Group performance based instruments and environmental issues : a re-view 

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The expansionary phase of irrigation development and its impact on the environment

Increasing the storage capacity. Between 1900 and 1940, the storage capacity in NSW was multiplied by 45, as illustrated in Table 2.2. Then, from the 1950’s, the Com-monwealth started to get involved in the management of natural resources, in particular through the nancing of irrigation development projects. The economic justi cation for the involvement of Federal funds into the construction of irrigation infrastructures was that ’in the long run, it is reasonable to expect that this cost will be o set by the extra revenue resulting from increased productivity and increased population’ (Powell 1989).
The Snowy Mountains Scheme is the most famous example of the Federal Government funding major irrigation works. Aiming at supplying the Murray and Murrumbidgee Ri-vers, this project cost A$800 millions for a storage capacity of 9,000 GL, a doubling of the country’s capacity (Smith 2001). The dam became a national emblem, the example of Australia’s success in managing water. The scheme was constructed for two reasons, to produce electricity and to increase the security of supply of irrigation water in the MDB. The economic reasoning underlying the project was that the returns on investments of the project would come only from the production of electricity, no contribution to the capital costs being expected from the irrigation sector. This amounted to a subsidy system for irrigated agriculture (Smith 2001). No more large dams were constructed after the 1980’s. Indeed, the need for an economic rationale as well as environmental issues were emerging, a sign that the water economy was entering its mature phase (Smith 2001).
Ignoring the signals : rst signs of salinity. Proust (2003) documents a series of accounts of manifestations of salinity by early settlers in South Eastern Australia. She also shows that examples of salinity-induced failures of irrigation schemes were available and documented in other parts of the British Empire, including India. The example of the Mur-rumbidgee Irrigation Scheme (MIS) is striking. The MIS was the rst intensive irrigation project established in Australia ; consequently its development was highly in uenced by the engineering profession, with concern primarily focused on the issue of water delivery. Together with the construction of the delivery infrastructure, soil surveys were undertaken as soon as 1903 on more than 1 million hectares. The Department of Agriculture provided a classi cation of soils according to their likeliness of being waterlogged. ’First class lands’ were those with good natural drainage. ’Second class lands’, poorer in natural drainage, were prone to waterlogging in the hands of inexperienced irrigators who tend to over-water the crops. The rst irrigation blocks were leased in 1912 when water was made available to second class land. Proust (2003) identi es here an ignorance of signs of irrigation-induced salinity by the policymakers in NSW.
A highly regulated water system, near closure. The degree of regulation of a river is an indicator of the mature state of the irrigation sector. Figure 2.4 presents a schematic diagram of the MDB. It illustrates the role of storage infrastructures, in all parts of the Basin. The construction of dams and the release of water according to irrigation needs altered the seasonality of river ows. An illustration is provided by Figure 2.5. First, the quantity of water owing is lower now that before irrigation development, especially out-side of the irrigation season, during the winter months. Second, the seasonality of ows has been changed, with a fairly constant level of ows except during the peak of irrigation, which leads to an inversion of the seasonal ow. This has consequences on riparian and river species, which depend on the seasonality of the river ows to survive (Kingsford 2000).
The expansionary phase of irrigation in Australia led to the over-allocation of water, partly because of its low perceived value. One of the reason is the ’hidden’ subsidy system to irri-gated agriculture illustrated by Federal funds injected into the Snowy Mountain Project. Also, the water right system tied water ownership to land ownership. This had the conse-quence of locking water in unused or ine cient uses. Finally, the ageing infrastructures needed investment, which was more and more di cult to nd (Haisman 2005), because of a shift in the priorities of the Governments, and of society at large. Economic and environ-mental issues arising in the 1980’s prompted the need for reforms. During the next twenty years, the Governments re-targeted their funds, from the construction of infrastructures to the nancing of research projects to assess the impacts of irrigation (Smith 2001). The ve founding myths of the the management of irrigation system were rejected (Smith 2001) illustrating the realization that : water is not a free commodity, it can’t be managed irres-pective of other considerations, the desert can’t be turned into a garden, social values will change and the management of water isn’t a technical problem only. Next the main natio-nal and regional water and salinity policy initiatives for water and salinity management are presented ; they form the framework within which State policies develop, as shown in Section 2.3.

