RIVER RESEARCH AND APPLICATIONS

River Res. Applic. (in press) Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/rra.680

RHETORIC AND REALITY IN THE ALLOCATION OF WATER TO THE ENVIRONMENT: A CASE STUDY OF THE GOULBURN RIVER, VICTORIA, AUSTRALIA
ANTHONY LADSON* and BRIAN FINLAYSON
Centre for Environmental Applied Hydrology, University of Melbourne, Vic 3010, Australia

ABSTRACT In the Goulburn River, located in Victoria (Australia), dams and diversions for irrigation have modiﬁed streamﬂows and water temperature, and contributed to environmental degradation that includes declining native ﬁsh populations. With the passage of a new Water Act in 1989, the Victorian Government proposed to address environmental and water allocation issues through the development of tradeable water entitlements. Initially, these had a strong environmental focus and were to be allocated within an adaptive management framework that involved monitoring and evaluation to reﬁne the total allowable diversion to sustainable levels. The actual speciﬁcation of tradeable water entitlements for the Goulburn River, undertaken in 1995, differed substantially from those early proposals. Entitlements were largely based on historical use with limited and ineffective allocation of water to the environment because water temperature was not considered. A water market has been established but market failure is likely to result in an under-allocation of water to the environment. Access to the market is restricted except to irrigation authorities and water users, and transaction costs and uncertainties in environmental requirements reinforce the status quo in water allocation which is dominated by production values. Copyright  2002 John Wiley & Sons, Ltd.
KEY WORDS:

Goulburn River; environmental ﬂows; water allocation; water market

BACKGROUND Throughout the world there are concerns that human activities have reduced or altered streamﬂows to the extent that the environmental qualities of many rivers are threatened. Large dams change the timing and quality of instream ﬂows and the extraction of water for irrigation, mining and urban water supply alters the natural ﬂow regime reducing the viability of indigenous plants and animals (Goldsmith and Hildyard, 1984; McCully, 1996). In arid and semi-arid areas, where much of the available water resources have been harnessed as part of economic development, streamﬂows have been severely depleted. Areas impacted by the signiﬁcant reductions in streamﬂow brought about by human activities include China’s Yellow River (Yang et al., 1999), the Aral Sea (Kotlyakov, 1991), the Murray River and tributaries in Australia’s Murray-Darling Basin (Murray-Darling Basin Ministerial Council, 1995) and many rivers in the western US (Gillilan and Brown, 1997). In these areas, ﬂow reduction has contributed to biological impacts that include: declining salmon populations (Oncorhynchus spp.) throughout the west of North America where several populations are extinct and others are in danger of extinction (Stouder et al., 1997); severely depleted populations of Murray cod (Maccullochella peelii peelii ) and trout cod (Maccullochella macquariensis) indigenous ﬁsh of the Murray-Darling Basin (Cadwallader and Gooley, 1984; Harris and Gehrke, 1997); the loss of 24 native ﬁsh species in the Aral Sea (Kotlyakov, 1991); and impacts to offshore aquatic life in the coastal areas adjacent to the Yellow River delta (Gao, 1998). There are also economic impacts because of declining ﬁsheries stocks and lack of water for further development and for urban supplies. These issues have led many jurisdictions to seek a balance in water use that recognizes the importance of instream ﬂows to river biota. This paper reviews efforts to establish such a balance for the Goulburn River, Victoria, Australia.
* Correspondence to: Anthony Ladson, Centre for Environmental Applied Hydrology, University of Melbourne, Vic 3010, Australia. E-mail: t.ladson@unimelb.edu.au

Copyright  2002 John Wiley & Sons, Ltd.

