Cap-and-trade of water rights: A sustainable way out of Australia's rural water problems?

Abstract

Trading water rights is a tool for re-allocation of water resources in water-scarce regions such as Australia. Tradable water rights help farmers to act flexibly when facing high fluctuations in water availability and to use the water in a sustainable and environmentally friendly manner. A precondition is that the quantity of water rights is capped at an appropriate level. The institutional arrangements and market structures in which water-right trading is embedded are key factors for the success of such water management instruments. By analysing the structure of the water-right market and water caps as well as using results from explorative expert interviews, the article sheds light on potential problems with the Australian cap-and-trade scheme concerning sustainable water usage. It also asks whether the Australian scheme provides lessons to be learnt by other countries facing similar problems.