Search

Irrigation externalities: pricing and charges by Gavan Dwyer, Robert Douglas, Deb Peterson, Jo Chong and Kate Maddern was released on 14 March 2006. The paper discusses the nature and causes of environmental change related to rural water use, and provides a taxonomy of the many diverse types. It also examines the issues surrounding possible charges on water use for water related externalities. There have been few attempts by water utilities to incorporate externalities into full cost pricing of irrigation water. The aim of this Staff Working Paper was to: examine the extent to which charges imposed by irrigation water utilities could address externalities from irrigation water supply and use; and to develop a framework to identify and characterise changes in environmental conditions from the supply and use of irrigation water that may lead to environmental externalities. The authors found that many factors influence the extent to which charging for water would change water use. These include the volume of water available to irrigators, the extent to which trade can occur, the size of the charge or tax, the price responsiveness for irrigation water and the existing mechanisms to address externalities. A tax on water use may increase economic efficiency where external costs are related only to the level of water use. However, such a tax is an unsuitable instrument if the Government's policy objective is to reduce environmental damage to a predetermined level or to raise a target level of revenue to address the externalities. The views expressed in this paper are those of the staff involved and do not necessarily reflect those of the Productivity Commission.

The joint conference paper, 'Third-party effects of water trading and potential policy responses' by Anna Heaney (ABARE), Gavan Dwyer (PC), Stephen Beare (ABARE), Deborah Peterson (PC) and Lili Pechey (ABARE), was presented to the American Agricultural Economics Association conference, Providence, Rhode Island, 25 - 27 July 2005. A key feature of water policy reform in Australia has been the separation of water access entitlements from land titles and the establishment of markets for water. However, the separation of water entitlements from land entitlement is not a sufficient condition to ensure that water markets are complete. In the absence of fully defined property rights, water markets will be incomplete and trade has the potential to create third-party effects. However, property rights over natural resources are seldom completely specified, because of the existence of transactions costs. The benefits from eliminating third-party effects need to be sufficient to warrant intervention. The objectives in this paper are to identify key potential third-party effects of water trade under existing property rights structures in Australia, and to examine policy responses to address these effects. The discussion draws on the concepts of exclusiveness and rivalry as key characteristics that determine the applicability of property rights solutions to third-party effects of trade. It is likely that many of the third-party effects of trade discussed in this paper do not warrant policy intervention at the national or state level. In some instances, effects are likely to be relatively minor, although some may be significant at the local level. The costs of addressing some third-party effects may outweigh the benefits. Where there are significant gains from trade, the existence of these third-party effects should not been seen as a reason to impede trade. There are first-best policy instruments to address these effects at an appropriate scale. *ABARE (Australian Bureau of Agricultural and Resource Economics); PC (Productivity Commission) **The views expressed in this paper do not necessarily reflect those of the Productivity Commission.

This working paper was released in August 2004. This research is part of a suite of research related to water reform, including the effects of expanding water trade and the management of environmental externalities associated with the supply and use of irrigation water. A foundation for this research is a detailed understanding of irrigated agriculture in the southern Murray-Darling Basin, including: the existing patterns of water use; the emerging trade in water property rights and the likely behavioural responses of individual irrigators to changing water prices. This paper explores the determinants of the elasticity of demand for irrigation water. It focuses on three main irrigated industries — rice, dairy and horticulture — to gain a greater understanding of the value that farmers place on water as an input. The paper provides detail relating to farm decision behaviour and biophysical production realities faced by irrigators in the southern Murray-Darling Basin.

The conference paper, 'Integrating rural and urban water markets in south east Australia: Preliminary analysis' by Gavan Dwyer, Paul Loke, David Appels, Susan Stone and Deborah Peterson, was presented to the OECD Workshop on Agriculture and Water: Sustainability, Markets and Policies Adelaide, 14-18 November 2005. The trade of water in Australia is constrained and generally limited to irrigators, with other industries and households excluded. A regional general equilibrium model of the Australian economy (TERM-Water) is used to undertake a preliminary analysis of the effects of expanding the trade of water in south east Australia to include both irrigators and urban users. The focus is on the urban centres of Adelaide, Canberra and Melbourne, and the major irrigation districts in the southern Murray-Darling Basin and Gippsland. Losses from a hypothetical reduction in water availability to gross regional product and household demand are reduced when water trade is allowed. The extent to which these losses are reduced depends on the extent to which trade is allowed and the differing water uses in each trading region. The results of this preliminary modelling show that net gains are greatest, and the costs to industries and regions are generally more dissipated, when trade is unconstrained. When regions with relatively low levels of water consumption (such as Adelaide and Canberra) face shortfalls in water availability and trade with regions that use large volumes of water (such as irrigators in the southern Murray-Darling Basin), they have little effect on traded prices and quantities. The opposite is true, however, when large water users experience shortages. These broad patterns hold when all regions experience the same hypothetical reduction in water availability. *The views expressed in this paper do not necessarily reflect those of the Productivity Commission.

This Productivity Commission staff working paper, 'Modelling Water Trade in the Southern Murray-Darling Basin', was released in November 2004. It examines the likely economic impacts of expanding water trade in the southern Murray-Darling Basin. The paper uses TERM-Water, a bottoms-up regional CGE model of the Australian economy, to examine the regional effects of expanding trade of irrigation water in the southern Murray-Darling Basin. The study finds that water trading dampens the impact of water allocation cuts on gross regional product (GRP). The benefits of introducing trading within irrigation districts are greater than the further benefits of expanding trade to between these regions. Permitting trade of seasonal allocations allows irrigators to reallocate water in reaction to climatic conditions and water availability - and it is this flexibility that enables GRP reductions to be minimised. The views expressed in this paper are those of the staff involved and do not necessarily reflect the those of the Productivity Commission.

The Productivity Commission staff working paper, 'Responsiveness of Demand for Irrigation Water: A Focus on the Southern Murray-Darling Basin', was released August 2004. This paper explores the determinants of the elasticity of demand for irrigation water. It focuses on three main irrigated industries - rice, dairy and horticulture - to gain a greater understanding of the value that farmers place on water as an input. This paper provides detail relating to farm decision behaviour and biophysical production realities faced by irrigators in the southern Murray-Darling Basin. The views expressed in this paper are those of the staff involved and do not necessarily reflect those of the Productivity Commission.