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Water management in Australia

Lin CraseLin Crase
Email: l.crase@latrobe.edu.au

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Matt Smith:

Welcome to the La Trobe University Podcast. I would be your host, Matt Smith and I'm here today with Professor Lin Crase, a very special guest because he's the person who I did our very first podcast with, 100 podcasts and going now. So, thanks for joining me Lin.

Lin Crase:

My pleasure.

Matt Smith:

So two years had been a long time now. You're a professor now, let me the first to congratulate you. Our last podcast interview was on water management in Australia. What's changed in those two years broadly?

Lin Crase:

For the last couple of years, I guess it has been a bit of trip back to the future for a number of us. We saw of course with Howard government's desperate throws to retain government it brought out its plan for water security. And it had a kind of familiar "Hollow Men" ring to it with ten dot points, 10-year program, 10 million dollars.

Unfortunately, a big component of that was the prospect of spending very large sums of public money on renovating private irrigation. Not to be outdone, the Rudd government brought its own little manifesto, this water for the future policy. And regrettably, it spends 13 billion dollars and the lion's share of that is actually spending a lot of money on irrigation infrastructure.

And unfortunately, those of us who are economists and those of us who are familiar with water, and so this is kind of a retrograde step. It's just not a very sensible use of public funds to be spending money on irrigation infrastructures. This is what we did for the best part of 100 years and it hasn't worked. I don't see why suddenly it should be seen as an appropriate policy stance at the moment.

So, that's kind of what has happened in the last of couple of years as many of us had been bemoaning this kind of reversal of public policy because up until that point, government had resisted calls for using public funds in this way. And we're making in my view quite sensible steps in terms of policy reform.

I guess the last couple of years had been a little problematic in that context for us and really I'm not confident that people in Canberra necessarily appreciate how difficult some of this stuff is and the legacy they're going to leave as the result.

Matt Smith:

In March this year, we kind of got the impression that all our water problems were over.

Lin Crase:

That's only if you live in Melbourne as

Matt Smith:

I suppose so. Maybe, Melbourne does exist by itself sometimes. But desalinisation plant, I'm not just talking about the torrential rainfall that we had, the huge hailstones that were coming down and the city being flooded. And you know we're building ark and everything like that at that point. Our water restrictions went down to level 3 from level 3A, and there was kind of a big sigh of relief.

Lin Crase:

One of the tricks with water in Australia in particular is for further understand that water is highly variable on a geographic basis. So it's not just highly variable on a temporal basis. That is you know hardly variable over time. But obviously as we've seen recently, you know, you can get massive floods in some parts of Australia and significant droughts in other parts of Australia. So for example in the Murray- Darling Basin, we're seeing significant inflows into the Northern rivers into the northern part of the basin and yet the southern part of the basin is desperately dry.

In the context of Melbourne which is not part of the basin, although now of course as a result of the north-south pipeline, it is intimately connected with the basin. So in the context of Melbourne, we've seen of course as you mentioned a relaxing of water restrictions which is a very sensible thing to do. Note of course that the timing of this… Well, some people argue that's to do with elections. But I would argue that may be a factor but in reality, people's outdoor water use during the cooler months of the year is far less. Your having water restrictions during winter is pretty meaningless anyway because relatively few people are actually watering outside.

So you have seen a relaxation of restrictions in Melbourne to claim that this is somehow vindication of government policy in Victoria around water is just a little bit of a stretch For my imagination. So the desal plants certainly that's charged ahead whether that's good or bad. Obviously, sometimes we'll have some very strong views as to whether that's the appropriate way to deal with water shortage.

My own view is that this is a very, very significant investment, a very significant public investment whether maybe government could have crafted some of the risk-sharing around the construction of that facility slightly better. Such that Melbournians are not going to be carrying so much that risk, that's one question. Quite obviously, people are likely to be willing to pay the price of desal water, it might run to 3 dollars a kiloliter. People in Melbourne are saying willing to pay that. On the face of it, it would seem to stack up. But there are other elements that we've seen with Victoria's water policy kind of fall off the radar.

You might remember that Victoria brought forward its big policy document that had three components. One was the North-South pipeline which was basically being bought off in a political sense with a billion dollars worth of infrastructure in irrigation areas in Northern Victoria.

So they didn't buy the water. They tried to buy the votes with a billion dollars worth of infrastructure. Then the desal plant was the second component. And the third component was the recycling of ice water streams out of Melbourne. Of course the recycling thing seems to have largely fallen by the wayside. And as an economist, I'm not that disappointed in that. I mean, actually, recycling water particularly given the configuration of Melbourne is actually very expensive.

If you think about the embodied energy in it even for example and you get wastewater streams that are flying all the way up to Werribee. You're treating this water back to within an inch of its life and then supposing you're going to pump it all the way back to Melbourne. You know, there are more sensible ways to deal with this.

