Water, again

July 15th, 2005

My piece on water in last week’s Fin (over the fold) got a couple of interesting responses. Before talking about that, thanks as usual to everyone who help me sort out my thoughts and particularly to Jason Soon at Catallaxy who noticed the interesting difference of views between Costello and Howard on the issue of urban-rural water trade.

One response was a letter from Gary Nairn, Howard’s Parliamentary Secretary, backing away a bit from the comments I quoted and criticised here and in the Fin piece. This was interesting, as I don’t often get ministerial responses to Fin pieces, and my criticism was pretty moderate. I suspect it was not so much the criticism of Howard as the praise of Costello that elicited this.

Also a writer from Canberra argued that, rather than buying water from Murray irrigators (the ultimate recipients of flows from Tantangara) Canberra should simply take more out of Googong Dam and leave less for the Murrumbidgee irrigators downstream. I’ll need to look up the relevant agreements to see who is supposed to own this water. Independent of who pays, though, there’s the argument as to whether extra water for Canberra is better sourced from the Murray or from the Murrumbidgee. I’ll need to look at this again.

Water dilemma flows on

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 currently 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 prices of water 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 US a decade or so ago, but the issue has never 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.

Similarly, points apply to water. There are reasons to be careful before moving to unrestricted trade in water rights. Poorly thought out moves 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 currently 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.

Categories: Economics - General, Environment Tags:
  1. Tom N.
    July 15th, 2005 at 18:47 | #1

    The analogy with farmland makes the issue so much clearer – its a nice device, which I hope you won’t mind if I plagiarise!

  2. SJ
    July 15th, 2005 at 19:02 | #2

    Also a writer from Canberra argued that, rather than buying water from Murray irrigators (the ultimate recipients of flows from Tantangara) Canberra should simply take more out of Googong Dam and leave less for the Murrumbidgee irrigators downstream.

    This doesn’t make much sense to me. Why would ACTEW be proposing to build this expensive system to pump water from the Murrumbidgee into Googong, if there was already enough in Googong?

  3. jquiggin
    July 15th, 2005 at 19:33 | #3

    I think there is only “enough” if the ACT takes water that has already been promised to downstream irrigators.

  4. SJ
    July 15th, 2005 at 19:47 | #4

    I think that the CANBERRA WATER SUPPLY (GOOGONG DAM) ACT 1974 – SECT 11 is pretty explicit:

    Rights to use and control of waters

    (1) The rights to use and dispose of all waters in the Googong Dam Area and to control, restrict or interrupt the flow of all waters in and from that Area are vested in Australia.

    “Australia” here, meaning the federal govt.

  5. SJ
    July 15th, 2005 at 20:10 | #5


    2. The right of the State or of the residents therein to the use and control of the waters of the Queanbeyan and Molonglo Rivers and their tributaries which lie to the east of the Goulburn to Cooma Railway shall be subject and secondary to the use and requirements of the Commonwealth (which are hereby declared to be paramount) for all the purposes of the Territory, and the State shall consent to the construction by the Commonwealth in the State of such works as are necessary for those purposes.

    (Googong is on the Queanbeyan River)

    And please check your e-mail, John.

  6. July 16th, 2005 at 00:44 | #6

    Is there any research anywhere on water loss because urban pipelines are receiving a lot less maintenance than they used to? One of the techniques for maintaining a lean and hungry public sector seems to be spending much less for basic maintenance of existing infrastructure.

  7. July 16th, 2005 at 01:43 | #7

    The analogy with farmland conversion can be taken too far, like many analogies. I remember once being told that the best agricultural land was used for cities, when – ideally – poorer land could have been used. The reason given was that cities were established with good hinterlands, and grew in the same locations rather than hiving off elsewhere because of the network externalities. It would have taken a lot more deferred gratification for the founders to choose sites that would have given optimal land use now.

    I don’t believe the same argument applies to water, at any rate that strongly. Land is less mobile than water (obviously), and this makes a material difference.

  8. hermit
    July 16th, 2005 at 12:52 | #8

    It looks like a food vs. hot air debate will emerge on Canberra’s water needs. I’ve pointed out before that x% of Googong-Molonglo water eventually passes to the Murrumbidgee via people’s kidneys. Another high capital cost option to add to the mix is a 20KL rainwater tank for every house in Canberra.

