Economic Rights and Regulatory Regimes: Is there still a ‘right’ to water?

Could trade in water resources promote water stewardship?

Alice PiureStrategy and Policy Analyst, Anglian Water

Water stewardship“Stewardship is about taking care of something that we do

not own. Stewardship approaches that focus on the management of public goods like forests, fisheries or, in our case, freshwater resources, are based on the premise that we are all accountable for the sustainable management of those resources and are, therefore, based on collective responses.

Environmentally sustainable water use maintains or improves biodiversity and ecological processes at the catchment level.

Socially beneficial water use recognizes basic human needs and ensures long-term benefits (including economic benefits) for local people and society at large.”

Water Stewardship is the use of freshwater that is socially and economically beneficial as well as environmentally sustainable.

Source: Alliance for Water Stewardship

28% of the region is below sea level

as a low-lying region there is a high use of energy to pump water around the region

demand for water will rise but available water won’t

population is expected to rise – around 1m homes to be built in the next 25 years

it is the driest region in the UK

Climate change impacts and uncertainty

What does water stewardship mean to Anglian Water?

sustainability reductions will reduce the water available for abstraction

88%

1%

5%2% 4%

Public water supply

Electricity

Other industry

Fish farming

Agriculture (inclspray irrigation)

Abstraction in the Anglian Region

Source: Environment Agency, 2012

A right to water?

A sustainable water allocation regime should:

• Protect the environment & other in-stream uses

• Ensure affordable and reliable water supplies

• Encourage efficient allocation and use of water

• Encourage dynamic efficiency or improvements in the efficiency of water use over time

• Co-funded by Defra & Anglian Water• Managed by Anglian Water

• Steering group

Water allocation project

Final report available at: www.cpsl.cam.ac.uk

The Upper Ouse & Bedford Ouse catchment characteristics

• c 3,000 km2

• Predominantly rural

• Urban centres: Milton Keynes, Hitchin, Letchworth, Bedford, Huntingdon.

• Farming; horticulture; aquaculture; quarrying; power generation; golf courses; race courses.

• Grafham Water

Source: Environment Agency, 2005.

Phase 2

Development of 2 demonstration trading platforms/models

Interactive workshops to share with with stakeholders

July – October 2012

Project Overview

Phase 1

Initial engagement with stakeholders: including abstractors in catchment, Environment Agency, Ofwat and innovative local land managers

May – June 2012-------------------------------------------

Common Pool

Hands on tradingdemo

Improved Pairwise

Hydro-economic model

Phase 1 Findings

Source, HR Wallingford et al, 2012.

Evidence of social capital & collaborative approaches during 2011-12 drought:

• EA took a flexible approach & worked closely with farmers

• Voluntary 20% reductions• Internal Drainage Board kept water levels higher

than usual• Agricultural abstractor groups trading HOFs• Investment in shared storage facilities

But:• Current trading system not well understood• Agreement current system not flexible enough to

deal with future challenges

Phase 2Trialled two alternative market models:

1. Improved pair-wise trading 2. Common pool model

Current system: Pair wise trading

Zara

Bill

DonBen

Frank

Roz

• Very thin market

• High transaction costs

Modelling an improved pairwise trading system

Zara

Bill

DonBen

Frank

Roz

Lower tra

ding time

and transa

ction co

sts

Improvements to the current system:

• pre-approved trades

• online bulletin boards

3 scenarios:• Current licensing system (volumetric

licenses with Hands Off Flows) • Current system with improved pair-

wise trading• ‘Shares’ licensing system

Models weekly abstractions, consumptive use, return flows, reservoir storage and trades.

Estimated demand curves

Real flow data

Transaction costs reflect measures to ease trading and approvals needed

Model suggests who might trade with whom, how much, and when

Right: Hypothetical Screenshot of an online trading bulletin board

• Abstraction points (green, yellowyellow, orange) indicate extent of pre-approval

• Red circles show interest in trading• Online transactions, link to Environment Agency records

You

0.1£/m3

Improved Pair-wise trading

Total volumes abstracted across sectorsDrastic water cuts to abstractors with unfavourable conditions (stringent HOF limits)

Short-term trading under either licensing system allows more favourable abstraction patterns

Flow exiting catchment

Current licensing system is not able to maintain environmental flows under very dry conditions

Improved pair-wise tradingReactions

• Improved pair-wise trading builds on the existing system and was generally more readily understood

• Pre-approved short-term bi-lateral trades were generally considered positively by the abstractors

• Mapping of parties willing to trade, water availability and the use of bulletin boards were seen as positive

Common Pool

• Weekly auction

• Users trade “quotas” with auction manager

• Quotas scaled to match forecast water availability

• Low transaction costs

• Trading platform underpinned by hydrological model

• Auction clears market subject to environmental flow constraints

• Needs suitable (unbundled) licences

Zara

Bill

Roz

Common pool model

Environmental Flow Monitoring Points

Abstractionpoints

Common Pool ModelReactions

• Change of mindset needed: abstractors, regulators

• Concerns:

– Would require training and time to manage

– Being short of water due to inappropriate bidding strategy (but: “isn’t this just like trading wheat futures?”)

– Perceived dominance of large abstractors (i.e. the reservoir) & consequent calls for “ring fencing”

– Discomfort/risk associated with scaling of quotas. Unused to non-firm licence rights. Governance of catchments?

– Potential for adverse unintended consequences e.g. loss of sector

Ring fencing supplies for agricultural abstractors?

• Ring fencing could restrict water for agricultural use only and so protect farmers’ abstraction rights

BUT• It might skew the market as it would keep non-

agricultural users out of part of the market• It could remove resilience from the trading system• It may inhibit farmers from investing in water storage

in partnership with other users• It could restrict farmers’ ability to buy, store and sell

water on the open market when conditions allowed

A wider debate on the pros and cons of ring-fencing is needed.

Could trade in water resources promote water stewardship?

Water Stewardship is the use of freshwater that is socially and economically beneficial as well as environmentally sustainable.

• Can protect the environment and other in-stream users (when rights are defined as a share of available water)

• Can encourage efficient allocation• Can encourage investment• FlexibleBUT• Concerns about unintended consequences

that would be socially undesirable• Concerns about transition

Possible next steps?

• Improve demo tools / models

• Use common pool demo as a trading “laboratory”– Effects of ring fencing– PWS dominance

• To what extent could trading encourage multi-sectoral investment in shared infrastructure?

• Extend to other catchments

• Funding partners sought!!

Final report available at: www.cpsl.cam.ac.uk