Establishing and managing the environmental water reserve – the interaction between different government policies

Policy to protect river ecosystems has changed rapidly in Australia and the mechanisms to both establish and manage environmental water are still evolving. Policy has moved from providing a fixed environmental target (albeit varying between years) to one in which the environment can actively participate in the market, with the possibility of better fulfilling variable water requirements. However, the inherent nature of the Sustainable Diversion Limit (SDL), established under the Water Act 2007, is that it represents a fixed allocation to the environment. This paper considers the interaction the new SDL for the Murray Darling Basin and potential issues arising from the interaction with the government buyback initiative. While both the SDL and buyback have been discussed extensively, the interaction between the two policies has received little debate. Pairing these two policy initiatives will have implications for the flexibility of an environmental water reserve (EWR) and the ability for ongoing trade between the environment and consumptive water users. Our position is that the SDL, or preferably rules based water, should reflect an absolute minimum limit on environmental water requirements, while the buyback should provide the EWR with tradable water rights with the flexibility to respond to shifts in the environmental water demand curve by providing environmental water over and above the SDL. If both a buyback and minimum flow rules are in place, the SDL will provide little additional benefits but increase administrative costs and reduce flexibility. This has significant implications for the way the SDL and buyback strategy are structured.