  9. July 16th, 2005 at 12:58 | #9

    P.M.L., I am not sure that argument about cities and farmland is correct. Cities perform better in certain geographical conditions: access to ports, rivers and water and flat easily traversed areas, that also happen to be where the best farmland is. The law of comparative advantage will apply, in that, if a city built on good farmland is substantially better than a city built on poor farmland then that might be a better use than farming. With modern transportation and communications the difference between well placed and poorly placed cities may may be less significant, so we may be suffering from a historical legacy, but I’m reasonably certain it would have held until relatively recently.

    Also, while land is less mobile, some land-uses aren’t. Pumping water uphill is extremely expensive, and there aren’t many places where catchments can be built that are on one side of a mountain where the water can be tunneled across and down to the other side (ala the Thomson Dam in Melbourne). Over the long term it may make more sense to build up the infrastructure and populations of our inland regional centres.

    JQ, I have a question too, regarding water trading. Given the volume of water available is highly variable, you can’t just give a fixed allocation because you’ll end up over-allocated during a drought. A period that also corresponds with higher demand, particularly in cities because people start watering their gardens. So, how do you propose we allocate water rights in the first place, given the time, volume and geographical constraints?

  10. gordon
    July 16th, 2005 at 13:53 | #10

    Alan, not in Australia (without doing a web search), but “Natural Capitalism” (Hawken, Lovins and Lovins, 1999) gives references to savings from fixing urban distribution systems in NY, Bombay, Manila and “the average US city”.

  11. gordon
    July 16th, 2005 at 14:06 | #11

    The report “Future Dilemmas” (CSIRO Resource Futures Working Paper 02/01, Foran & Poldy, Oct. 2002) provides useful estimates of water requirements for agriculture, industry and cities based on projections of population growth to 2050 and models of materials usage. It usefully reminds us to consider water quality as well as quantity. New York’s purchase of a whole catchment is an interesting option (p. 100)!

  12. July 16th, 2005 at 22:02 | #12

    RD, I was very careful to state that about city sites as something I had been told, not something I was claiming for myself. It is one plausible factor among many, however. Furthermore, we have some natural experiments that show the network effects in action. Both Newport in Rhode Island and Port Fairy here suffered a similar early accident. In each case a ship was lost and the financial stress slowed growth so it never caught up with adjacent settlements.

    On the matter of mobile land uses, I agree that it isn’t a simple fact (which is one reason single taxers are over-simplistic). But in my view the main complication is that water is not as easily moved as all that – see the WA canal scheme discussed hereabouts.

    In particular, there are very few better alternative water uses for the particular water used in Murray rice growing. One of many issues is the downstream use of water during value adding, but there are many others. From an opportunity cost point of view, unless you moved other land uses to the Murray, rice makes more sense than an across the board comparison suggests.

    However, the rice question is complicated by more than just water – it has flourished independently of government planning, indeed kept government assistance off its back since the ’50s, so it has no bureaucratic constituency lobbying for it now. [Irony alert]Silly people, didn’t they know government assistance was going to help them, even if only from sovereign risk changing water rights?[/Irony alert]

  13. SJ
    July 16th, 2005 at 23:18 | #13

    “This doesn’t make much sense to me. ”

    Now that I’ve seen the letter, John, your paraphrase:

    Also a writer from Canberra argued that, rather than buying water from Murray irrigators (the ultimate recipients of flows from Tantangara) Canberra should simply take more out of Googong Dam and leave less for the Murrumbidgee irrigators downstream.

    isn’t quite accurate. The letter writer said:

    The ACT uses only 35 gigalitres net of its 494 gigalitres in water resources. It exports 94 per cent of its water to Burrinjuck for use by irrigators downstream free of charge. The ACT never over-allocated its rivers and has a surplus of 225 gigalitres for human use over and above all environmental requirements. So why would it be rational for Canberra to pay to get back a part of what it is giving away free?

    The letter is obviously based upon the following passage from ACTEW’s FutureWaterOptions document:

    Is the ACT water poor?