A water reform agenda

COAG 94 : a national reform of the water sector. In 1994, the Council of Aus-tralian Governments8 agreed on the need for a national water reform agenda, and issued a series of principles. These principles consolidated the reforms that had been emerging in the di erent States and promoted a nation-wide consistent e ort. The main aim of the COAG reforms was to align the water sector with the National Competition Policy9, through the separation of water rights ownership from land ownership, and the facilitation of water trade. The COAG also agreed on the need for environmental ows to restore ri-vers’ health10. These recommendations were accompanied by a set of nancial incentives11. Consequently, the strongest impetus towards water reforms was not for environmental reasons, rather than based on economic grounds (Hussey and Dovers 2006). This double discourse of rising environmental concerns and economic purposes is a characteristics of most Australian water initiatives.
The Cap 96. An audit of water use in the MDB conducted in 1995 showed a continued steady growth of water use as unused rights became activated, putting the Basin’s river system under stress. The MDBC then agreed that a balance needed to be struck between consumptive and instream uses of water and introduced a (then interim) Cap on further increases in diversions or extractions. Each year the Cap on extraction is calculated basing on the level of development of the infrastructures that prevailed in the irrigation season 1993/94 and on the current climatic conditions. It is thus a dynamic measure. Such a regulatory instrument does not constitute an attempt at reducing extraction rather than a prevention against further increases in extraction. The main implication of the Cap is that all future growth in water based economic productivity must come from gains in water use e ciency or from water trade (Haisman 2005).
The combination of these two measures (capping water extractions and enabling or enhan-cing the potential for water trading) had various consequences. First, the level of diversion has been stabilised, and since the implementation of the Cap, most valleys have complied with it (National Competition Council 2004a). Second, the market has been successful in inducing structural changes in the irrigation sector, for example by moving water out of pasture areas to more productive and water e cient horticulture and wine areas, as ar-gued by Turral et al. (2005). However, some concerns have been raised. Indeed, the reform package has put a pressure on irrigation communities, who felt that their water rights were not secure enough. This led to some reluctance to engage in water trading, and may explain why some institutional barriers to trade remain at the local level. Also, it has had the unexpected consequence of increasing the level of diversion, ’sleepers’ and ’dozers’12 becoming valuable and e ectively used. These concerns, among others, prompted the de-sign of a new national strategy, resulting in the National Water Initiative being launched 10 Other key principles of the reforms include : consumption-based pricing, full cost recovery and trans-parency of cross subsidies and the approval of investment based on economic viability and ecological sustainability (Council of Australian Governments 1994).
11 Satisfactory progress against the NCP reforms entitles a State or Territory to a per capita share of A$16 billion of transfers from the Commonwealth. The compliance and progress of the States with the NCP is assessed by the National Competition Commission (NCC). For instance, the NCC reported in 2004 about NSW not providing ’evidence to show that the ecological requirements of the downstream wetlands and the native ora and fauna of the system would be met’ (National Competition Council 2004b, p.40) and consequently suspended the payment of A$26 millions as part of the NCP Payments 2004-05.
12 Sleepers and dozers are the water licences that are either owned but not used (sleepers), or only partially used (dozers).
National Water Initiative 2004. In June, 2004, the COAG launched the National Water Initiative (NWI) to address two issues of national importance that are increasing the productivity and e ciency of Australia’s water use while at the same time ensuring the health of the river and groundwater systems. To achieve this double target, the NWI outlines various objectives : to expand permanent trade, to provide more secure water access entitlements, to design more sophisticated water planning, to address over allocated systems and to better manage urban environments. In short, the objective is to increase the certainty of the environment and of investors in the water sector. By the national scale it endorses, the NWI was considered of unprecedent importance in the history of water management in Australia. However, Hussey and Dovers (2006) highlight potential problems with the implementation of the NWI, such as the lack of coordination of the various levels of governance within the Federal system. The recent National Plan for Water Security is a strong illustration of the Federal government’s will to take responsibility for water management in the MDB.