So we've seen less enthusiasm for that. The desal plant is proceeding and that's kind of gone beyond the point of no return. My overall assessment is that I think Melbourne would have had to go for desal anyway, at some point. I'm just concerned that the longer term risks haven't been appropriately shared with the providers of that infrastructure.

And I think my views on renovating irrigation districts in Northern Victoria are pretty well-known. Even in 10 to 15 years time we will see that as one of the worst public policy decisions ever made.

Matt Smith:

Has the North-South pipeline made much of a difference on either end?

Lin Crase:

Well of course, there's been relatively little water available to move down it. This is one of the silly components of this whole deal with renovating irrigation. That will only yield water if there is actually water available.

You would have been much better off using the market to access this water either on the basis of temporarily buying water which is what we call temporarily trade, buying allocation. Or entering into things like options contracts which is what happens in the US.

This would have made communities in Northern Victoria much more prosperous and much more able to adapt to climate change than silly whiz bang pieces of infrastructure that are going to fall over. Water markets in this country have been around for well over a decade. They're quite well-developed but the two main things that people trade; they trade on allocation which is actually a physical volume of water that they know exist in a dam that they can access.

And the other thing they tried is the long-term rights to access that water. So one of those is called temporary trade which is the buying of the annual allocation. And the other is called permanent trade which is buying the right to access that water over time.

Those markets are quite well developed and what we've seen elsewhere in the world is this idea of options contracts which is something that we've been working on here at the university. And an option of contract might be you're a farmer, I'm the city and I know that in dry periods, I'm going to need some water but I don't need it all the time. I just need it sometimes when my own reservoirs are not full. So what I do is I send you a check every year to keep the option open of buying your water. And then in those really dry years, what happens is I send you a really big check and say, "Well, it'd be better if you didn't produce this year. Rather, it would be better if you sent the water to me."

And what that's done in the US of course because it's made rural communities much richer because they're getting this payment every year for the right to access their water. The change in income within those communities has actually gone up rather than down.

What Victoria decided to do is that they will go down that road. Instead, build this infrastructure which supposedly will make communities more viable but I think most people who work in this area realize that this is a furfy. It's not going to work.

Instead of using the market, it's kind of left both ends of the exchange where it's off. It's going to make Melbourne people poorer because they're going to have to pay an awful lot more money than what they would have had to. And it's going to make rural people poorer because they're just going to end up with having to service this infrastructure which is not going to work.

Matt Smith:

Is the simple solution to saving water simply to raise the prices of it?

Lin Crase:

Well, it depends. This is why the government's getting nervous. So for example, some of their colleagues put forth this idea of scarcity pricing. Imagine Melbourne that relies on reservoirs on the other side of the divide from where we are at the moment.

So imagine those reservoirs are falling. One way that you might look to try and choke off demand for that water is to have the price rise at the same time. So as dam falls, price goes up. Now, the crawler of that of course is in wet years, when the dam starts to fill, the large eco-thing would be for the price to fall.

Matt Smith:

It probably wouldn't.

Lin Crase:

Well you're starting to see some of the political dilemma, you see. But this is called scarcity pricing and some people at ANU have been doing some work on this, it is one potential policy response. As storages fall, the price goes up.

People receive a clear signal in terms of the scarcity value of that water. And as the dam fill, of course, price would fall. To reflect the fact that it's not as scarce anymore. There have been some modelling done on this and it shows that to a very large extent it would deal with the problems of excess demand.

But of course the political challenge is allowing that to happen. I'm not sure whether people in Victoria actually realize how political water prices are. For example, 30% of the residents of Victoria get a rebate off their water bill. We provide a rebate to people who have healthcare card. Now I find it very hard to believe that 30% of the Victorian population actually needs a subsidy for this service. I'm not saying that they are not poor people within their community. And these are the people that need our assistance. In my mind, I just can't see that 30% of the Victorian population need a discount off their water bill, is this the appropriate way to be dealing with problems of income distribution and this is kind of a long-standing problem that we have with water in particular. Is that government's always want to fiddle with water as a vehicle for dealing with income distribution. Now, anybody who's passed economics 101 would know that you don't do this. The way you deal with problems of income distribution is through the taxation system. We tax people who are fortunate enough to earn more. And we redistribute that back through the safety net system, if you like. We don't fiddle with the allocation resources. We don't do it with petrol. We don't say to poor people or 30% of Victorians, he have a rebate of off your petrol bill. We know that that would just be dumb. We're sending the wrong signals to a third of the population in terms of their consumption of their product.

Matt Smith:

What do you see as the best way forward and what would be the next best step from your perspective?

Lin Crase:

You want to talk about Melbourne or you want to talk about…?

Matt Smith:

Your choice, your choice.

