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.
John Quiggin 
Why not set a price at which the government is willing to pay for the next five years? This sets a floor for the “real market” and it brings more certainty to irrigators and may even turn water rights into an asset against which they can borrow.
As part of the agreement on buying for a fixed price the buyer can require that the money received from the sale of water rights is to be spent on increasing the efficiency of water use (or increasing the supply) but allow receivers of the restricted money to sell it to others if they have no use for it themselves. This will ensure that the money received will go towards improving the utilisation of water – which is after all should be one of the objectives of the scheme. Irrigators have funds that they can use to increase efficiency while those that cannot or do not want to increase efficiency can sell (at a discount) to those who can increase efficiency of water use.
The discount will reflect the value of “new water”. If the price of water that the government buys back at is higher than it needs to be the discount will be large.
There is already a market in infrastructure of ways of saving or obtaining new water and this will ensure efficient allocation of resources and the market efficiency will increase because of the new buyers.
It is a simple system to introduce because we know how to transfer money and we know how to run markets in tangible things and we remove a lot of the uncertainty present in water rights markets because of the floor price.
If the government goes into the regular water rights market as a “normal buyer” will distort the market.
An argument against this proposal is that the price of water rights should reflect the true value of water and it should vary for all buyers. The counter argument is that having a large buyer of environmental flows distorts the market so that the water rights market no longer reflects the value of water because of the buyer with different values.
Another argument against the proposal is that irrigators should be able to spend the money on whatever they wish. The counter argument is that bringing stability and a floor price to the value of water rights justifies the restriction and the irrigators can sell their restricted money for unrestricted money and then spend it on whatever they wish.
A nice thing about the system is that the federal government can introduce it in any jurisdiction who will sell it water rights. It does not have to get agreement from all the States. It does not force irrigators to join and any irrigator who abuses the system can be banned from participating.
The government is guaranteed two results. The first is that environmental flows will increase by a known amount and the second is that it is guaranteed to get the most efficient use of the money it has spent in terms of increasing the utilisation of the non environmental flows.
The cost of setting up the system is minimal because there are no new rights to be defined and the markets in infrastructure already exist. It is difficult to abuse the system and those that are found to do so can be banned from participating.
John & others, I’d be particularly interested in assessing John’s view of the claim that if water could be bought at the types of prices you suggest in your article that much of the MDB problem could be resolved by buying back water rights using the whole $10 billion allocated by Howard for buybacks rather than only $3 billion.
Of course water prices would rise if buybacks occurred on a massive scale – presumably to something much more than $1000/ML.
You mention practical limits to buybacks in the article but 1500 GL’s are only about 7% of the stream-flow in the MDB.
With these figures – as well as your earlier work suggesting extremely low output losses as a consequence of climate change in the MDB – it looks like the problem is purely political. Economic policy changes are straightforward to design that will deal with the problem.
I am not sure of Kevin Cox’s proposal to require vendors to invest proceeds in improving ewater use efficiency. Why this constraint? In part at least the payment for water rights might be viewed as a structural adjustment payment that might see low value water users exit the industry.
i guess buying back water is reasonable, although the people who sold it should be in jail, as it was not theirs to sell. well, actually, it was- the gummint owns everything, don’t they.
letting pollies sell off the patrimony of the nation to enrich their mates and buy key votes would be a hell of a way to choose to run a nation, except ozzies have never been offered any choice, poor dimwits.
i have learned to shrug my shoulders and say “you get the government you deserve”, but it’s cold comfort.
“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.”
And this is the same cautionary fellow who wants us to auction declining rights to emit CO2, presumably to all those well informed, omniscient emitters now, that are in exactly the same knowledge position as our forbears were with MD water rights all those years ago. Priceless!
Or to put it another way, John, et al are now at the pointy end of what Greg Mankiw defined as Cap and trade = carbon tax plus corporate welfare and they don’t like buying out that welfare now. Now if MDB water allocations had been given out to our forbears to trade freely, but with an annual licence renewal fee attached, it would be a simpler matter to slowly raise that annual fee now(really a tax) until enough marginal users dropped out, in order to equilibrate long term average supply with demand. Good luck in trying to achieve that now, by publicly buying out the private economic rent attached to water rights, whatever their initial sale price.
