Elsevier

Journal of Hydrology

Volumes 412–413, 4 January 2012, Pages 256-268
Journal of Hydrology

Hydrological challenges to groundwater trading: Lessons from south-west Western Australia

https://doi.org/10.1016/j.jhydrol.2011.05.034Get rights and content

Summary

Perth, Western Australia (pop. 1.6 m) derives 60% of its public water supply from the Gnangara groundwater system (GGS). Horticulture, domestic self-supply, and municipal parks are other major consumers of GGS groundwater. The system supports important wetlands and groundwater-dependent ecosystems. Underlying approximately 2200 km2 of the Swan Coastal Plain, the GGS comprises several aquifer levels with partial interconnectivity. Supplies of GGS groundwater are under unprecedented stress, due to reduced recharge and increases in extraction. Stored reserves in the superficial aquifer fell by 700 GL between 1979 and 2008. Over a similar period, annual extraction for public supply increased by more than 350% from the system overall. Some management areas are over-allocated by as much as 69%.

One potential policy response is a trading scheme for groundwater use. There has been only limited trading between GGS irrigators. Design and implementation of a robust groundwater trading scheme faces hydrological and/or hydro-economic challenges, among others. Groundwater trading involves transfers of the right to extract water. The resulting potential for spatial (and temporal) redistribution of the impacts of extraction requires management. Impacts at the respective selling and buying locations may differ in scale and nature. Negative externalities from groundwater trading may be uncertain as well as not monetarily compensable.

An ideal groundwater trading scheme would ensure that marginal costs from trades do not exceed marginal benefits, incorporating future effects and impacts on third-parties. If this condition could be met, all transactions would result in constant or improved overall welfare. This paper examines issues that could reduce public welfare if groundwater trading is not subject to well-designed governance arrangements that are appropriate to meeting the above condition. It also outlines some opportunities to address key risks within the design of a groundwater trading scheme. We present a number of challenges, focusing on those with hydrological bases and/or information requirements. These include the appropriate hydrological definition of the boundaries of a trading area, the establishment and defining of sustainable yield and consumptive pool, and the estimation of effects of extractions on ecosystems and human users. We suggest several possible design tools. A combination of sustainable extraction limits, trading rules, management areas, and/or exchange rates may enable a trading scheme to address the above goals.

Highlights

► Externalities from trading may be uncertain and not monetarily compensable. ► Differing spatial distributions of water use will have differing total costs. ► Trades should leave overall welfare constant or improved. ► Scheme design should incorporate future effects and impacts on third parties. ► Sustainable use, trading rules, zones, and exchange rates have potential as tools.

Introduction

The south-west of Western Australia (WA) has experienced an 11% decline in average annual rainfall since the mid-1970s as compared to the higher-rainfall period between 1914 and 1975 (DoW, 2009a). Fig. 1 shows total annual rainfall for the period 1905–2008 for a sample site in the area of interest. This decline has been attributed, in part, to climate change resulting from emissions of greenhouse gases (CSIRO and BoM, 2007). Projections of future impacts of climate change for the south-west of WA show increased annual temperatures and decreased annual rainfall (CSIRO and BoM, 2007). The trend towards a warmer and drier climate, coupled with population growth and development, is putting increasing pressure on Western Australia’s diminishing water supplies, and presenting a significant challenge to water resource managers.

Perth is the capital city of the Australian state of Western Australia and has a population of over 1.6 million (ABS, 2010a). Water use in the Perth metropolitan area is around 650 gigalitres (GL) or 527,000 acre-feet (AF) per annum. Of this, around 43% or 286 GL is supplied by the Water Corporation (the water utility supplying the Perth metropolitan area) through the Integrated Water Supply System to domestic customers (Water Corporation, 2009). The remainder, about 57% or 370 GL (Water Corporation, 2009), is privately supplied in Perth and surrounding areas, and is used in agriculture, mining, and public open space, as well as from domestic garden bores for garden watering.

Unlike most other state capital cities in Australia, Perth relies heavily on groundwater sources for its public and private water supplies. Storage levels in reservoirs in surrounding catchments, traditionally the mainstay of Perth’s water supplies, have declined significantly over the past 25 years due to reduced rainfall and a 50% decline in stream flows (Water Corporation, 2009). Surface water now accounts for only 20–35% of public water supply. This has led to an increasing reliance on groundwater to meet demand (Water Corporation, 2009). The main source of Perth’s groundwater is the Gnangara groundwater system (GGS), a system of aquifers underlying much of the Perth Metropolitan area. We describe this further in the following section.