Received 9 July 2001 Revised 17 October 2001 Accepted 25 October 2001

A. LADSON AND B. FINLAYSON

The Australian water industry has been subject to Commonwealth and State Government reforms to address economic and environmental problems (Working Group on Water Resource Policy Secretariat, 1994). This reform process is advanced in Victoria where the 1989 Water Act included provisions that would allow water to be reallocated by market mechanisms. The Act established bulk entitlements to water that deﬁne the legal right to take from a river a speciﬁed quantity of water over a speciﬁed period. Bulk entitlements are owned by water wholesalers such as urban and irrigation supply authorities, who supply smaller quantities of water to urban consumers and irrigators. The purpose of bulk entitlements is to allow trading of water to assist in market-based solutions to the economic and environmental problems facing Victoria’s water industry. In Australia, proposals to use the market to allocate water, rather than the policy of rationing and regulation by a central authority, were considered in the 1970s (Musgrave, 1974). In the early 1980s tradeable water entitlements were proposed to address economic and institutional issues associated with water reallocation (Public Bodies Review Committee, 1984) and environmental issues associated with salinization (Salinity Committee, 1984). The Victorian Department of Water Resources supported transferable water entitlements in 1984 (Department of Resources and Energy and Australia Water Resources Council, 1984) and their 1986/87 annual report further documents the creation of a market for water entitlements and the introduction of a temporary transfer system (Department of Water Resources, 1987) which was trialed in the 1987/88 irrigation season (Langford and Foley, 1990; Pigram and Musgrave, 1990; Pigram et al., 1992; Pigram, 1993). In 1990, bulk entitlements, an instrument to achieve market trading of water amongst water wholesalers, were deﬁned in legislation when Victorian Water Act 1989 came into force. The Water Act is administered by the Department of Natural Resources and Environment (DNRE), which has the task of interpreting and applying the legislation. Similar types of water reform are also occurring in New South Wales and throughout Australia where there are moves to encourage market trading of water, separate the roles of resource stewardship and water supply, and promote full cost recovery of irrigation operations (Working Group on Water Resource Policy Secretariat, 1994). The implementation of bulk entitlements on the Goulburn River, which is the core issue discussed in this paper, shows there can be deﬁciencies in the process and outcomes of these water reform efforts and that environmental values may not be adequately considered. The Goulburn River system The Goulburn River has a long history of development and water resource use. Eildon Reservoir (capacity 3.4 × 109 m3 ) supplies water to the Goulburn Weir, 218 km downstream, where there are major diversions to irrigation areas (see Figure 1). The average annual ﬂow of the Goulburn River is 3.04 × 109 m3 and total annual diversion averages 1.476 × 109 m3 . Water is diverted for use in the Goulburn Catchment for irrigation, mainly for dairying and stone fruit (740 × 106 m3 ), for urban and industrial use (15 × 106 m3 ), and for rural use (24 × 106 m3 ). In addition, 697 × 106 m3 are exported to neighbouring catchments and to the urban supply system of Melbourne, Victoria’s largest city (Department of Water Resources, 1989). Eildon reservoir has a signiﬁcant inﬂuence on downstream hydrology (Erskine, 1996). Effects include reduced annual ﬂow because of evaporation from the reservoir and changes to monthly runoff that has reversed the natural seasonal ﬂow pattern (see Figure 2). Changes to ﬂow duration are such that high ﬂows (>95 m3 s−1 ) have been reduced, moderate ﬂows (40.5–95 m3 s−1 ) augmented and low ﬂows decreased. For any given frequency, ﬂood magnitudes have been greatly reduced. Near the dam, there is at least a 60% reduction in ﬂood magnitudes and at Seymour, 138 km downstream where the catchment area is 2.2 times the catchment area at Eildon, ﬂood magnitude has been reduced by 20%. Supply from Eildon dam is drawn off at 52 m below full supply level and because the reservoir is often thermally stratiﬁed (Cadwallader and Rogan, 1977), the released water is usually colder than it would be under natural conditions. For example, in January (the most affected month) the median temperature has been reduced from 19.5 ° C to 12.5 ° C (Gippel and Finlayson, 1993). There are environmental consequences of these changes. The reduced water temperature means that there are fewer opportunities for native ﬁsh to spawn in the 200 km of river downstream of Eildon. A further effect on native ﬁsh is the decrease in frequency and magnitude of wetland ﬂooding. Depending on the ﬁsh species, wetlands can be important for spawning, nursery habitat and as a source of food. Near Eildon, wetlands that
Copyright  2002 John Wiley & Sons, Ltd. River Res. Applic. (in press)

ALLOCATION OF WATER TO THE ENVIRONMENT

y Murra R
Echuca

G oulburn
e Ri v

r
Shepparton

Goulburn irrigation area Waranga Basin

Goulburn Weir
urn Goulb
Seymour Catchment boundary

River
Eildon

Lake Eildon

G

ou

lburn

N

R er iv

0

20 km

Figure 1. Goulburn River catchment

ﬂooded annually now receive water three years in ten, while wetlands that were ﬂooded on average every two years will now be ﬂooded every 20 years. Hydrological and water temperature changes have contributed to the declines in native ﬁsh populations in the Goulburn River (Cadwallader, 1979; Cadwallader and Gooley, 1984). Assessments of the environmental condition of the Goulburn River show that it is in marginal or poor condition downstream from Lake Eildon (DNRE, 2001). The Goulburn River is also an important source of water to the Murray River and harvesting the Goulburn’s water contributes to the environmental problems in the Murray (Thoms et al., 1998). Despite these changes, the Goulburn River has high historical and landscape values and part of it has been classiﬁed as a heritage river (Land Conservation Council, 1991). The cold water does advantage exotic brown trout (Salmo trutta) and the river below Eildon is popular with anglers.