It’s a bit like the sacked Woollongong Council deciding to auction the perpetual rights to Woollongong ratepayers to make their properties rate free forever, in order to invest the proceeds in what they see as worthy projects right now. Welcome to cap and trade folks!
Observa, don’t you ever get tired of pointless snark? If you presented serious arguments instead of silly pointscoring, I might read and respond. As it is, I just skip.
hc,
People who want the money to use for other purposes can sell their water money to someone who can use it. The constraint is there to make sure the money we have spent on buying environmental flows will sooner or later be spent on water infrastructure.
By putting constraints on the use of money we can direct expenditure. Money is created for a particular reason and it makes sense to keep that reason for its creation with the money until it is spent. This is not unusual. An example are shares in companies. Shares are a form of money and they can be used for trades(e.g. share script buyouts) but they can also be converted to regular cash. Why not do something similar with environmental flows money (perhaps call it flows:)
Another attraction of the system is that we get a surrogate market for water namely the market in water infrastructure that achieves the same purpose as water markets but we bypass all the arcane rules and regulations built up around the idea of water rights and allocations.
Observa, cap and trade is a complete non-sequitur in this context.
I agree something needs to be done, and I agree that if this is the lowest cost and most efficient means to do so then we should do it.
However my concern is the opposite of Observas – I hope we are not too generous to the farmers. In some cases (eg Cubby Station) they are guilty of shamelessly exploiting a weak system, which their own representatives lobbied government to set up that way. Just because they are massively subsidised doesn’t mean they should be paid to give up those subsidies.
There are many instances where government compulsorily acquires private prperty/rights eg land acquisition for road projects. People are paid fair market value for freehold land. For many rural leases, no compensation is owing for such acquisition, just reimbursement for changes to fencing etc. The rent is adjusted, but the rents are already so unrealistically low it makes no difference.
Would it be feasible to just pay the original issue price of the water rights, which were far too cheap from my reading? In some cases, would it be cheaper just to buy back the property?
“Would it be feasible to just pay the original issue price of the water rights, which were far too cheap from my reading? In some cases, would it be cheaper just to buy back the property?”
Unfortunately, not. The way in which freely issued water licenses were converted into tradeable property rights was a disaster, but there has been too much trade since then to allow for unscrambling the egg. I have a piece on this in preparation for Economic Papers
I wonder if an estimate can be made of the inflationary effect of irrigation cutbacks. Reductions in fruit, veg and dairy from the MD basin must impact on urban food prices. If so it seems tough to penalise mortgage payers with interest rises on top of grocery bill hikes partly arising from government policy.
Hermit
I don’t know but I would suspect the answer would be fairly small. Remember that JQ’s proposal reallocates water, which is currently distributed very inefficiently. There is no reason to believe that reallocating water will actually reduce the amount of groceries going to Oz supermarkets. Production might go up if water is allocated towards the most efficient users. We export 80% of the food we grow anyway, so any collapse would have to be pretty massive to affect consumers here. Remember too that some of our agricultural policies are intended to protect aussie farmers from cheaper foreign imports. In other words, they prtect farmers, not consumers. Finally, if you really want to reduce grocery prices, you might start with the 80% market share of the Coles/Woolies duopoly, which I suspect has far more effect on the prices you and I pay.
Now I don’t have a problem with the irrigation buy back, etc. It is needed but Yeah a water market. Just what the lower income rural townspeople need, another thing they pay through the nose for.
I’ve deleted your defence of snarky pointscoring. Check the comments policy on this. To spell it out, I’m not in the least interested in anything further from you alleging that some statement or position from me or Mike Rann or anyone else is inconsistent with some other statement or position. You’ve made your view on this clear at tiresome length. From now on, please state and defend a substantive position, or refrain from commenting at all – JQ
What did you (Pr Q) think of Ken Henry’s speech?
People might be interested to know that the water market seems to be up to something in the marginal agricultural areas of the Riverina. The water is so valuable that it has been sold off separate to the land, which of course means that the land becomes fairly useless and it’s sale value therefore decreases significantly. This is being seen as a Bad Thing in the region of course, and moves are afoot to limit the practice.
Then again, it is marginal land, and siphoning off a lot of farm welfare during droughts, which will increase. Then again again, at least some of that water is now going on people’s lawns in Albury, the council having bought some for that purpose, which seems less productive than irrigation agriculture.
