Managing freshwater by cap-and-trade would help address iwi claims, manage contaminants and fairly allocate the
freshwater estate, according to the New Zealand Initiative
says the current system allows too much water to be drawn from some catchments and too much pollution back in, so we
need a better way of managing our freshwater at a catchment level.
The SMC asked experts to comment on the report.
Please feel free to use these comments in your reporting.
Dr Viktoria Kahui, Natural Resource Economist, University of Otago, comments:
"A cap-and-trade system governed by a trustee arrangement is a step in the right direction for New Zealand’s water
"First-come, first-served is not an efficient solution for water allocation in New Zealand because it does not allow for
the transfer from low value uses to high value uses. For example, a company may have secured access for the sale of
bottled water but a subsequent proposal, such as an avocado farm, is denied even though it may be more beneficial to the
region in terms of income and employment.
"The New Zealand’s Initiative’s suggestion of a cap-and-trade system for water addresses this type of inefficiency, and
in theory, is an improvement to the status quo. An important part of the Initiative’s report centres around ownership.
If no one owns water, it will be overexploited, something that is known as the tragedy of the commons. A trusteeship
rights arrangement such as for the Whanganui river would provide a solution in two ways; it implements kaitiakitanga and
it recognises the complex interactions in an ecosystem.
"There are caveats. If water is priced, it becomes valuable. People can ‘capture’ water elsewhere as it rains (on their
farms and properties), thereby reducing the flowback of water into the catchment. In Australia, the initial
over-allocation of water rights due to previously unused rights led to a costly buyback program. In Chile, trading was
slow because owners retained their surplus rights.
"The trustees of a self-owning river as decision makers need to be aware of these issues and guide the process carefully
to get good outcomes, both environmentally and economically.”
No conflict of interest.
Dr Julia Talbot-Jones, Victoria University of Wellington School of Government, Motu affiliate, comments:
"The New Zealand Institute’s latest report on freshwater management is a welcome addition to the freshwater debate. The
report lays out a framework for addressing water scarcity in New Zealand using market mechanisms. Using a similar model
to what was first outlined in 2017, the report proposes that a cap on water take be determined jointly by community,
iwi, and hapū and then the trade and exchange of consents be permitted between water users in order to achieve greater
efficiency in use.
"Elsewhere in the world, water trading has helped meet the demands of changing economies and growing populations. It has
played a vital role in encouraging conservation and stewardship and helped address cultural, social, and environmental
priorities. However, water markets are not a panacea. Getting the cap right is difficult – you set it too high and users
have no incentive to change their behaviour; you set it too low and the costs imposed on users could be too great. You
also need to make sure property rights are well defined and defended, transaction costs are low, water rights are
decoupled from land rights, there are enough active traders responding to price signals, and there is regular monitoring
"Because of this, shifting from the status quo in New Zealand is likely to be costly. Significant changes in legislation
at the national and local level will be needed, as well as meaningful investment in determining initial allocations,
capacity building, and Crown-iwi negotiations. Yet, should assessments indicate that net benefits from trade could be
gained, establishing a water entitlement and allocation system that makes rapid, low-cost water trading possible is
certainly one policy tool that could build flexibility and resilience into New Zealand’s water management system going
No conflict of interest.
Professor Troy Baisden, Freshwater scientist, University of Waikato, comments:
"The New Zealand Initiative’s Eric Crampton has released the first paper in a two-part series proposing to solve New
Zealand’s water woes with market economics in the form of cap-and-trade systems. What’s proposed in this paper – using
markets to manage water quantity – is worth considering. The end-point of the series, a focus on cap-and-trade for
nutrient pollution will be more problematic.
"Crampton leans heavily on the first use of cap-and-trade systems to solve acid rain. This worked because the big power
plants could predict and manage their emissions well. What came next hasn’t been so promising.
"In the last 20 years, the same cap-and-trade systems have been tried in many forms to manage greenhouse gas emissions
causing climate change. Has this worked? Many would say no, and I suspect this includes both Greta Thunberg and
foresters heavily exposed to price fluctuations in New Zealand’s emissions trading scheme (ETS). Crampton’s proposal
suggests we haven’t learned from what hasn’t worked.
"The problem is that the complex process of designing market-based trading schemes is a source of first delay, and then
uncertainty mixed with confusion. Delay happens because ‘allocation’ of permits within the cap to use or pollute a
resource is difficult. Determining allocation means determining who gets what – and is a profound argument of fairness
and equity reaching into the past and the future.
"Even more than setting the cap, determining allocation requires science that we typically don’t have. It is a stretch
to say we can account for all the freshwater flows across New Zealand. At catchment scale we’re not too bad off, but can
we always do this fairly for each farm?
"Problems with our modelling frameworks make accounting for nutrient pollution even harder. For every three or four
units of nitrogen that leaches from the root zone in the Overseer model, only one typically shows up downstream in
water. We lack frameworks for determining where this nitrogen went, and whether anyone should get credit for its removal
prior to causing impacts on our freshwater.
"These are the factors that cause confusion in cap-and-trade schemes. If too much uncertainty or complexity undermine
the ability of managers to make good decisions at the scale of their operations, then little is resolved. At the scale
of farms, rather than giant power plants, this is almost sure to go badly.
"The only hope for cap-and-trade schemes, and a hope not covered in this paper, would be that the design of the market
results in greatly improved information on our water resources, down to the scale of management decisions."
No conflict of interest.