Everyone knows the old joke about the traveller who, on asking directions to a better place, is told he shouldn’t have started from here. But stepping back from it a little, we always start from here.

Policy never starts from a blank slate. The path to better policy always depends on where we started from, and a less-than-ideal starting point does not always make a good case against progress.

This week, the New Zealand Initiative released a report recommending cap-and-trade systems for better freshwater management. In places where water is scarce, capping the total amount of water that can be drawn from aquifers and rivers, and making it easy for those with permission to draw water to trade it, provides a ‘best-buy’ for environmental management. It is simply the most cost-effective way of managing a scarce resource and achieving the objectives set out in Environment Minister David Parker’s Essential Freshwaterprogramme. We recommend the water smart-market system developed by researchers at the University of Canterbury and the RAND Corporation.

Reading through years of reports on freshwater management, I was not all surprised to find rather broad agreement on where we need to get to. The Initiative is not the first to recommend cap-and-trade systems. Reports going back at least as far as 1995 have recommended using cap-and-trade approaches.

Iwi claims

But all approaches have foundered because of fears about the starting point. The more that traded rights under a capped water allocation look like a property right, the more the government has worried they would draw iwi claims and costly Treaty processes.

So governments have maintained a fiction that water is unowned until the second it is drawn into a pipe, and better freshwater management is delayed.

But iwi are not the only parties with a relevant stake. Councils have resource consent to draw water for town water supply. Commercial and industrial water users also have a stake as do those with irrigation consents.

That brings us to our unenviable starting point: an existing set of consents and potential iwi claims that, together, exceed environmentally sustainable limits in too many catchments, and the risk that better management systems for existing allocations would trigger those iwi claims. So successive governments have maintained the pretence that water is unowned, and have kicked the can of better water management down the road.

The environmental costs of that approach are mounting. If iwi water rights were not extinguished by contract or Treaty in some catchments, it seems a matter of natural justice that those claims see fair negotiation. 

Our proposal for cap-and-trade systems for freshwater management begins from where we are. Existing consent holders have rights that cannot be ignored. Whether or not the government wishes to consider existing permissions to draw water as a property right, they are treated as such when people buy and sell irrigated land.

Initial water allocations should grandparent existing consent-holders and provide them with tradeable rights based on their existing consented water take. Some of those tradeable rights would continue over a longer term; some would be scaled down over time so existing water users would share in the burden of reaching sustainable outcomes. Iwi rights established through negotiations in each catchment could scale up over time. And the Crown would buy back and retire rights through the trading scheme to bring total use down to sustainable levels because the benefits of better environmental outcomes are broadly enjoyed.

Alternatives based on substantial expropriation of existing use-rights, whether through the expiration of existing consents or water taxes, would bankrupt many farms. Work by economist Arthur Grimes,  a professor at Victoria University, suggests that up to a third of the value of irrigated land is due to the associated irrigation consent. Those who borrowed heavily to buy irrigated land would quickly find themselves underwater on the mortgage.

Just transition

Rather than taking a just transition as an afterthought, our proposal embeds it at the outset. Those owning land with a resource consent would find themselves more easily able to sell their water rights; those without water rights would have a much easier time of acquiring them. If a farm on marginal land did not draw as much value from irrigation, it would see its water rights as more valuable sold to others rather than exercised on the home paddock. And the funds gained by selling water back into the trading system would help enable their transition to other land uses.

Just as the Emissions Trading Scheme encourages those with the lowest costs of reducing greenhouse gas emissions to be the first to reduce their emissions and sell emission rights back into the ETS, an ETS for water would also encourage finding the “low-hanging fruit” in water conservation.

It would also help ensure our priceless water resources are better valued. Councils able to sell water back into the system might have an easier time justifying water infrastructure upgrades that plug leaks. Irrigation schemes able to look at prices in futures markets would have a better sense of whether capacity expansions are worthwhile. Land that is currently underused because owners have not been able to secure water rights would be able to be turned into vineyards or orchards – if water were more valuable in those uses. And the prices in water markets could also tell us whether it makes more sense to irrigate the next paddock or to just put the water in bottles and sell it directly.

If New Zealand started from a different place, initial water allocations for a cap-and-trade system could be rather different. Starting from a blank slate, Crown auctions of water through a cap-and-trade system could make sense. But from where we are, basing substantial and necessary water reform on substantial expropriation of existing stakeholders risks blocking progress toward a more environmentally sustainable solution. Sharing the burden of improving environmental quality enables a just transition.

Dr Crampton is chief economist with the New Zealand Initiative.