    Currently, the average runoff from the catchments within the ACT’s control is 494 GL per year. More than half that total (272 GL/yr) is allocated to the environment and the remainder (222 GL/yr) is available for human use. ACTEW extracts 65 GL/yr (less than 1/3 of the human use allocation) and about half of this is returned to the Molonglo River after treatment at the Lower Molonglo Water Quality Control Centre. The Molonglo River flows into the Murrumbidgee River and eventually into Burrinjuck Reservoir from where the water provides environmental benefits and is allocated to downstream users. The ACT stores and uses relatively little of the water available to it (only 6%)…

    The ACT is therefore water rich relative to its population. It has enough water under ACT control to meet the environmental requirements and to supply more than a million people, however storage is currently limited…

    ACTEW hasn’t explained its case very well, but if I may read between the lines a bit, what they’re concerned about is very similar to the situation facing Sydney.

    On average, the inflows to Canberra are more than enough. However, Canberra doesn’t store much of this inflow. What happens during a sustained drought? The inflow disappears, and that’s a problem.

    There are two obvious solutions for maintaining supply: store more of the inflow, and use it during dry years, or get water from somewhere else during the dry years. It’s not a matter of taking more, because in a dry year, it simply isn’t there to be taken.

    So the questions that ACTEW are running through are:

    – Can we store more? What are the dollar costs, what are the environmental costs?

    – Can we get it from somewhere else? Are those dollar costs higher or lower that for the storage option? Is the environmental cost higher or lower?

    – What’s the political tradeoff between dollar costs and environmental costs?

    (Disclosure: I live in Sydney, and I don’t get paid by ACTEW, Sydney Water, the Sydney Catchment Authority, nor any of their contractors, nor any prospective tenderer for any dam or pipeline or desalination work proposed in the ACT or NSW).

  14. SJ
    July 16th, 2005 at 23:40 | #14

    what they’re concerned about is very similar to the situation facing Sydney.

    I should expand on this a bit vis-a-vis Sydney. Water usage in Sydney is something like 630 GL/pa, and the average inflows into the catchemnts are about 2,100 GL/pa.

    600 GL/pa of that inflow goes into the main storage system: Warragamba, Nepean, Avon, Cataract, Cordeaux, Woronora Dams, having a total storage capacity of about 2,300 GL, or about 4 years of inflow.

    The other 1,500 GL/pa of inflow goes into Tallowa Dam, which can store only 90 GL, or about 3 weeks of inflow.

  15. Tom Davies
    July 17th, 2005 at 01:17 | #15

    So if we could expand Tallowa significantly, that would help Sydney a lot?

  16. July 17th, 2005 at 11:20 | #16

    The issue of high water use from the establishment of monoculture tree plantations in Australia has not been mentioned.

    This is a major crisis already in Tasmania where short rotation tree plantations (grown for pulp) are replacing native forest. The water used by such agroforestry operations -a tax deduction driven ‘enterprise’ that takes advantage of the quick growth of young trees- is immense compared to the low water consumption of older mixed-age and mixed-species indigenous forests that are replaced by the former.

    The respected Hobart geologist and geophysicist Dr David Leaman says that even if this practice stopped immediately “this annual water deficit would rise to about a million megalitres over the next few years – a water shortage equivalent to two Olympic-size pools per Tasmanian, per year./ /”?.Dr David Leaman says Tasmania has already reached the first stage of what he terms “desertification” caused by plantation forests soaking up so much from groundwater storages. * He names rivers whose catchments he says are drying up or failing to cope as a direct result – the Meredith and Swan Rivers on the East Coast, North Esk and St Patrick, in the Launceston area, Brid, Great Forester and Georges Rivers in the North-East* – and points to many instances of farmers whose springs, bores and wells have dried up or where the water level had dramatically fallen, directly because of the competition by plantation forests for the available water.”/

    Reference: Richard Flanagan replies to Peter Volkers *By RICHARD FLANAGAN* Tasmanian Times *Sunday, April 25, 2004*

    This problem will be apparent wherever corporate tree plantations exist in Australia – Eden Monaro, WA, Melbourne and Canberra’s water catchments and that of Southern Queensland.

    My website to-date has focussed on water quality issues in Tasmania related (mostly) to the huge increases in pesticide use from such Government sponsored corporate activity. http://www.geocities.com/rosserbj

    And then there’s the long list of social and economic issues that arise from the huge transfer of land from families and public ownership in the last decade (in particular) to a handful of ‘forestry’ corporations.

