Responding to Water Scarcity
Prof. Quentin Grafton's work provided the key evidence on water rights and environmental flows at a critical stage in Australia's national water reforms
The Millennium Drought began in the Murray-Darling River Basin of Australia in the early 2000s. It started like many past dry spells, but by the time it ended a decade later it would break historical records in terms of low inflows and the environmental damage it caused. When the drought got under way, the policy response was to draw down the large water storages in the Basin and to prioritise dam releases so that irrigators who consume about 90% of the water in the Basin could access what they needed for their crops. Eventually, as water storages fell, the water used by irrigators got less, but the volume of water allocated to the environment fell by a much greater proportion. The drought did not just affect farmers, but impacted everyone who depended on water flows and was devastating for aquatic environments across the Basin. Notably, the Murray River that flows more than three thousand kilometres to the sea ceased to reach its Mouth and was only kept open by more or less continuous dredging.
By the start of the irrigation season 2006-07, with record low inflows and very low water storages, irrigators and water managers realised that ‘this time really was different’. State governments were blaming each other for the crisis, but offered no feasible way forward. Finally, in January 2007, the Prime Minister broke through the ‘blame game’ and launched the ‘National Plan for Water Security’ – a A$10 billion and 10 point plan to be implemented over 10 years. This astonishing sum of money for water reform was part of a ‘social contract’ whereby irrigators would be compensated to ‘exit the industry with dignity’ so as to reduce the level of water extractions in the Basin to sustainable levels. This would be achieved by increasing stream and river flows by subsidising irrigators to increase water efficiency and by purchasing water rights from willing sellers. In 2007, a Water Act was passed that inserted the Federal Government in the determination over how much water could be sustainably extracted by Basin irrigators. The Act is implemented through a Basin Plan that sets sustainable diversion limits at a catchment and Basin level for a period of up to 10 years. After much acrimony, and following the breaking of the drought in 2010-11, the first Basin Plan was enacted in November 2012.
Coincident with the Millennium Drought, all of Australia’s major coastal cities, but not all located in the Basin, experienced much reduced inflows into the water catchments that are their principal sources of drinking water. Following several years of water restrictions in response to lower water storages in city dams, state governments responded by building desalination plants to supplement water supplies. The construction costs associated with desalination plants exceeded $A10 billion and was the single most important factor in the 50% or more increase in volumetric water price paid by households between 2007-2012.
The National Plan for Water Security had a two-to-one budget in favour of irrigation subsidies versus buybacks of water rights. Quentin was the first economist to publicly engage with the National Plan and predicted, in April 2007, that subsidies for irrigation were a very expensive way to ‘restore the balance’ in the Basin. Subsidies cost at least twice as much compared to buying water rights from willing sellers. His water expertise led to his appointment as Chair of the Social and Economics Reference Panel for the Murray-Darling Basin Commission. His hydro-economic modelling showed that the effects of the buyback of water rights would, over the Basin as a whole, impose a much lower proportional costs than the percentage reduction in extractions. This work was a fundamental input to the 2010 Wentworth Group of Concerned Scientists report. This report, not implemented, outlined a strategy to increase environmental flows and to provide billions of dollars of support to drought-distressed Basin communities.
Based on a time-series analysis of inflows into Sydney’s catchment and economic modelling, Quentin made the policy recommendation that the most economical way to respond to Sydney’s temporary water shortages should be to impose a temporarily higher uniform volumetric price of water so as to reduce household water demand during the drought. This price increase would be offset by a decline in the fixed component of water bills, especially for poorest households.
Quentin, along with co-authors, also calculated that a proposed Sydney desalination plant to increase water supplies was not required and that it would generate billions of dollars of welfare losses if built. This prediction has proved correct. The Sydney desalination plant has not been in use since 2012, but its multi-billion-price tag will need to be paid for by all Sydney households for many years to come.
In terms of Basin Water Reform, Quentin’s work provided the key evidence to justify bringing forward the purchase of water rights when the Water Act was being debated in the Federal Senate. His economic evidence, and that of the Wentworth Group of Concerned Scientists, was instrumental in increasing the notional environmental flows in the Basin Plan despite very strong opposition by irrigators. His joint work on hydro-economic modelling in the Basin was subsequently awarded with one of Australia’s premier science prizes in 2011.
In urban water, Quentin’s work on water pricing was key evidence used by the Productivity Commission to argue for increased efficiency in water pricing in the Australian water sector. Unfortunately, he was unsuccessful at convincing the New South Wales State Water Minister (later Premier) not to build the Sydney desalination plant. It remains a white elephant. Paradoxically, his joint work on urban water has been given more attention outside of Australia and has featured in policy recommendations of the OECD, celebrated with keynote addresses and research awards.
In sum, water scarcity and the required policy responses, is not just a ‘Made in Australia’ problem, but a global challenge. Understanding water risks, engaging with decision makers and promoting solutions to water conflicts are a key, global priority.
Quentin is Professor of Economics at The Australian National University.