Thoughts?
Here is another attempt to explain what we are proposing. I would be interested if anyone thinks it makes better sense.
When people discuss water trading they are not talking about trading water. They are talking about trading water allocations or water rights. That is, you are not really buying and selling water in the same way that we buy and sell petrol. That is trading in rights or allocations is used as a surrogate for the water. We have invented another market based on a “virtual product” that acts in place of water. Unfortunately virtual products are “pliable” and depend very much on the definition and rules and regulations which can change.
We are suggesting that a better approach to the water problem is to use a different surrogate water market. One way of thinking about it is as a market in “new water” or in technologies that can save water or find new sources.
The beauty of such a system is that we do not have to invent a new product and a new market. We already have a market in sustainable technologies. The problem is having buyers. It is normally uneconomic in the sense that you can get a better return on your dollar if you invest it in other places than water so the market in sustainable technologies will not work without a bit of help.
One way to do this is to give people dollars that can only be spent in the market and to make sure that they only spend it in that market. This turns out to be very easy to do because it is a technological problem not a legal problem.
We suggest giving people who could use a resource but choose not to use much of the resource the money paid for from the people who use a lot of the resource but with the proviso that the money transferred has to be spent on sustainable technologies.
I am told that transfers of funds from one group to another does not change the GDP and hence doing this will keep the GDP the same while at the same time “solving” the problem in a socially equitable way and probably increasing the GDP for the next generation because we have invested the money in sustainable infrastructure not spent it on consumables that do not generate future income.
Sean, the problem you allude to is not so bad if all trades in water rights are in restricted dollars as the money has to be spent on producing more water so Albury can have its water and they seller has to spend their money producing or saving water.
James Haughton,
Here is my letter to the Canberra Times on Henry’s speech.
Ken Henry (CT March 5th) puts the case for a realistic price for water. Most would agree with his article.
Unfortunately it will not happen in the ACT because ACT Treasury supported by all political parties are not willing to give up the taxes that come from being a monopoly water supplier. The arguments against a free market in water are that it is efficient to have a single supplier, restrictions are socially equitable and that the extra money we get from the scarcity value of water is spent on socially desirable services like hospitals and schools. ACT water restrictions can be removed tomorrow if we increased the price of water to high consumers, give all the extra money collected to low water users and require the money they receive to be spent on water supply infrastructure as a surrogate market for water. This would be socially equitable, would get wide spread support, is simple and cheap to introduce. It does not happen because all political parties are unwilling to give up monopoly taxes. In a true market the money collected from the scarcity value of water would go to increasing the supply of water but the ACT Treasury calls this hypothecation and does not let it happen. So Ken Henry’s call for a market based water supply system will remain just a call while his State Colleagues continue to believe taxing water is better government policy than a free market in water or the surrogate water infrastructure market.
Socrates (@9)
Doesn’t work that way. S 51(xxxi) of the Constitution guarantees ‘just terms’ for the compulsory acquisition of property by the Commonwealth (although not, interestingly enough, the destruction of property). [This only applies in States, not territories but that’s not germane here.] Essentially, just terms is AT LEAST market price and can contain other forms of compensation.
Buying by tender gets around this by (a) not being compulsory and (b) by definition being at market price.
Buying the property (except voluntarily) is a process which would make you shudder at its complexity, length and expense. See the Lands Acquisition Act (Cwlth) on http://www.austlii.edu.au if you are really interested.
“When people discuss water trading they are not talking about trading water. They are talking about trading water allocations or water rights. That is, you are not really buying and selling water in the same way that we buy and sell petrol. That is trading in rights or allocations is used as a surrogate for the water. We have invented another market based on a “virtual productâ€? that acts in place of water. Unfortunately virtual products are “pliableâ€? and depend very much on the definition and rules and regulations which can change.”
Without continually offending the host here Kevin that’s the fundamental point of disagreement. Water rights are effectively available water, providing they are truly allocated (ie on the basis of long term supply considerations) as well as policed to prevent misappropraiation, stealing and the like. Now that proviso applies to cap and trade or simple taxation, be it for CO2 emissions rights (ie ultimately the right to extract oil, turn it into petrol and flog it off to people who’ll burn it) or rights to pour water all over the countryside or ultimately out to sea. Cap and trade or simple taxation, noone’s arguing that govt shouldn’t provide the overarching constitutional marketplace for all the players here. The question is one of which is best for govt.
