Elsevier

Land Use Policy

Volume 82, March 2019, Pages 595-608
Land Use Policy

A systems thinking approach to water trade: Finding leverage for sustainable development

https://doi.org/10.1016/j.landusepol.2019.01.004Get rights and content

Highlights

  • Water trade is a key water scarcity risk-management tool for water users.

  • Behaviour of water markets is controlled by a number of interacting feedback loops.

  • Systems thinking offers a holistic approach to developing sustainable water markets.

Abstract

Water trading has become a key water scarcity risk-management tool for irrigators. Effective and enduring water trade systems require approaches that can cope with dynamic complexity and enable the inclusion of multiple stakeholders. Previous efforts to improve water trade systems have largely focused on reductionist approaches, which examine system components in isolation neglecting their interconnected nature. Such approaches to water trade system assessment are at risk of maladaptation resulting in increased market inefficiencies, transaction costs and market failure through barriers to participation. Using a systems thinking approach, we develop a conceptual model of a generalised water trade system in Australia’s Murray-Darling Basin (MDB or the Basin). The model visualises the Basin's water trade systems as a whole and identifies feedback mechanisms likely to influence trade development and endurance. We argue that such a conceptual model provides an effective communication tool for achieving a better understanding of market dynamics and alignment of stakeholder priorities to improve enduring market use. It can also serve as an assessment/evaluation tool for water trade policy and identify key leverage points for systemic interventions.

Introduction

Water scarcity is a significant and growing challenge in many parts of the world, driven by rising population numbers, rapid economic development and increasing concern about environmental degradation (Cosgrove and Loucks, 2015). The water scarcity challenge also requires urgent management solutions, particularly in the face of climate change (Khan et al., 2010; An-Vo et al., 2015). Agriculture is the world’s largest water consumer, accounting for approximately 70% of the Earth’s available fresh water (FAO, 2016). In some countries, where water resource management reforms have been implemented, market-based approaches have been used to facilitate the efficient trade of water products between parties (Grafton et al., 2016; Wei et al., 2017). The context-specific drivers of water trade to address scarcity issues, and the need for effective reallocation in many global contexts, are thus increasingly important research areas (Grafton et al., 2016; Wheeler et al., 2017). A principal concern is the need to develop enduring water trade systems, particularly in the face of future uncertainty and water supply risk, which not only improve allocative and productive efficiency from economic uses, but also from allocations of water to environmental flows (Horne et al., 2018).

The broad concept of enduring markets links multiple objectives such as livelihood protection and improved market access (economic), with safe labour practices (social), and reduced natural resource degradation or pollution (environmental). For water markets, the links between economic, social and environmental objectives may be similar, but the criteria for an enduring market are different. Beyond the requirements to establish any water market (e.g. enforceable property rights, legislative arrangements for trade, scalable gains from trade, and reasonable transaction costs (Wheeler et al., 2017)), enduring water markets can be characterised by: i) a capacity to accommodate new entrants within the existing property rights base; ii) capacity to evolve with respect to new institutions, products and/or reallocation objectives; iii) market integrity with respect to price-setting, speculation, and protection from side-trades (e.g. black market exchange); iv) transparent monitoring, evaluation and reporting of market activity; and v) temporal stability in the face of supply shocks.

Studies of water trade systems frequently identify interactions between multiple social, economic, environmental, institutional, hydrological, and market components across a range of temporal and spatial dimensions (Williams, 2017). Such systems are influenced by rapid change, such as increasing volatility in commodity or agricultural production markets; uncertainty related to reform of existing water management practices or arrangements; and extreme variability in climatic conditions (Adamson et al., 2017). In addition, water trade systems involve multiple stakeholders (e.g. water users, water service providers, irrigation infrastructure operators, water-basin jurisdictions, water-basin authorities, environmental water users, and financial investors), each having different management objectives, agendas and interests that potentially lead to unforeseen conflicts of interest. Such conflicts can impact efficient water market development and negatively impact upon water trade outcomes over time (Hussey and Dovers, 2009; Alexandra and Marshall, 2016). The combination of all these factors means that water trade systems are inherently complex.

Previous research, government policies and measures designed to improve water trade systems primarily tend to reduce these combined factors into separate components contained within the sectors of most immediate concern. Factor reduction thus neglects the interconnected and/or interdependent nature of the system. For example, Khan et al. (2009) focus on the nexus between water trading and soil salinity; Bjornlund et al. (2011) emphasise the relationships between water trading and farm debt; and An-Vo et al. (2015) investigate the impact of water trading on conjunctive water use in agriculture. In many cases, analysts have also used a single discipline lens; examples include ecological (Kingsford et al., 2017), economic (Wittwer and Dixon, 2013; Nguyen-ky et al., 2018) and simplified metrics (Grafton, 2017). Despite the validity of the research questions and study design in each instance, there is growing consensus that such narrow viewpoints have reduced our ability to understand water trade systems as a whole (Thompson et al., 2018). Hence, they may arguably fail to deliver desirable and enduring water trade objectives.