    For more information go to:
    http://www.edo.org.au/edotas/ Leaman%20-%20Plantation%20Forestry.pdf

  17. July 17th, 2005 at 11:37 | #17

    “Between 1994 and 2004, the proportion of households which purchased bottled water increased from 3% to 21%. ”
    (Australian Bureau of Statistics)

    “The cost ratio of bottled water to New York city tap water is 1000 to 1”
    (Troubled Water, Anita Roddick)

    “3 million gallons of water are needed to produce one days supply of newsprint in the US”
    (Troubled Water, Anita Roddick)

    “The water crisis results from an erroneous equation of value with monetary price. However, resources can often have very high value while having no price. Sacred sites like forests and rivers are examples of resources that have high value but no price. Oceans, rivers and other bodies of water have played important roles as metaphors for our relationship to the planet. …

    Conservation is based on sacred values and ecological values. Sacred waters have no price, they cannot be commodified. Market value destroyes spiritual and ecological values.

    Markets create incentives for overexploitation, not for conservation or equitable distribution.

    (Troubled Water, Anita Roddick)

  18. July 17th, 2005 at 12:08 | #18

    PML, I know. That is why I called it “that argument” instead of “your argument”. Nor was I disputing the theory itself, but rather the idea that it might have been better to build them on poor farmland. The economic effect of their placement is significant and ongoing, at least until the present day. I don’t think it applies to suburbs, they are the result of man-made infrastructure (train lines and roads). Sorry for the misunderstanding.

  19. jquiggin
    July 17th, 2005 at 13:31 | #19

    “JQ, I have a question too, regarding water trading. Given the volume of water available is highly variable, you can’t just give a fixed allocation because you’ll end up over-allocated during a drought. A period that also corresponds with higher demand, particularly in cities because people start watering their gardens. So, how do you propose we allocate water rights in the first place, given the time, volume and geographical constraints?”

    John Freebairn and I look at this question here (PDF file)

  20. July 17th, 2005 at 15:32 | #20

    thanks John, that addressed a few of the problems I’m having envisioning a functioning water market.

  21. SJ
    July 17th, 2005 at 18:39 | #21

    So if we could expand Tallowa significantly, that would help Sydney a lot?

    Yep. The original idea was to build a much larger dam further to the south at Welcome Reef, which is roughly halfway between Ulladulla and Canberra. The current state government has placed the project on indefinite hold, but it may still go ahead someday.

  22. James
    July 17th, 2005 at 22:43 | #22

    Hi John, this post is interesting reading. Do you have a view on Bob Carr’s plans for desalination instead of dams?

  23. jquiggin
    July 18th, 2005 at 07:49 | #23

    I haven’t had time or found enough info to do a proper analysis of Carr’s desalination proposal. But my gut reaction is that this a premature move, maybe a rushed response to inadequate planning earlier. More soon on this, I hope.

  24. gordon
    July 19th, 2005 at 10:43 | #24

    I was saddened to see that the paper you linked to above seems essentially to represent a surrender to vested interests in water. The paper amounts to a sustained attack on the very sensible idea first proposed by the Wentworth Group in 2002 of allocating shares of available water rather than actual volumes (http://www.wwf.org.au/News_and_information/Publications/index.php?offset=15). That proposal directly addressed the water scarcity and variable supply problems endemic to Australia. To seek to revert to a system of perpetual actual entitlements (“high security entitlements”) grandfathered on the basis of existing rights is, to my mind, very retrograde.

    I have a couple of specific problems with the paper (Freebairn and Quiggin 2005) you linked to.

    First, the supposed superiority of the “actual volumes” model with two levels of entitlement relies on there being fewer trades of allocations. But the whole benefit of a market-oriented water system is derived from price accurately tracking scarcity. The fewer the trades, the less this is likely to happen. The larger number of likely trades you state would be associated with the “share of available flows” model actually looks like an advantage from this point of view, other things being equal.

    Second, you liken the difference between entitlement and allocation to the difference between owning a share of stock and a dividend. To me it looks like simple asset and rent, with short-period “sale” of allocations really being rent of an entitlement. How is rent-seeking to be avoided?

