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Economic rationalism, water and conservation

June 28th, 2005

Following on from yesterday’s post , I note that
Howard has moved quickly to oppose the idea of urban-rural water trade. Putting on my economic rationalist hat, it’s hard to see the rationale for this, and certainly those offered in the article are incoherent.

In thinking about irrigation water and trading, I always find it useful to mentally substitute “land” for “water” and see what conclusions you draw. The analogy doesn’t work perfectly, since water is movable and land is not, but it often works well enough to be helfpul.

To start with lets look at this argument from Murrumbidgee Irrigation Area Commission chairman Dick Thompson

“Selling 15,000 megalitres to Canberra is manageable, but if Sydney wanted to buy 100,000 megalitres that would mean drying out about 2000 high-security farms and that’s a lot of fruit and vegetables to go missing,”

That’s true of course, but I’d be willing to bet many more than 2000 fruit and vegetable farms on the outskirts of major cities have been converted to residential use in the past twenty years. This was a hot issue in the US a decade or so ago, and it’s had an occasional run here in Australia, but it’s never gained much traction. There are good urban planning reasons for keeping green space, including farms, but I don’t think many people would support a general prohibition on the conversion of agricultural land to residential use.

Much the same points can be made in relation to Gary Nairn, who says

cities must learn to use the water they had more efficiently before they considered buying irrigation water from outside their catchments

Again, there’s no general suggestion of applying this rule to land. Sydney’s population could be fitted on a small fraction of its current area if we had the urban densities characteristic of most developed countries.

More generally, Nairn says

“Proposals to transfer water from one catchment to another should only be pursued when all other viable alternatives have been exhausted and only on the basis of rigorous scientific evidence that there won’t be any detrimental impact to those affected river systems … The philosophy ought to be: what have we got, how are we using it and can we use it better?”

But if this means anything, it means that catchments were demand exceeds supply should be compelled to adopt high-cost conservation methods rather than arranging with other catchments to exercise lower-cost options. So water will be wasted where it is plentiful, while it is rationed where it is scarce, with the dividing line being determined by essentially arbitrary catchment boundaries.

In this context, it’s worth looking at another item of news, concerning the Wimmera Pipeline project which replaces a system of open channels running hundreds of kilometres from the Grampian mountains with pipelines. This follows an earlier project covering the Northern Mallee. The project is supposed to save 100GL per year, at a capital cost of $500 million, shared equally between local, state and federal governments. On the face of it, this looks pretty expensive, but I’ll need to look more carefully at the economics.

My main point, though, is that with this kind of money at stake, arbitrary restrictions based on an ill-defined “philosophy” could be hugely expensive, and could lead to less rather than more conservation of water. We really need to adopt a system wide approach here. That doesn’t mean going for unrestricted trade in water rights, but it also doesn’t mean treating trade as a last resort.

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  1. Razor
    June 28th, 2005 at 18:04 | #1

    This shows the Howard Government as the politicians they are, rather than the fabled right wing death beast economic rationalists that the ALP, Unions and journalists try to frame them as.

    I am dissappointed, but it beats the hell out of having the ALP in Federal Government.

  2. June 28th, 2005 at 20:33 | #2

    Australia does not suffer from a water shortage. It suffers from a shortage of dams, storages and pipelines. It is short of these things because we do not build them anymore. We do not build them anymore because environmentalists invariably oppose the construction of them (I think it was Lake Pedder that set them off) and because it suits state governments (who would rather spend resources elsewhere) to capitulate to them.

    In Victoria the Watson’s Creek storage (which would have drought proofed Melbourne until 2050) was abandoned twenty years ago because of pressure from environmentalists. This is why Melbourne suffers from restrictions today.

