine the ability of managers to make good decisions at the scale of their operations, then little is resolved. At the scale of farms, rather than giant power plants, this is almost sure to go badly.

"The only hope for cap-and-trade schemes, and a hope not covered in this paper, would be that the design of the market results in greatly improved information on our water resources, down to the scale of management decisions."

No conflict of interest.

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