That’s where I think you make the mistake. There’s no shortage of water, just a shortage at the current managed price. The world is 80% full of water when you look at the big picture, but here’s the rub. If SA Water can’t buy MD water from upstream users and it can flow down to Adelaide, we’re going to produce 50ML of CO2 per year to turn 50ML per year of that ocean of water, into the form we want. That’s where the tradeoff comes and exactly why water owners should be allowed to flog their rights(true allocations remember) to the highest bidder. We can afford to pay up to around $3/Kilolitre for the stuff. Where do you think that leaves cotton/ rice growers and flood irrigators in the marketplace? Out of there and putting their scarce capital to the next best use.
Buying back water from any volunteer is fraught with danger. In my area, dairy farmers were given a huge allocation which I could grow apricots with, let alone grass. Instead of rehabilitating, to use less water and stop returning waste to the river, most sold their water rights, and their cows, and became instant millionares.
Good luck to them after the scourges of globalisation and the deregulation of the dairy industry .
However, there is such a thing as critical mass with many rural communties and associated industries, and now we are faced with the probable closure of the two milk/cheese factories.
Observa, I generally agree with your comment. It’s true that market-based instruments like water are still policy instruments, but the main problem at the moment is restrictions on trade.
Observa,
I understand what you are talking about and I agree that water rights trading is a surrogate for water trading and will work if it becomes a true free and open market.
My argument is that it is not a free market, and as in my letter relating to the Henry speech, free water trading is unlikely to happen without some sort of circuit breaker.
I am suggesting a different approach based on cooperation rather than competition. I have tried to explain myself better at response 43 at https://johnquiggin.com/index.php/archives/2008/03/03/monday-message-board-101-2-3-2/#comments
I also understand that the price of water is so low that it means it is silly to invest in ways of saving it. We are proposing a different solution than higher prices. That is, give people money that they can only spend on infrastructure and the investment will happen.
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.
We are proposing a modification to the way we trade “common goods” or the commons as in “The tragedy of the commons” It is one of many possibilities and does not exclude the other methods such as water rights trading. It does not require legislation or rules and regulations but it does require cooperation and governments are the best ones to help us achieve cooperation.
Look at it from the point of view of will it work – not whether it is better or worse than something else – and then tell me why it won’t work.
So far the reasons people have given on why it won’t work are:
1. It is too complicated and will cost too much.
2. You will never get people to agree to do it because it smells of socialism. (give more to the frugal?)
The answer to the first is that it is simple to introduce and people are already used to the idea of rewards (like frequent flyer points) so it is easy to explain to consumers and we can automate almost all processes. It will cost less than other methods of getting investment into infrastructure.
The second one is the hard one because we have to convince gatekeeper economists that it will work – hence this blog response. My guess is that economists will only believe if they see it working and measure what happens – but this is a classic catch 22 dilemma. We have to convince the gate keeper economists that it is worth trialling but they say “show me it working and then we will believe and let you do it”!
To my knowledge the approach has not yet been tried and it is going to take a brave economist to say it is worth a trial. This is because people say “if it is such a good idea someone else would have done it and I am not going to risk my reputation on unproven schemes”.
i suppose it’s a case of talking about what’s at hand. but shouldn’t the first question be, should government encourage wet-land farming, in a dry land? should it even permit irrigation when down-stream environmental disasters are evident?
Indeed, talking about what’s at hand is what I encourage, Al. I’ve deleted the OT section of this comment – JQ
No one can disagree that water needs to be re-allocated from irrigators to the environment, but buying it back in a drought year is not the way to do it.
There are higher priorities than buying back water, such as cracking down on all those who are taking water illegally in NSW and Qld. Such as ensuring all irrigators are metered (NSW and Qld again), pipelining all open channel systems and taking, not buying, taking back the savings for environmental flows.
Cotton brings in big export dollars and supports many large communities, but it is an environmental disaster both from poor usage of water and extreme chemical use.
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 !)
Sorry Kevin I missed your response.
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.
It would appear that not even wall to wall Labor can overcome the vested interests http://www.news.com.au/adelaidenow/story/0,22606,23335524-2682,00.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.
“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.
#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.
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.
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.