    Sydney hasn’t had a new dam in decades, despite rapid population growth. There are a number of sites around Sydney where new dams could be built, if it were not for the inevitable anti-dam campaigning from environmentalists. Instead the NSW government is looking at fossil-fuel powered de-salination plants! As Sam Newman might say “absolutely ridiculous”. This is not the MIddle East, we are not short of water. Australia has about 480 km3 (source UN FAO estimates) of annual renewable water resources, or about 26000m3 per capita. To put this into context that is about four times the per capita resources of the United States, eleven times that of the United Kingdom and nineteen times that of Germany. Of course our big reserves are not where we live, but this is merely a technical problem; either we should live and farm where there is water, or bring the water to where we live. But for environmentalists this is quite unacceptable. It would mean a surfeit of bad things like economic development and big engineering projects. Nature would need to be changed, not just left as it is. So we get bombarded with nonsense instead and have our liberties pared away with silly regulations, propaganda campaigns and Dad & Dave solutions like rainwater tanks, etc.

  3. SJ
    June 28th, 2005 at 22:09 | #3

    Maybe the tide has turned, Craig. Earlier this month, it was announced that one of the dams would be expanded. According to the ABC (13/06/05):

    “The Tallowa Dam on the Shoalhaven River will soon have its capacity boosted in a bid to supplement Sydney’s water supplies.

    NSW Premier Bob Carr announced at the weekend ALP conference that construction on the dam would start as early as November next year”

    There hasn’t been much in the way of objection. The Shoalhaven Council has expressed a bit of annoyance about lack of consultation. But I haven’t heard much from the people I would’ve expected to complain.

    The dam wall is only going to be raised by 5 metres, but that’s enough to put a hugely popluar camping and canoeing site under water. Not a peep from the people who use the camping ground. Not a peep from the Colong Foundation. It’s really strange.

  4. June 28th, 2005 at 23:14 | #4

    Can’t find the original sources, but one was quoting that Australians have one of the highest available water per capita in the world (owing to our lower population), and Australian farmers are the worst water wasters.

    Being able to sell farm water to the city is one of the ways for farmers to put a value on the water they have, and allows them a choice how to manage their water.

  5. June 28th, 2005 at 23:44 | #5

    My favourite quote from the story was this.

    “If you allow inter-basin transfers then you’re picking winners and losers, and metropolitan areas are always going to have a greater capacity to buy water than the agricultural sector,” he said.

    Couldn’t have put it better myself. Come to think of it, global trade is really picking winners. I think we should make better use of the wheat we grow rather than flooding the rest of the world market with it and picking ourselves as a wheat winner. And our wool. And those New Zealanders sending us their carpet wool. They really should make better use of it themselves.

    etc etc.

  6. Guardian of the Faith
    June 29th, 2005 at 09:17 | #6

    Again, something of an off-topic post, but it still fits under the heading of economic rationalism and conservation… [Note to JQ, you are welcome to delete my posts if they are too far off the mark. Or, let me know and I'll try not to stray.]

    The Sydney Morning Herald this morning is running a story about Michael Costa’s proposal for a toll road to replace the Sydney-Brisbane Pacific Highway (particularly through the North Coast of NSW). The proposed toll is a mere $50. The idea behind the proposal is that tollroads attract private funding and this would mean that the Pacific Highway could be upgraded sooner. That’s the ‘economic rationalist’ part of my posting…

    Now the conservation part… The tollroad would run parallel to and west of the existing Pacific Highway. The existing highway would remain as a toll-free road (though I suspect it would be neglected until no one apart from 4WD enthusiasts would use it). The environmental impact of a second highway running several hundred kilometres would be substantial.

    One of the big problems is that economic rationalism doesn’t pay sufficient attention to costs to the environment and society. Environmental damage would not cost the tollroad operater all that much. Hence, it makes economic sense to put in a second highway…

  7. Homer
    June 29th, 2005 at 09:34 | #7

    The problem with inter-catchment water transfer is not ideological. It fosters belief in an unending resource and associated profligacy. This is a market failure that can be offset if the politics of the day allow true price signals to show, including internalisation of all externalities.

    Craig’s interesting assumption is that population and its economic and environmental footprint must grow inexorably until all of nature and natural resouces are consumed and only then resort to local capture (not just tanks but stormwater recharge of aquifers), re-use and efficiency. Is it true that economic development can only continue if no resource, no river, creek or forest is spared! The intellectual paucity of this assumption speaks for itself. Alternatively we could stop now we have reached or passed the limit of sustainable extraction to consider alternatives, hopefully not those with even greater economic and environmental costs than our current water supply options. New dams, pipes and desalination only entrench our dependency on cheap energy – not a sensible approach at this point in history.