In order to address the dynamics of complex systems such as water trade, it is necessary to understand the system structures that have not only influenced past and current trends but also have the potential to influence future trends (Mai and Smith, 2015). This is the domain of systems thinking—a method that seeks to holistically address persistent issues through understanding the complex dynamic interactions between actors and the feedback mechanisms that influence system behaviour over time (Sterman, 2000; Kelly et al., 2013; Mai and Smith, 2018). Originally developed by Von Bertalanffy in 1956, systems thinking frames a problem in terms of seeing the whole, rather than focusing on particular components (Senge, 2006). It allows a greater understanding of what drives change and where the leverage points are within the system (Van Mai and To, 2015); that is, the tipping points, where a small shift can produce big changes leading to enduring improvements in the whole system (Meadows, 1999). Importantly, systems thinking enables the outcomes of policy decisions, as well as the unintended consequences of intervention programs and strategies, to be forecast (Van Mai and To, 2015; Mai and Smith, 2015). Nowadays, the approach is widely used by academics and practitioners alike to address sustainability challenges in many fields (Mai and Smith, 2015; Van Mai and To, 2015; Turner et al., 2016). However, despite decades of research into water markets, and a global requirement to explore the development of enduring water trade models for effective reallocation, systems thinking approaches have not been employed by water market researchers.

This paper employs a systems thinking approach to develop a conceptual model (systems model) which defines the underlying structure of water trade systems, and identifies key leverage points which may inform future water market policy. We use a case study approach focusing on water trade in Australia’s Murray-Darling Basin (MDB or the Basin)—one of the World’s largest interconnected water markets. To do this, we first establish a link between systems thinking theory and water market development theory. Next, we construct a systems model of water trade in the MDB. Finally, we use this systems model to evaluate current water trading policies and identify leverage points to suggest intervention strategies that may ensure enduring water market development in the MDB and elsewhere around the world.

Section snippets

The link between water market development and systems thinking

The development of the Australian water market has a lengthy history, and numerous researchers have attempted to describe the dynamics of water markets, both generally and in the MDB (e.g. Pigram, 2006; Connell, 2007; Musgrave, 2008; Loch et al., 2013). According to Musgrave (2008), the evolution of water markets follows a common path involving four key phases (exploration, development, maturation and transition to sustainability), as outlined in Fig. 1. In the case of the MDB, exploration

Case study: the Murray-Darling basin

The Murray-Darling (Fig. 3) is Australia’s largest and most important river system. The Murray-Darling Basin (MDB or the Basin) covers a significant portion of south-eastern Australia and is home to over two million people. It is also Australia's most productive agricultural region (Crase et al., 2012) producing over one-third of Australia’s food supply and containing around 65% of its irrigated land (Wheeler et al., 2014). In addition, the MDB has high biodiversity values, nationally and

Preliminary CLD

The preliminary CLD for Australian water trade, based on the S-shaped evolution of MDB water markets (Fig. 2), contains one reinforcing (R1) and one balancing (B1) loop (Fig. 5). Loop R1 makes a link between the variables of Water trading, Water availability, Water productivity, and Irrigators’ economic benefits, while loop B1 connects the variables of Water trading, Administrative and legal requirements, and Transaction costs (Fig. 5).

In this preliminary CLD, the reinforcing loop R1 describes

Discussion

Where water markets have been established, water trade is, and will continue to be, a vital business tool for many users in the face of variable (and increasingly finite) water availability. By adopting a systems thinking approach, we have constructed a conceptual model of water trade in the MDB. While still undoubtedly a simplification, the model attempts to provide a holistic view of the overall water trade system under consideration and visualises feedback mechanisms believed to control

Conclusion

The potential aggregate benefits of water markets have seen governments promote this economic instrument in response to growing water scarcity and reallocation requirements. However, enduring water market development and trade require comprehensive understanding of the inherent complexity of water trade systems and attention to key levers that may ‘make or break’ the market in the long-term. We suggest that systems thinking provides an approach that explains the behaviour of dynamic complexity

Declaration of interests

The authors declare no conflicts of interest.

Acknowledgements

This research was supported in part by Discovery Early Career Researcher Award Fellowship funding from the Australian Research Council (grant number DE150100328).

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