China has been trying to use market-based mechanisms to handle its growing environmental problems. In her battle against climate change, seven pilot carbon markets were launched to try and cut emissions of greenhouse gases. A similar mechanism is also being introduced for water with the aim to promote efficient use and better management. In July 2014, the Ministry of Water Resources (MWR) announced seven provinces (Gansu, Guangdong, Henan, Hubei, Inner Mongolia, Jiangxi and Ningxia) will host pilot markets for water rights trading. According to Xinhua on 9 October 2014, after two-years of planning, led by the MWR, the basic framework of a national-level water trade market has been confirmed and will be submitted to the State Council for approval; relevant management measures and regulations will be set by the end of 2015.
However, what are water rights in China now? Who owns them and how can they be traded? … With these questions in mind, China Water Risk sat down with Professor Jia Shaofeng, Deputy Director of the Center for Water Resources Research of the Chinese Academy of Science in Beijing, to get his insights on these questions and more.
China Water Risk (CWR): What are the water rights in China and who owns them?
Jia Shaofeng (JSF): In China, water rights are about water resources utilization; a set of rules about who can & cannot use water and how water should be used. It can be divided into ownership and right of use.
“Water resources belong to the State and that the State Council, on behalf of the State, holds the ownership of these water resources”
thus ”water right” is in fact limited to the right to use water
The “Water Law of the PRC” (2002) clearly defines that water resources belong to the State and that the State Council, on behalf of the State, holds the ownership of these water resources.
In addition, compared to the previous version of the “Water Law” (1998), the 2002 version stipulates that “the water in the ponds and reservoirs built by rural collective economic organizations, is used (not owned) by the respective rural collective organization”.
This means the rural collective can use this water without a permit but only for daily or agricultural purposes.
Thus, in China, given the fact that water is owned by the State, ‘water right’ is in fact limited to the right to use water. So when we talk about reforming water rights in China, we are actually talking about reforming the right of using water.
CWR: So how does the State Council manage water use?
State Council uses the Three Red Lines policy to set provincial quotas and provincial water use is then decided by local governments
JSF: The State cannot directly use water resources and it is not realistic for the State Council alone to manage all of China’s water use.
So, the State Council under the “Three Red Lines” policy determines each province’s water quota. Then, provincial water use is delegated to local governments, who own the province’s water use rights.
CWR: Many rivers run through several provinces. Does this complicate this management method?
JSF: Take the Yellow River as an example: the MWR coordinated and issued the “Water Allocation Program of the Yellow River”, which was approved by the State Council in 1987. This water allocation program mainly considered the actual amount of water used by various users in 1980 and the expected water demand in 2000 for each province respectively.
In addition, it also needed to ensure that there was a minimum volume of water available to transport sediments in the river. The resulting 37 billion m3 of water available for use was then divided amongst provinces along the Yellow River as well as Hebei and Tianjin, which were expected to also draw water from the Yellow River.
CWR: What about water allocation between different users within a province under this program? Are there fees involved?
industrial users require a Water Use Permit from the local government to access water
JSF: Since 2003, water right (more precisely, Water Use Permit) transfers have been put into practice along the Yellow River, mainly in Ningxia and Inner Mongolia. The basic principle is that industrial users require a Water Use Permit from the local government to access water.
The money (Water Resource Fee regularly paid by the user under agreement of the permit) has been used by the local governments for agricultural water saving projects. At that time, the reasons behind this were:
- industrial water quotas had almost reached their limits and the remaining quotas were not sufficient for new industrial projects, especially in energy bases; and
- MWR’s vigorous promotion of a water rights trading market.
An administrative change of Water Use Permit ownership allowed water to be ‘traded’ between water users in order to meet increasing industrial demand due to economic development
However, we need to realize that, without actual trading between water users, the so-called ‘water right transfer’ is neither Water Use Permit trading nor water right trading. It is an administrative arrangement of a change in Water Use Permit ownership.
Although it is a quick method to obtain water for new projects, it is still a kind of adaptation and innovation under the current system and circumvents current regulatory limitations in order to meet increasing water demand due to economic development. So the name ‘water right transfer’ (not ‘water right trade’) is more appropriate.
CWR: We know that the North (where the majority of China’s farmlands lie) is heavily reliant on groundwater. Do any of China’s water permit transfer schemes include groundwater?