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A salinity reform agenda

Salinity has not been recognised as an environmental issue of national importance until recently. Earlier reforms were undertaken within the framework provided by the MDB.
MDBC Salinity and Drainage Strategy (SDS). The SDS13 tried to meet two con icting objectives, increasing the Murray river’s quality while at the same time pro-tecting irrigation zones from waterlogging, using nancial transactions. It constituted a once-o agreement between the MDB States and the Commonwealth to nance a pro-gram of investments to improve River Murray salinity, through the construction of salt interception schemes. These schemes have proved successful in reversing the salinity trend between 1990-2000. However the long-term sustainability of such schemes is being ques-tioned (Ke ord 2000). Indeed, as an engineer solution to salinity, their main consequence is to move the salts from the river to evaporation basins, from where they eventually go back to the river system, by percolation or run-o . Another outcome of the SDS was the creation of salinity credits, the salt disposal entitlements (SDEs), granted to individual States in recognition of their nancial participation to salt disposal schemes14. The SDS clari ed the notions of past and present responsibility towards stream salinity. Each State was rendered responsible for its actions a ecting stream salinity, the salinity levels over the period 1975-85 being adopted as the baseline for attributing impacts of all future actions.

Table of contents :

1 Introduction 
2 Management strategies in Australia 
2.1 Levels of governance arrangements for water and irrigation-induced salinity
2.2 Biogeography and policy development : links and clashes
2.2.1 Early water policies
2.2.2 Expansionary phase of irrigation development
2.2.3 A water reform agenda
2.2.4 A salinity reform agenda
2.3 Trends in water and salinity management
3 Group performance based instruments and environmental issues : a re-view 
3.1 Performance and group performance based instruments : some denitions
3.1.1 Performance
3.1.2 Group performance based instruments
3.2 Group performance based tax/subsidy schemes and strategic interactions
3.2.1 More than an answer to informational asymmetries
3.2.2 When the informational structure matters
3.3 Concluding remarks
4 Water markets and environmental externalities : a review 
4.1 Allocative eciency through water trade ?
4.1.1 Theoretical foundation
4.1.2 Empirical studies : ‘siren songs’ ?
4.2 Taking environmental issues into account : rening water markets
4.2.1 The returnow externality
4.2.2 Surface water quality
4.2.3 Surface-groundwater interactions
4.3 Water markets and irrigation-induced salinity
4.3.1 Managing the recharge..
4.3.2 … in the context of scarce water resources
5 Synthesis of Part I : hypotheses 
6 Dynamic taxation schemes : modeling choices and assumptions 
6.1 Basic structure of the models
6.2 Dierential games and strategy space description
6.3 Informational requirements
6.4 Concluding remarks
7 Managing irrigation-induced salinity as a stock pollution 
7.1 The model
7.2 Individually vs socially optimal decisions
7.2.1 Optimal solution
7.2.2 Open-loop equilibrium
7.2.3 Feedback equilibrium
7.3 A general taxation scheme
7.4 Deriving the optimal taxes
7.4.1 Open-loop strategies
7.4.2 Feedback strategies
7.4.3 Comparing the feedback and open-loop taxes
7.5 Numerical illustrations
7.6 Concluding remarks
8 Managing correlated externalities : water taxes with a pinch of salt 
8.1 A general model of interrelated stocks
8.2 Stock accumulation and irrigation decisions
8.2.1 The model
8.2.2 Comparison of socially optimal and individual programs
8.3 Designing optimal water taxes
8.3.1 Numerical illustrations
8.4 Conclusion
9 Modeling framework 
9.1 Denitions and assumptions
9.2 Accounting for environmental concerns
9.2.1 Social environmentalows constraint
9.2.2 Social recharge constraint
9.2.3 Stream salinity damage
9.2.4 Districtow constraint
9.3 Conclusion
10 Basic programs 
10.1 The regulator’s problem
10.1.1 The socially optimal allocation of water use and abatement levels
10.1.2 Shadow cost analysis
10.2 Individual agent’s problem
10.2.1 Coupling constraints and environmental issues
10.2.2 District constraint on instreamow : a ‘community-based’ penalty
10.2.3 Coupling constraints as a policy instrument : enforcement of the social constraints
10.3 Concluding remarks
11 Water allocation under various cap and trade systems 
11.1 Cap and trade systems under study
11.2 Constraints on diversion and recharge under study
11.3 Zonal cap and trades
11.3.1 The status quo
11.3.2 Waterlogging rst : managing the recharge
11.3.3 A system combining two types of zonal cap and trades
11.4 Removing barriers to trade
11.5 Concluding remarks
11.5.1 Testing the Hypotheses
11.5.2 Limits and extensions
12 Concluding remarks


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