Lin Crase:

It's my podcast.

Matt Smith:

Yes.

Lin Crase:

Look, a sensible thing to do would be; one obviously I'm very concerned about the vast sums of public money at the federal and state level that are going into irrigation infrastructure. If we could slow that down, that would certainly help.

Some of that's kind of slowing down anyway because governments require that there be things like business cases that proves that these things are worth doing. Now, quite clearly, it's pretty hard to prove that any of these is worth doing. So that's slowing down.

Again, at the level of the Murray-Darling Basin, an expansion of buyback which is quite controversial where the government's been buying back water. An expansion of that seems to me like a very sensible thing to do. And the recent recommendations by the productivity commission to look at a broader portfolio of water products seem to make a lot of sense to me as well.

Particularly given that the Basin plan hasn't yet been released. At the urban level, it would be really helpful if governments could stop fiddling with water to achieve social objectives. I know that is not going to happen quickly but in terms of a policy outcome, that would be very desirable if we could at least limit the excesses of government trying to fiddle with water as a vehicle for delivering social outcomes.

And that would then lead to more transparent signals to customers about the use of water. And less of this kind of command and control-type mechanisms that we currently have. So in the urban areas, one of the reasons we have water restrictions and one of the reasons we have people desperate to dob in their neighbours is because we've created the society where people see water as something quite peculiar and quite different. And governments are very largely to blame for that.

If you actually sit down with most sensible people and talk to them about water as a resource and how prices and markets allocate all sorts of other resources, people start to really wonder, "Well, why do we treat water so special?"

Matt Smith:

I see the big problem with water usage isn't really are so much at home but how much is used through industry.

Lin Crase:

One other problem is we tend to make value judgments throughout the use of water. If we simply allow markets to send appropriate price signals, well then, usually you'll end up with a better allocation of the resource. So I'm not going to sit here and say, "Industry is to blame for excessive water use and households are doing a good job."

That seems to me like a pretty silly way to go. What would be more appropriate would be to allow markets and prices to drive the allocation of the resource. Now, I keep coming back to the irrigation. I don't know for people in Melbourne, that probably doesn't resonate that well.

But in simple terms, take Adelaide for example. So Adelaide is intimately connected to irrigation because it draws water from the Murray River. Canberra is intimately connected to irrigation because it draws water from the Murrumbidgee River.

Canberra has these draconian water restrictions, much more severe than Melbourne. And it's almost like the ACT government kind of revels in punishing its own citizenry. All it needs to do is go and buy a bit of water from Murrumbidgee irrigators and people in Canberra will be as happy as Larry.

But instead what they've done is they've invested all these effort creating this idea that we've got the very last drops of water and we're all going to die unless we switch to a half-flushed toilet or something. And you end up with all these kind of flow on silly decisions as a result.

So households make decisions that really don't make a lot of sense, you know. Rainwater tanks actually don't make a lot of sense. If you sit down and do the economics of it, you end up with all these very large investments when you add them all up that don't make a lot of sense simply because of their reluctance to use the market which would be to buy some water off of some farmers.

Can you see my problem? In the context of Melbourne, the same thing really applies. I'm not going to sit here and say, "Households are doing a good job. Industry is doing a bad job. We need to plan and you know, have some super government allocating water to these groups."

What government should be doing is making sure we have appropriate institutional structures so that people see the consequences of their decisions. And that will then enable Industry decide, "Water is too expensive to use here we need to cut back on it."

And households to say, "Well, yes, I really value my garden and so I'm going to water my garden. I'm prepared to pay that price or I'm prepared to undertake water saving activities indoors in order to offset it," but that's an individual choice.

So I think your comment as to whether industry needs to save water, I think governments need to allow appropriate price signals so that industries can then make a judgment as to whether they save water. We go to the Bundoora campus quite often. I don't… You know, you're at the Bundoora?

I don't know whether people listening to this like had it on the Bundoora campus. I despair at how silly the university is sometimes. You know, I drive down there and see people working around the campus with these little tractors pulling around little tubs of water watering plant that they've pumped out of the mat there. You know, has anybody sat down and worked the cost of that? My point is, once you start fiddling with the signals about the value of something, you can end up making some pretty dumb choices. Next time you're wandering around Bundoora in summer, you might kind of query whether this is the most sensible thing to be doing.

You know, the university is beating its chest saying, "You know, we're putting rainwater tanks here, there and everywhere." Maybe, we should think this through. Where was that water going previously? Are we just stealing water from someone else? What's the cost of harvesting that water versus some other mechanism to access it? We need to think these things through. And unfortunately, because we tend to and because government historically have tended to fiddle with the allocation of water resources, we can end up with some pretty dumb outcomes.

Matt Smith:

Professor Lin Crase, thank you for your time today.

Lin Crase:

My pleasure, Matt.