  25. July 19th, 2005 at 21:59 | #25

    Land is the single largest item in national wealth. Will the ‘corporate squattocracy’ in Australia (the land grab Laurie Aarons, 1999:23, mentions) control the water rights on the huge tracts of agricultural and plantation lands now owned by them?

    That is, will it be one of the many unearned gains resulting from their taxpayer sponsored land ownership?

    What will be the implications be now that 20% of freshwater samples in Australia (with the exception of the Northern Territory) are contaminated – presumably at any one time – with pesticides?

  26. SJ
    July 19th, 2005 at 23:05 | #26

    To me it looks like simple asset and rent, with short-period “sale� of allocations really being rent of an entitlement. How is rent-seeking to be avoided?

    I have no idea what your background is, and so please take this response as an attempt to be helpful.

    The term “rent-seeking” is a term of art, which does not really relate to the rental or lease of assets. Rather, it refers to extracting payments or entitlements from governments or consumers without giving any value in return.

    There almost certainly will be rent-seeking involved in the allocation of water rights.

    The sale of short term allocations, however, is not an example of rent-seeking.

  27. jquiggin
    July 20th, 2005 at 07:15 | #27

    Gordon, I’m not following your criticism at all. Grandfathering of existing rights is logically separate from the structure of the rights and would certainly happen under the Wentworth Group proposal, given the political weight of the irrigators who hold these rights.

    The issue is one of risk management, and the structure of rights we propose does a better job than a proportional sharing rule. Undoubtedly either proposal has equity effects, but they are far too complex to assess using terms like “retrograde” and “vested interests”.

  28. gordon
    July 20th, 2005 at 10:41 | #28

    Prof. Quiggin, as far as I can see the Wentworth Group in its paper “Blueprint for a National Water Plan” (July 2003, not 2002 as I mistakenly said above) anticipates some reduction in existing rights. To say that “grandfathering of existing rights is logically separate from the structure of the rights” cannot mean that, if the structure of rights is to change, existing rights can be continued unchanged. There must be a method of either abolishing and replacing, or of restructuring them. How that is to be done is moot, but done it must be. Reductions (under Wentworth) are likely to occur for those holding unused or inefficiently-used rights. The paper says (p.16) “Many irrigators have, for example, benefited financially from recent changes and stand to benefit further from the increased security and trading opportunities outlined in this Blueprint. If these reforms are implemented, many could contribute a significant proportion of their current total water use towards environmental flows and still be better off”. The Blueprint does suggest some compensation where unfairness may result from the proposals, but not for “existing entitlement holders who are not genuine water users, such as people holding onto ‘sleeper licences’ “. As far as risk management is concerned, your sensitivity to “the political weight of the irrigators” seems to create a huge risk of what I call rent-seeking by large owners of entitlements. The proportional allocation proposal in the Wentworth paper seems to me to reduce this risk.

    Which brings me to SJ and the Wikipedia reference he gave. Where large-scale owners of entitlements “sell” short-term allocations from their entitlements for a season or less at rates which may well reflect oligopoly or monopoly structures, I think we are within the definition given in the reference. Wikipedia links to EDC News (http://www.edcnews.se/Research/RentSeeking.html), where the discussion and further links reinforces this belief. And no, I am not an economist.

  29. jquiggin
    July 20th, 2005 at 17:56 | #29

    Gordon, I repeat that the question of the treatment of variability in water rights has nothing to do with the issue of how much rights will be cut back in aggregate and who will bear the cost of this.

    It’s clear (and agreed in the NWI) that there has to be a once-off reduction in allocations for over-allocated catchments. This will be done in part by eliminating some rights altogether (ideally including sleepers, but it looks as if that horse has bolted) and partly by scaling down allocations on a proportional basis.

    This is totally separate from whether year-to-year fluctuations in availalability should be dealt with by proportionally reducing all allocations (current practice in some states) or by having different classes of water rights (current practice in others).

