Rationality and water

Here’s my Fin article from yesterday. It’s a bit economic rationalist in tone, but this is a situation where rationality (economic rationalism in the 1970s sense of the term) is needed.

The drought: rational solution needed, not politics

The announcement by Prime Minister John Howard that, in the absence of good rain, there will be no allocation of water for irrigation from the Murray-Darling next year renders much of the previous discussion of this issue somewhat academic. There’s still a chance of above-average rainfall – for once, the forecasters are optimistic. Still, it’s necessary to plan for the possibility of no allocations, and for the near-certainty that even holders of ‘high-security’ allocations will have severely restricted access to water.

The crisis strengthens Howard’s position in demanding a Commonwealth takeover of the entire sector. The general case for centralisation, as opposed to co-operative federalism is weak, and Victoria’s objections to the plan had some merit. But in an emergency situation, a unified response is needed.

In other respects, the National Plan for Water Security, announced on January 25 The announcement was striking in a couple of respects. On the one hand, the timing seemed remarkably good. With Kevin Rudd having announced a plan based on co-operation between the Commonwealth and the states only a week earlier, the government was, it seemed, fortunate in having its own plan in the works, almost ready for release. On the other hand, the plan was unclear in crucial respects, and showed little evidence of supporting economic analysis (Water remedy clear as mud AFR 1/2/07).

Over time it has become apparent that these are two sides of the same coin. The plan was a rush job, hurried out the door to meet the political requirement for a response to Rudd’s initiative. In the process, many of the standard sources of advice, including Treasury, environmental experts and even Cabinet were bypassed. The result was a plan much stronger on politics than on policy.

The emergency conditions now prevailing render much of the Plan obsolete. Not only does it offer no response to the immediate crisis, but its proposed long-run responses, consisting mainly of funding for on-farm works, are inadequate to the severity of the problem.

In the short term, if we get some rain, but not enough to supply the requirements of all users, it may be necessary to consider the option of rationing. One option would be to supply enough water to keep tree crops alive, while giving little or no water to other irrigators.

A resort to rationing would represent a retreat from the move towards reliance on markets that has driven policy for the past fifteen years. It would raise the risk of continued micro-management. On the other hand, considered strictly as a short-term emergency response, it may well be the best of a bad set of options.

Given the need to spend to spend large amounts on drought relief, it makes sense to use at least some of this money to bring us closer to a permanent solution to the problem of over-allocation. Farmers who want to shift from irrigated to dryland agriculture, or to leave agriculture altogether would benefit from the opportunity to sell permanent allocations of water back to the government. In the absence of any clear indication of when normal allocations will resume, the market for permanent allocations is bound to remain thin unless governments enter as purchasers.

Moreover, there is mounting evidence that the decline in runoff, and therefore in available water, observed over recent years, is not just a transitory, though obviously severe, drought. It seems likely that we are seeing the effects of human-caused climate change, possibly along with a multi-decade cyclical shift from wet to dry conditions. Water allocations will need to be reduced, not only to reverse past over-allocation but to deal with permanently lower average flows.

Under the risk allocation principles set out in the National Water Initiative, the risk associated with climate change is borne primarily by irrigators, meaning that they will not be compensated for reductions in allocations made in response to reduced inflows. However, it remains to be seen if the inevitable resistance to such reductions will be overcome.

Our current problems are, in part, the result of a drought more severe than could reasonably have been foreseen on the basis of past experience. But they also reflect the mistakes of the past, including the over-allocation of water and the refusal of governments to buy back excessive water allocations before the current crisis. For now we can do little more than hope for rain. But future policy must be based on a rational assessment of the options, without regard for political sacred cows.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.

5 thoughts on “Rationality and water

  1. Things that I find alarming include the idea of draining wetlands to enable river bank towns to have drinking water. If we were talking about a temporary emergency, it would make sense. But if we are talking about long-term dry conditions (for which you rightly point to the ‘mounting evidence’), the draining of wetlands will only exacerbate the condition. In the Mildura/SA Riverland some people have already cashed in their water allocations and formerly irrigated grape/fruit blocks are now wasteland. Yet Mildura still has 60,000 people who ultimately depend on irrigated farming (not to mention the other towns) and the longer people hold out the lower will be the value of their land when they decide to leave. The Murray mouth has been closed for about 5 years and long before that it was known that the high levels of water extraction from the river system were unsustainable. For how many decades have we been ‘hoping’ for rain?

    Warragamba dam is down to 34% – only a few months ago it was 46% (at which point we were told we had 2 years water left – so it seems as if there is now only 18 months or less). We had a week of rain in Sydney and none of it fell in the catchment area. Yesterday the catchment had 20 mm. Big deal! All the politicians can talk about is transferring water from one place to another. Or, if they belong to the National Party, moving all the farmers up to the tropics. This is cloud cuckoo land. The country will be criss-crossed with increasingly dry pipelines. And it won’t just be the Murray-Darling system that suffers.

    For your next piece, can I suggest some real suggestions on how we can get a ‘permanent solution to… over-allocation’? Do we just let the populations of those towns sink into poverty while the desertification of the country progresses? What to do about SE Qld? Sydney?

    Meanwhile, the power/fuel industry has increased emissions 20% above our generous Kyoto targets! Civic minded consumers who try to be carbon neutral on a voluntary basis are obviously insufficient.

    If irrigators are paying for water now, why aren’t the rest of us?

    Am I panicking unnecessarily?

  2. Many irrigated farmers would face financial ruin if forced to change to dryland farming, the relatively small size of the property means that intensive farming using irrigation is the only viable option. Without security of water the land, in its present form, is of little value.

  3. there is mounting evidence that the decline in runoff … is not just a transitory, though obviously severe, drought. It seems likely that we are seeing the effects of human-caused climate change …

    I’m not saying it’s impossible that this is a manifestation of AGW, but I haven’t seen any hard evidence, let alone mounting evidence, that it is. We shouldn’t just make this sort of stuff up – can you point me to this evidence, John?

  4. DD, if you compare rainfall in the MDB for the decades from 1950 to 1980 with rainfall since 2000 or so, you get a dramatic decline, too large in my view to be plausibly explained as the result of random annual draws from a stable population. You can draw some trends here. As I mentioned this could be AGW or it could be a multi-decade fluctuation arising from a process we don’t know about. For purposes of water policy, the two are much the same.

    The other, unequivocal, contribution of AGW to reduced runoff is higher temperatures leading to higher evaporation.

  5. Eyeballing the relevant graph for the MDB (thanks for the link BTW), it seems quite possible to me that they do in fact represent random draws – just not necessarily annual ones. In particular, it looks as though the late 30s-early 40s had a similar pattern to the last five years. This may be weak evidence some sort of autocorrelation between years causing multi-year (not multi-decade) fluctuations, but it’s no evidence at all for a permanent shift due, say, to AGW. Anyway, it still looks consistent with a story of our just having (randomly) run into two el nino events in short succession (2003 and 2006) with the years in between happening to be pretty average.

    It’d be interesting for the time-series analysts to have a crack at it, but in the meanwhile the bottom line is as I said – we should be very chary of linking the current dry to AGW.

    That said, your point about higher evaporation is of course correct.

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