Transcript

Water Trading with Lin Crase

23 April 2008

lin-craseDr Lin Crase
Email: l.crase@latrobe.edu.au
Transcript of interview with Dr Lin Crase, Executive Director of Albury-Wodonga campus.

You can also listen to the interview [MP3 16.9MB].

Matt:

I'd like to welcome you to the first La Trobe University podcast, I'm your host Matthew, and joining me today is Dr. Lin Crase, a professor in economics at La Trobe University, he's here to talk to us about his new book water policy in Australia and the effects of water trading on Australian rural and residential communities.

Dr. Crase:

Water policy in Australia the impact of trade and uncertainty. In all good bookstores.

Matt:

For those of you who forget what rain sounds like, here's a classic hit song from the nineties. (SOUND OF RAIN)

Dr. Crase:

I guess it's an opportunity to have a bit of a chat about some of the general issues about water policy. I think if you hop into a cab in Melbourne just about everybody can tell you something about water policy or politics or interest rates. I remember ten years ago I don't think there would be very few people would know much about water but it's very hot topic at the moment, very front of mind for many people. So I guess the book is timely in that respect, I think what would be really helpful from this session is if people could understand some of the basics about how we've come up with this dog's breakfast of a water policy that we currently have and then realise why it's so difficult to move from where we currently are to a better state.

Matt:

I did a bit of reading beforehand and I've come up with, well, in Melbourne at the moment our water restrictions are level 3A which essentially means that people can only water their yards on certain days if they're a certain number house, no spitting, no internal bleeding, we've got things like that going on, our water storage is currently at 32.9%, I looked that up this morning, and one interesting thing I found that is essentially we've got to ration the water that we've got…

Dr. Crase:

Well yes, the question is how you go about rationing water. What you need to understand, I think, and listeners need to understand is that we've already allocated a large quantity of this water to particular sectors, to particular groups, and the reason that's come about primarily is because historically Australians thought it a noble thing to do to allocate water to agriculture. Agriculture was seen as a noble activity particularly in the early 1900s or late 1800s it was seen as a social policy to relocate people to inland Australia to develop an irrigation sector and therefore have all these 'noble yeoman' working on the land. The upshot of that is once you've allocated the resource it's very hard to reallocate it to other users and of course the urban population has grown, urban demands have grown, and what we're struggling with at the moment is coming to grips with the fact that we've created a sector around allocating water to agriculture and are now trying to reallocate this to other urban users is a really difficult political problem. So what we currently have is a situation where we have restrictions, quite severe restrictions imposed on our communities, primarily because we haven't come to grips with how we reallocate water away from agriculture.

Matt:

So is this where the water trading is going to come into play?

Dr. Crase:

This is where water trading can play a big part and in fact in some parts of the state it does play a big part. The difficulty is that Melbourne has been largely locked out of some of that trading so if you look at the north of the state where I come from, Wodonga, which is on the Murray system and we are connected with irrigation so in those towns we've been trading water into those towns so that some users are basically able to avoid restrictions so this is just the market working to allocate the resource away from agriculture. Now the people who have sold access to that water were quite happy with the money they received and the people who are now using it to save very expensive investments in things like bowling greens or community assets, they're better off as well so the market's actually working, that's how a market's supposed to work, it's supposed to make everybody better off.

Matt:

So the water's essentially water that's been allocated to rural uses, and because they've got a surplus and they don't need to use all the water they've been allocated they're therefore able to sell this water on or trade it on?

Dr. Crase:

Yes, or the individual seller makes a rational decision. Take a dairy farmer – I realise a lot of people in Melbourne don't know a lot about dairy farming but you don't have to use water to produce milk per se, I mean you can substitute grain for water, so instead of using water to grow grass for your cows to eat so you can have milk the alternative is to buy in fodder or to buy in grain and you actually have a substitute. So instead of using their water, they can sell their water to an urban community and then use that income to buy in grain and hay from other sources. The other thing you need to understand I think is that in Victoria we have a very strange perception of what high value agriculture is. We think that high value agriculture is fruit trees and grape vines and things like this. That may be the case now, but I'd ask you think about what it's going to be like in an era of climate change when we have thirty percent less stream flow. Which means these grape vines or these fruit trees that need water every year face the real prospect of not having any water in some years, so is this going to be really high value agriculture? I'd suggest to you that high value agriculture is more likely to be an agricultural system that you can turn off in a really dry year, sell the water to places like Melbourne, and then in a wet year turn the agriculture back on. In Victoria we've got this really strong mindset that somehow high value agriculture is only perennial crops, you know, things that need water every year. I don't think that's going to be the case for the future.

Matt:

Won't that therefore damage a lot of businesses in the rural community as far as… you used grape growing as an example, that will damage it during years when there's low water.

Dr. Crase:

Regrettably I'm an economist and words like 'damage' mean different things to different people. Structural adjustment is a fact of life, you know, the reality is that resources will never stay in the same use year in year out. That's like arguing that if your children grow up in regional Australia they're not allowed to move to Melbourne to get a job. My daughter lives in Albury-Wodonga and I don't think I'm going to be able to persuade her that she shouldn't move to a higher value use if one is on offer. So water's a resource if you think about it in those terms sure it's going to move around and industries will contract and others will expand and that's how a vibrant economy is supposed to respond to change. If you try to fiddle with the resource allocation there's only one thing you'll guarantee and that's that we'll all end up poorer. Sorry, but that's the economics of it.

Matt:

They'll protest to it.

