Letting water price signals flow

There is resistance to water pricing. This is most serious in agricultural settings that offer the greatest opportunities for price signals to work in economising on water use. The idea is to trade water permits and make relatively more expensive crops that are water intensive. The costs associated with that will flow to consumers who will then presumably change consumption patterns and force a change in the crops that are planted. In the end, we will match water to utlimate consumer value. Ta da.

The problem is that there is resistance to this. I don’t get it but that is the way it is. So what can you do? An alternative would be to price water and measure the intensity of water usage by crop. Then at the consumer end you would price a given unit of produce, say an apple, and alongside it you would also list the cost of water (unpriced) that went into producing it. Consumers only have to pay the usual price but they will see the ‘environmental harm’ they are causing. It is a form of good product labelling. But consumers might with this information use it to change their consumption patterns. And come up with a way of using less water and you will reduce the ‘water price’ that consumers see. So while it isn’t perfect, some price signal could be sent and replace the desired intent of a fully fledged water market.

The ACCC is likely to recommend unit pricing as part of the grocery inquiry. Why not go further and include various environmental labels too? After all, the worst that happens is consumers don’t care but the same pricing label has to be printed anyway so what would we lose. The best thing that happens if we get signals going even without a real market. It would be a good start at least.

3 thoughts on “Letting water price signals flow”

  1. Here are a few things wrong with trading water permits. Go listen to a group of irrigators and they can probably tell you more.

    Problem number one is the allocation of the water permits. NSW has given many more permits relative to river flows than Victoria. Between different districts the giving out of permits to the available water varies enormously. We all know about Cubby farm. The allocation of permits has been a mess.

    Problem number two is that when your neighbour sells their permits then it impacts you. For example if you are in a dairying district you need a certain number of farms to justify a milk tanker. If half the farms stop dairying the rest go out of business even if they are viable and make good use of water.

    Problem number three is speculation. Let the city folk purchase permits (or fund a farmer to purchase permits) then those with deep pockets can corner a local market.

    Problem number four is measuring and abuse. It is very easy to drill into groundwater. You can put a dam on your property or to put a ground water system that absorbs water falling on your property or perhaps gets water from a stream running through your property or put a fish (or eel) in the measuring device. There are many ways to cheat and it is very difficult to detect and if you do detect it what do you do? Fine people and how much do you fine them? What if they do not pay do you put them gaol? Good luck.

    Problem number five is that the money you pay for permits is unlikely to be spent on saving water or on increasing supply. A seller is much more likely to take the money and go do something else like move to the city and spend the money on consumption items not on investing in improving water supply. You would feel better if you knew that the money you had paid had gone to saving water somewhere or on increasing the supply rather than enhancing the life style of a farmer or even worse a speculator.

    Like all artificial trading systems it looks good on paper but implementing in a fair way is difficult.

    A better solution is to try to make transactions with respect to buying water “fair” so that people will respect it and wish to cooperate. You also try to make sure any money spent on water goes directly to water savings and increasing supply through the existing market place in infrastructure.

    Take a look at http://cscoxk.wordpress.com/2008/07/27/making-better-use-of-water-resources-without-water-restrictions-o/

    where I have done the calculations for Canberra where the average price of water appears to be about $1.50 per kilolitre. This approach will mean that those who become more efficient in their use of water will get a Reward and the Reward will be spent on ways to save water. This is “obviously” fairer and turns out to be an efficient way to allocate water resources in terms of getting more water for the money spent. You get a decrease from the price going up, a decrease from people trying to get Rewards and most importantly a compounding increase in supply from the directed investment. The nice thing about the system is that it is inexpensive to implement and to get compliance.

    I am working on the same idea for rural systems. Irrigators could get Rewards based on best practise for their type of crop as measured in terms of income per litre of water but that would be determined in consultation with the irrigators. If you cheat the system then you are excluded from receiving future Rewards.


  2. The trouble with environmental labeling of food items is that it’s essentially impossible for the average citizen to form an accurate picture of the relative environmental impact of two competing products based on any labels that could plausibly fit on a supermarket shelf.

    For instance, it’s pretty likely that organic products will be more water-intensive than equivalently grown products using pesticides and fertilizers.

    Kevin Cox makes some interesting points. However, on his point about the critical mass required for farming service infrastructure, if dairy farmers are effectively co-dependent, they probably need a legal structure that recognizes that co-dependence rather than just leaving it to the vagaries of fate.


  3. The co-dependence argument is I think the one that country-dwellers and country MPs are most concerned about. Once sufficient water permits are sold around a country town the once arable farmland deteriorates to what exactly? The population drifts downwards and the townsfolk are left (if I can venture a pun) high and dry.

    Suppose in an area for example where irrigated grapes do well, there is a bad year for growers, with a glut of fruit, and some of them sell their water. Even if grapes are, on the whole, a high value-added use of irrigation water, the district may never get that water back.

    If, as some projections indicate, Murray-Darling river flow will continue to decline as a consequence of climate change, there will be a scramble among all affected districts to avoid being the first to totally throw in the towel.

    There is currently no provision for a buyer of permits to continue to contribute to the existing irrigation infrastructure cost if he chooses to extract his water from some other place in the river.

    Maybe we accept that this is the Schumpeter creative destruction process at work and what happens, happens. But people who are being creatively destroyed can get pretty nasty about finding that they are victims for the benefit of society.

    As a subsidiary thought, how much research and development is going into creating dryland crops that will flourish in soils and climates that used to be reasonably fertile when irrigated?


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