IMPLEMENTING BULK ENTITLEMENTS ON THE GOULBURN RIVER A series of reports on bulk entitlements followed the passage of the Water Act, 1989. In 1990, the Department of Conservation and Environment (DCE) produced an information bulletin to highlight the environmental credentials of the new Act (DCE, 1990). It documented that one of the purposes of the Act was to provide formal means to protect and enhance the environmental qualities of waterways and their instream uses. Speciﬁcally, it was noted that the Act allowed water to be allocated for environmental uses, required all water management decisions to incorporate environmental considerations, and aimed to ensure that all water
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A. LADSON AND B. FINLAYSON
400 350 300

Discharge [Mm3]

250 200 150 100 50 0 Jan Feb Mar Apr May Jun Current Jul Aug Sep Oct Nov Dec

Natural

Figure 2. Natural and regulated (current) ﬂows on the Goulburn River downstream of Eildon Reservoir (average for June 1955 to September 1991) (Erskine 1996)

management functions are carried out in an environmentally sound way (McPhail and Young, 1991). Bulk entitlements were considered as an important method of allocating water to the environment although applications could be made only by authorities deﬁned under the Water Act. There were further details in a 1992 report The New Framework of Bulk Entitlements and Conversion of Existing Rights which was produced by the DCE to guide the implementation of the bulk entitlement provisions of the Water Act 1989 (DCE, 1992). Bulk entitlements were intended to achieve: ‘provision of greater legislative security and better clarity of the rights held by water authorities and other public bodies over their water assets; and greater efﬁciency in the allocation of water since the instrument of allocation, the bulk entitlement, can withstand the rigours of market trading’ (DCE, 1992, p. 1). DCE (1992) explains the new framework of bulk entitlements to water and discusses water for the environment and the conversion of existing rights to water to bulk entitlements. DCE (1992) was a planning document, intended to detail the procedure that would be used to specify bulk entitlements when they were established. The ﬁrst bulk entitlements in the State were created on the Goulburn River and bulk entitlement orders were documented by the successor to DCE, the Department of Conservation and Natural Resources (DCNR), in a 1995 report The Bulk Entitlement Conversion Process (DCNR, 1995). DCNR (1995) also documented the procedure that was used to develop the bulk entitlements. This procedure differed substantially from the 1992 proposals. The 1992 and 1995 reports stress that bulk entitlements will have environmental as well as economic beneﬁts but emphasis on achieving practical environmental outcomes using bulk entitlements changed over time. DCE (1992) takes a strong stand on the environment. DCNR (1995), completed during the ﬁrst term of a new government, is focused mainly on the rapid conversion of existing entitlements with limited concern for environmental issues. Setting up a water market In practice, setting up a water market involves three steps: allocation, distribution, and trading (Daly, 1996). First, in the allocation step, it is necessary to create a limited number of rights to speciﬁed quantities of water. In the case of the Goulburn River, these are deﬁned by the bulk entitlements. Secondly, these rights
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ALLOCATION OF WATER TO THE ENVIRONMENT

(bulk entitlements) must be distributed initially to different people or organizations. Thirdly, once the initial allocation has been made, and the bulk entitlements distributed, reallocation can then occur through trading. Initial allocation of water. In 1992, it seemed that the initial allocation of water on the Goulburn River to bulk entitlements was to take account of environmental requirements: ‘[bulk entitlements] provide a secure basis for the development of proper water entitlements to meet environmental needs’ (DCE, 1992). The procedure for estimating environmental water requirements was to consist of two stages: 1. setting management objectives for each element of a river system (including river reaches, storages, and lakes); and 2. specifying ﬂow events to meet these management objectives (e.g. high ﬂows may be required at certain times of the year to encourage spawning of native ﬁsh) (DCE 1992, p. 18). Once the environmental water requirements were determined, the allocation of water as bulk entitlements for consumptive use could commence. This environmental emphasis contrasts with the practice of granting bulk entitlements for the Goulburn River that was completed in 1995 and documented in DCNR (1995). The two-stage procedure for estimating environmental water requirements outlined in 1992 was not followed during the speciﬁcation of bulk entitlements for the Goulburn basin (DCNR, 1995); instead, the needs of consumptive users were considered ﬁrst, with a trade-off process used to determine environmental ﬂows. Initial distribution of bulk entitlements. As discussed above, it is possible to separate the initial allocation of water to bulk entitlements from the distribution of those bulk entitlements to people or authorities. In the case of the Goulburn River, bulk entitlements were distributed to historical consumptive users with a volume largely determined by their demands. For urban authorities the volumes speciﬁed in bulk entitlements were based on design capacity of works, with water to be supplied with a reliability of 99%. This resulted in allocations 20% to 40% greater than maximum historical use (Marsden Jacob Associates, 2000). Bulk entitlements to irrigation authorities were based on aggregate demands of individual irrigators, which are made up of their ‘water right’ and requirements for ‘sales’ water. A water right speciﬁes high security water (100% of water right would be expected to be supplied in 99% of years) whereas the volume of sales water is declared during an irrigation season by the water authority based on the amount of water in storage and projected demand (Langford and Foley, 1990; Pigram et al., 1992). The use of water by irrigators expands with the amount available so it is difﬁcult to ﬁnd water ‘left over’ that can be allocated to the environment. This was conﬁrmed by modelling, which showed that any water allocated to the environment reduced the security of supplies to irrigators (Fitzpatrick and Bennett, 1994). Under these conditions determining environmental ﬂows requires a trade-off with irrigation demand. A committee, the Goulburn/Broken Bulk Entitlement Forum, was established to make that trade-off. There were two major outcomes of this trade-off process to specify environmental ﬂows. First, in years where there was sufﬁcient water to provide irrigators with 200% of their water right, minimum ﬂows would be increased from the current discharge of 1.4 m3 s−1 to 2.9 m3 s−1 downstream from Eildon Dam. Secondly, a spring ﬂush was to be provided in November in wet years by a release of a maximum of 8 × 107 m3 of water over ﬁve days, with a ﬂow rate not to exceed 185 m3 s−1 (DCNR, 1995, p. 100; Gippel, 2000). The context and effectiveness of these environmental allocations are now considered. EVALUATING THE OUTCOME OF THE BULK ENTITLEMENT PROCESS FOR THE ENVIRONMENT Both the process of selecting environmental ﬂows, and the outcomes, are of questionable value because of a lack of environmental advocacy, insufﬁcient scientiﬁc input, inappropriate application of recognized techniques to select environmental ﬂows, and disregard of information that was already available about environmental requirements including those related to water temperature. There has also been inadequate monitoring of the ecological outcomes of the ﬂow changes resulting from the bulk entitlement process.
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A. LADSON AND B. FINLAYSON

