Alternatives to urban water restrictions

lin-crase Professor Lin Crase

First published in the Border Mail on 21 August 2009
Urban water restrictions do not occur simply because it does not rain.  Water scarcity and variability are facts of life in this part of Australia, just as scarcity and variability occurs with most other resources.  The trick is to manage the risk associated with variability in a sensible manner.

For generations the solution to variability was big ‘engineering’ works.  More recently, this philosophy has been re-shaped into smaller projects with greater emphasis on subsidies and programs designed to encourage local re-use, rainwater tanks, stormwater harvesting and the like.  

While this might appear to be a major shift in philosophy, our thinking about water variability hasn’t actually changed much.  It is still based on overcoming variability by increasing supply – it’s just that the gadgets are smaller, more expensive and there are more of them.

A different approach to variability is to use the market to share the associated risks.  There are several sides to this worth thinking about.  

The first is the notion of scarcity pricing, a concept currently being considered by the National Water Commission and the Australian Competition and Consumer Commission.  The basic idea behind scarcity pricing is that water prices move up and down in accordance with the amount in storage.  During a prolonged drought, water prices would move up and households would make a choice about using more or less water.  Given that most people buy less at higher prices (what economists like to call the law of demand) some households would ration their water use.  This is seen as preferable to having the Council or Water Corporation randomly decide which water-using activities are deemed allowable.

A second component to the market approach is to have Councils and Water Corporations participate more actively in the water market.  This could be in the form of purchasing temporary water allocations or buying additional water rights, usually from irrigators.  Other alternatives include options contracts and leasing arrangements, which are quite common in the US.

A third alternative is to allow individuals and firms to access different levels of service and pay for the privilege.  A limited form of this already exists for customers of North East Water.

The basic objection to these approaches stems from the perception that the water market would really only benefit the rich.  However, proponents of this view conveniently ignore the fact that the well-off already avoid water restrictions by installing groundwater bores.  Even worse, some install extravagant grey water recycling schemes subsidised by the state, which ultimately are paid for by taxpayers.  They also underplay the social cost of having neighbours acting as water vigilantes.  

Water markets have been advocated in this country for over a decade but the wider population has been prevented from sharing the benefits.  Until they are more sensibly used by Councils and Water Corporations urban water customers will continue to be treated ‘equally badly’.