  30. gordon
    July 21st, 2005 at 16:52 | #30

    Prof. Quiggin, things are getting a little confused. My original comment sought to (a) defend the Wentworth Group proposal of allocating shares of available water rather than allocating actual volumes (in megalitres or whatever) as I understand your proposal (Freebairn and Quiggin 2005) would do, as well as attack your grandfathering of existing rights even where water is over-allocated (p.19) and (b) clarify two points in your proposal – why fewer trades are said to be better, and the risk of rent-seeking by large-scale entitlement holders. Obviously, my problem with your proposal largely arises from my fear that it will create a group of “water barons” able to manipulate prices and supply in a trading system either by grandfathering, or by entry of cashed-up new investors, or both.

    The Wentworth Group (Blueprint for a National Water Plan, 2003) suggested variable entitlements: “Entitlements would be specified as a perpetual share of the available water resource in any season, rather than a specific volume” (p.12). I assume, from other statements in the Blueprint, that this perpetual share would be a share of a variable amount of water available for consumption – what the National Water Initiative calls “consumptive pool”. The alternative is, of course, entitlement to a specified volume of water. A shift to a Wentworth-type entitlement would present difficulties for current holders of the latter sort of entitlement, so that such a change in the structure of the rights would certainly affect how they could be “grandfathered”. This strikes me as another advantage of changing to a shares system, because it would force reconsideration and maybe reduction of existing volume entitlements rather than allowing them simply to be carried over intact and unexamined as your proposal seems to do.

    Whether we end up with a Wentworth-like shares system now seems to depend on the “consumptive pool” of the NWI. If it is varied regularly according to water availability, we have a shares system. If it becomes fixed in size, or is varied only in extreme circumstances (as a desperate measure in a really bad drought), we effectively end up with the old volume entitlements all over again. I suppose, in the context of the NWI, your proposal would imply the latter.

    I am glad you think the NWI proposals will involve reductions in entitlements – the NWI itself simply includes an agreement to develop “pathways” by each State to address over-allocations. I don’t know if any State has yet defined its “pathways”.

    I’m sorry if my original comment was obscure. Hopefully this rather long explanation will put everybody on the same page.

  31. jquiggin
    July 21st, 2005 at 17:51 | #31

    Gordon, here’s what the paper said

    A final issue concerns the initial allocation of property rights for water. From the perspective of efficiency, the Coase theorem indicates that trade from any initial starting allocation will lead to an efficient allocation in the long run (Coase 1960). The current reality is that, in most cases, available water is fully allocated, if not over-allocated, and existing users perceive that they own the water rights, even though the legal basis for the perception is fuzzy at best (Goddin 2003). In these circumstances, widely-held views on distributional equity favour a grandfather arrangement whereby the new property rights are allocated to current users. In cases of over-allocation, or where water is to be reallocated from extractive uses to environmental flows, reductions in usage could be achieved without violating rights, by government purchase of rights or by specifying the rights to have a schedule of declining entitlements to water in the future. A further option would be for governments to purchase reversion rights when current licenses expire (Quiggin 2004).

    I honestly can’t see how you can assert that this can be said to endorse grandfathering, as opposed to saying (correctly) that it is widely supported.

    Note in particular the reference to the option of “specifying the rights to have a schedule of declining entitlements to water in the future”. This is, as I see it, exactly what the Wentworth group proposed.

  32. jquiggin
    July 21st, 2005 at 20:44 | #32

    On rethinking, Gordon, if that’s how you read it, then we should have written it more carefully. I’ll address this in the next revision.

  33. July 21st, 2005 at 22:01 | #33

    Could someone please clarify?

    JQ: “widely-held views on distributional equity favour a grandfather arrangement whereby the new property rights are allocated to current users.”

    There seems to be a constradiction here. Are we talking about a system whereby existing landholers are allocated water rights that they can then trade? Are they allocated these ‘rights’ FREE of charge to begin with?

    If that’s the case then we’re not talking about a market system at all – since access to water has been a gift to chosen beneficiaries to begin with. A judgment has been made to ‘allocate’ significant economic and social power (by way of granting control over water).

    And what does the term ‘current user’ mean in the above sentence as it applies to water. We ALL use water, don’t we?

  34. jquiggin
    July 22nd, 2005 at 06:44 | #34

    There are indeed big contradictions here, Brenda. The rights were initially allocated free of charge as you say, and tied to particular blocks of land. In many cases, the land has been resold, at a price that incorporates the value of water rights. Those who’ve bought the land, not surprisingly, think of the associated water as theirs, and this view is widely supported in the community. The sellers made windfall gains.