Lack of environmental advocacy First, there was a lack of environmental input to the process of trading off environmental and production values. Although, ofﬁcers of the DCNR claim that the committee overseeing the creation of bulk entitlements, the Goulburn/Broken Bulk Entitlement Forum, included environmental representation (Fitzpatrick and Bennett, 1994), in fact the committee consisted of three representatives of water supply authorities, two from the DCNR, one farmer representative and one ‘community’ member who was also a landholder and irrigator (DCNR, 1995). Better environmental representation would have made it more likely that the committee would ﬁnd an appropriate balance between production and environmental values. Lack of scientiﬁc input There was also a lack of scientiﬁc input into the development of environmental ﬂows. The DCNR established internal arrangements to provide environmental input into the speciﬁcation of bulk entitlements (DCNR, 1995). At the June 1993 meeting of the Council of Australian Governments, Victoria agreed that ‘environmental requirements, wherever possible, be determined on the best scientiﬁc information available’ (National Competition Council, 2001). The ability of these internal arrangements to provide best available scientiﬁc information can be questioned. Christoff (1998) argues that the government department that oversaw implementation of bulk entitlements lacked both (1) strategic capacity (the ability to recognize environmental problems and develop rational policy responses that would lead to ecologically sustainable outcomes if implemented effectively), and (2) implementation capacity (the stafﬁng levels and skill base capable of implementing policy, reacting to new challenges, and learning from previous experiences). Tan (2001) also suggests that there was organizational instability during this period and a dismantling of mechanisms within the Victorian government for integration of environmental decisions, along with a focus on ﬁnancial performance. During development of bulk entitlements for the Goulburn River (1992 to 1995) staff levels in the overseeing department were reduced by 39.3% and most divisions were profoundly under-resourced and lacked skills required to implement policy and strategies (Christoff, 1998). Inappropriate application of the natural ﬂow paradigm Scientiﬁc principles to determine environmental ﬂows were inappropriately applied when selecting ﬂows on the Goulburn River. Fitzpatrick and Bennett (1994), both ofﬁcers of the Department of Conservation and Natural Resources, claim that environmental ﬂow options were developed based on the philosophy that a ﬂow as close as possible to the natural regime would provide the best form of environmental protection. They state that it was expected that environmental ﬂows would improve instream habitat with the greatest beneﬁt being in the reach immediately downstream of Lake Eildon and that ﬁsh spawning would be stimulated. The process was based on the ‘natural ﬂow paradigm’–the assumption that reintroducing elements of the natural ﬂow regime to a regulated river will increase environmental values. Although the natural ﬂow paradigm may result in environmental improvement if a range of ﬂow facets are considered (Poff et al., 1997; Richter et al., 1997), there are reasons to question the way it was used to guide water allocation in the Goulburn River. First, the objectives of introducing a more natural ﬂow regime were compromised by the requirement to limit impacts on irrigators. The goal of the ﬂow changes, as discussed by Fitzpatrick and Bennett (1994), were, if possible, to reintroduce some aspects of the natural ﬂow regime, while having minimal impact on security of water supply to existing users. Rather than using the opportunity of implementing bulk entitlements to rehabilitate the river system, only minor ﬂow changes were proposed and limited outcomes expected: ‘at a minimum, the current environmental values of the Goulburn River will be preserved. . .’ (Fitzpatrick and Bennett, 1994). As a result, the proposed ﬂow changes are small, perhaps too small to have a measurable effect, because of the constraint of minimizing the impact on irrigation security. For example, consider the speciﬁed spring ﬂush. The volume of this event is too small to achieve signiﬁcant inundation of wetlands on the Goulburn River ﬂoodplain. For the proposed ﬁve day ﬂood, a maximum of 1.3 × 106 m3 will inundate the ﬂoodplain
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ALLOCATION OF WATER TO THE ENVIRONMENT