JSF: No. Groundwater has not been included in the current systems.
CWR: How does a company go about getting a Water Use Permit?
JSF: Companies need to apply for the Water Use Permit. However, before applying companies need to pass a water resource project assessment. The application and approval of a Water Use Permit is determined by the “Water Law of the PRC” (2002) and the Regulation for Water Drawing Permit and Collection and Management of Water Resources Fee (2006).
A Water Use Permit is usually valid for 5 years. The permit owner needs to submit a renewal application to the original approving authority at least 45 days before the expiry date. The approval authority should make a decision before the permit expires.
CWR: What are your current views on China’s water rights system? Can it ensure effective water management?
“Under China’s current water rights system, the interest of the State as the owner of water resources is not well protected; neither is the public’s. ”
JSF: Under China’s current water rights system, the interest of the State as the owner of water resources is not well protected; neither is the public’s. Overall it has the following issues that hinder more effective water management:
Confusion over the State’s role as the owner and the government’s role in administration
The State currently plays a dual role: as the owner of water and as the protector of a public good. There are obvious conflicts of interest.
As the owner, the State should maximise the return through allocation of water resources & collection of fees, but then water will be exploited instead of protected. As the protector of a public good, the administration should focus on maintaining public order and protecting public interest, in particular reducing negative externalities. By fulfilling this role, the government may not effectively manage water – currently the State only receives around 10% of water resource fees whereas the remainder stays in the province. But as the owner of water, should it not be receiving more?
‘Water right’ is not a a property right
Neither the water quota allocation nor the Water Use Permit is a water right in the strict sense of property right, since the ownership in either of these two systems is not clearly defined. Moreover, the current transfer of Water Use Permit does not involve trading between specific users, so the owner of the property (water) is also unclear.
Lack of specific regulations for water rights
For example, in the Water Law of the PRC there is no single word mentioning ‘water rights’, let alone a definition of ‘water rights’.
Lack of market-based water rights trading system
In China, there is still no water right trading except for the transfer of Water Use Permits which is regulated by the government.
Water quantity and water quality are not associated
Water quota allocation only measures the amount of water and there are no regulations with regards to water quality. Water that is heavily polluted is of no use and as such, any quota allocation would be of no use.
CWR: So moving forward, what are your suggestions for the current system?
JSF: Firstly, we should let the market play the decisive role for resource allocation. After all, water resources are also a kind of economic resource and should follow the basic economic principle of resource allocation.
“Let the market play the decisive role for resource allocation … After all, water resources are also a kind of economic resource”
We shall accept the fact that having access to water is a human right and preserving ecological water use will benefit the public, both of which could be primarily managed by the government. However, for economic water use, it should be allocated by market mechanism.
Meanwhile, we should promote the clear classification of water rights at each level of adminstration – from central government to grassroot-level government or down to irrigation districts. Each category of water rights should be clearly defined:
- Once the exact amount of water is allocated, it should not be easily adjusted through administrative measures;
- The Water Use Permit should be applied to all users; and
- All the elements of the Water Use Permit should be clearly defined, including water quantity, water quality, time, location and requirements for water discharge.
“Water rights should be elevated to the level of property rights”
Furthermore, water rights should be elevated to the level of property rights so as to receive the same protection as such rights . To achieve this, ‘water rights’ should be clearly defined in the Law of Property Rights and the interests of water rights owners should be protected.
In the end, we could establish a market-based water rights trading system which allows free trading between different water users, so that the market itself could function to promote efficient allocation of water resources.
CWR: The MWR recently proposed a national market for trading water rights. It is not clear whether this will be an extended version of China’s current trading systems or a whole new one. What are your thoughts?
JSF: The proposed national water rights trading market by MWR is a big and also meaningful step towards reforming water resources management.
“The proposed national water rights trading market by MWR is a big and also meaningful step”
The imbalance of water resources allocation can be adjusted through market mechanisms, which can not only help alleviate water shortage in some areas, but also provide incentives to water conservation.
This has clear advantages over water allocation by the government, which tends to be not flexible and lacks incentives.
Many questions still remain …
… let’s wait and see
As I mentioned before, the current system is still at the stage of ‘water right transfer’ and does not have a long term view as it is limited by the 5-year validity period of the Water Use Permit.
Many questions still remain: how to establish a real water rights trading market? How to set the rules? What will be the benefits? Let’s wait and see.
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