    In subsequent ‘reforms’, these rights have been made tradeable. There are some benefits to this, but it has certainly resulted in more windfall gains for some, particularly the owners of ‘sleepers’ (allocations that were never used). I’ve written a fair bit about this.

    Although irrigation is the biggest use of water, it’s true of course that we all use water. And most people in cities, including me, assume that we have a ‘right’ to water, though we don’t have any explicit rights, and of course we can be subject to various kinds of restrictions in periods of water shortage.

  35. gordon
    July 23rd, 2005 at 10:03 | #35

    Prof. Quiggin, it seems everybody is now clear about positions on grandfathering. Are you interested in commenting on the other issues I raised?

  36. July 23rd, 2005 at 11:09 | #36

    Thanks for clarify, John.

    I’m also rather vague on the term ‘sleepers’ used in the following paragraph:

    “It’s clear (and agreed in the NWI) that there has to be a once-off reduction in allocations for over-allocated catchments. This will be done in part by eliminating some rights altogether (ideally including sleepers, but it looks as if that horse has bolted) and partly by scaling down allocations on a proportional basis…”

    Does that mean we’ll have a situation where those landholders that use the water that goes through their property for environmental (and other forms of non-exploitative purposes) are expected to have their ‘rights’ taken from them?

    A situation like this occurs in the ‘forest’ (mostly forest destruction) industry where organisations/groups/individuals who wish to purchase forests for purposes other than logging are disbarred from auctions. (Yet another example of the ‘market’ system in operation).

  37. jquiggin
    July 23rd, 2005 at 12:36 | #37

    “Sleepers” refers to irrigation licenses that were allocated to a block of land but never used. These became tradeable and therefore valuable as a result of the ‘reforms’ of the late 1990s. The issue of non-consumptive uses is important, but mostly separate, except in cases where environmental groups or governments buy rights from irrigators and use them for environmental flows.

    Gordon, fewer trades are generally better because trade is costly to organise and implement.

    As regards the possible rise of ‘water barons’, this is again a somewhat separate issue from the way in which rights are specified, though there is obviously going to be some interaction.

    There are a couple of different ways in which this term could be introduced. First there are big enterprises like Cubbie Station that have, and use, large water allocations. I have plenty of concerns about Cubbie, but they would be much the same whether or not water was tradeable. They were given lots of water very cheaply, at a time when it was clearly a scarce resource, and this should not have been done.

    The second possibility, more relevant to market design issues, is the possibility that large-scale investors, not engaged in agriculture themselves, will acquire big allocations of water rights and extract monopoly rent from irrigators and other water users. I think this is probably the kind of thing you are concerned about.

    I haven’t investigated this issue in detail, but applying the strategy of mentally substituting “land” for “water” suggests to me that this probably won’t happen. We don’t have “land barons” in this sense, that is, large-scale landowners who rent land out to farmers , and there are good economic reasons why we don’t. Some of those will apply to water and some will not, but the general point, as in our article, is that such an arrangement will incur a lot of unnecessary transactions costs.

    Hope this helps.

  38. July 23rd, 2005 at 13:09 | #38

    John, we DO have “land barons�. Gunns Ltd (the monopoly forest corporation in Tasmania) owns over 60% of the Burnie municipality in Tasmania. Effectively they control the water catchments for the city of Burnie and other coast townships such as Wynyard, for example.

    I expect that a handful of corporations would own a similar percentage of the Waratah-Wynyard municipality (where I live) and look like they are aiming to achieve (if they haven’t already) similar land ownership control in North East Tas and many parts of Victoria, southern WA and other areas.

    This change has happened very quickly – over the last 10 years.

    At present the land they own is not generally rented out to farmers but the Tasmanian State Government are trying to encourage this new form of arrangement because very few people can now afford the inflated land prices on the farming blocks remaining.

    If these corporations now enjoy tradeable irrigation licences then this is likely to herald the birth of ‘water barons’ in the hinterland behind major cities and rural townships.

    Stories are beginning to appear in the media on a regular basis regarding the accelerating loss of farmland to these tax-and-other-subsidy driven corporations. See: ‘Blue Gum Dairy Alarm’

    “…About 60 dairy farms around Heytesbury have been sold for use by blue gum plantations over the past three years.”..