which is less than 0.3% of the average annual volume of 4.6 × 108 m3 that occurred as overbank ﬂow prior to regulation (Gippel, 2000). The spring ﬂush is also of short duration, which limits the opportunity for the growth of algae and macroinvertebrates in wetlands that could then be transported back to the river. Opportunities for ﬁsh spawning and migration are also limited (Young, 2001). Measurable objectives have not been speciﬁed for the spring ﬂush nor has monitoring been established to determine what effect it will have. Secondly, the inﬂuence of exotic species is not taken into account. The Goulburn River has been colonized by willows (Salix spp.), a weed of national signiﬁcance (ANZECC, 1999), which are thriving under the current regulated ﬂows (Erskine, 1996). The effect of changing to a more natural ﬂow regime is unknown but it could promote willow populations as increasing ﬂood frequency could inadvertently provide more opportunities for vegetative reproduction or more sites capable of producing viable seedlings (Cremer et al., 1995). There are also exotic ﬁsh, both desirable (brown trout) and undesirable (carp, Cyprinus capio). The presence of exotic species complicates the application of the natural ﬂow paradigm as their response to ﬂow changes needs to be considered. Using the natural ﬂow paradigm as justiﬁcation for assuming that a small change toward natural ﬂows will be beneﬁcial is an inappropriate rationale for suggesting minimalist changes to the ﬂow regime. With small changes in ﬂow, there may be no change in river condition, or conditions could move closer to, or further from, a desirable state. It is appropriate to investigate and understand likely changes rather than just assuming a minor change toward natural ﬂow will be better for the environment. Lack of consideration of water temperature The low temperature of water released from Eildon Reservoir at the time of the speciﬁed spring ﬂush means any environmental beneﬁt is limited. The released water is too cold to support native ﬁsh in the (138 km) section of the river between Eildon and Seymour (Gippel and Finlayson, 1993). The temperature of water released from Eildon Dam in November, the proposed time of the spring ﬂush, is about 12 ° C (Gippel and Finlayson, 1993). November is a preferred time for the spawning of some native ﬁsh and carp (see Table I) and increased water levels and access to ﬂoodplains are important spawning cues; however, water
Table I. Spawning temperate and cues for indigenous and exotic ﬁsh in the Goulburn River (adapted from Gippel and Finlayson (1993) except where noted) Species Macquaria australascia Maccullochella peelii peelii Gadopsis marmoratus Tandanus tandanus Bidyanus bidyanus Macquaria ambigua Salmo trutta Cyprinus carpio Common name Macquarie perch Murray cod River blackﬁsh Freshwater catﬁsh Silver perch Golden perch Brown trout Carp Spawning season Late Oct.–early Dec. Oct.–Dec. Nov.–Jan. Oct.–Mar. Oct.–Dec. Nov.–Mar. Apr.–Aug.a Sep.–Dec.a Spawning temp. ( ° C) 16.5 20 16 >24 >23 >23 10 17–25a Spawning ﬂood cue Not critical Not critical Not critical May nest on ﬂoodplains Flood required, cue plus habitat Flood required, cue plus habitat Spawning is often after ﬂoodsa Floods increase spawning habitat Conservation statusb Vulnerable Vulnerable Indeterminate Vulnerable Vulnerable Potentially threatened Exotic Exotic

a McDowell b Koehn

(1996). and Morison (1990). River Res. Applic. (in press)

