There’s been a lot happening in water policy lately, and for once, most of the news is good. Most importantly, it’s been raining, a lot. The total volume of the recent rains has been estimated at around 6000 Gigalitres. Even after diversions, evaporation, absorption by the soil, refilling of water tables and so on, there will be somewhere between 600 and 1000 GL to flow down the Murray and stave off the disaster threatening the Lower Lakes, as well as many upstream ecosystems.
Meanwhile, the Rudd government’s decision to bite the bullet and start buying water from irrigators willing to sell has been thoroughly vindicated. The money has been a huge benefit to farmers keen to move out of agriculture, or from irrigated agriculture to dryland, and has done a lot to soften the impact of the drought. Most recently, a couple of irrigation districts have voted to sell en masse with a resulting saving in the cost of irrigation channels and other infrastructure. In a situation where too much water had been allocated to irrigation, and where (despite the current rain) there is likely to be less in the future, this is a necessary part of the adjustment process.
The government has copped some flak (recently in the Fin, for example) because the prices it paid last year were higher than in previous years (when the government was not in the market) or this year, following the rain. I’m surprised to see the Fin ignorant of basic principles of supply and demand. It’s obvious that, once environmental values are taken into account, the demand for water will rise, and therefore so will the price. And it’s equally obvious that plentiful rain is going to reduce the market price of water entitlements. This effect will be biggest for temporary (annual) entitlements, but it will also be present for permanent entitlements.
Buying water is much more cost-effective, in most cases, than public engineering projects aimed at saving water. Given a market price for water, farmers and irrigation suppliers have every incentive to find the cost-effective solutions themselves. Nowhere is this more evident than in the case of the Victorian government’s Food Bowl Modernisation project. I was one of a number of economists interviewed by the Sunday Age, all of whom said this was a silly idea. In fact, I was more sympathetic than most, since I recognised the political constraints on the government – even after paying something like $4000/GL saved, they are still facing resistance to supplying any of this water to Melbourne.
It now seems likely that the government can, if it chooses, buy back 1500 GL of entitlements for the environment (the highest level considered in the Living Murray exercise that was killed off under Howard) and still have plenty of change from the $10 billion allocated under Howard’s National Action Plan. Rather than dissipate this in engineering works in the Basin, where we already have a functioning market, I’d like to see at least some of it allocated to the problems of North Queensland, where runoff from agriculture and urban development is one of the major stresses (along with climate change and fishing pressure) threatening the survival of the Great Barrier Reef.