Simulating impacts of water trading in an institutional perspective

Water availability in outback Australia is defined by the occurrence of large rainfall events, and changes often from a situation of scarcity to temporary abundance. Informal institutions are often able to translate such dynamics into sustainable water-use rules. Policy interventions are mainly focused on changing access rules to avoid over-use or inefficiencies. Such formal institutional changes can lead to unexpected unsustainable outcomes; outcomes that are often captured in the 'story' behind informal arrangements. This paper analyses one case study on water access in outback Australia and translates field work results into an agent-based model. The agent-based model is calibrated based on data from experiments conducted with actual farmers from the case study region. In order to project unintended outcomes of institutional changes, interventions in water access is explored in an applied context. The core focus of the modelling exercise is the treatment of newcomers on a newly created trading scheme for water access rights. Simulation results show that total water extraction is significantly lower if the burden of water restrictions is limited to newcomers while the regional economic performance is not statistically different from a case in which the burden is carried by all irrigators. Interview data documents that currently extraction levels are regulated by informal processes as community members communicate observations on river health to irrigators who adjust accordingly, which indicates perceived personal responsibility. Overall, the environmental and economic performance of a water trading scheme that will replace this informal self-regulating system depends on how water restrictions are implemented and how valid the overall cap of 20% outtake is, which is not widely accepted throughout the community.