New Zealanders’ Concerns: Water-Trading Clubs for Freshwater Quality

New Zealanders have consistently rated freshwater health as a leading environmental concern for over 25 years. However, the issue is absent from the 2023 election campaign due to the controversial new water reform law and the 2020 Essential Freshwater package. The Essential Freshwater package faces resistance from farmers and landowners who feel pressure from compounding environmental regulations.

The absence of environmental markets for addressing scarcity and improving freshwater quality in New Zealand streams and rivers is a policy omission. Water trading can help improve efficiency and drive water conservation by shifting water from low-value to high-value uses or from areas with relative abundance to places of relative scarcity. New research presents a novel method for managing freshwater in small catchments.

Freshwater in New Zealand is allocated on a “first come, first served” basis, with consents or permits granted to water users since 1991 under the Resource Management Act (RMA). However, these consents are not defined as property rights, making them open to interpretation when challenged under law. This ambiguity around water rights is driven by unresolved questions about proprietary rights and Māori interests in water due to inconsistent translations of Te Tiriti o Waitangi.

Formal water markets, like those in Australia’s Murray-Darling Basin, require property rights to be well defined, defended, and divestible, and have several institutional preconditions, such as low transaction costs and a large number of active traders. These conditions make them poorly suited for many small New Zealand catchments.

Research suggests that implementing formal trading regimes in small New Zealand catchments could be simplified by designing water markets as “clubs.” Economic theory argues that the transaction costs associated with The establishment of an active water market is likely to outweigh any potential efficiency gains from trade. Designing water markets as clubs could help overcome the political and economic complexities of New Zealand’s freshwater policy landscape by allowing small groups of users with shared interests to voluntarily trade their water endowment under certain conditions.

The introduction of group-level trading in small catchments can improve water quality, community wellbeing, and internalize costs imposed on other group members. The club model performs best when there are few active traders, challenging common assumptions about group size and market performance. Water users, like farmers, can trade their water consent with other members, improving the environment and enhancing the net benefits of their private agricultural production.

Although this model does not address Māori rights and interests in freshwater, it offers an innovative way to adapt a trading regime to suit New Zealand’s political and geographical context. This innovation is likely to be discussed by political leaders during the campaign trail.

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