The Water Corporation has forecast an increase in demand from 286 GL (232,000 AF) per annum to 515 GL (∼418,000 AF) per annum by 2060, based on a projected increase in the population of the Perth metropolitan area to over three million (Water Corporation, 2009). In the nearer term, increasing population is expected to cause an increase in annual demand for potable water alone of 50 GL (∼41,000 AF) by 2020 (GSST, 2009). Perth’s population increased by over 20% between 2001 and 2009 (ABS, 2010b). The Water Corporation forecasts a potential supply shortfall of 365 GL (296,000 AF) per annum by 2060. Given the projected future decline in rainfall, run-off to dams is expected to continue to diminish, further reducing the contribution of surface water to public supplies. Recharge of groundwater systems, including the Gnangara system, is also expected to diminish further, restricting the availability of groundwater for public supply.

The Water Corporation has identified a portfolio of options to help meet the supply–demand gap (Water Corporation, 2009). Recently, water from Perth’s first seawater desalination plant has augmented supplies. A second desalination plant is currently under construction. In addition, recycled water from waste-water treatment plants is increasingly being used for industrial purposes and on parks, gardens, and sports grounds.

One supply augmentation option is rural–urban water trading. Although the Water Corporation has in the past permanently ‘traded’ surface water with Harvey Water (a south-western irrigation co-operative), rural–urban water trading is currently neither common nor straightforward. There is only a small rural–rural water market, based mainly on trading within the irrigation co-operatives operating in WA.

Water trading is increasingly accepted across Australia as an efficient mechanism for managing water resources in fully allocated systems with strong competition for available water (e.g., NWC, 2009, NWC, 2010). Properly functioning water markets can facilitate more efficient use of water, both through making the value of water (i.e., its opportunity cost) transparent and by providing a mechanism for water to ‘move’ from lower value to higher value uses. In this way markets offer an alternative to the more traditional ‘command and control’ approaches to water resource management (e.g., Howitt, 1994, Hearne and Easter, 1997).

In this paper, we present some of the background, challenges, and possible approaches to designing an economically and environmentally robust groundwater trading scheme. An objective of the paper is to inform and promote inter-disciplinary discussion on the topic. Using as a case-study a major Western Australian aquifer system, we orient groundwater trading within the Australian water reform agenda. We then present some of the economic conceptual context for groundwater trading, and introduce key issues such as third-party (including environmental) impacts. This foundation is then used to address a number of the primary hydrological challenges to the design of an effective groundwater trading scheme. Finally, we present a selection of possible approaches to mitigating some of the issues discussed.

Section snippets

Gnangara case overview

The GGS covers an area of approximately 2200 square kilometres (DoW, 2009a), extending roughly 90 km north from the Swan River, and east for around 40 km from the coast (see Fig. 2). The system comprises multiple aquifers at varying depths: uppermost is the unconfined superficial aquifer or ‘Gnangara Mound’; the Mirrabooka aquifer is semi-confined; the deeper, ‘confined’ aquifers are the Leederville and the Yarragadee.

Perth, the fourth-largest city in Australia (ABS, 2010b), is dependent on the

Water reform in Australia

The Australian Government’s recent water reform agenda commenced with the 1994 Council of Australian Governments’ (COAG) Water Reform Framework. This aimed to achieve efficient and sustainable water use by establishing an integrated and consistent approach to water resources management throughout Australia. COAG set out a framework for the encouragement of water trading, elements of which included:

  • a comprehensive system of water allocations or entitlements, including separation of water

Hydrological challenges to establishing trade

In this section we describe a number of the requirements for effective implementation of a groundwater trading scheme, focussing on requirements that have a hydrological basis and/or that require hydrological information regarding the groundwater resource. As Ostrom notes with regard to the appropriation of common-pool resources such as groundwater, “[a] major source of uncertainty is lack of knowledge. The exact structure of the resource system itself – its boundary and internal

Potential tools/approaches

Potential third-party impacts could be limited by the implementation of market rules, embedded in the relevant management policies (such as the water allocation plan and/or the water use approval system). Such tools may function best in combination (subject to the avoidance of excessive complexity and resultant transaction costs).

State-wide policy in WA is that trades must not result in “unacceptable” environmental or social impacts, “either through direct impacts or through the concentration

Conclusion

In groundwater-dependent regions, the implementation of groundwater trading based on sustainable extraction volumes is one potential policy response to water scarcity. Western Australia’s major metropolitan area exhibits growing demand for groundwater, while facing conditions of diminishing supply. Groundwater-dependent ecosystems are under increasing pressure due to the extraction of groundwater for a range of human uses. Implementation of groundwater trading would be consistent with the

Acknowledgements

The authors are grateful to the National Centre for Groundwater Research & Training which is an Australian Government initiative, supported by the Australian Research Council and the National Water Commission.

Philip Commander kindly provided information on the hydrogeology and management history of the case-study area.

Dr. Jeff Connor of CSIRO Sustainable Ecosystems commented on a draft.

The first author thanks Rachel Macy.

We are grateful to an anonymous reviewer for helpful comments and

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