Date created:27/8/04
Last modified:27/8/04
Maintained by: John Quiggin
John Quiggin

Watershed solution needed

Australian Financial Review

3 June 2004.

The problems of the Murray-Darling Basin are, rightly, at the top of the nationıs environmental agenda. Unlike the battles of the 1980s and 1990s, over issues like the Franklin and Daintree, the problem is too large and complex to be resolved by the stroke of a pen.

The core of the problem is simple enough. There is a finite, though highly variable, quantity of water available to us. We have made commitments, which, in total, exceed the amount available. These commitments include water for existing irrigators, promises of access to new entrants, urban water supply for Adelaide and elsewhere and the preservation of sufficient flows to sustain the natural environment.

As with all unbalanced budgets, the only resolution is for some users to take less. The problem is to determine who should go without and who, if anyone, should bear the cost of compensating the losers.

The problem has been complicated by the naive faith in simple market solutions that dominated the 1990s. A simplistic application of the ideas of Nobel-prize winning economist Harold Coase yields the conclusion that, to resolve an environmental problem, all that is necessary is to create appropriate property rights and establish the markets in which they traded.

Acting on this idea, policymakers converted licenses to use water into tradeable property rights. Among the many complexities ignored in the initial period of enthusiasm was that of Œsleepersı, people who held licenses but had never actually used any water. Thanks to the property-rights approach, these Œsleeperı rights have been converted into tradeable entitlements for which the holders, naturally enough, want compensation at full market value.

As a result, the simplest and neatest solution to the problem of over-allocation, that of buying out enough users to bring supply and demand into balance, is considerably more expensive than it might have been. The conflict over who should bear the costs has therefore become sharper.

One possible market-based resolution rests on differences in timescales and discount rates. Although a reduction in water use is crucial in the long term, there are a range of measures that can be employed in the short term to mitigate the damage caused by overallocation. On the other hand, the problems associated with a reduction in the use of water for irrigation are, to a large extent, short-term problems of adjustment.

One way to resolve some of the conflicts therefore, might be to make payments to irrigators now in return for relinquishment of water rights in the future. Evidence from the (still rather thin) market in temporary and permanent transfers of water rights suggests that this might be a cost-effective way of securing long-term reductions in aggregate water use.

If this approach is to be tried, it would be sensible to move quickly. As part of the reform process, existing licenses with fixed terms of 10 and 15 years are to be converted to perpetual entitlements. It would make sense to see if some license holders were willing to forgo this conversion in return for an up-front payment.

.....

Peter Saundersı response to my piece on bracket creep adds little new information to the debate and one piece of (admittedly trivial) misinformation. Saunders complains that I took no account of changes in average real earnings. In fact, the original article included comparisons to average weekly earnings to show that there had been no real bracket creep since 1974. I showed that the period of significant bracket creep in Australia was Œbetween 1964 and 1974, a period during which prices rose by 60 per cent, and average weekly earnings more than doubledı, while the tax brackets were unchanged. Saundersı figures, from 1970, are entirely consistent with my original analysis.

Having made little headway on the substantive issue, Saunders resorts to the claim that, having moved to Queensland to take up a Federation Fellowship, I have acted inconsistently with my own stated views. Among the many problems with this line of argument, the most obvious is the fact that I moved to Queensland at the end of 2002, and was not awarded the Fellowship until March 2003, something Saunders could easily have checked on the weblog he cites as evidence.

Despite the flimsiness of his latest piece, Saunders has made some substantial contributions to Australian public debate since his arrival here from the United Kingdom a few years ago. I am, therefore, happy that he did not allow his own location decisions to be determined by marginal tax rates.

John Quiggin is an ARC Federation Fellow at the University of Queensland, working on a major ARC Discovery Project on the sustainable management of the Murray-Darling Basin. His weblog is http://www.johnquiggin.com

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