Buying back water

My Fin column last Thursday was on the Rudd government’s announcement of a tender to buy irrigation water rights, with the resulting water to be managed for environmental flows. This is a long overdue step

After an election campaign in which each side sought to look as similar as possible to the other on most issues, John Howard warned, quoting Paul Keating in a similar situation, ‘change the government and you change the country’. He was right.

The changes go beyond the dramatic symbolism of Kyoto and the apology to indigenous Australians. All sorts of shibboleths that seemed to represent immovable obstacles to policy progress have quietly ceased to be relevant. Recent policy announcements regarding the Murray–Darling Basin are just one example.

At least since the National Water Initiative in 2004, it has been clear that the problems arising from overallocation of water in the Basin could be addressed only if governments were willing to buy water rights back from irrigators. Ecologists, economists and environmental organizations all made the same point, but ran into a brick wall of opposition from politicians and irrigator organizations.

Under a succession of ministers, the Howard government treated buybacks, or even transfers between catchments, as last resorts, to be pursued, in the words of former Parliamentary secretary Gary Nairn, ‘only when all other viable alternatives have been exhausted’. Even when Nairn was replaced by Malcolm Turnbull, who clearly understood the problems, progress was glacial.

Turnbull finally secured agreement to allow buyback of water, but only if it was saved as a result of on-farm efficiency improvements. The idea that farmers might be allowed to sell their water assets and invest the proceeds elsewhere, remained beyond the pale. This limited initiative had produced little or nothing when the government lost office.

Three months after the change of government, the seemingly immovable barriers to action have disappeared. The Minister for Water, Penny Wong, has announced a tender to buy water rights back from irrigators willing to sell, allocating $50 million for the current financial year.

This is a radical step. Yet, as in other areas, the Rudd government has sought to emphasise continuity rather than change. Interviewed on the 7:30 report on Tuesday night, Wong ignored repeated invitations to draw a contrast between the policies she was announcing and those of the previous government.

Of course, $50 million is nowhere near enough to fix the problems of the Murray-Darling Basin. But, with any new initiative of this kind it’s sensible to test the market first, before entering on a larger scale. Prices of permanent water allocations have risen as high as $2000 a megalitre in the current drought, but a longer-term price of $1000/ML seems more likely.

And, considered as an allocation for the remaining six months of this financial year, $50m is a good start. At a price of $1000/ML, it would cost $500 million to buy back 500 gigalitres, thereby reaching the target for environmental flows agreed in the National Water Initiative. With expenditure of $100 million a year, this target could be reached in five years; a slow pace, but much better than anything achieved under the previous government.

Unfortunately, as with the Garnaut report on climate change, the targets are shifting. Even before the current drought, the expert evidence suggested that a reduction in allocations of 500 GL was not nearly enough, and that at least 1500 GL would be needed to restore the health of the river system.

The drought and the likelihood that climate change will mean more such droughts in the future have complicated the picture further. The Sustainable Yields analysis being undertaken by CSIRO suggests that, if projections of a hotter and drier climate in South-Eastern Australia are realised, average runoff in some parts of the Basin could decline by as much as 50 per cent by 2030.

Such an adjustment could not be managed by buybacks alone, but they are an important part of the solution. Under the principles established by the National Water Initiative, the risks of climate change are supposed to be borne by water users, in the form of reduced allocations or reduced security. In practice, substantial adjustment assistance will be necessary, and buybacks of already-reduced allocations would be one way of providing this.

Buybacks of irrigation water rights, and improvements to water markets are not, on their own, a solution to the problems of the Murray-Darling Basin. But they are essential if further progress is to be made. The Howard government knew this, but could not bring itself to act. The Rudd government has shown itself capable of decisive action. Now it needs to follow through with a comprehensive national water policy.

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

33 thoughts on “Buying back water

  1. In relation to my post above, it struck that a lot of the devalued land will presumably go back to being grazing land rather than cropping. Maybe even some native timber plantation? I’m leaning towards thinking it’s a win for the environment, though it obviously means less money & jobs in those communities.

    If this is insufficiently theoretical for you ecconomists, let me know & I’ll stop trying !)

  2. Without water rights a lot of land would be useless as it is too small for dryland farming, selling a water license for a few dollars might well cost the property many more in value.

    Last year I sold water at $500/meg – due to restrictions and zonings it worked to my advantage. So I would be foolish to sell my allocation for $1-2,000/meg as it adds considerably to the value of the land. $1-2,000/meg is a piddling amount.

    I can only guess that those who do sell would be severely strapped for cash but most farmers wouldn’t sell, when John Howard offered a cash deal to walk off the land few if any took it up.

  3. It would appear that not even wall to wall Labor can overcome the vested interests,22606,23335524-2682,00.html
    You only have to compare that outcome now with Rudd’s big talking in Opposition about how he’s going to take over the hospitals if the States can’t get it right.

    If Al Loomis has one valid point now, it is that the current electoral system is failing us here with an important environmental/economic issue like the MDB. There is no doubt that a large majority of Australians generally favour fixing up our past mistakes, but the stumbling block now is our seat based electoral system and the need to gain a majority of seats. That’s where I’d advocate electing the two houses in reverse to overcome this perennial problem. We despeartely need proportional party voting for the Reps now, so that vested interests can’t continually frustrate the common good, like they are with fixing the MDB.

  4. “We are very interested in finding out why the proposal to pay the frugal but require the money they receive to be spent on solving the common problem will not work.”

    Kevin, I guess that’s at the very heart of the problem you may be having with the traditional economic view. How do you define your ‘frugal’ and consequently reward it? Now I could be a very frugal rice grower and demaonstrate how I grow my rice using say 15% less water than my more profligate peers. Where’s my frugality reward so I can spend it on more frugal infrastructure to grow more rice? Meanwhile in Adelaide, where potential users can gain much greater economic and environmental marginal benefit per kilolitre of my water, they’re digging even deeper to give me your bevy of public servants and their administration of your frugality rewards, not to mention the frugality rewards themselves.

  5. #29 Your assessment only holds water (sic) if you accept the spin that Victoria’s opposition to Howard’s National Plan represented “vested interests”. Actually, the Howard Plan was a disaster and the agreed modifications make good sense.

  6. I’m not here to defend Howard’s plan John as I think he was as beholding to rural vested interests as Rudd is now with Victoria and unless Rudd has some personal magic wand, we’ll still be talking about all this at the end of his reign too. Announcing a cap with the States to police it was simply an unadventurous no-brainer politically speaking. After all the current water rights holders understand nature’s overriding cap very clearly now. They didn’t need Rudd’s ‘metoo’ to understand that.

  7. observa,

    How do you reward the frugal?

    First you have to realise that it does not matter who you give the money to as long as there are a lot of different buyers. The real point is having a lot of money in a lot of different hands and that money has to be spent in the market place of sustainability investment products and services.

    However, giving the money to the frugal is a socially equitable way to give out money associated with common goods. The high consumers of public goods pay more and the low consumers get a reward.

    The frugal for home users is simple. You measure the amount per person from the mains and if you are below some value you are frugal.

    For businesses you do it on “best practise”. If you get from the common supplies a certain amount of water and you produce a certain amount of rice then you can be compared to others. Remember it is only the amount of common water that we are concerned about.

    We have all the tools, all the measurements we need to do it. We just need the political will for someone to take it up.

    The system is inexpensive, it is easy to enforce compliance and it will be near optimal in allocating resources to achieve water sustainability.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s