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A. LADSON AND B. FINLAYSON

temperatures greater than 15 ° C are required before spawning will take place. The proposed spring ﬂush is too cold for native ﬁsh to spawn and the extent of ﬂoodplain inundation is severely limited as discussed above. The November ﬂush is not expected to beneﬁt trout spawning as this occurs earlier in the year. Increasing the water temperature would require artiﬁcial destratiﬁcation of Eildon reservoir or construction of facilities to allow selective withdrawal of water, neither of which were proposed as part of the bulk entitlement process. If the cost of destratiﬁcation and an annual spring ﬂood are prohibitive then it may be more pragmatic to manage this section of the river for recreational ﬁshing of introduced species and instead restore other reaches or other streams where there are fewer barriers to rehabilitation (Gippel and Finlayson, 1993). The other adopted environmental ﬂow option, an increase in minimum ﬂows, is also likely to be ineffective in restoring environmental values because of cold water releases. The impact of these low water temperatures is largest in the reach immediately downstream of Lake Eildon, which is the area where the greatest environmental beneﬁts were claimed by Fitzpatrick and Bennett (1994) for the ﬂow changes. Inadequate monitoring of the bulk entitlement process In 1992 it was acknowledged by the Government that: ‘[bulk entitlements] will prevent any further degradation of the State’s water resource if an appropriate standard of monitoring and reporting of entitlements is achieved’ (DCE, 1992). It was argued that as there is limited understanding of river environments, it was important to measure the response of the natural system to change and modify management intervention if necessary. A comprehensive monitoring programme was proposed that would include ecological surveys, catchment surveys, river channel surveys, and water quantity and quality monitoring. This proposed monitoring effort contrasts with actual procedures that were speciﬁed as part of the granting of bulk entitlements on the Goulburn River in 1995 (DCNR, 1995). A much narrower range of reporting requirements was proposed for organizations granted bulk entitlements. For example, the reporting obligations for the Eildon-Goulburn Weir bulk entitlement (DCNR, 1995, Section 17, (a) to (o)) relate exclusively to water quantity. This is to ensure that the amount of water extracted from the river is within the licensed conditions. There are environmental obligations of authorities granted a bulk entitlement but in practice they are restricted to developing a programme to manage the local environmental effects near an authority’s structures such as silt removal from offtakes and operational rules to control releases (DCNR, 1995, Section 15, p. 89). No monitoring is proposed that could be used to evaluate if the environmental ﬂows result in improved river condition or to guard against adverse consequences. Not only is environmental monitoring much reduced from what was proposed at the start of the bulk entitlement conversion process, but the ability of other authorities to address environmental concerns has been restricted by legislative action. Waterway management authorities, whose functions include identiﬁcation and protection of environmental values of waterways, are prevented by 1995 amendments to the Water Act from acting inconsistently with bulk entitlement orders: ‘[A waterway management authority] must not exercise its functions or powers. . . in a manner which is inconsistent with any provision of an Order granting a declared bulk entitlement and any purported exercise of a function or power in such a manner is, to the extent to which it is so inconsistent, of no effect’ (Water Act, section 186 1A). Therefore, the granting of a bulk entitlement to an irrigation or urban water supply authority reduces the ability of a waterway management authority to address environmental issues that could be caused by the extraction of water under the bulk entitlement.

WILL THE WATER MARKET RESULT IN REALLOCATION OF WATER TO THE ENVIRONMENT? Restricting the ability of third parties to have input into the allocation of water does offer the advantage of strengthening property rights and makes market trading of water more viable. So, even if the initial allocation of water in the Goulburn River is not the most advantageous, as argued herein, can the water market be relied upon to create a socially optimal reallocation? Economic theory (the Coase theorem) suggests that a perfectly operating market will result in socially optimal allocation of resources regardless of the initial allocation, provided transactions are costless (Coase, 1960). However, there are several reasons to expect that
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ALLOCATION OF WATER TO THE ENVIRONMENT

