Over time, water prices need to move to their own level, argues John Quiggin
DESPITE the recent rains, the problem of water shortages in Australia is not going to go away. The problem is not one of inadequate total supply (on a per-person basis, Australia has plenty of water), but one of competing demands for water in specific locations. Politically determined boundaries can make a big difference, and a dispute over these boundaries has opened up within the commonwealth government.
One of the biggest issues in water policy is whether water allocated to irrigation should be transferred to cities, either through administrative fiat or through unrestricted trade in water markets.
Treasury secretary Ken Henry has called for water prices to be equalised between urban and rural users, something that would happen naturally with unrestricted trade. Treasurer Peter Costello has been less explicit, but has spoken in glowing terms of the merits of national markets in water and energy.
By contrast, the prime minister has set his face firmly against the idea. His parliamentary secretary, Gary Nairn, has said ‘cities must learn to use the water they had more efficiently before they considered buying irrigation water from outside their catchments’ and even appears to support stringent restrictions on trade between rural catchments.
A useful way to think about this issue is to mentally substitute ‘land’ for ‘water’. Cities have always grown by converting farmland to residential use. Concern about the resulting loss of productive capacity was a hot topic in the United States a decade or so ago, but the issue has not gained much traction in Australia.
There are good urban planning reasons for keeping green space, including farms, but few would support a general ban on the conversion of agricultural land to residential use, or requiring cities to accommodate all future population growth within their existing boundaries.
Similar points apply to water. There are reasons to be careful before moving to unrestricted trade in water rights. Moves poorly thought out in this direction have produced unforeseen consequences such as the activation of unused, but now valuable water rights (called ‘sleepers’) thereby exacerbating the problem that trade was meant to resolve. Nevertheless, in the long run, water should be allocated to its most valuable process, and the standard way of doing this is through market transactions.
The cost of getting things wrong could be substantial. If the price of water differs greatly in different locations, expensive options for water conservation may be pursued where water is scarce, when cheaper opportunities are available elsewhere in the system. And if transfers of water are regulated improperly, expensive options may be adopted simply because they avoid controls that preclude cheaper alternatives.
Suggestions to require all new houses to have rainwater tanks are superficially appealing, but would cost billions of dollars over, say, ten or twenty years, and would yield only modest savings in water use in many locations, such as those with long dry seasons. It would probably be cheaper to look at reusing stormwater on parks and gardens.
The recently announced project to pipe water to the Wimmera also raises some concerns. The announced cost is $500 million for an annual saving of 100 gigalitres now lost through evaporation and seepage, implying a capital cost of $5000 for each megalitre saved annually. The market price of permanent water transfers in most parts of the Murray-Darling Basin is well below this, suggesting that cheaper conservation options may exist elsewhere. Of course, the fact that water is heavy and hard to transfer means that these prices are not necessarily relevant to the Wimmera, but the issue ought to be looked at.
In general, transferring some water from irrigation use to cities in or near the Murray-Darling Basin, including Adelaide, Melbourne and Canberra, looks like a sensible option in the long term, but careful evaluation is necessary to ensure that this is done in a way that is both environmentally and economically sustainable.
Proposals to transfer water from Tantangara Dam in the Snowy Mountains to the Googong Dam supplying Canberra, via the Murrumbidgee, look interesting and potentially feasible. On the other hand, the recent suggestion that this water could be taken further, to the Wollondilly River at Goulburn and thence to Warragamba Dam for use in Sydney, seems like a pipeline too far.
This is an issue that needs to be handled carefully. In the long run, however, water must be used where its social value is greatest. Implementation of this principle will almost certainly involve market-based transfers between environmental, irrigation and residential users.
Professor John Quiggin is a federation fellow in economics and political science based at the University of Queensland and the Australian National University. His web site is at http://www.uq.edu.au/economics/johnquiggin and his weblog is at http://johnquiggin.com