Efficiency follows equity

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Professor Lin Crase

Australia’s experience shows how water markets can provide a useful response to escalating drought, if governments clearly define allocations in advance and ensure all stakeholders gain equal access

By Lin Crase*

Australia, known as the ‘driest inhabited continent on earth,’ commands international interest in its local policy responses to protracted drought.

Some of that attention is well-deserved and can usefully guide actions elsewhere. Other elements of Australia’s drought response are instructive only for their failure to deliver good outcomes, and should thus be avoided. Still other ‘lessons’ may be artefacts of unique local circumstances; it is unlikely the ideas can be transposed universally.

Recognising these constraints, consider Australia’s 1997-2009 Millennium drought, which recorded the lowest average rainfall since 1900. The drought coincided with a series of major policy reforms, enacted by states to align with the National Water Initiative (NWI).

The National Water Initiative had a strong focus on economic efficiency, and the escalating drought-related scarcity helped improve its more contentious components. For example, the separation of land and water rights–clearly defining the latter as a variable portion of available resources–paved the way for extremely active water trading. That trade significantly cushioned the downturn in irrigated agriculture from the worst economic impacts of the Millennium drought.

One key to trade was that states were prepared to define the limits of water resources and specify these in water plans. Yet a thriving water market in the nation’s most productive agricultural zone didn’t just happen. It coincided with a number of unique conditions: rediscovered enthusiasm for competitiveness; previous land reforms in state-owned irrigation entities; enhanced commercialisation and aggregation in agriculture; and governments ready to promote water variability as a non-exceptional circumstance, and one for which those with an interest in water should prepare.

It would be a mistake to think that markets like ours will thrive everywhere but it does advise stakeholders to anticipate and calibrate the limits to water availability, and lay the groundwork prior to drought.

While farmers gained from market access as water resources dwindled, the same benefits were not bestowed on other claimants. Urban and industrial water users were demonised for seeking water through the market. Many ended the drought by paying for high-priced supply augmentation projects, usually instigated by governments. The large desalination plants–now sitting idle outside major cities–are a case in point.

These burdens run in stark contrast to the initial ambitions of the National Water Initiative for greater water market connectedness for all water users and the requirement that supply augmentation works must pass basic economic and environmental tests. Non-agricultural water users must never underestimate, and should guard against, the proclivity of governments to use drought as a justification for foisting exorbitantly expensive high-tech solutions onto their backs.

The onset of drought both helped and hurt environmental uses of water. Planning frameworks exposed that even the meagre initially volumes set aside to maintain ecosystems were residual to other claimants; the correction to ensure higher ecological flows was a major policy achievement. Yet the agricultural bias–that low-cost market access was solely for irrigators–meant building an environmental reserve came at excessively higher costs.

Water trading can only work to the extent that governments are willing to deal with the difficult issue of defining the quantum of the resource. Clear allocations are the most important and enduring element of drought policy, and markets, or their alternative, can only function if that task is dealt with early and often.

Indeed, the failure to treat all claimants equally will simply result in subsequent tinkering with high-cost augmentation technologies, which a market should seek to avoid in the first place.

*Professor Lin Crase is Head of the School of Commerce at the University of South Australia