Water resource problems - more politics than economics?

The Rudd Government’s decision to purchase by tender $50 million worth of water rights from irrigators in the Murray Darling Basin is sensible policy. The Howard government agreed only to purchase water that resulted from technology-induced water savings, a policy that was never going to get far. According to much of the press the current government’s initial purchases should secure at least 20 GL - my rough calculations suggest that, at realistic water prices, they should be able to do much better than that.

Buying back over-allocated permanent water rights from owners of these rights at the minimum cost to the purchaser is the most cost-efficient and fairest way of eliminating the problems of excess water allocations in the MDB. It provides compensation to the owners at a price that leaves them better-off than retaining and possibly using the water and, subject to this fairness constraint, minimises the cost of achieving an important environmental objective.

John Quiggin (AFR, 28th February, subscription required) estimates that in the absence of drought the long-term price of a permanent water allocation is likely to be around $1000/ML so for $500 million one could buy back 500 GL thus reaching the target for environmental flows in the National Water Initiative of 2004. Quiggin argues however that, even before the current drought, expert evidence suggested that a cut of 1500 GL would be needed to restore the heath of the MDB.

Indeed the CSIRO’s Sustainable Yields Project suggests that, with severe enough climate change, average runoff in certain parts of the MDB could decline by as much as 50%. If this is the case then buybacks might not be sufficient to address the problem.

I’d be interested in checking out the validity of these figures with those who have more expertise in water resource management than I do. Even if prices of water rose substantially in response to high levels of buyback it would seem these cutback objectives could be realised at the cost of the Howard Government’s $10 billion water plan. All but $3 billion dollars of money in this plan was to be spent on ill-advised technology handouts to farmers that might not be particularly effective. Thus there might be gains in reallocating the money intended for technological fixes towards buybacks. On the face of it solving this major resource problems in the MDB looks like a political problem not one involving economic feasibility.

Maybe my arithmetic is wrong here or I am overlooking something fundamental - I’d appreciate advice to that effect.

By the way the relevant act driving these policies is the Water Act 2007 which relates specifically to the management of the MDB from the viewpoint of economic, social and environmental perspectives is discussed here.

The Federal Opposition spokesperson on the environment, Dr. Sharmon Stone, expressed opposition to the plan on the grounds that it will increase water prices and that farmers in the MDB will be disadvantaged. I was dismayed by these comments as with those of various farming lobby groups. In relation to the Rudd Government’s Plan, according to the Age:

‘But Victorian Farmers Federation president Simon Ramsay attacked the plan, saying government involvement threatened to distort the market.

"Farmers are already stressed; the temptation to sell water, which has been allocated for agricultural use, will prove too great for some to the detriment of farming properties and Australian food production," Mr Ramsay said.

Victorian Opposition spokesman for Country Water Peter Walsh said the policy was to the detriment of agriculture along the river and could prompt water prices to rise.

This foolishness suggests that farmers in stressful economic situations will be somehow made worse off by being given the option to sell their water. Given that water resources have been over-allocated, an increase in prices will help to shift water consumption into higher-valued uses which is exactly what is called for. It is true that those farmers who seek to purchase water in a market with increased demands will have to pay higher prices but that is just a consequence of the shortage in sustainable supplies.

Moreover, resolution of these water supply issues is in the long-term interests of farmers who, because of climate change, will face increasing water shortages and increased variability of water supplies.

A colleague suggested to me yesterday that a Coalition Government in Australia is unlikely to regain power federally for at least two terms of office. One thought is for the Liberal Party to split from the Nationals now in an attempt to build a party that can be more rational than one which is plagued with National Party stupidity.

The Nationals overall have very low electoral appeal and have policy attitudes that seem parochial and self-interested but which, in fact, also disadvantage both the nation as a whole and farmers - the constituency the Nationals are supposed to represent. A split now would get rid of a corrosive force and give the Liberals a chance to re-group. This is something I will think about.