The Basin Plan, the buy-back and climate change: determining an optimal water entitlements portfolio

Abstract

The long-term success of the Basin Plan and the Buy-Back will be judged by the capacity of the allocated public funding to deliver water to the environment, potable water supplies for the community and water for irrigation. Water property rights in the Murray-Darling Basin can be divided into four distinct groups (ground water, high security, general security and supplementary) reflecting their inherent capacity to deliver water supplies in response to climatic conditions in a given year. The price paid for these entitlements reflects their ability to provide water under known climate variability. The optimal portfolio of water entitlements needs to encapsulate this information in order to determine which entitlements to purchase, the number needed and their location in the river system in order to deliver net social benefits. The optimal portfolio of entitlements is further complicated by the climate transitioning from a known mean and variance to a new mean and variance. The spatial impact of climate change on water resources is not uniform. Hence what is seen as a good portfolio now may in fact be sub-optimal in the future. The aim of this paper is to illustrate the benefits of a state contingent framework for describing the optimal portfolio of water entitlements under a changing climate. By explicitly determining the real value of water entitlements in normal, drought and wet states of nature, we can determine the Buy- Back’s ability to achieve the Basin Plan’s goals and suggest an optimal entitlement mix to deliver long- term economic, social and environmental benefits under climate change.