a water market on the Goulburn River will not operate efﬁciently and that the amount of water allocated to the environment will be less than is socially desirable. There are ﬁve reasons why market failure is likely. First, access to the market is restricted. Bulk entitlements can be traded only between authorities deﬁned under the Water Act 1989, and private individuals, or environmental groups, would have to negotiate with these authorities to buy water for the environment on their behalf as they are restricted from directly entering the market. The whole or part of a bulk entitlement can be transferred to a person but only if they (1) own or occupy a holding in an irrigation district, or (2) hold a licence to take and use water. Although there is a framework to allow the granting of a licence for instream use of water (Water Act, section 52), administrative procedures are yet to be established. Australian environmental groups have also so far resisted involvement in water markets (NCC, 2001) and to date, in Victoria, no water has been purchased on the market to achieve environmental beneﬁts. A second reason for market failure is that transaction costs are likely to be a barrier to allocation of water to the environment. Transaction costs include the cost of gathering information about how much water is required to maintain environmental values and overcoming administrative hurdles (Gillilan and Brown, 1997). There is also likely to be considerably more uncertainty in determining environmental requirements compared to assessing the cost of alternative uses of the water in irrigation. This greater uncertainty favours maintenance of the status quo. Transaction costs also discourage the collective action that would be required to obtain sufﬁcient funding for environmental groups to enter the water market even if their access were not restricted (Hardin, 1982; Olson, 1982). Thirdly, there may be external effects from market activities that have environmental costs. Water trading can affect instream ﬂows, by, for example, moving the point of diversion upstream, or requiring the delivery of water from headwater storages to urban areas outside the catchment (Bjornlund and McKay, 1996). Since these negative effects need not be considered by market participants, it is likely that resulting allocation of water will not be socially optimal. A fourth reason is that environmental ﬂows may be under-supplied by a water market because there may be beneﬁts to those not directly involved in the transactions. The ‘public good’ nature of environmental ﬂows provides a justiﬁcation for government intervention (Musgrave and Kaine, 1991; Gillilan and Brown, 1997). For example, purchasing an instream ﬂow entitlement to supply water for a particular ﬁsh species may also provide water for swimming, canoeing and enhancing the river landscape (Loomis, 1987; Brown et al., 1991; Gillilan and Brown, 1997). The water may also provide substantial offsite values (Sanders et al., 1990). Because of these positive externalities, beneﬁts of environmental ﬂows are likely to exceed the amount of money that will be available for their purchase by market participants so they will be undersupplied without government intervention. Musgrave and Kaine (1991) describe the public good nature of environmental ﬂows as a ‘problem that won’t go away’ and state that the only practical solution to providing sufﬁcient water to the environment is to constrain the extent to which markets can operate, through control by regulation. Finally, it is politically difﬁcult for the government to enter the water market to purchase water for the environment. Although this has not been discussed for the Goulburn River, plans by the Victorian Government to purchase water on market to enhance the environmental condition of the Snowy River in the east of the state were strongly attacked by irrigators and opposition politicians. Irrigators were concerned that prices would be distorted because of government intervention and water and wealth would be transferred away from irrigation areas. There was extensive reporting of these issues in Victorian newspapers (Anon., 2000; Bolt, 2000). In response to hard questioning by the rural press, the Minister of Natural Resources and Environment stated there would be ‘an absolute commitment from this government that there will be no distortion of water prices’ (Hamblin, 2000), which brings into question the use of the water market to provide environmental ﬂows. The issue was also discussed in the Victorian Parliament where, between 24 October and 28 November 2000, the Government was asked 18 questions by the opposition relating to the purchase of water from irrigators to provide environmental ﬂows. An example of the issues raised is this question by Hon. B. W. Bishop, member for North Western Province, an electorate with many irrigators: ‘. . . the minister should now be aware that the prospect of having the government step into the market to purchase existing water
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A. LADSON AND B. FINLAYSON

entitlements to deliver a commitment on environmental ﬂows to the Snowy River has sent shock waves through the entire irrigation industry. Given the minister’s most recent assurance that direct water purchases would be only a last-resort strategy, on behalf of Victorian irrigators, I ask the minister to take the next logical step and rule out such an option completely.’ (Victoria, Parliament, 2000a). There is also likely to be pressure on the government not to remove water from production because of implications for the revenue base of irrigation authorities (Willey, 1991). In a situation where there are high ﬁxed costs, transferring water from irrigation to environmental use is likely to increase the unit price for water for the remaining irrigators which could leave the perception that they are paying for increased environmental ﬂows (Victoria, Parliament, 2000b). Already in Victoria, during times of drought when less water can be sold to irrigators, the ﬁnancial viability of authorities can be threatened. For example, Goulburn-Murray Water, the largest irrigation authority in Victoria, lost $66.1 million between 1995/96 and 1999/2000 during a period of record low inﬂows to reservoirs because there was less water available to be sold and water prices had been determined on expected average conditions (Borchard, 2000). Problems with the operation of water markets have been conﬁrmed through empirical research. In their study of ﬁve water markets in the American west, Salba et al. (1987) found that the markets deviated substantially from the competitive model and that the price of water deviated from its social value. They recommended that when considering reallocation of water, market prices be supplemented with other measures of value such as the contingent valuation of water in recreation, or its marginal product in alternative uses. In their review of water trading in the Goulburn-Murray Irrigation Area, which is supplied by the Goulburn River, Bjornlund and McKay (1995) argued that water transfer policies needed to provide environmental criteria to assist the operation of market tools. While Victoria has set up strong property rights for water in an effort to stimulate market trading and more efﬁcient allocation, different approaches have been used in other jurisdictions where the difﬁculties of market approaches are recognized. For example, since 1928 California has moved toward greater public participation, and now water use can be viewed as a privilege granted by the government that is monitored by agencies and the courts and can be reallocated among competing users to achieve the greatest social good (Schulz and Weber, 1988; Haddad, 2000). Public trust considerations, such as protection of ﬁsheries, riparian ecosystems and recreation, must be satisﬁed in deciding how much water can be taken from a river and where diversions can be made (Sax, 1990). For example, the Supreme Court of California decided to protect the environmentally signiﬁcant Mono Lake by reducing tributary diversions, even through the city of Los Angeles had held a permit since 1940 to appropriate most of the inﬂows (Sax, 1990; Hart, 1996; Gillilan and Brown, 1997). Although there have been efforts since 1980 to establish a market in California to achieve reallocation of water, these have so far been unsuccessful (Haddad, 2000). A ‘cap and trade’ approach to water allocation has been suggested as a way to protect the environment by capping diversions and then allowing trading of the excess water to provide the advantages of market-based redistribution while protecting the environment (Daly, 1996). For example in the Goulburn River, if the total amount of water available to be traded by bulk entitlements could be based on principles of ecological sustainability, rather than on historical demands by consumptive users, reallocation of the portion of ﬂow in excess of environmental requirements could then occur through markets in the interests of efﬁciency. In the Goulburn River, bulk entitlements have capped diversions; however, the cap was based on unfettered consumptive demand, not on consideration of environmental requirements. Setting an appropriate level of any cap will always be difﬁcult but there is an opportunity for the bulk entitlements process to lead to environmental protection if the cap on diversions could be adjusted adaptively. This would require monitoring of river conditions and comparison to a desired sustainable state. Similarly, there may be an opportunity to use the spring ﬂood, proposed for the Goulburn, if issues such as cold-water releases and the inﬂuence on exotic pest species can be addressed. Similar concerns are present in the Colorado River, USA, yet a partnership was formed between scientists and managers that allowed an experimental ﬂood to take place which achieved improvements in environmental condition and increased understanding of the river system (Marzolf et al., 1999). Such a partnership represents a way forward for the Goulburn River but would require a commitment by stakeholders to experimentation and learning.
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ALLOCATION OF WATER TO THE ENVIRONMENT

