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John Quiggin

Perhaps a rational solution

John Quiggin Australian Financial Review

26 April 2007

The announcement by Prime Minister John Howard that, in the absence of good rain, there will be no allocation of water for irrigation from the Murray-Darling next year renders much of the previous discussion of this issue somewhat academic. There’s still a chance of above-average rainfall – for once, the forecasters are optimistic. Still, it’s necessary to plan for the possibility of no allocations, and for the near-certainty that even holders of ‘high-security’ allocations will have severely restricted access to water.

The crisis strengthens Howard’s position in demanding a Commonwealth takeover of the entire sector. The general case for centralisation, as opposed to co-operative federalism is weak, and Victoria’s objections to the plan had some merit. But in an emergency situation, a unified response is needed.

In other respects, the National Plan for Water Security, announced on January 25 The announcement was striking in a couple of respects. On the one hand, the timing seemed remarkably good. With Kevin Rudd having announced a plan based on co-operation between the Commonwealth and the states only a week earlier, the government was, it seemed, fortunate in having its own plan in the works, almost ready for release. On the other hand, the plan was unclear in crucial respects, and showed little evidence of supporting economic analysis (Water remedy clear as mud AFR 1/2/07).

Over time it has become apparent that these are two sides of the same coin. The plan was a rush job, hurried out the door to meet the political requirement for a response to Rudd’s initiative. In the process, many of the standard sources of advice, including Treasury, environmental experts and even Cabinet were bypassed. The result was a plan much stronger on politics than on policy.

The emergency conditions now prevailing render much of the Plan obsolete. Not only does it offer no response to the immediate crisis, but its proposed long-run responses, consisting mainly of funding for on-farm works, are inadequate to the severity of the problem.

In the short term, if we get some rain, but not enough to supply the requirements of all users, it may be necessary to consider the option of rationing. One option would be to supply enough water to keep tree crops alive, while giving little or no water to other irrigators.

A resort to rationing would represent a retreat from the move towards reliance on markets that has driven policy for the past fifteen years. It would raise the risk of continued micro-management. On the other hand, considered strictly as a short-term emergency response, it may well be the best of a bad set of options.

Given the need to spend to spend large amounts on drought relief, it makes sense to use at least some of this money to bring us closer to a permanent solution to the problem of over-allocation. Farmers who want to shift from irrigated to dryland agriculture, or to leave agriculture altogether would benefit from the opportunity to sell permanent allocations of water back to the government. In the absence of any clear indication of when normal allocations will resume, the market for permanent allocations is bound to remain thin unless governments enter as purchasers.

Moreover, there is mounting evidence that the decline in runoff, and therefore in available water, observed over recent years, is not just a transitory, though obviously severe, drought. It seems likely that we are seeing the effects of human-caused climate change, possibly along with a multi-decade cyclical shift from wet to dry conditions. Water allocations will need to be reduced, not only to reverse past over-allocation but to deal with permanently lower average flows.

Under the risk allocation principles set out in the National Water Initiative, the risk associated with climate change is borne primarily by irrigators, meaning that they will not be compensated for reductions in allocations made in response to reduced inflows. However, it remains to be seen if the inevitable resistance to such reductions will be overcome.

Our current problems are, in part, the result of a drought more severe than could reasonably have been foreseen on the basis of past experience. But they also reflect the mistakes of the past, including the over-allocation of water and the refusal of governments to buy back excessive water allocations before the current crisis. For now we can do little more than hope for rain. But future policy must be based on a rational assessment of the options, without regard for political sacred cows.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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