Dr. Crase:

Of course they'll protest to it, and that's part of the political system. You've got to make a judgement between the protest that people in agricultural areas are going to make against the allocation of resource, and the protest that urban people are going to make about not having enough water. There's a balancing act here. There's another thing to understand about this which is often overlooked. What you also have to understand is that there are a good number of willing sellers that we're talking about here, we're not actually talking about going and taking something from somebody who doesn't want to sell it. So often the people you hear who are most vocal are those involved in agriculture who have something to lose. The farmer who's really struggling, who wants to get out and wants to sell and get the best price he can is obviously a clear contender for selling. And what you're really advocating is to lock that person into poverty. I don't see that as a particularly rational policy response. To me a rational policy response is you help the market to better allocate the resource and then if that generates wealth and you're concerned about adjustment well then you redistribute the wealth, and not the resource, to account for that concern. So you always deal with social policy by dealing with things like taxation on income and wealth. You don't fiddle with the allocation of the resource as per se, I know that sounds really bland, but that's how an economist looks at the world.

Matt:

You're not trying to save the world, you're trying to work with what you have.

Dr. Crase:

Well for example if you put water aside for a moment and think about labour. So lets say that kids who grow up in country towns that are underpinned by irrigation decide to move to places like Melbourne or Sydney or even bigger regional centres in order to make more money. So you have a choice, maybe you bring in a policy that says children who are born in those country areas have to stay in those country areas and work for the next ten years. Now you and I both know that that isn't going to work, politically it won't fly. Alternatively what you do is you allow the market to allocate that resource, you allow the kids to move from those country towns to other centres, they therefore earn more income and then if you're worrying about those towns disappearing off the map, what you do of course is you tax that additional income to provide support back to those people that are still in that town. It doesn't make sense to try and fix the problem by stopping the resource from moving. It makes more sense to make the pie bigger, to generate more wealth and more income and then redistribute your income to address your social concern.

Matt:

So to bring it back to water trading, do you think that would work within an urban community, do you think it will work on a small scale with households potentially trading between each other?

Dr. Crase:

Well there's a lot of work at the moment looking at the viability of that. Personally I think what economists call 'welfare gains', the benefits if you like, that you are going to have from inter-household trading are really small compared to benefits of just breaking down the divide between agriculture in Victoria and urban water use. The magnitude of gains of being able to transfer a modest amount of water away from agriculture to urban use. The welfare gains are, in my mind, an imperial question, the gains are enormous compared to you selling me a little bit of water and me being able to water my fruit tree or lemon tree, or fill up my pool. The other thing you have to bare in mind are the transaction costs – how much is it actually going to cost to administer a policy like that versus trying to free up the trade between agricultural and urban users. Now the Victorian government have put in place this north-south pipeline which is creating a lot of controversy, I'm sure you've heard of the plug the pip group. This is a group trying to prevent the north-south pipeline, to prevent the capacity to move water. I think the pipeline's a great idea, one of the things that does bother me though the way they've been able to achieve this is they're talking about the rejuvenation of the food bowl as the pay off, they're building the north-south pipeline, they're pacifying country voters by saying 'we're going to rejuvenate your irrigation district' to help offset this. I think that's nonsense, I think the offsets are more in the minds of the politicians than they are real. If you come back to thinking about 30% less stream flow, if you go and invest all this money in irrigation to make it less leaky, it's not going to make any difference, you need to have water to put in the channel. I think the whole concept of rural urban trade is a good one, I think it's better to do it from a marketing way rather then some engineer tell us he's going to put a bit of concrete in a channel.

Matt:

If I could throw a quote at you, this is from John Howard, he said it in April last year. 'It's all very serious, it's unprecedented in my lifetime, and I really feel deeply for the people affected. So we should all, literally and without irony, pray for rain over the next six to eight weeks.' So John Howard's solution to the water problem was getting out and doing a rain dance to a bit of tub-thumping music. What do you think about the current policy as far as water solution goes, do you think the Rudd government is going to have the right approach here?

Dr. Crase:

Well it's early days, but from what we've seen from Penny Wong is something that I think many of my colleagues would not regard as particularly encouraging. We have a national water plan which was cobbled together at the last minute, I think most commentators would argue that the national water plan was a demonstration of panic the government at the time to try and offer a solution besides praying as rain, which is just about as good, It was cobbled together quickly without the gaze of treasury, and to many people its a significant waste of public money. One of things that bothered me and my colleagues at the time is that the balance seemed to be all wrong. We're actually spending 3 billion dollars to buy back entitlements and spending 7 billion dollars on infrastructure. That was the basic balance. As far as I can tell from the announcements from the current federal minister is that I don't think they've radically altered that balance. As I've already indicated, investing a lot of money in infrastructure is not going to count for much if you have 30% less streamflow. The way the counting is done on this is actually quite false in thinking they're creating water by investing in infrastructure. All you're doing is preventing water from moving to where it was previously used. If water seeps into the soil, it doesn't disappear to Mars. Invariably that seepage is underpinning a streamflow somewhere else. There's plenty of hydrological studies that show that all this stuff about water use efficiency is nonsense. So we just need to be careful, we're spending a lot of public money to line channels, or even worse to actually underpin and subsidise investments by farmers in their farms, which ultimately they'll appropriate when they sell their farms. So this is public money that is being spent to create quite spurious water savings. I just think it's not a very wise use of public money, The reason this is happening is that we as a society are struggling with the idea of how you allocate water away from agriculture which in society has such a high standing? It's a social issue as well as an economic one.

Matt:

You've been listening to the La Trobe University Podcast with me, Matthew. I'd like to thank my guest Dr. Lin Crase. I'd also like to thank Mikhaela Delahunty behind the scenes, Simon Knight from OTSU on the pots and pans, and Mark Pearce as always, the wind beneath my wings. I'd like to dedicate this podcast in the memory of Charlton Heston. Guns don't kill people, apes with guns kill people!

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