    “”We are gradually seeing our community shrink, as dairying families
    disappear,” he said.

    “Our schools and community groups are suffering, and so are the local grain
    and machinery stores.”

    He said dairy farmers who were selling out to the trees were benefitting.

    But it was getting increasingly hard for younger farmers to buy into the

    “Every time a farm is sold to trees, it gets harder for our young farmers to
    get in,” he said.

    “This is the prime dairying region in the country and our farms are
    disappearing before our eyes.”


    Do you know where one can source the stats on land ownership in Australia?

  39. July 24th, 2005 at 11:19 | #39

    I’m curious about the concept of ‘environmental flows’? Does that refer to rivers only?

    Again, there appear to be parallels here with the forest industry whereby only the forests set aside for ‘conservation’ are left intact. [Which is not an accurate assessment as it is with much illegal logging and breaching of the forest reserves, and so forth.]

    ‘Conservation’/’environmental flows’. It all the same thing it seems. All our natural resources are up for grabs except the tiny pockets that enjoy genuine protection.

    The allocation of tradeable ‘water rights’ year in year out would not be a one off windfall. Isn’t it potentially the granting of the ‘right’ to ‘suck many of us dry’, on an ongoing basis.

    In Tasmania many of our rivers and streams are losing their ‘environmental flows’ due to the very heavy uptake of water by fast growing plantation trees on vasts tracts of corporate land. Where does water trading and allocation come into the picture here?

    Dr David Leaman, a noted Tasmanian geohydrologist, will give a presentation at the University of Tasmania’s Cradle Coast Campus (Burnie) on Wednesday night , 27th July 2005 between 7pm and 9pm.

    The talk is entitled: ‘The Mismanagement of Tasmanian Water Resources’.

    Dr Leaman understands that the problems created by such mismanagement are leading Tasmania into environmental and economic chaos.

    Listed concerns are: dam storages, wastage, irrigation, forestry and environmental flow.

  40. gordon
    July 25th, 2005 at 09:45 | #40

    Sounds interesting, Brenda Rosser. Will the talk be available on the internet?

  41. July 26th, 2005 at 11:29 | #41

    I’ll see if this can be arranged (with Dr Leaman’s permission).

    Meanwhile you might want to check out the following links:

    Scientist warns on catchment logging
    By FRAN VOSS, Sunday, 31 August 2003

    Geohydrologist Dr David Leaman discusses Tasmania’s water situation.
    Reporter: Ticky Fullerton
    Date: 16/02/2004

    Broadcast: 19/07/2004
    Aerial spraying report renews health concerns
    LOCATION: http://www.abc.net.au/7.30/content/2004/s1157381.htm

    Days when it was progress and be dammed

    The bottom line is that our water problems are the result of our land use decisions. We should be able to see how the ‘market’ mechanisms and ‘market’ mentality have destroyed the world’s forests. The World Rainforest Movement have some very good articles on the latter topic at http://www.wrm.org.uy

    Brenda R
    PS: Theres a very good article on the Net entilted *THE RELIGION OF THE MARKET* written by David R. Loy

  42. July 26th, 2005 at 11:51 | #42

    An associated issue is the proposed new Gunns Ltd Pulpmill for Tasmania. (Gunns Ltd could easily be described as Tasmania’s ‘water baron’. Not satisfied with holding vast quantities of Tasmanian land and forests the corporation now has its eyes set on Victorian farmland.)

    Cash-gap dam given nod
    THE controversial Meander dam will be built, despite an admission by the State Government the project does not make financial sense.

    Flow-on benefits Gunns’ new mill
    A SIDE benefit of the Meander Dam go-ahead will be that the supply of water in summer will be more assured for Gunns’ proposed $1.3 million pulp mill.

    Pulp mill to use as much water as cities
    GUNNS Ltd’s controversial $1.5 billion pulp mill in northern Tasmania will consume as much water each year as the cities of Launceston, Burnie and Devonport combined – despite record low dam levels in the state.

    $30m pipe plan angers river advocate

  43. July 28th, 2005 at 21:19 | #43

    For further reference:

    Issues of Water Use and Management in Tasmania
    Dr David Leaman (geohydrologist)


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