  8. Homer Paxton
    June 29th, 2005 at 10:21 | #8

    I wish I could write as well as he can

  9. derrida derider
    June 29th, 2005 at 16:30 | #9

    Practise, Homer, practise!

  10. June 29th, 2005 at 17:52 | #10

    Nichola Gruen. You have a point. Perhaps water should be zoned “agricultural” or “industrial” or “urban”, to prevent cities buying all the bush’s water & preventing our agriculture from realising full potential.

    Can’t think who is a winner in our wheat production, except perhaps the countries which buy our wheat, it certainly isn’t ozzi farmers who benefit.

  11. metric system
    June 30th, 2005 at 01:18 | #11

    I don’t think the agricultural objections to inter-basin water transfers are an argument from efficiency. I’m sure the agricultural sector would (after a bit of complaining) be happy to sell water to cities where it is valued more highly. The question is about property rights.

    Correct me if I’m wrong, but the way water rights are allocated now, doesn’t removing water from one catchment to another have little effect on high priority users but remove water from lower priority users without compensation? Therefore the net effect is increased efficiency and a transfer from low priority water rights holders in sending catchments to urban dwellers. It’s obvious why the water rights holders have an incentive to argue against such transfers, and why cities (where the benefits per person are widely spread and small) don’t have anything like the same political clout.

  12. jquiggin
    June 30th, 2005 at 06:39 | #12

    With the trading system as it now exists, cities could buy allocations from individual high-priority users. Adelaide has done a bit of this already, I think.

  13. metric system
    June 30th, 2005 at 08:56 | #13

    Yes, but wouldn’t the big efficiency gains come from the water consumed by low priority users (who get a lot of water in good years for which a higher value use would be to store it for urban needs in future years)?

  14. Homer Paxton
    June 30th, 2005 at 09:12 | #14

    DD, if one does not have the ability practice is irrelevant

  15. jquiggin
    June 30th, 2005 at 09:18 | #15

    metric system, things would work the way you say in a system of capacity rights, which has been proposed, but under the current system, individuals can’t carry over rights from one year to the next – this is handled by the system manager.

  16. metric system
    June 30th, 2005 at 09:47 | #16

    Maybe I expressed it unclearly, but that was my point, I think – that the fact that agricultural users don’t have full property rights over the water (since they can’t do the intertemporal trading that would transfer the water to those that value it more, that is, urban dwellers in bad rain years) means that any water transfers by the system manager come at their expense. Another way of putting the question – who precisely has the rights to sell the water that is used by low priority users in good years? It seems like the answer is ‘nobody’ (assuming the system manager does not play banker). Which is the problem – that low priority users need to be able to be paid not to consume their allocations so they can be stored in the dams for the future.

    But I am certainly not an expert on the system here, and so maybe I am misapplying economic theory through misunderstanding the particular institutional context here.

  17. wilful
    June 30th, 2005 at 16:53 | #17

    Craig, I gotta say, that’s a load of crap, at least in Victoria. All catchments north of the divide are fully allocated, and the Murray river is exhibiting many environmental signs of stress due to a lack of adequate water. Building a few dams would merely stuff up the environment even more, while wasting water on evaporation.Now there are certainly intersting things going on with efficient use and water pricing (and the Wimmera pipeline) but there’s no more water coming through the system. In fact if you believe CSIRO climate change modelling, tehre’ll be a lot less sometime soon.

    As for south of the divide (a much smaller proportion of the State, but including most of the population), do you really think it would just be greenies complaining about a new dam? I think (or rather know) not! The farmers are pretty interested in that as well.

    The solutions are simple – water efficiency measures are cheap and plentiful and will see us through the inevitable population growth. The big uncertainty is climate change – something that desalination plants or pumping massive distances are a bit of a perverse solution to!

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