Methods for the allocation and valuation of water property rights in New Zealand

Abstract

Growing populations and incomes leading to increased competition for water are placing a strain on existing water resources worldwide - a strain that many current frameworks for water allocation fail to adequately address. Nonetheless, many countries have recognized the need to allocate scarce water resources efficiently and have implemented, or are beginning to implement, more effective property rights frameworks for water allocation. This study considers methods, based on economic theory and the experiences of a sample of countries, for the allocation and valuation of water property rights in New Zealand. It firstly addresses New Zealand's current framework for water allocation and identifies a number of issues with this framework. Based on recent experience with similar issues in other countries, this study finds that significant benefits to New Zealand's water sector could be generated by creating well-defined and tradable property rights to water. Within such property rights frameworks, it is also important that the value of these rights is well known by water users. This study outlines separate approaches for the valuation of two types of water rights for, respectively, the extraction of water and the storage of water. These types of rights are modelled as options, where the right holder has an option to extract or store water. Thus, contingent claims analysis can be used to determine the value of such rights. The results of this study have implications for New Zealand's current water allocation framework and the value of property rights to water, both within this current framework and in more desirable tradable water rights frameworks.