CONCLUSION The history of the allocation of bulk entitlements to water shows a narrowing of management focus that occurred between the initial discussion in 1990 (DCE, 1990), planning in 1992 (DCE, 1992) and their deﬁnition for the Goulburn River system in 1995 (DCNR, 1995). During this time, the core proposals are similar and are consistent with the economic rationalist approach to reform of the Victorian water industry that has been occurring since the early 1980s. The differences highlight a perceived decrease in environmental concern and include: • a decrease in the amount of environmental monitoring required as part of the granting of bulk entitlements; • establishing internal procedures to review environmental requirements rather than seeking input from external scientiﬁc experts; • restricting the water extracting authority’s responsibility for any environmental damage; • restricting third party rights, in particular, restricting the ability of waterway management authorities to address environmental concerns that arise from the extraction of water granted under a bulk entitlement; • decreasing the reporting requirements of authorities that are granted a bulk entitlement; • reducing the requirement for the setting of management objectives as part of the bulk entitlement process; and • reducing the need to specify objectives for environmental ﬂow events. There are many possible reasons for these suggested changes. There may have been a fear amongst the economic reformers that environmental issues would delay the introduction of bulk entitlements. They may have considered it better to introduce the reforms and then address any environmental issues later if they engendered public concern. It is also possible that the reform agenda was captured by production interests keen to maximize the amount of water that could be extracted and to limit the liability for any environmental damage. Many of these changes have strengthened property rights by limiting the opportunities of third parties to have input into decisions about water diversions. These types of changes make bulk entitlements less risky to purchase, and easier to sell and so facilitate a water market that has the promise of efﬁciently allocating water resources. However, it is unlikely that a water market will achieve a socially optimal outcome because it will under-supply environmental requirements. On the Goulburn River, access to the water market is restricted, transaction costs associated with environmental purchases are likely to be high, and the public good nature of environmental ﬂows means that the amount of water purchased for the environment will be less than socially optimal. The lack of opportunities for intervention by government authorities and the limited monitoring combined with the inﬂexible nature of bulk entitlement order means that the environment may not be adequately protected. Bulk entitlements are granted in perpetuity, and analysis to determine a suitable quantity for a bulk entitlement was based on historical records and did not consider issues such as climate variability or changes in land use (DCNR, 1995). Preliminary analysis of the possible impact of climate change suggests that for some climate scenarios there could be substantial reduction in Goulburn River ﬂows (Schreider et al., 1997). Other inﬂuences on water availability include timber plantations, which are expected to reduce runoff (Government of Victoria, 1999), and construction of farm dams could also have a substantial inﬂuence on tributary inﬂows (ICAM, 1999). Examples in other systems that involve exploitation of natural resources show that a lack of monitoring can lead to a crisis when inﬂexible, narrowly focused organizations are confronted with environmental problems (Holling, 1995). It seems unlikely that the Goulburn River will avoid this crisis given current institutional arrangements.
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