Buying Back the Living Murray: At What Price?

In June 2004, the Council of Australian Governments approved the Intergovernmental Agreement on Addressing Water Overallocation and Achieving Environmental Objectives in the Murray-Darling Basin (IGMDB). The IGMDB sets out arrangements for a 'Living Murray' that includes a budget of $500 million to return 500 billion litres of water per year to the Murray River by 2009. This article examines plans by the Australian Government to purchase permanent water entitlements via 'water through efficiency request for tenders' (WTERT) to support the Living Murray. The tender process will allow the Australian Government to purchase water entitlements from individuals who agree to undertake water-saving measures equal to the amount of water entitlements they wish to sell. A potential problem with market-based water recovery to increase environmental flows is that it is not cost effective given the current water pricing arrangements and the rules for the tenders. First, the market price for water entitlements does not include the costs of use in terms of deteriorating water quality; and, hence, is 'overpriced' where use imposes such costs. Second, the constraint in the tender process that requires water users to undertake infrastructure investments when selling their entitlements also unnecessarily raises the cost of water purchases, such that it is likely to at least double the cost to the Australian Government of purchasing water entitlements.